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

Chapter 4: Risk Management of PFI
This chapter discusses the risk management of a PFI. First, an overview of risk management based
on the "Risk Allocation Guideline", which the Cabinet Office in Japan has developed, is reviewed.
Then, the issues of risk management in Japanese PFI are considered in more detail from the
following four viewpoints: risk allocation, expertise of contract, risk workshop, and monitoring by
financial institutions.
Overview of PFI Risk Management
Regarding the risk management of a PFI, " Risk Allocation Guideline" were compiled in 2001,
which provided the basic concept of risk allocation between the selected operators and the public
facilities administrator and assumed risk elements and their considerations based on the idea that
“risks should be allocated to the party best able to manage them.” (Government of Japan, Cabinet
Office, 2001) This section organizes and presents an overview of the risk management that is listed
in the actual guidelines.
Concept of Risk
Risk means the possibility of interruption or discontinuation of projects or economic losses
when it becomes apparent, although its exact impact cannot be assumed at the time of the
contract. To continue to implement PFI projects stably and continuously, advanced
clarification of the assumed risks during the implementation of the project and specification of
the measures to be taken when the risk becomes actualized are required.
Classification of Risk
In PFI projects, the risks that should be assumed in advance are expected to be numerous
because not only is the project team composed of a number of parallel organizations, including
private enterprises, the public sector, and financial institutions, but also because the project
period is lengthy. Therefore, to smoothly recognize or evaluate the risks and their allocations,
it is valuable to analyze the risk from various perspectives. Table 7 is a summary of the main
classifications and specific examples of these risk classifications.
Process of Risk Management
Risk management means effort for reducing the probability that risk exists to the greatest
extent possible and effort to minimize the consequences and their impact as much as possible
if the risk became apparent. Also, it refers to effort to reduce the impact on the project and
prevent the collapse of the project. Figure 12 is an example of a process from the recognition
to the allocation of risk for a PFI project, which is leading up to the sharing agreement.
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