Managing partner relational and performance risks in public private partnerships (PPPs): leveraging social capital and management control systems
Creators: name: Senarath, Chathuri
Publisher: name: RMIT University
Year: 2024
Subjects: classificationCode: 350105
subject: Management accounting

description: Public private partnerships (PPPs) are a critical avenue for infrastructure development and the provision of public services. The inherent hybridity of these partnerships give rise to a plethora of risks for relationships between partners and the performance of the PPP organisation. While social capital mechanisms and management controls can support efficient and effective risk management within PPPs, empirical evidence distinguishing risk management challenges and solutions across different PPP organisational forms and their life cycle phases is scant.

Addressing the aforementioned limitation in extant literature, the present study focuses on two major PPP risks, namely, partner relational risks (i.e. relationship issues between partners) and performance risks (i.e. risks related to the project itself), and draws on social capital and management control system (MCS) concepts to better understand how social relationships and organisational controls can function to manage such risks.

The overall aims of this study are two-fold. First, to understand how PPP risks related to partner relationships and performance vary across two different organisational forms (i.e. contractual and institutional PPPs) and two distinct phases of a PPP life cycle (i.e. formation and operational phases). A contractual PPP is an outsourcing arrangement between public and private partners formed through a contract, while an institutional PPP is a joint entity established by the partners and which operates collectively. The second aim is to evaluate how social capital dimensions as construed by Nahapiet and Ghoshal (1998) from a three-dimensional lens (i.e. structural, relational and cognitive dimensions), and Simons’ (1995) levers of control (LOC) (i.e. belief, boundary, diagnostic and interactive) affect the relationship between PPP risks and performance. In doing so, the study sets out to identify how LOC are leveraged to build social capital, taking into consideration systematic variations in partner relational and performance risks across different PPP forms and life cycle phases.

The study solicits evidence from two case studies from Sri Lanka. The first case, referred to as Project Alpha, is a thermal power plant project formed as a contractual PPP to outsource electricity generation. The second case, referred to as Project Beta, involves an institutional form of PPP and is a terminal operation joint venture formed in the port sector. Sri Lanka was chosen as it is a developing country where PPPs are on the rise but which faces challenges at the macro (policy) level and micro (organisational) level. The data collection was primarily conducted through 36 in-depth interviews with senior managers and related stakeholders from both the public and private sectors, and data analysis triangulated with interview findings, documentary analyses and direct observations.

Drawing on agency theory, the study found partner relational and performance risks tended to be associated with information asymmetry and goal congruence perceptions between partners and the level of uncertainty facing the PPP. Further, partner relational risks appeared more visible in the institutional PPP compared to the contractual PPP as a consequence of challenges related to goal alignment. By contrast, information asymmetry was seen to elevate partner relational risks and performance risks with an increase in perceived environmental uncertainty. This situation is more apparent in the contractual PPP compared to the institutional PPP where the private partner tends to be more engaged in day-to-day management and hold greater levels of information than the public partner. Findings also indicate that partner relational risks tend to exacerbate when moving from the formation phase to the operational phase in both contractual and institutional PPPs as a consequence of increasing uncertainties around operational and due diligence matters. By contrast, performance risks appeared to manifest more acutely during the operational phase for the institutional PPP relative to the formation phase, while in contractual PPPs performance risks were largely mitigated through explicit contractual terms.

The study also highlights how social capital dimensions relate to risk management in different PPP forms and phases. In general, participants in the contractual PPP were found to highly value bridging ties (structural dimension), competency trust (relational dimension) and shared values (cognitive dimension) in their management of PPP risks. By contrast, in the institutional PPP more reliance was placed on bonding ties (structural dimension), goodwill trust (relational dimension) and shared vision (cognitive dimension) to manage PPP risks.

Finally, the results also reveal how belief, interactive, diagnostic and boundary LOC have been perceived to support social capital development among key stakeholders in both PPP forms. In the contractual PPP, managers preferred to use boundary and diagnostic controls to develop relational and cognitive social capital, while relying on interactive controls to build structural capital. Conversely, in the institutional PPP, more emphasis was placed on belief and interactive controls to build structural and cognitive social capital while more informal interactions supported structural social capital development. Nevertheless, the emphasis and manner of use of LOC were seen to differ, particularly between the formation and operational phases.

The present study contributes to PPP literature by providing much-needed, rich evidence on the nature of partner relational and performance risks under distinct types of PPP forms and phases. The study also provides a more fine-grained understanding of how social capital dimensions in conjunction with different use of LOC are interrelated and affect PPP risk management, with impacts on PPP outcomes. Practically, the study also informs strategic decision-making within PPPs where managers can become more aware of factors that affect partner relational and performance risks, and plan appropriate risk management strategies through focusing on social capital and complementary use of LOC. Furthermore, the present study also informs policymakers of the potential pitfalls to avoid when forming and operationalising contractual and institutional PPP arrangements, paying vital attention to accountability, access to information and clarity in formal agreements between PPP partners and related stakeholders. Finally, the overall findings of the study are likely to be of particular use to developing countries such as Sri Lanka where a lack of policy framework and strong institutional setting for PPP formation and governance may hamper opportunities to gain critical resources for national development.