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

Figure 12: Process of Risk Management from the Recognition to the Allocation llocation
Source: Merna & Owen (1998). Understanding the Private Finance Initiative Initiative: The �ew �ew Dynamics of Project
Finance, Euromoney Publishing Ltd
Treatment
Avoidance
Reduction
Retention
Transfer
1. Risk recognition
• Recognize clearly risk factors and locations (Recognition of uncertainty. Recognize
where risks and what the factors of them are.)
2. Risk quantification
• Recognize the risks quantitatively (If the risk cannot be quantified, it will be
recognized qualitatively.)
3. Impact assessment
• Evaluate the degree of impact on the project when the risk was actualized.
(Considering how to respond it at the same time)
4. Evaluation of the ability for risk management
• Assessment (1) the ability to prevent the actualization of risks, (2) the ability to cope
with risks, and (3) the ability to control risks
5. Evaluation and consideration of mitigation technique of risk
• Consider and evaluate a method to reduce the overall and individual risks
(Considering an appropriate risk management techniques)
6. Decision of risk allocation
• Allocate the risks in the most appropriate entity to manage them
Table 8: Potential Risk Treatments
When there is no ability to respond to a risk between the parties, they share a risk by considering the
consequences in the case that the risk was actualized.
Manage a risk by utilizing a variety of techniques and minimize the degree of its impact to an
acceptable level. It is fundamental to reduce the probability of occurrence and devise a plan, which
can suppress the damage when the risk occurs.
Retention is adopted for a risk that can occur but cannot be eliminated. There are two methods for
this treatment: dealing with the risk when it occurs without being prepared in advance or setting aside
the necessary time and funds in advance. In the latter case, the cost can be lessened if the risk
appears.
By transferring the negative impact of the risk to a third party, such as investors and the trustees, it is
possible to avoid the financial impact. Usually a payment to the party who can accept the risk is
required. Although the contract price could become high, there is a merit to reducing the uncertainty
of the cost in the early stages of a project.
Source: Nagoya Urban Institute. (2008). Research on PFI.
55
Concept