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

design-build-maintain-operate steps to achieve a higher profitability. Figure 2 compares public
works under the conventional delivery system with ones under the PFI. (Ohama, 2008)
Figure 2: Comparison of Public Works under Conventional Delivery Method and PFI
Source: Government of Japan, Cabinet Office, PFI Promotion Office (2011). PFI Annual Report (FY 2009)
Evaluation of the Value for Money (VFM)
In PFI projects, the concept of the VFM indicator, which represents an efficient and
economical use of government funds, is significant. The VFM is fundamentally produced from
two aspects, the enhancement of service quality and the reduction of cost. If the service quality
remains unchanged, a lower cost can achieve a higher VFM; however, if the cost is the same, a
higher service quality can result in a higher VFM. According to the “VFM Guideline”, the
selection of PFI projects should be based on whether the project can be achieved efficiently
and effectively by the private sector, and this decision is evaluated through the concept of the
VFM.
Fundamentally, the VFM can be calculated by comparing the public sector comparator (PSC 8 )
with the life cycle cost (LCC 9 ) of the prospective PFI project, each of which should use the net
8 The PSC is the net present value of the estimated amount of public financial burden throughout the project period when
the public sector conducted the project by itself. It is calculated based on the appropriate cash flow projection for the
lifetime of the project, and a prospective formation, such as outsourcing, should be assumed. The calculation includes all
the summation of all costs accrued over the various stages, including the design, construction, operation, and maintenance
stages. Risks in these stages and indirect costs are also quantified and included in the PSC.
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