Risk Management and Governance for PFI Project ... - Title Page - MIT

Introduction
Japan has a long history of public-private partnerships (PPPs). It has promoted many projects based
on the policy of PPP in various forms since the enactment of the “Private Sector Resources
Utilization Law” under Prime Minister Nakasone in 1986. Japan, however, has experienced many
failures in the long history of PPP. The representative example is the management failure of the
“Third Sector 1 ”, which means a joint corporation invested by both the public sector and private
sector. In fact, many of the third sectors, which were mainly in the field of urban development, were
successively bankrupted. In addition, large projects conducted by the third sector, such as Tokyo
Bay Aqua-Line and Kansai International Airport 2 , have raised serious questions because of their
optimistic demand forecasts and extremely large project costs in spite of their low profitability. The
reason for these failed or questionable projects is because the governance of the third sector did not
have a specific system of responsibility sharing but instead relied on a cozy relationship between
the public sector and private sector, and, eventually, the overall governance of the project did not
appropriately function.
Based on these failed experiences, the new scheme “Private Finance Initiative” (PFI) was
introduced and actively promoted with great expectations. PFI is based on the concept of clarifying
the shared responsibility by contractual governance, which solves the problem of the ambiguous
risk sharing that existed in the third sectors. Because the idea of a definite risk allocation of PFI
made it possible to produce the private sector’s ingenuities, many successful projects have been
implemented that have achieved economical and efficient operation by utilizing the dynamism of
private sectors. However, there are few PFI projects in Japan in the area of core infrastructure, such
as airports and railways, while most of the projects are in building construction. Yet, under these
circumstances, an amendment to the PFI law was enacted in May 2011 aiming to double the scale
of the PFI operations in the subsequent eleven years. This progression would be expected to further
increase the application field and the market size of the PFI. Based on this situation, this thesis
reviews the previous experience of Japanese PFIs and tries to propose policy recommendations
aiming for a better PFI project implementation in the near future. The following is a description of
the structure of this thesis.
Chapter 1 reveals the history of the introduction of PPP policy in Japan, cites some cases of failure
of previous third sector projects and takes into consideration the lessons learned from those cases.
Chapter 2 explains the general description of a Japanese PFI, which has been promoted due to the
failure of the third sector. Also, it clarifies the reason why the Japanese PFI has not yet been
prevalent. In addition, by pointing out the future expansion of the Japanese PFI market that is
1 "Third Sector", in Japanese, means the joint sector of the first (public) and the second (private) sectors.
2 Kansai International Airport Co., Ltd. is strictly not a “third sector” based on the general Commercial Code, but
equivalent to a special company based on the special law (Kansai International Airport Co., Ltd. Law).
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