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

Basics
● The plan of this project was to construct a citizen health spa, including a fitness club, by
using thermal energy produced by disposal burning to obtain the residents’ acceptance
for the construction of a disposal center.
● In March 2000, the implementation plan was published. The consortium, whose head was
a construction company (Ohki Co.), was established in November 2000, and the contract
was made in February 2001.
● After the design and construction, Taraso Fukuoka was opened in April 2002.
Unforeseen impact
● The SPC was in the red from the first year, and the balance had not improved in spite of
various countermeasures. Eventually, the result was an excessive debt in FY 2003
(ending in March 2004).
● The Ohki Co., which was the largest capital investor of the SPC (Taraso Fukuoka) and
had supported its financial management, began civil rehabilitation proceedings in March
2004 and ended in impossible-to-continue support. 13
Causes of problems
● Excessive transfer of demand risk: bid with a significantly low operating price that was
based on an optimistic demand forecast 14 . 15
● Inflexibility of project schedule: the city had set one year as the period from the
publication of the policy implementation to the agreement. It lacked time to modify the
schedule in accordance with the progress of the business and could not get sufficient
applicants from the private sector.
● Operator's poor risk management: the city was not fully aware about the need to
perform their own monitoring of financial management to prevent bankruptcy. Also, the
city did not prepare in advance for the provisions of the ordinances and procedures about
the change of the business operator in case the business management deteriorated.
13 The facility was closed in November 2004 once, but the new SPC took over the scheme of this project in February
2005, and it opened again in April of the same year.
14 The application period was extremely short (two weeks) and only two companies applied the bid. There is the opinion
that it had been possible to find that the demand forecast of Ohki Co. was too optimistic compared to other companies, if
there would have been plural bidders with longer application period. (Oshita, 2007)
15 Suzuki points out that one of the reasons for this is that the administrative agent (Ohki Co.) was a construction
company. There was the incentive for a construction company to discount the service purchase fee keeping the
construction cost high. (Suzuki, 2011)
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