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

Considering the preferable risk allocation for risks in each quadrant, the risks in the upper right
quadrant of the matrix are would be preferably borne by the private sector. Risks in the lower
left quadrant of the matrix, however, also have a rational reason for being borne by the public
sector. As for the upper left quadrant and lower right quadrant, a more detail consideration
using additional axes should be taken into consideration, which form a “risk allocation cube”
with the original two axes (See Figure 14).
Figure 14: Risk Allocation Cube
The third axis, “acceptability” indicates the degree that the private sector can tolerate the risk
by their managerial capability. This could possibly be called the indicator that is inversely
related to the expected value of the loss resulting from the risk. Acceptability should be taken
into consideration to ensure the continuity of the PFI project. For example, small risks can be
accepted by an SPC without major problems; however, if the risk is too big, there is a great
possibility that the SPC would go bankrupt, similar to the experience of Taraso Fukuoka.
Alternatively, this risk could become a burden on the operator’s management, such as the large
debt of Kansai International Airport. Also, the bigger the transferred risk becomes, the more
likely the competitiveness can be inhibited upon bidding.
Simulation of Risk Allocation Based on the Framework
Here, I would like to consider the preferred risk allocation for each risk, which was described
in the actual case studies. Table 10 calculates the preferred risk allocation by considering the
characteristics of each risk and assigning points based on six levels (0 to 5) for three factors
(acceptability, controllability, and predictability). Although this method includes arbitrary
assumptions, it can be useful for analyzing the characteristics of each risk.
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