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

Conclusion
Japan has repeatedly experienced many failures and learned various lessons in its long history of
public-private partnerships. Truly, each failed project has its own particular causes. However, if you
look for the common denominators among them, they would include the "ambiguous relationship
between public and private sectors", "insufficient knowledge of contractual governance and risk
management”, and an "opaque decision-making process".
The scheme of the third sector, of which many projects failed, had included all of the above factors.
In fact, the scheme lacked the specific contractual governance based on the assumption of the
ambiguous trust relationship and had the characteristics of a government-led project, where the
principles of competition did not work. For these reasons, this unclear responsibility sharing created
a cozy relationship between the public and private sectors; as a result, the scheme deadened the
vitality and ingenuity of the private sector that had effectively produced them.
Under the lesson of the third sector’s failure, a new method of PFI was introduced with high
expectations. Based on the three principles of "contract", “objectiveness", and "independence", the
PFI has been actively promoted as a replacement for the third sector to overcome its disadvantages.
Of course, however, the introduction of the PFI has not solved all of those problems. Some of cases
of failure, such as those described in this paper, have proved the weakness of the Japanese-style
PFI.
The insufficient knowledge of risk management and contractual governance might be derived from
the traditional Japanese-style governance that relies on the ambiguous trust relationship. To
overcome the problems related to the risk management, it is required for the government to promote
risk workshops for improving the stakeholder’s risk perception, to understand the mechanism of
private finance, and to further strengthen the guidelines, including those for a better risk allocation.
To improve the contractual governance, it would be effective to develop more precise contract
standards, create incentives for the contractor to be innovative, and stipulate detailed mechanisms
for change by assuming various future scenarios.
There are also problems in the opaque decision-making process, including that the VFM indicator
for determining the PFI method is quite arbitrary and the project evaluation system for PFI is not
sufficient compared to other countries. To increase the transparency of the process for decision
making, it is necessary to improve the accountability. And to do so, it is essential to strengthen the
"evaluation governance." At each phase of the project period, including the project-planning phase,
an independent audit by third-party organizations, such as the Board of Audit, would be required.
There are many challenges left for them including the development of audit frameworks.
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