Risk allocation of foreign funded infrastructure project a case study in south east Sulawesi

Abstract

The role of foreign investment in infrastructure development in Indonesia is quite significant. However, foreign funded infrastructure projects are considered as high risk business. Meanwhile, unmanaged or unmitigated risks are one of the primary causes of project failure. This research discusses risk allocation in contract clauses of EINRIP project in Southeast Sulawesi Province in Indonesia, by taking account contractual party’s perspective on potential risks in the project, based on their initial sources, and their magnitude on project’s performances, namely quality, time and budget. Among 50 risks identified in this research based on their initial sources, it was found that only 16 risks are significant to the project performance. The risks at national/regional level consist of inconsistence of government policy, inflation rate increasing, currency exchange fluctuation, tax rate increasing, and culture tradition differences. The risks at construction industry level involve non-standard contract form and differences in legal relationship between partners. The risks at company/project management level entail disadvantage contract, unclear detail design or specification, unfavorable sub-contractor, default supply of materials, equipments and plants and human resource shortage. The risks at project implementation level engage damage by human errors, incomplete design, and bad weather. However not all these risks are contained in contract through clauses. There are only thirteen risks that contained in the contract namely inconsistence of government policy, inflation rate increasing, currency exchange fluctuation, tax rate increasing, culture tradition differences, unclear detail design or specification, unfavorable sub-contractor, default supply of materials, equipments and plants, human resource shortage damage by human errors, incomplete design, and bad weather. While three risks are not contained in the contract namely non standard contract form, differences in legal relationship between partners, disadvantage contract. However these unstated risks are able to be omitted by the use of MDB Harmonised Conditions of Contract for Construction as the standard form of contract in this project. As addition, the application of Project Management Manual (PMM) as the guidance in implementing the project is pivotal. Therefore it can be concluded that MDB Harmonised Condition of Contract for Construction is able to cope with the risks that possible to occur in this project.