This is the authors version published as:

Pribadi, K.S., dan Pangeran, M.H. (2010). Assessing Readiness of Public Sector Risk Management For PPP In Infrastructure Development In Indonesia, Proceedings of The 2nd International Conference on Construction In Developing Countries (ICCIDCII), Ahmed, S.M., Lodi, S.H., Farooqui, R.U., Saqib, M., dan El Agroudy, M., Eds, Cairo, pp. 271-280, NED University of Engineering & Technology.

Second International Conference on Construction in Developing Countries (ICCIDCII) Advancing and Integrating Construction Education, Research & Practice August 3-5, 2010, Cairo, Egypt

Assessing Readiness of Public Sector Risk Management for PPP in Infrastructure Development in Indonesia
Krishna, S. Pribadi (Bandung, West Java, Indonesia, ksuryanto@si.itb.ac.id) M. Husnullah Pangeran (Bandung, West Java, Indonesia, husnullah_pangeran@yahoo.com)

Abstract
Public private partnership (PPP) can be an effective way for achieving value for money in infrastructure development. However, its implementation usually involves various dimensions that contribute to a broad range of uncertainty in the frame of a long term PPP contract. Effective risk management is a must for a successful PPP implementation. It should not be limited to only the process for identifying, analyzing and planning for response, not to say the ad-hoc implementation, but should also be carried out in integration with the other processes within the organization. The study aims to assess the readiness level of organizational risk management of the public authority bodies implementing PPP in infrastructure procurement in Indonesia, by using a risk management capability maturity (RMCM) model. The measurement model defines the readiness level into four stages i.e. level 1 (ad-hoc), level 2 (initial), level 3 (competent), and level 4 (excellent). The model uses five attributes i.e. culture, process, experience, application, and partnership as measuring instrument.. By using self-assessment questionnaire, a survey was conducted to a number of public sector organizations as the authority and service provider in the drinking water sector. The survey results shows that the average risk management readiness level of the organizations surveyed is found to be at the initial stage (level 2). In this level, the principles of risk management has been adopted but not supported by a structured and formal processes. The result shows that the model can provide adequate information on the readiness in managing risks for PPP projects.

Keywords
Public private partnership, risk management, infrastructure project, readiness, procurement.

1. Introduction
The Government of Indonesia has initiated various efforts in order to accelerate the development of infrastructure, including the set up of legal framework for the involvement of private sector investment through public private partnership (PPP) mechanism. Basically, a well formulated selected PPP option can be an effective way to achieve value for money in public infrastructure investment. In addition to its advantage in mobilizing private investment, a PPP scheme can introduce competition among the prospective bidders such as that the public sector can benefit from the private sector excellent innovation in delivering a more efficient and reliable infrastructure services (Li, et.al, 2005; Kwak, et. al, 2009).

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The central government also seeks to promote private infrastructure investment in Indonesia by carrying out a number of events such as Indonesia Infrastructure Summit in 2005 and Indonesia Infrastructure Exhibition in 2006. However, most of projects offered at both events were percepted as not sufficiently attractive by the private sector. A study by Pribadi and Pangeran (2007) indicated that private sector actors are still concerned with the return on investment issues associated with the high level of uncertainty in predicting the project viability. Although there is no empirical evidence, there is a wide concensus on the importance of appropriate risk sharing for a successful PPP project. This concern has really been recognized by the Government of Indonesia through the Presidential Regulation No. 67 year 2005 concerning PPP in infrastructure provision, which stipulates that risks should be allocated to parties which are best able to control and manage the risks in order to ensure project efficiency and effectiveness. However, efforts are still needed to change the paradigm that a PPP scheme is just another type of project delivery similar to any other traditional project delivery methods and which separate the procurement of design and construction execution, where project information is sufficient enough to make more predictable assumptions to the parties. A PPP project usually takes place in less perfect situation related to information availability (Hurst and Reeves, 2004), thus all involved parties need to anticipate all possible contingency throughout the contract period (Katz, 2006). Within this context, an effective risk management system is a must because, from the public sector and in particular PPP procurement authority point of view, adequate risk management capabilities will greatly assist in managing the risks in a systematic way to improve the quality of decision making (AG DFA, 2006). Risk management should not be limited to only the process for identifying, analyzing and planning for response, but it should also be carried out in integration with the other processes within the organization. It should not also implemented as an ad-hoc process, despite the fact that a study by Akintoye, et, al. (1999 indicated that public sector risk management practices that deal with PPP transactions in United Kingdom are still on an ad-hoc basis, reflected by their unstructured applications. In many cases, for complexity reasons, risks are usually under estimated and allocated to parties without adequate knowledge and capabilities to manage the risks effectively, resulting in increased costs, project delays and services which fail to deliver value-for-money (Ng and Loosemore, 2006). Thus, it is important to ascertain the readiness of risk management process and practices within the public sector organizations aspiring to establish a PPP project, in order to have a better bargaining position with the partner(s). The study investigates the readiness level of organizational risk management of the public authority bodies implementing PPP in infrastructure provision in Indonesia, taking water supply infrastructure as the case study. It is based on the assumption that every organization should be able to measure its risk management capability, considering that there are many areas in risk management that need to be developed in a comprehensive manner to build a strong foundation towards an effective implementation of risk management (INCOSE, 2002). The urgency of risk management in PPP procurement and importance of adequate capability of public sector in terms of risk management discipline is discussed first, followed by the discussion of a proposed model for measuring the readiness level of risk management within the PPP context, including the result of investigation with analysis and conclusion.

2. The Need of Risk Management in PPP Project

Basically public-private partnership (PPP) can be described as a spectrum of possible cooperation between the public and private entities for the purpose to plan, design, construct, finance, operate, and maintain the infrastructure project and services. The term public sector refers to the services under the responsibility of Government which may be represented by the related Ministries acting on behalf of the central government, or a municipality/regency representing local government, and may include local state

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owned enterprises (SOE) providing the public services. On the other side, the private actors may include private businesses which could be a company or a consortium, as well as non-governmental organizations (NGOs) such as donor agency. Worldwide experiences show that PPP, if properly formulated, promises the following benefits (Harris, 2004; and Kwak, et.al., 2009) : increase the value for money in infrastructure development and services by providing more-efficient, lower-cost, and reliable services compared with service provided by public sector provider; reduce the project life-cycle costs and project delivery time; facilitates innovation and spread best practices; improve the quality and efficiency of infrastructure services; promote local economic growth by developing new businesses; and strengthening the national infrastructure. Given the technical, legal, social, political and economic complexity of infrastructure projects, with a broad range of risk and uncertainties in a long-term PPP contract, PPP procurement is a sophisticated process, and appropriate risk allocation between public (Government) and the private sector is the key for the achievement of value for money. As shown by the New South Wales Government (2006), one of the drivers of the value for money in the PPP scheme is improved risk management. However, despite its importance, a study of Pangeran and Wirahadikusumah (2010) found that risk management in value for money methodology is a difficult process and requires adequate ability from the public sector side, as there is no standard method for identifying and analyzing the risk in the process. In Indonesia, it is a fact that many government units may have limited special expertise needed to implement PPP transactions properly, in particular in risk management field. There is a need to enhance this capacity as well as to outsource the expertise support from outside, in the form of risk management consultancy or advisory services in areas where the government units may have limited expertise. For the public sector, the benefit of risk management in a PPP transaction may include (AG DFA, 2006) (i) enhanced performance delivery (through early risk identification, structured and systematic consideration of risks, effective risk allocation and monitoring); (ii) an accountable platform for project planning (i.e. improved value for money through appropriate and efficient risk allocation and management, reduction in project costs through development of a standardized process of allocating risk); and (iii) a robust decision making process (i.e. improved decision-making through development of a comprehensive Public Sector Comparator model including the impact of project risks; placing an agency in a better position to negotiate a project contract through gaining a better understanding of the project risks). For example, in the procurement stage, risk management is the key input in modeling public sector comparator for assessing quantitatively the potential value for money of a PPP proposal. If the project eventually reach financial closure and the project is executed, then risk management will continue to play a substantial role in project management over the life of the long-term contract. It means that risk management should not be limited to only the process for identifying, analyzing and planning for response, in an ad-hoc manner, but should also be carried out in integration with the other processes within the organization.

3. Research Approach The study developed a Risk Management Capability Maturity (RMCM) Model that aims to assess the risk management capability of involved parties in the PPP in infrastructure development. The model was used based on the understanding that the maturity of an organization can be used to describe the organizational readiness in introducing and/or implementing a particular management process and practices, as exemplified by Khalfan, et.al (2001) for concurrent engineering readiness in construction industry, and Bourne (2008) for stakeholder management relationship readiness in project management. Within this context, the term of risk management maturity can be defined as the description of the stages in the development of an organizational capability in introducing and implementing risk management process and practices, which can serve as a benchmark for other organizations (Hilson, 1997). The assessment tool, questionnaire form and data analysis, and sample of respondents are described bellow.

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3.1 Assessment Tool The measurement model defines the risk management readiness level into four stages i.e. level 1 (ad-hoc), level 2 (initial), level 3 (competent), and level 4 (excellent) (see Figure 1). The model comprises five attributes i.e. culture, process, experience, application, and partnership as measuring instruments, which are divided into eighteen sub-attributes i.e. risk awareness, attitude to risk management idea, perception on value of risk management, way for dealing with uncertainty, risk management strategy and policy, process formalization, process effectiveness, integration with other organizational process, personnel qualification, competency, training, knowledge management, standard application, method and tools, metric system, resource allocation, internal communication, and stakeholder management..
Excellent (Level 4)

Competent (Level 3)

Initial (Level 2)

Ad - hoc (Level 1)

Figure 1: RMCM model for assessing readiness of public sector risk management in PPP in infrastructure development Table 1 shows the detailed structure of the model in matrix form, where its elements provide the indicators for each sub attributes representing risk management maturity stages. Table 1: RMCM Model for assessing risk management (RM) maturity stages
LEVEL 1-Ad-Hoc Culture
No support from upper management , tend to be hostile

LEVEL 2-Initial
Upper management encourage passively (no real action to ensure its implementation). RM reports not used RM process viewed as additional overhead with variable benefits to organization

LEVEL 3-Competent
RM idea accepted and supported by upper management, direct participation to promote it.. RM reports used, although not consistently RM benefits are recognized, expected and believed to be useful and provide added value

LEVEL 4-Excellent
Top-down commitment to RM with leadership. Risk information used in decision-making. Organization provides reward for proactive efforts in term of RM Trust that RM will improve performance, including targets achievement. Active use of risk information to improve organizational processes and gain competitive advantage. Mechanism to respond to uncertain event developed. Risk information is actively used to improve performance and targets achievement

RM perceived as distraction

No approach to deal with uncertainty. Tend to continue with existing process, even in the face of project failures. Likely reactive and repetitive Unaware of the existence of risk and the need for management of uncertainty.

Able to respond with standard response mechanism (effectiveness not guaranteed), ignoring other available options Terminology to explain risk exists but not used consistently. Most staffs are aware of risk associated with their respective roles.

Strive to calculate each risk, options tailored to the considered responses

A detailed glossary to explain risks already exists and used consistently in all organizational aspects. All staffs are aware of the potential benefits of managing risk

All staffs are fully aware of the existence of risk and main negative and positive impacts/consequences to the achievement of organizations goals or targets. Organizational philosophy accepts the idea that people may make mistakes.

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LEVEL 1-Ad-Hoc Process

No formal procedures for dealing with uncertainty or risk

LEVEL 2-Initial
No RM plan. Informal risk processes. The existence of RM team is limited to specific projects/ operation. RM strategy and policies not yet consistently applied

LEVEL 3-Competent
Formalized generic RM process (i.e. identification, analysis and response) applied consistently in most project or operation RM strategy policies are accepted and applied in all organizational processes

LEVEL 4-Excellent
Formalized risk management process and active implementation in all organizational process, incorporated into quality system RM strategy and policies are regularly evaluated and refined to suit the various changes that occur

No RM strategies and policies

No evidence that RM has been done effectively

Little evidence; effectiveness depends heavily on the skills of project risk team and the availability of external support Attempt to apply RM principles is limited to the processes that are functionally related, e.g. budgeting RM qualification is limited to individuals who may have had little or no formal training. Most staffs have basic skills for participation in RM issues

Key steps of RM has been consistently implemented and there is evidence that it improves outcomes

RM plan always updated and mechanism for controlling and monitoring risk to ensure RM performance and achieving target is available RM is built-in into all organizational processes and directly linked to the quality system. All staffs are capable to use basic RM skills in order to support RM processes in organization

No RM effort or sporadic attempts to apply RM principles

RM is part of organizational process (cross-functional). RM unit or division may exists There is in-house core of RM expertise, formally trained to improve basic skills

Experience

No qualified staff for RM or who understand risk principles or language

No staff with RM competencies or understand or has experience in accomplishing RM procedures No RM training

Some staff are able to lead and take on RM initiatives

Some staffs are capable to act as mentors for others and able to improve their ability independently and formulate solutions to more complex RM issues In addition to regular training to enhance the ability (skills) of RM personnel, learning from experience is an integral part of RM process State-of-the-art tools and methods (the development of methods and tools in accordance with organization needs) Risk ideas applied to all activities; reporting, monitoring , controlling, and making decision are always based on risk.

Little RM training

Formal and periodic RM training

No knowledge management

The use of methods and tools are on ad-hoc basis, and information collected is not utilized optimally. No structured RM application. In many cases the risk strategy is selected without risk analysis in depth. Qualitative risk analysis methodology used exclusively

Specific methods and tools has been developed

Application

No risk identification and risk analysis performed

Structured and systematic RM application, ranging from identification, analysis and response.

No RM method and tools in use

Both qualitative and quantitative risk analysis methods are used

Integrated set of tools and methods. Both qualitative and quantitative risk analysis methods are used with great emphasis on having valid and reliable historical data sources to ensure the availability of reliable and credible information. Risks metric is used routinely; consistently receive feedback for improvement, tailored to the needs and characteristics of the business. Dedicated organizational resources at the corporate or institutional level

No risk metric in use

Organization still uses common measures

Risk metric system is collected (e.g. beta, valueat-risk, etc)

No dedicated resources for RM

There is resource allocation for RM, but not significant

RM is supported by adequate resources, implemented on project basis

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LEVEL 1-Ad-Hoc Partnership

No risk communication at all (internally)

LEVEL 2-Initial
Informal risk information

LEVEL 3-Competent
Already formalized risk communication channel

LEVEL 4-Excellent
Risk communication is run effectively at all organizational levels within the feedback mechanism for improvement Risk is consistently managed with the strategic partners. Negotiation of risk with stakeholders continues to be supported by knowledge, capability and compatibility of own RM system

RM is only done when required by the clients or partners. Unaware of the need for stakeholder involvement

Standardized processes for stakeholder management, but not yet accepted and used widely in the organization

Stakeholder management is viewed as essential to success of the project/ business. By sharing the benefits and risks, some key stakeholders have been involved.

3.2 Questionnaire Form and Data Analysis A self assessment questionnaire was developed for collecting information on the current organizational risk management status, based on respondents opinion, adapting Hilsons (2003) model for measuring the maturity level of organizational project management. The closed-type questionnaire comprises 18 questions reflecting the sub-attributes as depicted in the matrix, each question has 4 possible answer statements, each of them is given a score ranging from one (Level 1) to four (Level 4). The maturity index value of each attribute is the average value of the scores for the attribute (the total of the scores from all the questions divided by the number of the questions in the attribute). 3.3 Sampling of Respondents The targeted respondents of the survey are individuals representing local government units from Municipalities and/or Regencies related to PPP project procurement and Local Drinking Water Companies (Perusahaan Daerah Air Minum-PDAM), based on the consideration that there are two approaches in implementing PPP project in Indonesia for water supply sector. If it is a Greenfield project, (no prior service in the area) then the authority of contract is the Mayor or Regent. In this case PPP procurement authority is usually a grouping of several agencies forming a local PPP unit, for example, the local Development Planning Agency (BAPPEDA) and the local Office of Public Works join together to set up a local PPP unit. In the case of a PPP project in an existing service area, the authority of the contract is the local water company (PDAM). However, in practice, the PPP unit of a PDAM usually communicates with the PPP unit of the local authority. All samples were taken from jurisdictions where PPP has operated according to the Agency for Drinking Water Supply Provision Development Support (BPPSPAM)-Ministry of Public Works, or ready to offer and/or listed in the national priority according to the National Development Planning Agency (BAPPENAS).

4. Results and Discussion

The survey was conducted in the period from January to February 2010. The surveyed respondents consist of 16 organizations representing the local government agencies (Office of Public Works and BAPPEDA) and PDAM. More than two-third of the survey were done by direct interview, while the rest were communicated through mail. Some interviews involve only one respondent, while in other cases the interviews involve more than one person at the request from the interviewed parties in order to ensure the accuracy of the responses. Respondents came from seven provinces, i.e. North Sumatra, Jambi, and Lampung (in Sumatera Island) and West Java, Banten, Central Java and East Java (in Java Island). Figure 2 shows the distribution of respondents by region (a) and organizations that they were representing (b).

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East Java 19%

Sumatera 19%

Office of Public Works 13%

BAPPEDA 25%

Central Java 13% West Java and Banten 49%

PDAM 62%

(a) (b) Figure 2: Respondents distribution based on region and institution The survey shows that the average value of the maturity index is a 2.03, indicating that the risk management readiness for all the surveyed organizations is at the Initial level (Level 2), while the highest and the lowest values are respectively 2.43 and 1.50. Both of the values are obtained by local water company organizations (PDAM). In general, it can be said that the risk management process in the surveyed organizations is more or less informal and its implementation has not yet been consistent. Some of the personnel can take a risk management initiative and implement some specific applications, but this capacity was obtained in a self-taught manner, with no formal qualification. Consequently, the use of methods and tools continues to be on ad-hoc basis, and the collected risk information is not utilized optimally; there is no risk registration system available. Although contingency is recognized as one of the risk response mechanism that is often opted, it is often done without a comprehensive analysis due to limited knowledge of the methodology. Table 2 summarizes the obtained maturity index for each surveyed organization, locations and name of institutions are not disclosed for confidentiality. Table 2: Value of maturity index for all surveyed organizations
General Information Resp
Name of Organization Office of Public Works. BAPPEDA. BAPPEDA. BAPPEDA. BAPPEDA. PDAM. PDAM. PDAM. PDAM. PDAM. PDAM. PDAM. PDAM. PDAM. PDAM. Office of Public Works. No.of personnel +120 +40 +90 +80 +40 +295 +160 +1200 +315 +430 +430 +220 +364 +950 +417 +400 Annual Turnover (Billion Rp) 90 4.5 17 14 (N/A) 45 25 270 40 300 144 19 (N/A) 270 185 (N/A) Biggest Project Value in last 5 Cult. years (Billion Rp) 5 0.29 0.7. 2 1.2 (N/A). 1 20 3.5 4.5. 40 (N/A). (N/A) 12 (N/A) 3.35

Maturity Index Pro. 2.00 2.25 1.25 2.13 2.63 2.00 1.75 1.75 2.25 2.00 2.00 1.88 1.75 2.00 2.38 2.25 Exp. 1.88 2.25 1.50 1.88 2.00 1.63 1.75 1.50 2.13 2.88 2.00 1.63 1.88 1.38 2.25 2.13 App. 1.75 1.75 1.25 1.63 2.38 1.75 1.50 1.25 2.50 1.88 1.38 1.38 1.38 1.88 1.63 1.56 Part. 2.00 2.00 2.00 1.75 2.25 2.00 2.00 1.00 2.50 2.50 1.75 1.75 1.50 2.00 2.50 2.00 Ave. 2.10 2.15 1.63 2.10 2.35 1.88 1.88 1.50 2.43 2.38 2.00 1.83 1.65 2.05 2.38 2.21

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

2.88 2.50 2.13 3.13 2.50 2.00 2.38 2.00 2.75 2.63 2.88 2.50 1.75 2.13 3.25 2.94

Note: Cult (Culture); Pro (Process); App (Application); Exp (Experience); Part (Partnership); Ave (Average). Rp 1.000 = approximately USD 0.11 at the time of the study (February 2010).

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As shown, the values of risk management maturity index of the surveyed organizations vary significantly, and all (except for two organizations showing Level 3 for the culture attribute) are found to be below Level 3 (Competent). Figure 3 illustrates three spider diagrams showing the comparison of average maturity index of each assessment attributes for the three groups of respondents (Offices of Public Works, Bappedas, PDAMs), all showing that neither of them are at the competent level, with the Public Works group showing a little bit better for the culture attribute.
Culture
4.00 3.00 2.00

Culture
4.00 3.00 2.00

Culture
4.00 3.00 2.00

Partnership

Process
1.00 0.00

Partnership

Process
1.00 0.00

Partnership

Process
1.00 0.00

Application

Experience

Application

Experience

Application

Experience

(a) Office of Public Works

(b) BAPPEDA

(c) PDAM

Figure 3: Comparison of maturity index of grouped organizations The diagrams show that all of the groups have a more or less similar pattern of risk management maturity. All respondents stated that they are basically aware of the risk issue. There is a tendency that all respondents feel that their organizations have been in the right track in this regard and they insisted that the risk management principles have implicitly existed in their organization policy. However, the result does not indicate that the concept of risk management has really been formally accepted. The survey also shows that a number of organizations seemed to understand risk management as another area of management leading to impression that the literal concept of risk management is not yet well known. Some local government organizations also argued that the existing current regulations do not enable them to promote a drastic innovation outside their authority boundary. Basically the survey shows that there is no organization that wants to be considered as nave enough to say that their internal policy is opposing to the effort to anticipate any change toward improvement. Some organizations just described their risk awareness, for example, as an existence of concerns over potential problems that may accompany any bidding process, such as if the contractor cannot complete the work in accordance with the requirements, or if the decision to execute the project takes too long, resulting in project cost escalation. However, it should be noted that the attitude to have concern only does not guarantee that risk management principles have been applied, unless proven by concrete actions. Within this context, the survey indicates that the organizations could not demonstrate a product of internal policies that specifically describes the general and/or specific procedures to deal with uncertainty or potential problems which can occur in the future. The study also tried to explore the knowledge on PPP of each organization, either at the concept level or in practice. There is a consensus that the success of PPP can not be separated from effective risk management and appropriate risk allocation. However, the study indicates that the central government effort to introduce knowledge on PPP, including the understanding of various pre-conditions required for a successful PPP, is not yet well received at the local level. The BAPPEDAs, as the planning units in each Municipal/Regency, seem to be more optimistic and have a better knowledge about PPP. Similarly, the Public Works Office organizations are relatively more moderate when looking at PPP. On the other side, PDAMs tend to be more defensive concerning PPP. Actually, some PDAMs even consider that PPP will be more a competitor to PDAM rather than bringing benefits as used to be stated by PPP partisans. Some PDAMs from the areas where PPP schemes have been implemented are now starting to realize the

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emergence of various problems as a result of not anticipating for potential problems during the procurement stage in the past. It is no surprise that renegotiation of PPP contracts becomes one of the agenda of many local governments who have implemented PPP schemes.

5. Conclusion
The study investigate the development of a model for assessing the readiness level of organizational risk management of the public authority bodies implementing PPP in infrastructure procurement in Indonesia, taking water supply sector as a case study. The process is based on the concept of risk management maturity model using various indices of maturity for a series of attributes, i.e. culture, process, experience, application, and partnerships.. The study shows that the readiness level of risk management in the surveyed organizations is still in the Initial stage (Level 2), meaning that risk management principles have been applied but still limited to a small number of individuals and not supported by a formal or structured process. Although all the organizations do have awareness about the importance of risk management, its implementation is not yet effective and does not bring much benefit. The case study shows that the developed model can be used to provide information about the readiness of public authority organizations in implementing risk management in PPP projects transaction. The collected information from the assessment process can be used for developing strategies as to improve the risk management capability within the targeted organizations, in order to strengthen them for future planning and implementation of PPP projects.

6. Acknowledgement
The authors wish to thank all parties for their kind cooperation during data collection. Authors also acknowledge that the research has been supported by the Doctoral Student Research Grant year 2009 provided by the Directorate General of Higher Education, Ministry of National Education of the Republic of Indonesia.

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