Risk management and governance for PFI Project : technology policy lessons from the case of Japan

Abstract

Japan has a long history of Public-Private Partnerships (PPPs); however, it has experienced many failures but learned various lessons from them. The representative example is a management failure of the third sector, which is a joint corporation capitalized by both the public and private sectors. In fact, many of the third sectors were successively bankrupted or serious questions were raised concerning their decision processes and management systems. This is because the governance of the third sector did not have a specific system for responsibility sharing but instead relied on a cozy relationship between the public and private sectors. Based on these experiences, the new scheme "Private Finance Initiative" (PFI) was introduced and actively promoted with great expectations. PFI is based on the concept of clarifying the responsibility by contractual governance, which solves the problem of the ambiguous risk sharing. Because the definite risk allocation of the PFI makes it possible to produce the private sector's ingenuities, many successful projects have been implemented to achieve economical and efficient operations. Currently, the PFI projects in Japan have been limited in their application area and scale, but both are expected to increase due to an amendment to the PFI law that was enacted in May 2011. Hence, this thesis reviews the problems of Japanese PFIs and proposes policy recommendations. By citing some case studies, this thesis describes some problems that exist in Japanese PFIs regarding the public-private relationship, risk management, contractual governance, and decision-making process. Regarding the relationship and risk management, this thesis claims the need for risk workshops, an effective use of private finance, and an improvement of guidelines for a better risk allocation. Concerning the contractual governance, the thesis discusses the need to develop precise contract standards or guidelines that allow for the creation of proper incentives for the private sectors and the flexibility to appropriately deal with the risk and uncertainty derived from a long-term contract. With respect to the decision-making process, it also claims to increase the transparency and accountability of PFI projects through an evaluation by a third party.