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

disappears. Therefore, project finance has a mechanism through which lenders can enhance the
stability of the business by managing the existing risks to pursue economic benefits.
However, in the Taraso Fukuoka case, the purchase of the facility was an obligation rather than the
right of Fukuoka City by the operator’s rationale. For this reason, the lender was guaranteed to get
the purchase amount even in case of the project’s bankruptcy and was completely risk-free for
repayment of the loan. Therefore, the lender did not have an incentive to check the financial
conditions of the operator through financial monitoring and intervening. Fukuoka City lacked the
recognition of a financial scheme at all, and the city was not able to quickly respond and take steps
towards business restructuring even when the conditions of Taraso Fukuoka became worse.
The monitoring function of financial institutions is not only one of the advantages of a PFI but also
the intent of private finance. Financial institutions determine whether they can fund at the planning
phase by reviewing the contents of the business plan and checking the validity, stability, and
profitability of the business to manage the loan risk. In addition, they continuously check whether
there is a problem in the management of private businesses through monitoring at the management
phase and attempt to restructure the business through project intervention if a risk would be
actualized. This inspection mechanism of the business plan and operation by the financial institution
is intended to introduce private capital into public works. A further understanding of the project
finance and its effective use is required for the public sector.
Summary
The features of risk management of PFI projects in Japan include the presence of the imprecise zone
of agreement and the lack of management expertise. As for the risk management expertise, many
cases of failure have been reported where a risk was actualized by inappropriate risk sharing or an
inefficient operation was made by incomplete contracts. In addition, to appropriately exercise the
monitoring function of financial institutions, a better understanding of project finances by the public
sector is required.
Additionally, in the PFI contract in Japan, there is a imprecise zone and a tendency to respond to
risks on the basis of a conventional but obscure agreement, as compared to the contracts in other
countries such as the UK. The UK-styled contract scheme is not necessarily desirable for Japan
from the viewpoint of both the public and private sectors; however, in the future, it will be
necessary to consider a more reasonable risk management and contract method.
It cannot be denied that the relationship between the public and private sectors still maintains the
tradition of an "ambiguous relationship", which has been unique in Japan (for details, see Appendix
1). Therefore, clarification of the responsibilities of risk allocation by utilizing the opportunity of a
risk workshop and building an equal relationship between the public and private sectors allowing
for their mutual understanding is required.
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