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

method for high-risk parameters such as the "user fee income", the simulation and sensitivity
analysis could become more reliable.
For example, in France, the "Guideline for Finance Study of the Pre-Assessment" has been
published with an Excel simulation tool, where a variety of probability distributions are set for
each risk. Also, it is stipulated that a practitioner should input parameters, such as average
value and standard deviation, on the basis of an expert opinion. Thus, there are devices for a
reliable simulation. In the UK, there is the idea of "optimism bias". Optimism bias is based on
the fact that the parameters, such as cost and demand, tend to be evaluated optimistically while
ignoring a variety of unknown risks. This is also an effective device to prevent the
manipulation of the estimated parameters.
Arbitrariness of the Discount Rate
As for the arbitrariness of the social discount rate, the Board of Audit of Japan has published a
report "Implementation Status of PFI Projects" in an annual report for FY 2010. It reveals the
situation that the discount rates used to evaluate the VFMs varied between each project (Board
of Audit of Japan, 2011). For example, although the VFM guidelines recommend using the
risk-free rate for the discount rate of the VFM, more than half of the PFI projects have adopted
a value of 4.0%, which is listed in the MLIT’s guidelines for a conventional project "operation
policy of cost-benefit analysis" without clear grounds.
Arbitrariness of Reduction Rate
The reduction rate is an arbitrary percentage often used for the estimation of the VFM. In many
projects, when estimating the VFM, expense items, including design cost, construction cost,
operation and maintenance costs, are usually reduced to be multiplied by a certain reduction
rate to simplify the calculation of the PFI-LCC. According to a survey conducted by a public
sector about the calculation method of the VFM, nearly half of the businesses that responded
had calculated the expense items of the PFI-LCC using reduction rates. However, most of the
reduction rates were adopted without a clear basis, so they seem to be rather arbitrary.
Limited Scope of Assessment
There is also a problem in the scope of the project assessment by the VFM indicator. The
current VFM assessment is targeted only for the amount of public financial burden. VFM,
however, originally was aimed at examining how much the PFI project could supply
high-value services compared with the payment of the orderer. The improvement of the value
of services includes improvements of the convenience due to the private sector’s ingenuity, the
increase in the number of users, and the effect of early and fast service provisions. In the
present situation, however, such factors are not considered when calculating the VFM, and
their effects are only considered as the reduction of costs by using the aforementioned unclear
"reduction rate".
68