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

Risk perception is a starting point of risk management. The proper risk perception makes it possible
to consider the measures for preventing the actualization of risk in advance and to minimize the risk
impact when it becomes actualized. Therefore, it is necessary to increase the ability of risk
perception of both the public and private sectors at the first stage of risk management. In a general
PFI project in Japan, a “risk allocation table” is created by the public and private sectors to perceive
specific and common risks. However, for the specific risks in each project, the public sector usually
does not have sufficient technical knowledge. Furthermore, there is no place where the public and
private can communicate for recognition of such risks.
As a countermeasure against these challenges, the implementation of risk workshops is an effective
method. Risk workshops are a place where stakeholders, such as private operators, the public sector,
and a project advisor, meet together to recognize the various risks accurately and discuss their
appropriate allocation and treatment methods. By providing this kind of forum for direct dialogue
between public and private sectors, they can communicate with each other about the overall
risk-related issues including the specific risks of a particular project. In addition, it would be
expected that the private side could propose risk management ideas to the public sector that go
beyond the traditional flow that the public side proposes the idea of risk allocation to the private
side.
In PFI projects in the UK, there is a forum called the "competitive dialogue procedure (CDP)"
where the orderer and bidders can discuss and strictly clarify each risk. Under the CDP, authorities
enter into a dialogue with bidders about their requirements before issuing a final tender. After the
final tender has been submitted, an authority may only fine-tune and clarify. Thus, CDP can
enhance the function of a risk perception between stakeholders. For the Japanese PFI to consider the
system of a risk workshop as an improvement in the robustness of the contract, this CDP approach
could be a useful reference.
Utilizing the Monitoring Function of Financial Institutions
Project finance is a financing method to limit the repayment to within the cash flow generated by
the business itself, and it does not depend on the value of the collateral and the creditworthiness of
the company. In general, financing is made to the SPC, which was established to execute the
business, and retroaction to its parent companies is limited. The reason why the project finance
method is desirable for PFI projects is that it can block the effects of corporate performance that
make up the SPC and ensure the independence and stability of the business. In addition, the lenders
play an important role in reviewing whether the private operators have the creditability and ability
to accomplish the project; therefore, the lenders can contribute to the stability of the business
through financial monitoring and intervention during the operation stage. The reason why such
actions can be expected is because the lenders also have a risk that their loans may not be fully
repaid if the project has a problem, which can damage the cash flow, or if a source of repayment
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