Japanese Infrastructure Market Updates

Current Status and Issuesof Concession PFI
Ver.01

May 19, 2015

Sumitomo Mitsui Trust Research InstituteContents

I

Background ........................................................................................... 1
1 Infrastructure dealt with in this report ............................................... 1
2 The narrowing gap between supply and demand ............................ 2
2-1 Needs of public sector (supply side) ........................................ 2
2-2 Needs of investors (demand side)............................................ 3
3 Social significance of public infrastructure market andintroduction of concessions ............................................................. 3
3-1 Social significance of public infrastructure market.................... 3
3-2 History of public-private partnerships in Japan and introduction ofconcessions ............................................................................. 4

II Current Status of Concession PFI in Japan .......................................... 6
1 Size of market for concession PFI ................................................... 6
2 Current status of concession PFI in general .................................... 7
3 Airports ............................................................................................ 8
3-1 Sendai Airport .......................................................................... 8
3-2 Kansai International Airport and Osaka International Airport (KansaiInternational /Itami) ................................................................ 13
3-3 Other airport projects under examination ............................... 18
4 Roads ............................................................................................ 20
4-1 Aichi Prefectural Road Public Corporation ............................. 20
4-2 Other road projects under examination .................................. 25
5 Water systems ............................................................................... 25
5-1 Osaka City Waterworks Bureau ............................................. 25
5-2 Other water system projects currently under examination ..... 29
6 Sewages ........................................................................................ 30
6-1 Hamamatsu City Seien sewage treatment plant .................... 30
6-2 Osaka City Sewage Works..................................................... 32
6-3 Other sewage projects currently under examination .............. 33
III Issues of Concession PFI in Japan ..................................................... 34

I Background
1 Infrastructure dealt with in this report
There are various methods of classifying infrastructure, for example, “economic
infrastructure” and “social infrastructure”, or “greenfield” and “brownfield”. Anothermethod is to focus on the owning and operating entities and to classify infrastructure
into “public infrastructure” and “private infrastructure”. There are, in fact, various cases,
and infrastructure cannot always be clearly classified but, broadly speaking, in Japan’scase, infrastructure such as water systems and sewages, airports, roads, ports andharbours can be described as public infrastructure, while renewable energy facilities,
nuclear power, thermal power and other power plants, telecommunication facilities
such as base stations, and most railways can be described as private infrastructure.
The reason for intentionally saying “in Japan’s case” is that the situation differs fromcountry to country, and infrastructure such as roads and airports that is being privatizedoverseas is still public infrastructure in Japan, while railways that are often positioned
as public infrastructure overseas have been privatized in Japan.
Table 1.1 Basic scheme for concessions introduced in Japan
Ownership

Public sector
Consideration for establishmentof operating right

Provisionof services

Users
User fee

Establishment ofoperating rightOperating

right
SPC
(PFI Business Operator)
Commission fee

Loan

Financial
institutions, etc.

Equitycontribution

Business Operator

Sponsors,
investors, etc.
Source: SMTRI

Such “partial privatization” where the government grants a private-sector business
operator the right to operate public infrastructure on a long-term basis is called a“concession” and was first introduced in Japan at the time of the amendments to the
Act on Promotion of Private Finance Initiative (“PFI Act”) in 2011. However, in Japan,
concessions are only granted for operational (brownfield) public infrastructure that1

generates user-fee revenues, and they are not granted for availability-based
infrastructure (the type where service payments from the government go up or down
depending on the degree of attainment of service requirements). More specifically,
concessions may be granted for projects such as toll roads with toll revenue, airports
with revenue from landing fees, terminal buildings, etc., and water systems andsewages that generate user-fee revenues.
This report deals with public infrastructure that generates user-fee revenues and iseligible for concessions in Japan, and discussion of other kinds of infrastructure will besaved for another occasion.

2 The narrowing gap between supply and demand
The introduction of the concession scheme in Japan looks set to create opportunities
for investors (financial investors) to invest (equity) in public infrastructure, hardly everseen before. In other words, a market for public infrastructure-related transactions will
be borne in Japan.
The formation of such a market requires a “matching of supply and demand” between
the public sector that is the supplier of infrastructure and the investors that are thedemand side and, currently, due to the needs of the respective sides and the changing
environment, the gap between supply and demand appears to be narrowing.

2-1 Needs of public sector (supply side)
Japan’s public infrastructure was generally increasingly constructed from the period ofhigh economic growth in the 1960s until its peak around 1995 after the collapse of the
bubble. As this infrastructure stock gradually reaches the age of 50, the expanding
burden of maintenance, management and replacement costs is starting to become amajor social issue.
In the meantime, most public sector entities in Japan, including national and local
governments, are finding it difficult to secure budgets to spend on the maintenance,
management and replacement of infrastructure because they are hard up financiallyand there is also no prospect of a future increase in tax revenues due to a declining
birth rate and aging population and companies shifting to overseas operations.
Against this backdrop, national and local governments are starting to recognize thatthey will have to rely on private-sector investment capital to cover the shortfall that isstill going to arise despite the implementation of various measures to reduce future
maintenance, management and replacement costs such as rehabilitation, reduction
and disposal. The approach that it is more effective to utilize private-sector expertiseand capital with respect to maintenance, management and replacement is also2

beginning to catch on.

2-2 Needs of investors (demand side)
Investors currently find themselves in a situation where it is difficult to invest. They havethe capital to invest but there are no appropriate investment targets due to sustained
low interest rate environments around the world. In particular, an alternative to bondinvestment offering stable long-term cash flows is required, and infrastructure
investment is considered to meet such needs. In addition, infrastructure has a low
correlation to traditional assets such as equity and bonds, and is also consistent with
the needs of investments who want to achieve diversification benefits. Furthermore,
infrastructure investment is starting to be considered suitable from the viewpoint ofsocially significant investment, which has become a requirement among investors inrecent years.
There are also quite a few Japanese investors who have already made infrastructure
investments. However, most of these are investments in overseas infrastructure (funds)
because there is no market in Japan. The establishment of an infrastructure investment
market in Japan would also have huge advantages for such investors by making it
possible for them to invest in infrastructure that is closer to home without assuming
exchange rate risks. Meanwhile, Japan’s public infrastructure has the potential toattract attention from overseas investors as the infrastructure of a nation that is stablein terms of its national circumstances and legal system.

3 Social significance of public infrastructure market andintroduction of concessions
3-1 Social significance of public infrastructure market
The establishment of a market for public infrastructure-related transactions would not
only bring benefits for the public sector, investors and other direct market participants. It
also has enormous social significance.
To begin with, the establishment of a new investment market would lead to thecirculation of investment capital inside and outside of Japan, and revitalization of theeconomy (regional economies) and growth in employment could be expected.
Moreover, the introduction of market discipline to public projects that tend to be sloppily
managed could also be expected to improve operation efficiency and increasetransparency.

3

3-2 History of public-private partnerships
introduction of concessions

in

Japan

and

Public-private partnerships in Japan are said to have started in earnest in 1999. This isbecause this was the year when the Act on Promotion of Private Finance Initiative,modeled on PFI in the UK, entered into force. Since then, Japan has built up a decent
PFI track record, undertaking a total of 468 PFI projects costing 4.3942 trillion yen as ofthe end of September 2014. However, the nature of such projects is heavily biased
towards “services sold to the public sector” out of the three types of PFI, and this has
been regarded as a problem. Especially in the case of PFI consisting simply in thedevelopment of a public facility (called hakomono in Japanese) by a construction
company, etc. and deferred payment of the consideration by the public sector side,most of the project costs are supplied by banks in the form of public sector debt and theconstruction company in question makes a slight equity contribution, and so investment
opportunities for general investors were rarely ever seen.
Fig. 1.2 Three types of PFI project in Japan

Services sold to the public sector
Project
Agreement

Public sector

Provision ofservices

Users

Business operator
Servicepayments

Financially free-standing projects
Provision ofservices

Project
Agreement

Public sector

Business operator

Users
User fees

Joint ventures
Project
Agreement

Public sector

Provision ofservices

Business operator
Servicepayments

Users
User fees

Source: SMTRI

Since this can hardly be called full utilization of private-sector capital and expertise andalso deviates from the original aim of public-private partnerships, from around 2009, 10
years after enactment of the PFI Act, examination began with a view to further
promoting financially-free standing projects (and joint ventures), and this led to theestablishment and entry-into-force of amendments to the PFI Act in 2011. The system
which was then introduced to Japan for the first time as part of this reform was theconcessions system.

4

After that, despite the change of government from the Democratic Party of Japan to the
Liberal Democratic Party in December 2012, policy on public-private partnerships
remained unchanged and was if anything pushed more strongly. In June 2013, thePrivate Finance Initiative Promotion Corporation of Japan, a PPP infrastructure fund forfinancing (investing in the preferred equity and subordinated bonds, etc.) of PFI
projects that are either financially free-standing projects or joint ventures, wasestablished, giving fresh impetus to the supply of risk money for PFI projects. The
Action Plan Toward Fundamental Reform of PPP/PFI was also announced, specifying a
numerical target for the first time by saying that “the Japanese government would
promote PPP/PFI projects totaling 12 trillion yen over the next 10 years (2013 ~ 2022)”.
A year later, the government also set ambitious targets with regard to concession PFI
projects included in this action plan, saying it would accelerate the implementation of 2
to 3 trillion yen worth of this type of PFI project and implement 19 projects (six airports,
six water systems, six sewages and one road) over a three-year intensive
implementation period running to the end of FY2016.
Fig. 1.3 History of public-private partnerships in Japan andbackground to the introduction of concessions
Date

Matter

September 1999

Entry-into-force of Act on Promotion of Private Finance Initiative (PFI Act)

October 2009

Start of concrete discussions on amendments to PFI Act by the Growth Strategy Council

June 18, 2010

Approval of the New Growth Strategy by the Cabinet
 Incorporation of measures to enhance the PFI system, including introduction ofconcessions

March 11, 2011

Approval of Amended PFI Act by the Cabinet

November 30,
2011

Full entry-into-force of Amended PFI Act
 Full entry-into-force of amendments including “introduction of concessions”, and“introduction of proposal system by private sector”

June 5, 2013

Passing of bill for partial amendment of PFI Act
 Establishment of Private Finance Initiative Promotion Corporation of Japan

June 6, 2013

Publication of PFI Act Guidelines
Approval of Action Plan Toward Fundamental Reform of PPP/PFI Government decides to promote PPP/PFI projects totaling 12 trillion yen over the next
10 years (2013 ~ 2022)

June 16, 2014

Approval of Initiatives during the Intensive Implementation Period of the Action Plan
Toward Fundamental Reform of PPP/PFI With regard to concession-type PFI projects included in the Action Plan Toward
Fundamental Reform of PPP/PFI, the Government decides to accelerate theimplementation of 2 to 3 trillion yen worth of this type of PFI project and implement 19
projects (six airports, six water systems, six sewages and one road) over a three-year
intensive implementation period running to the end of FY2016 .

Source: SMTRI5

II Current Status of Concession PFI in Japan
1 Size of market for concession PFI
As explained earlier, in Japan, concessions are granted only for public infrastructurethat generates user-fee revenues. The materials for the meeting of the Industrial
Competitiveness Council on April 17, 2013 go into detail about the scale of suchinfrastructure. When we aggregate asset amounts for each type of infrastructure, forexample, 92 trillion yen for sewages, 46 trillion yen for toll roads, and so on and so forth,public infrastructure that generates user-fee revenues amounts to 185 trillion yen. In
other words, this amount represents the maximum potential size of the market forconcession PFI in Japan.
Meanwhile, we estimated, mainly from the Annual Report on National Accounts of 2013,that Japan’s entire public infrastructure, including public infrastructure that does not
generate user-fee revenues, amounts to around 750 trillion yen. In other words,
Japan’s public infrastructure amounts to around 750 trillion yen on a stock basis and, of
this, public infrastructure that generates user-fee revenues and is eligible forconcessions amounts to 185 trillion yen. And, for the present (the coming three years),
it is the government’s target as explained above to aim to create a market with respect
to around 2 to 3 trillion yen worth of such projects.
Fig.2.1 Japan’s public infrastructure and size of market for concession PFI

Aggregate value of public infrastructure
Around 750 trillion yen

Value of public infrastructure thatgenerates user-fee revenues
Around 185 trillion yen

Market size aimed for atpresent (over coming
three years)
Around 2~3 trillion yen

Source: SMTRI

6

2 Current status of concession PFI in general
As explained earlier, the government has set itself the target of accelerating
implementation of 2 to 3 trillion yen worth of concession PFI projects in Japan andimplementing 19 projects (six airports, six water systems, six sewages and one road)over a three-year period running to the end of FY2016, and the public and private
sectors are currently striving to achieve this target.
Fig. 2.2 Major concession PFI projects currently under examination in Japan
Present operating
entityGovernment

Subject infrastructure
Projects for which bids already invited
Major projects under examination

New KansaiInternational Airport

New Chitose
AirportOsaka City
Obihiro City

Water system,
sewageObihiro Airport

Kansai International
AirportGovernment
New KansaiInternational Airport

Sendai Airport

Osaka International
AirportShizuokaPrefecture
Shizuoka Airport
Government
Aichi Prefecture

Fukuoka Airport

Toll road
Government

Hamamatsu City
Sewagetreatment plant

Takamatsu
AirportSource: SMTRI

With respect to airports, projects at airports such Obihiro Airport, New Chitose Airport,
Shizuoka Airport, Toyama Airport, Kobe Airport, Hiroshima Airport, Takamatsu Airportand Fukuoka Airport are apparently being examined, in addition to the two projects at
Sendai Airport and Kansai International Airport/Osaka International Airport (KansaiInternational/Itami) for which bids for operating rights have already been invited, andthe target of 6 projects is beginning to look achievable.
Examples of overseas projects suggest that roads have even more hidden potential.

7However, there is currently an institutional obstacle posed by the Act on Special
Measures concerning Road Construction and Improvement, which does not permit thecollection of fees by the private sector, and the only project under examination is a
project by Aichi Prefectural Road Public Corporation, which is trying to overcome thisobstacle through the utilization of a Structural Reform Special Zone. That said, thetarget for roads is one project ~ possibly due to an awareness of the difficulties ~ and isthus also very achievable.
Meanwhile, the area in which the government is said to be furthest away from achieving
its target is water systems and sewages. The target is six water systems and six
sewages, making 12 projects in total, but apart from water system and sewage projects
in Osaka City and a sewage project (sewage treatment plant) in Hamamatsu City, noother projects are currently being examined in earnest.
As for the target of implementing around 2 to 3 trillion yen worth of concession PFI
projects in total, since the cost of the Kansai International Airport/Osaka International
Airport project (Kansai International/Itami) alone is expected to amount to around 2
trillion yen, the target will be almost achieved through this project, resulting in a lack ofbalance compared with the number of projects.

3 Airports
Previously, airports in Japan have been operated mainly by national and local
governments. However, there are now calls for more efficient operation utilizing
private-sector capital and expertise against the backdrop of competition withneighboring countries to capture demand for air transportation, amongst other factors.
After concessions were introduced following the amendments to the PFI Act in 2011, aframework for utilizing concessions in airport operations became evident throughdevelopments such as the enactment of the Act on Operation of National Airports
Utilizing Skills of the Private Sector in 2013, and examination of the privatization of
airports suddenly progressed. As a result, out of the four areas mentioned as targets for
introduction of concessions by the government, airports is the area in which mostprojects are currently underway.

3-1 Sendai Airport
BackgroundThe number of passengers using Sendai Airport, which is a national airport, and thevolume of cargo handled in the airport has been decreasing since a peak of 3.35 million
passengers in 2007 and 24,000 tons in 2000, respectively. However, Sendai Airport has

8enormous potential, with sufficient facilities and functions for international flight services
and an excellent location that benefits from convenient transport links with Sendai City,
the diverse regional resources of the Tohoku region, and clusters related to automotive
and other industries. Through revitalization of the surrounding areas, the airport is also
expected to play a role as a driver of the recovery from the Great East Japan
Earthquake.
The government now aims to privatize the operations of Sendai Airport and to realize
integrated and flexible management of Sendai Airport by integrating the operations of
the basic airport facilities, passenger building facilities, cargo building facilities andparking facilities. Through revitalization of the airport, the government also aims to
expand the non-resident population visiting from other parts of Japan and overseas andrevitalize the Tohoku region as a whole.
Fig. 2.3 Current Schedule for privatization of Sendai Airport

2014： Launch of Operation
MAR： Conclusion of the
NOV
Project Agreement： Establishment of the
NOVRight to Operate： Selection of the
AUG
Preferred Negotiation
Right Holder｜｜ Second Screening｜

FEB： Submission Deadline
MAY
for the second Bid｜｜｜ Competitive dialogues｜｜： Notification of the First
JAN
Screening results

JUL： Submission Deadline
DECfor the first Bid｜｜prior confirmation by｜
Miyagi prefecture｜： Announcement ofJUN
Application Guidelines： Announcement of
APR
Implementation Policy

Sendai

2016

2015

m axim um of 65
years(30y + extension
within 30y +force m ajeure)

Source: Produced by SMTRI based mainly on MLIT data

Project scheme
The government will select an operating right holder (SPC intended only for this project)
by inviting bids. The selected private business operator will operate the runways, etc.
(including collection of landing fees, etc.) by being granted the right to operate public
facilities, etc. by the government and will perform integrated operation of terminalbuildings, etc. by acquiring shares in the building company.

9

Fig. 2.4 Sendai Airport concession scheme

Government
Ownership of
public facilities

Project
agreement
Establishment ofoperating right
Provision of facilities
Monitoring ofoperations(Airport site,runways, etc.)

Payment ofconsideration

Private-sectorbusiness operator
Operating right(Integrated operation of
runways and airport
terminal buildings, etc.)
Provision ofservices

Airportterminal

Payment ofuser fees

Airline users
Source: MLIT data

Conditions of concession, etc.
—Scope of the business
The implementation policy specifies (i) ~ (iv) below as airport operating businesses and(v) as building facilities, etc. business, and states that integrated operation with the
Sendai Airport Access Line is also possible.
(i)

Airport Operating etc. Business (maintenance, administration and operation of
runways, etc., setting and collection of the landing fees, etc.)(ii) Airport

airnavigation

facility

operatingetc.

business(maintenance,

administration and operation of aeronautical ground lights, etc.)(iii) Environmental measures business (development and maintenance of green
zones and other buffer zones)(iv) Other incidental businesses (parking facility business, businesses and services
proposed by the Preferred Negotiation Right Holder (businesses and services
for a symbiotic relationship with local communities, businesses and services forpromoting the use of the Airport, etc.)(v) Buildings facilities business (passenger building facilities and cargo building
facilities)—Project Period
The period of the project is 30 years and there is an option for extension during the 30
years (only once). Even in the case of extension due to force majeure, etc. themaximum period of operation is 65 years.
—Setup of Usage Fee and bearing of costs
The project is a so-called financially free-standing PFI project where the operating right10

holder sets and collects the landing fees and other user fees, and pays all costs
necessary for implementation of the project out of such revenues.
—Treatment of the Replacement Investment etc.
The operating right holder may, at its own discretion, carry out maintenance on andadministration (replacement investment) of the facilities subject to operating rights, andthe facilities are owned by the government. The operating right holder may not, however,construct (new investment) or rehabilitate the facilities subject to operating rights.
—Consideration for the Operating Right
The operating right holder shall pay consideration for the acquisition of the sharesissued by the passenger building facility operator and the cargo building facility operator,
consideration for the acquisition of the assets for transfer, and consideration for the
grant of the operating right. However, the consideration for acquisition of the shares ofthe passenger building facility operator and the cargo building facility operator is around
5.7 billion yen, and the implementation policy states that “only the proposal for an
amount more than 0 yen will be accepted” as the consideration for acquisition of theoperating right.
—Risk Allocation
The implementation policy states that since the Operating Right Holder may establish
and collect the landing fees and other user fees, any risk associated with the project
shall be borne by the operation right holder. However, risks listed in Fig. 2.5 areenvisaged as risks that will be exceptionally borne by the government, including the riskof force majeure such as a large disaster.
Fig. 2.5 Risks borne by public and private sectors in Sendai Airport concession PFI
Risks (excerpt)

Government

Private Sector(Operating Right Holder)

Business risks in general,
including airport demand-Force majeure(large natural disaster, etc.)(Required to purchaseinsurance)

Liability for latent defects

(Latent defects founds
within 6 months)-

Particular change of acts
(applicable to the project)

-Emergency events(Article 29, Paragraph (1), Item (ii)of the PFI Act)-

Source: Produced by SMTRI based mainly on MLIT data

11

Status of invitation and selection
Following the announcement of the Implementation Policy on the Qualified Project Etc.
for Sendai Airport Operation on April 25, 2014, MLIT announced the Application
Guidelines on the Qualified Project Etc. for Sendai Airport and Miyagi Prefectureannounced Participation Requirements for Selection of Business Operator Applicantson June 27, 2014. Later, following a briefing on the application guidelines, submissionof statements of interest in participation, and notification of the results of participation
requirement screening, MLIT closed applications for the first screening on December 5,
2014. At this stage, the media reported that the following four groups had applied. On
January 26, 2015, it was also reported that MLIT had notified all these four groups thatthey had passed the first screening.
Fig. 2.6 Four Groups reported to have applied for right to operate Sendai Airport

Mitsubishi Estate, Taisei Corporation, Japan Airport Terminal,
ANA Holdings, Sendai Television
Mitsubishi Corporation, Rakuten
Tokyu Corporation, Tokyu Land Corporation, Maeda Corporation,
Macquarie Group (Aus), Toyota Tsusho
AEON Group, Kumagai Gumi
Source: Produced by SMTRI based on Nihon Keizai Shimbun (December 5, 2014)
and other media reports.

Points for attention in the future
The Sendai Airport project has been called a “good project” by those involved as theprice is affordable and there are also few restrictions. The four groups that passed thefirst screening are all strong candidates and, whichever group becomes Operating
Right Holder, there will no doubt be high expectations for the revitalization of the airport
and the surrounding area after the start of operation.
On the other hand, it is feared that the degree of capital market involvement such as
financial investors and project finance will be limited because the expectedconsideration for the operating right is not very high and, on the strength of this project
alone, there is little hope of the establishment and development of the infrastructure
investment market in Japan.
There are also reports that the deadline for the second screening is expected to beextended due to delays in the proceedings.

12

3-2 Kansai International Airport and Osaka International Airport(Kansai International /Itami)
BackgroundAs a result of the management integration of Kansai International Airport and Osaka
International Airport on July 1, 2012, the operations of both airports were transferred to
the wholly government-owned New Kansai International Airport Company, Ltd. “theNKIAC”), to promote improvement in the efficiency of operations and expansion in airtransport demand through collaboration between the two airports. The NKIAC decided
to establish operating rights on the two airports mainly for the following three purposes
and to consign the business to a private-sector business operator.
(i)

Revitalization and enhancement of the function of Kansai International Airport as
an international hub airport including improvement of transit between
international and domestic flights(ii) Operation of Osaka International Airport as an environmentally friendly urban
airport, improvement of airport access for meeting the needs of users, etc.
(iii) Early and certain repayment of debts using the consideration received for theoperation right
The NKIAC then announced the Implementation Policy on July 25, 2014 and theApplication Guidelines on November 12, 2014 and is now in the process of selecting apreferred negotiation right holder in preparation for the start of operation around
January 2016.
Fig. 2.7 Current Schedule for privatization of Kansai International Airport andOsaka International Airport (Kansai International/Itami)

2014

2016
JAN:
Commencement of the Project： Execution of the
SEP
Project Agreement： Grant of the Operating
SEP
Right

： Selection of the
JUL
Preferred Negotiation
Right Holder： Submission deadline ofJUN
the Second Screening
Documents

Competitive dialogues

Pre-competitive dialogues： Submission deadline of
MAY
the First Screening Documents｜｜｜： Submission deadline of
FEB
the Intent Statement ofParticipation： Notification ofDEC
participation requirements
screening results： Announcement of
NOV
Application Guidelines： Announcement of
JUL
Implementation Policy

KansaiOsaka

2015

45 years(not beextended)

Source: Prepared by SMTRI based mainly on data released by the NKIAC

13

Project scheme
The preferred negotiation right holder that is selected by the NKIAC and concludes abasic agreement will establish an SPC intended only for the execution of the project.
The SPC will become the operation right holder upon being granted operating rights
with respect to the airport site and facilities necessary for implementing specified
businesses located in the vicinity of the airport including runways, taxiways, aprons,
parking facilities, passenger facilities, cargo facilities, offices and retail outlets (airport
facilities). The operation right holder will conclude a project agreement with the NKIAC
and implement the project upon transfer of the stock, agreements and movables of
New Kansai group companies from the NKIAC in accordance with the provisions ofsaid agreement.
Fig. 2.8 Concession Scheme of Kansai International Airport andOsaka International Airport (Kansai International Airport/Itami)
Sale of airport operating right
The NKIAC

Operation Right Holder

Establishment andadministration of airport

Operation of airport
Concession fee
Utilization of private-sector
management skills

Repayment of debt of
Kansai International Airport

Source: MLIT data

Conditions of concession, etc.
— Scope of the business
The scope of the airport operation project for the Kansai International Airport andOsaka International Airport (Kansai International/Itami) consists of the mandatory
businesses (i) to (vii) below and optional businesses (businesses that serve thepurpose of the project and require the approval of the NKIAC).
(i)

Operation, maintenance and administration of the Basic Airport Facility etc.
（runways, taxiways, aprons, car parking lots, water discharge facilities androads）(ii) Operation, maintenance and administration of the Airport Air Navigation
Facility(iii) Operation, maintenance and administration of the Airport Function Facility（passenger facilities, cargo facilities and Aircraft Fueling Facility）(iv) Operation, maintenance and administration of Airport Convenience Facility

14

（ offices, shops, accommodation facilities, resting facilities, observation
facilities and facilities for tour）(v) Environmental Measures Business(vi) Operation, maintenance and administration of the Access Facility（excluding
the Kansai International Airport Access Bridge (road part) and the railway
facilities of the Kansai International Airport Access Line）(vii) Incidental Business （ Lease of land to the airport offices and CIQ, etc.,
Operation, maintenance and administration of company housing, etc.）— Project Period
The period of the project is from project commencement date until March 31, 2060, andwill not be extended.
— Setup of Usage Fee and bearing of costs
The project is a so-called financially free-standing PFI project where the operation rightholder may set and collect the usage fees such as landing fees, air navigation facility
user fees, passenger facility user fees and parking facility user fees.
— Treatment of the Replacement Investment etc.
In principle, the operating right holder may, at its own discretion and expense, carry out
maintenance, repair and expansion of the airport facilities, and such facilities will
belong to the NKIAC. The operating right holder may, however, not make newinvestment in the construction of runways, etc., which is outside the scope of theoperation rights or rehabilitate the facilities.
— Consideration for the Operating Right etc.
The minimum proposal amount of the consideration for the Operating Right shall be theamount of the base price (39.2 billion yen (annually)) after deducting the estimatedamounts of Revenue Sharing Fees (voluntary) and the estimated amounts which taking
into account an equivalent to the interests of the Performance Guarantee Deposit.
To secure the performance of the Project Agreement, in addition to the consideration
for the Operating Right, etc., the Operating Right Holder shall pay Performance
Guarantee Deposit. The minimum amount of Performance Guarantee Deposit shall be
175.0 billion yen, and only such proposals with amounts in excess of this amount shallbe accepted. If the Operating Right Holder has been properly performing its obligationsin accordance with the Project Agreement, the Performance Guarantee Deposit shallbe returned to the Operating Right Holder in proportion to the years that have elapsed

15

since the Project Period commenced.
— Risk Allocation
The implementation policy states that since the operating right holder may establish
and collect the landing fees and other user fees, any risk associated with the project
shall be borne by the operation right holder, in principle. However, risks such as thefollowing are envisaged as risks that will be borne by the NKIAC to a limited extent,
including the risk of force majeure such as a large disaster.
Fig. 2.9 Risks borne by public and private sectors in the Kansai International Airport
and Osaka International Airport (Kansai International/Itami) concession PFI
Risks (excerpt)

Government

Private Sector(Operating Right Holder)

Business risks in general,
including airport demand-Force majeure(large natural disaster, etc.)(Required to purchaseinsurance)

Liability for latent defects

(Latent defects found within
24 months/12 months)-

Particular change of acts
(applicable to the project)

-Emergency events(Article 29, Paragraph (1), Item (ii)of the PFI Act)-

Ground settlement of the Airport
site (additional measures)(Borne to the extent
specified in theRequirements)

Source: Prepared by SMTRI based mainly on data released by the NKIAC

Status of invitation and selection
The results of Participation Requirements Screening were announced on December 26,
2014, and 20 companies from both inside and outside of Japan passed theParticipation Requirements Screening.

16

Fig. 2.10 Companies which passed the Participation Requirements Screening
regarding the Qualified Project, etc., for Airport Operations of Kansai International
Airport and Osaka International Airport (Kansai International/Itami)
Consortium representative
company candidates

Consortium constituent member candidates

 AMP Capital Investors Limited

 ORIX Atlantia S.p.A.

 Sumitomo Realty &Development

 Changi Airports International
Pte. Ltd.
 Ferrovial Aeropuertos S.A.U.

 Daiwa House Industry

 Global InfrastructureManagement, LLC

 Tokyu Corporation

 GMR Infrastructure Limited

 Nippon Life Insurance IFM Investors Pty Ltd

 Marubeni Corporation

 Macquarie Capital Group Limited
 Manchester Airports Holdings
Limited Mitsui Fudosan Mitsubishi Corporation

 Public Sector Pension
Investment Board Mitsubishi Estate

 VINCI Airport S.A.S.

Source: Produced by SMTRI based on release of the New KansaiInternational Airport Company (December 26, 2014)

Points for attention in the future
In the case of the Kansai International Airport and Osaka International Airport (KansaiInternational/Itami) concession PFI, the high level of the consideration for the operationright, which is said to amount to around 2 trillion yen over the total period of the project,
is a general point of concern. Even if EBITDA (earnings before interest, taxes,
depreciation, and amortization) is 70 billion yen, the consideration is around 30 times
this, far exceeding 15~20 times EBITDA, which is said to be the average in similarcases overseas. There is, therefore, concern over the small number of business
operators that applied and when, on February 10, 2015, the deadline for submission of
the first screening documents, which was initially February 16, was extended for threemonths, these concerns grew even bigger. As a result of this extension, extension of
the rest of the schedule is also expected.
On the other hand, with ORIX expressing its intent to participate in collaboration with
VINCI Airport, there are those who see the consideration for the operation right, whichis generally considered high, as valid provided there is an appropriate growth strategy
that includes tapping into demand for air transport among LCCs, and attention is
focused on the future moves of candidate companies.
Since the consideration for the operation right will in any case be high, attention is also17

focused on the capital structure, which will include the Private Finance Initiative
Promotion Corporation of Japan, a public-private investment fund.

3-3 Other airport projects under examination
Takamatsu Airport (local government-administered airport)
Kagawa Prefecture began properly examining introducing consignment of the operatingrights of Takamatsu Airport using MLIT’s “innovative public-private partnership support
project” scheme in FY2013. Later, in March 2015, the prefecture revealed plans forprivatization by the spring of 2018. This fiscal year, Kagawa Prefecture began
preparations in earnest, including a survey of the current status of airport facilities,
renewal of the implementation policy and project agreement, and examination of the
proposed project scheme, and plans to announce the bidding conditions, etc. in thespring of 2016 at the earliest.

Shizuoka Airport (local government-administered airport)
Since the opening of Shizuoka Airport in 2009, an airport operating company (Mt. Fuji
Shizuoka Airport Co., Ltd.) established through capital contributions exclusively fromlocal companies has operated the passenger terminal buildings and also performed
administrative operations for the basic airport facilities as designated administrator.
However, after much deliberation, including a feasibility study for introduction of theright to operate a public facility, etc. as an innovative public-private partnership support
project adopted by MLIT in FY2012 and meetings of Shizuoka Prefecture’s Council ofExperts, it was decided that the final airport operating structure should be a
private-sector entity which was assigned the right to operate a public facility, etc., andShizuoka Prefecture is now working towards realization of this plan. In 2014, as part ofthis, Shizuoka Prefecture made a capital contribution to the airport operating company(becoming a major shareholder alongside two private companies). It also bought thepassenger terminal buildings, strengthening prefectural involvement in airport
operations while maintaining the framework of the designated administrator system.
At the Prefectural Assembly in December 2014, Governor Kawakatsu said that “Theright to operate a public facility, etc. will be introduced at the earliest in FY2019 after
expiration of the current designated administration period. To this end, there will be
statements of interest from private-sector business operators in FY2017 andprocedures for entering into an agreement in FY2018.”

Obihiro Airport (specific local government-administered airport)
Obihiro airport is a specific local government-administered airport. The central

18

government established the airport and commissioned Obihiro City to administer it. The
airport is being examined as an innovative public-private partnership support project
adopted by MLIT in FY2014, including a project feasibility study for operation of a public
facility, etc.

New Chitose Airport (central government-administered airport)
The operation of New Chitose Airport has been the subject of discussion at an advisory
panel of experts since 2011, and a report proposing changes such as the integration of
airport operation, the commissioning of operation to the private sector and theintegrated operation of other airports within Hokkaido area was published in March
2012. Later, in June 2014, Hokkaido Airport Terminal Co., Ltd., which operates the
airport buildings, stated that it was aiming for privatization within five years, but
Hokkaido has been said to be cautious about the privatization of New Chitose Airport.
However, expectations for airport privatization are picking up again, with the Hokkaido
Shimbun reporting in January 2015 that the Hokkaido Prefectural Government wasconsidering approving privatization. However, it was also conveyed that the integrated
operation of other airports within Hokkaido area will be addressed in the future and that,for the time being, the prefectural government will consider the privatization of New
Chitose Airport only. The plan appears to be to increase New Chitose Airport’s ability to
attract passengers as the hub airport within Hokkaido area and create synergies forother airports within the prefecture through increased connecting flights via New
Chitose. In any case, New Chitose Airport is seen as one of the most high quality
projects and it could become a major project with a sale price exceeding 100 billion
yen.

Fukuoka Airport (central government-administered airport)
The “Fukuoka Airport operations consultative committee,” established by Fukuoka
Prefecture and Fukuoka City in 2013, looked at outsourcing the operations of Fukuoka
Airport to the private sector, and submitted its report in October 2014. The following
month, the Governor of Fukuoka Prefecture and the Mayor of Fukuoka City together
expressed their consent to the consignment of airport operations to the private sector.
They revealed a plan to increase the convenience of the airport by consigning its
operation to the private sector, including using part of the proceeds from the sale of theoperating right to build a second runway, and to link this to regional development. They
plan to announce the Implementation Policy by the end of FY2016, select the Business
Operator that will be consigned the operating right from the spring of 2017, andprivatize the airport around April 2019. They aim to complete the new runway, which isestimated to cost 180 billion yen, around 2024.

19

4 Roads
Under existing legislation in Japan, privatization of toll roads using the concession
system is difficult. This is because the Act on Special Measures concerning Road
Construction and Improvement only allows road administrators such as prefectural
governments and local road public corporations and expressway companies to build or
rebuild roads and collect tolls, and does not permit the operation of toll roads byprivate-sector business operators. Another major obstacle has been that the act also
assumes that road construction costs will be recovered through the toll revenues
collected within a certain period (full-cost-recovery principle) and the roads will then be
toll-free. It does not allow inclusion in tolls any margin of profit beyond construction,
reconstruction, maintenance, repair and administration costs.
Against this background, Aichi Prefecture is attempting to realize operation of toll roads
by a private-sector business operator through utilization of the system of special zones
for structural reform. However, there are no other projects under examination at thepresent time. That said, the target for concession PFI roads projects by the end of
FY2016 is one project, and the Aichi Prefecture project will probably be the only projectthat will be granted a concession for the time being.

4-1 Aichi Prefectural Road Public Corporation
Background
Aichi Prefectural Road Public Corporation is attempting to get a private-sector business
operator to operate eight of the roads for which it collects tolls, thereby creating new
business

opportunities,

providingaffordable,

high-quality

services

through

private-sector ingenuity, and revitalizing the local economy including development of
the areas served by the roads.
In May 2014, following a proposal from Aichi Prefecture, the government (Headquarters
for the Promotion of Special Zones for Structural Reform) approved a plan to make an
exception to the Act on Special Measures concerning Road Construction and
Improvement, including granting authority to collect tolls to a private-sector business
operator that has the right to operate a public facility, etc., to enable operation of tollroads by a private-sector business operator. In October 2014, a bill was submitted to an
extraordinary session of the Diet, but the bill was shelved and then scrapped when theHouse of Representatives was dissolved for a general election. On April 3, 2015, thebill was resubmitted to the 189th ordinary session of the Diet. If the bill is passed in thissession of the Diet, this will be a big step towards realization of the privatization of tollroads, and the operation of toll roads by a private-sector business operator is expected20

to start in 2016.
Fig 2.11 Events leading to the examination of privatization
by Aichi Prefectural Road Public Corporation
Date

MatterMarch 2012

Proposal of special zone for structural reform (21st proposal) by Aichi Prefecture, asking forspecial measures to allow entry of private-sector companies to the toll-road sector

August 2012

In the government’s plan in response to 21st proposal of special zone for structural reform(decision by Headquarters for the Promotion of Special Zones for Structural Reform), thegovernment decides to consult promptly with Aichi Prefecture and reach a conclusion by May
2013.

May 28, 2013

Proposal “for realization of operation of toll road business by private-sector business operator”
by Aichi Prefecture
Operation of toll road business by private-sector business operator
Granting of incentives to private-sector business operator
Continued collection of toll revenues to improve and maintain convenience of roads

April ~ June 2014

“Gathering of opinions on operation of toll road business by private-sector business operator”
by Aichi Prefecture

May 19, 2014

Government’s plan in response to 24th proposal of special zone for structural reform (decision by
Headquarters for the Promotion of Special Zones for Structural Reform)
Special regulatory measures to be taken in special zone for structural reform“An exception shall be made to the Act on Special Measures concerning Road Construction
and Improvement, including granting authority to collect tolls to private-sector business
operator that has right to operate a public facility, etc. to enable operation of public
corporation-administered toll roads by a private-sector business operator.”

October 2014

Bill to amend part of the National Strategic Special Zones Act and Act on Special Districts for
Structural Reform submitted to the Diet in order to enable operation of public corporationadministered toll roads by private-sector business operators

November 2014

Bill shelved and scrapped

December 2014

Aichi Prefecture passes bill to change business of Minamichita Road, Chitahantō Road,
Chitaōdan Road and Chubu International Airport Connecting Road. Extends toll collection period
to March 31, 2046.

April 3, 2015

Bill to amend part of the National Strategic Special Zones Act and Act on Special Districts for
Structural Reform resubmitted to the Diet

Source: SMTRI based mainly on data released by the Cabinet Office’s
Regional Revitalization Promotion Office and data released by MLIT

Also in tax system reform requests for FY2015 related to this matter, the following twochanges were approved.
(i)Reduction in the rate of registration tax for registration of the right to operate apublic facility, etc. in relation to the toll road business of a local road public
corporation to 0.0005% (usually 0.001%) for a limited period of two years(period of application: FY2015 ~ FY2016)(ii) Toll roads administered by local road public corporations come under “roads for
public use” and are, therefore, not subject to fixed asset tax and will still not be
subject to fixed asset tax even in the event of utilization of the concession
systemThe total revenue of the eight roads in question is around 17 billion yen (FY2013) andnone of roads is making a loss. Around half of this revenue was applied to recovery of
construction costs, etc. but there are also apparently some roads where recovery of21

costs is not going as initially planned. This is why the introduction of concession is
being examined, but there are also growing expectations for various synergies such as
the expansion of business opportunities related to the project and the creation of new
jobs.

Project scheme (planned)
Aichi Prefectural Road Public Corporation will grant a private-sector business operator
the right to operate toll roads (authority to collect toll charges, etc.) in accordance with
the Act on Special Measures concerning Road Construction and Improvement. The
operating right holder will be allowed to undertake operations such as the maintenanceand repair of the subject roads, collection of toll charges and traffic administration, andwill also be allowed to undertake businesses aimed at revitalization of the local
economy such as development of the areas served by the roads.
Fig. 2.12 Scheme of Aichi Prefectural Road Public Corporation’s
concession project
Minister of Land, Infrastructure,
Transport and Tourism
License(Ownership)

Granting of operating right(Operating right)
Private-sectorbusiness operator

Local road public corporation
Payment of consideration

User fee
Users

Source: MLIT data

Conditions of concession, etc. (Planned)— Scope of the business and Project Period
The scope of the project is eight out of the roads for which Aichi Prefectural Road
Public Corporation collects tolls (total length 72.5km). The project will end with theexpiration of the toll collection period of each road licensed by the Minister of Land,
Infrastructure, Transport and Tourism. In December 2014, the Prefectural Assembly
passed a bill changing the business including the construction of interchanges andparking areas with respect to four out of the eight roads in question: Chitahantō Road,
Minamichita Road, Chitaōdan Road and Chubu International Airport Connecting Road.
As a result, the toll collection period was extended to March 31, 2046.

22

Fig. 2.13 Roads included in Aichi Prefectural Road Public Corporation’s
concession project and toll collection periods
Name of road

Length(km)(1) Chitahantō Road

20.9

July 15, 1970 - March 31, 2046

(2) Minamichita Road

19.6

March 1, 1970 - March 31, 2046

(3) Chitaōdan Road

8.5

April 1, 1981 - March 31, 2046

(4) Chubu International
Airport Connecting Road

2.1

January 30, 2005 - March 31, 2046

(5) Kinuura Tunnel

1.7

August 1, 1973 - November 29, 2029

(6) Sanage Green Road

13.1

April 1, 1972 - June 22, 2029

(7) Kinuura-Toyota Road

4.3

March 6, 2004 - March 5, 2034

2.3

November 27, 2004 - November 26, 2044

(8) Nagoya-Seto Road
Total

Toll collection period

72.5

Source: Prepared by SMTRI based mainly on MLIT data and Aichi Prefecture data

— Setup of Usage Fee, bearing of costs and Treatment of the Replacement Investment
etc.
The tolls will be determined flexibly by the operating right holder up to the amount for
which Aichi Prefectural Road Public Corporation received a license, etc. from the
Minister of Land, Infrastructure, Transport and Tourism. It is assumed that Aichi
Prefectural Road Public Corporation will establish certain rules and grant incentives tothe operating right holder with respect to net income and expenditure of operating
activities, including increased revenues or cost savings. If development of facilities isnecessary to increase convenience, including large-scale replacement or interchanges(including in the event of proposals by the private-sector business operator), theprivate-sector business operator will be allowed to undertake such activities but will
recover the costs necessary for the development of facilities, etc. from toll charge
revenues. The construction of new roads or road reconstruction is considered outside
the scope of the operating right and the operating right holder may not engage in suchactivities at its own discretion.
— Consideration for the Operating Right
The consideration for the operating right to be paid to Aichi Prefectural Road Public
Corporation by the operating right holder will be determined based on the proposal of
the private-sector business operator after the public corporation has estimated andpresented a standard price.
— Risk Allocation
Since Aichi Prefectural Road Public Corporation is entrusting every aspect ofmanagement, including the authority to collect toll charges, to the private-sectorbusiness operator, all business risks including fluctuation in demand and economic

23

conditions will basically be borne by the private-sector business operator. It is, however,envisaged that the risk of construction of a competing road or a force majeure event
such as a large disaster or the risk of a change in laws and regulations that relates tothe road project will be borne by the public corporation.
Fig. 2.14 Risks expected to be borne by public and private sectors
in the Aichi Prefectural Road Public Corporation’s concession PFI
Risk (excerpt)

Public sector

Private sector(Operating rightholder)All business risks
including road demand-Competing road risk
(new construction, etc.)-Large-scale rehabilitation risk-Force majeure(large natural disaster, etc.)

-Particular change of acts
(applicable to the project)-Source: Prepared by SMTRI based mainly on Aichi Prefecture data

Points for attention in the future
The Bill to amend part of the National Strategic Special Zones Act and Act on Special
Districts for Structural Reform already submitted to the Diet must be passed andenacted before the concession can be introduced. If this happens, Aichi Prefecture will
apply for approval of a plan for a special zone for structural reform, and if this isapproved, Aichi Prefectural Road Public Corporation will carry out procedures inaccordance with the PFI Act to enable operation by a private-sector business operator
at last.
Another point to watch is the concession conditions that will no doubt be examined indetail in the future, including the project scheme, the risks borne by the public andprivate sectors, and the consideration for the operating right. The consideration for theoperating right was initially estimated at around 100 billion yen, but due to the extensionof the toll collection period of the four roads, some say it will exceed 150 billion yen.
Currently, interest among private-sector players, especially construction, automotive,
trading, real estate and expressway companies, is said to be extremely high.
In the meantime, there is also talk that Aichi Prefecture is planning a toll-free Nishi
Chita Road on the west side running almost parallel with the Chitahantō Road and thetruth of such rumors and the effect of such a plan also needs to be borne in mind.

24

4-2 Other road projects under examination
As explained earlier, partly because the concession system cannot be applied to tollroads unless the system of special zones is used and an exception is made to the Act
on Special Measures concerning Road Construction and Improvement, there are noother projects besides the Aichi Prefectural Road Public Corporation project currently
under examination. Given that the government target is one road project, it could beconstrued that this project marks the end of introduction of the concession system toroads. However, other local governments are thought to be watching the developments
and if this project turns into a huge success, the possibility that similar initiatives will
suddenly take off cannot be ruled out.

5 Water systems
There are hardly any previous examples of the privatization of water services in Japan,
partly because the Water Supply Act (Article 6, paragraph (2)) stipulates municipal
operation in principal, and the “consignment of operations” (especially partial
consignment which involves consigning only a part of operations) has been the main
form of public-private partnership. Consequently, the idea that water services areoperated by the public sector is widespread among the general public in Japan and theintroduction of the concession system may not only require the pursuit of economic
advantages but also a change of mind set on our part.
Partly because of this backdrop, the only project currently being examined in earnest is
the Osaka City Waterworks Bureau’s project, and the target of six concession PFI
projects by the end of FY2016 is at risk of not being met.

5-1 Osaka City Waterworks Bureau
Background
Although Osaka City’s water services have been profitable every year except FY2001,
there is no prospect of any halt in the decline of water demand in the future and thebusiness outlook, including the high ratio of corporate bonds to sales (water supply
revenues), is by no means optimistic. Moreover, a large amount of business costs are
considered necessary in the future for the downsizing of water purification plants in
response to reduced water demand, improvement in the ratio of aged pipelines(pipelines that have exceeded their statutory useful service life of 40 years) andacceleration of the introduction of earthquake-resistant pipeline.
Meanwhile, Osaka City has an eye on expanding a wide range of businesses utilizing25

Osaka City’s high level of technology and knowhow, including aiming for wide-area
operation and actively promoting business expansion both inside and outside of Japan.
Osaka City, therefore, set forth a privatization plan through the “separation of
infrastructure and operation” using the “system of right to operate a public facility, etc.”
as a management technique that would allow it to (i) demonstrate management
freedom and aim to ensure business efficiency, sustainability and development
potential and (ii) ensure the public nature of water services. Examination is currently
underway aiming for the start of operations in April 2016.
Fig. 2.15 Events leading to examination of privatization
by Osaka City Waterworks Bureau
Date

MatterNovember 11,
2013

With respect to the privatization of water services, Osaka City’s strategic council
selected the separation of infrastructure and operation using the system of the right tooperate a public facility, etc. as the method that would increase efficiency anddevelopment potential while ensuring the public nature of the services and also offers
the possibility of early realization and decided to aim to formulate a basic plan.

April 9, 2014

Osaka City’s strategic council approved the policy and direction of project operation(ensuring safety and security, accelerating introduction of earthquake-resistant pipeline
and realization of merits including a review of water service tariffs) and the details of aestimate schedule draft for the start of operations.

April 14, 2014

Osaka City announced “Osaka City Water Services Privatization Basic Policy (Draft) ~Utilization of System of Right to Operate a Public Facility, etc.” and invited publiccomments and conducted market-sounding.

August 12, 2014

Osaka City announced the results of public comments and market-sounding.

November 19,
2014

Osaka City’s strategic council approved a detailed implementation plan for utilization of
the system of right to operate a public facility, etc. (establishment of operating rightholder, formulation of implementation policy draft, estimate schedule draft, etc.)

Source: Prepared by SMTRI based mainly on Osaka City Waterworks Bureau data

Project scheme (planned)
Osaka City, holder of the assets, will aim to improve management efficiency throughprivatization based on the scheme of separating infrastructure and operation, and theoperating right will be granted to a private-sector business operator (operation rightholder). The private-sector business operator will acquire a water supply license, andwill take over the majority of water supply operations, from the direct collection of tariff
revenues to maintenance, administration and facility replacement.
However, the “private-sector business operator” in the envisaged scheme will be a
joint-stock company wholly owned by Osaka City (water supply business accounting),
and Osaka City will transfer city officials relating to the water supply business (transfer
of employment, dispatch of employees) to the new joint-stock company (operating rightholder) before granting it the operating right and having it implement the project. The
city’s contribution will be around 11 billion yen ~ 14 billion yen, including contribution inkind. The city will examine a partial sale of shares on the condition of securing the26

public nature of the services on a time-scale of 3~5 years after commencement of the
project.
The operating right holder will establish an integrated group management structure withsubsidiaries and associates, inviting equity contributions exceeding 50% from theprivate-sector, and will ensure appropriate division of roles. For example, it is assumed
that the operating right holder will be in charge of city water supply services while
subsidiaries and associates will be in charge of business development inside andoutside of Japan.
Fig. 2.16 Scheme of Osaka City Waterworks Bureau’s concession project
Ministry of Health,Labour and Welfare(2) Water supply license

Private-sector business
operator (operation right holder)(2) Authorization to discontinue
water supply services(1) Agreement on right to operate a public facility, etc.

Water supplier under the
Water Supply Act

Osaka City (Administrator)(4) Transfer of employees, operations, etc.
(6) Facility replacement

Operating right(6) Payment of some costs of facility replacement

Water supply services under
Local Public Enterprise Act(special accounting treatment)
Holdingof water supply
facilities(7) Payment of consideration for operating right, etc.

[Public facilities](8) Monitoring(5) Provisionof services

Watertariffs

Users

Subject
operations(3) Supply
regulations

Borrowing/
Repaymentof funds

Fundprocurement

Ministry of Finance
Local public bodies
Financial institutions

Financial institutions- Management and administration - Preparation of development plans- Facility replacement- Management of facility operation- Customer services- Holding and disposal of facilities- Borrowing and repayment of funds- Monitoring

Source: Osaka City Waterworks Bureau data

Conditions of concession, etc. (planned)— Scope of the business
The project consists of businesses the operating right holder is obliged to undertake(specified businesses) and businesses besides the specified businesses that theoperating right holder can opt to undertake (optional businesses). Specified businesses
refers to all operations undertaken with respect to the city water supply services,
including the operation and administration of water supply facilities, water quality
control, the formulation of facility development plans, the replacement, maintenanceand preservation of facilities, recovery from major disaster, etc., water meter
inspections and the collection of water tariffs. Meanwhile, optional businesses could bebusinesses such as the undertaking of operation and administration for the purification
plants of other towns and cities, the undertaking of overseas water supply projects, and27

the manufacture and sale of bottled water.
— Project Period
The period of the project is 30 fiscal years.
— Setup of Usage Fee, bearing of costs and Treatment of the Replacement Investment
etc.
The city will determine an upper limit for water tariffs according to existing water tariffs,
and the operating right holder will set the tariffs within these limits. The operating rightholder may revise tariffs at its own discretion provided they do not exceed the upper
limit and upon receiving authorization for a change in supply conditions such as water
tariffs from the Minister of Health, Labour and Welfare.
Changes in the upper limit for the water tariff will be made upon consultation with thecity in a review every five years and via procedures which will include referring thematter to a panel of independent experts for their opinions, obtaining the approval of
the City Assembly, revising the relevant ordinances and obtaining the authorization of
the Minister of Health, Labour and Welfare. The operating right holder may request
cancellation of the agreement for reasons on the city side if a proposal for the revisionof tariffs is not passed by the City Assembly and no agreement is reached despite
subsequent consultation with the city on matters such as contractual amendments.
The operating right holder will make replacement investment and the replaced facilities
will belong to the city. The operating right holder will depreciate the replaced facilities
over their statutory useful lives and will pay the city in cash an amount equal todepreciation and amortization during the period of the project. However, the amountequal to depreciation and amortization occurring after the period of the project will beborne temporarily by the city and recovered through consideration, etc. obtained fromthe operating right holder in subsequent fiscal years.
— Consideration for the Operating Right
The operating right holder will pay the city an amount equal to depreciation andamortization that will be incurred during the period of the project on existing facilities
owned by the city (around 300 billion yen). The operating right holder will also pay thecity an amount calculated based on estimated revenues obtainable from the specified
businesses during the project period less expenditure required for the specified
businesses. In both cases, payments will be spread over the project period.
It is assumed that the city will use such consideration and other revenue to cover costs
such as principal and interest redemption cost on issued bonds (corporate bonds

28

issued by the city prior to the project start date), expenditure related to ownership offacilities and monitoring of the operating right holder.
— Risk Allocation
Any risk associated with ordinary business operation will be borne by the operatingright holder, in principle.
Regarding the risk of physical damage to water supply facilities as a result of a disasteror other force majeure event, the city will, however, ensure sources of revenue forrecovery, including government subsidies, and formulate a facility recovery plan upon
consultation with the operating right holder. The operating right holder will bear the costof measures necessary for recovery within the scope of water tariff revenues. If it isdifficult to ensure the recovery of facilities and business continuity even throughmeasures such as government subsidies, the city will take necessary measures
including financial measures, revision of water tariffs and extension of project period.

Points for attention in the future
Osaka City is currently in a state of political flux and the success or failure of this project
may also end up being determined by how this situation pans out. There are still anumber of difficult issues including consultation with the labor unions over the transferof city employees and their working conditions, and various twists and turns are
expected before target start date of the project in April 2016.

5-2 Other water system projects currently under examination
Besides the Osaka City Waterworks Bureau, the authorities of other cities such as Otsu
City and Nara City appear to be in the initial stages of examining introduction ofconcessions. However, Otsu City and Nara City are both aiming for introduction of aconcession covering both the water and sewage systems, and their plans are different
from those of Osaka City.
Judging from the current situation, the target of six projects by the end of FY2016 is at
risk of not being met. However, as explained earlier, almost all water supply services inJapan are managed by municipalities and the business scale of individual services is,therefore, by no means large, and today, when local authorities are faced with the
problem of aging facilities, wide area supply, in other words, the M&A of water supply
services is considered inevitable. It is expected that the introduction of concessions will
be examined to coincide with such structural reorganization.

29

6 Sewages
Sewages are deemed to have an even stronger 'public good' quality than water
systems, mainly because measures to deal with rainwater are linked with disastermeasures, and the Sewerage Act (Article 3) stipulates that establishment,
reconstruction, repair, maintenance and other administration shall be undertaken bymunicipalities, and there are no previous examples of utilization of the concession
system or privatization.
Public-private partnerships for sewages as for water systems have been widely
undertaken in the form of the “outsourcing” (especially orders placed with given
specifications) to the private sector. With respect to the administration of pipelines andsewage treatment facilities, more than 90% of service providers are said to havealready introduced outsourcing to the private sector. PFI projects are also increasing in
the area of facilities for the effective utilization of sewage sludge.
Against this backdrop, MLIT established the Study Group on the Utilization of PPP/PFI
in the Operation of Sewage Facilities in December 2012. The Group presented a planfor starting with “partial concessions”, which would involve introducing concessions tocertain sewage service operations such as the administration of treatment plants andeffective utilization of sewage sludge, and for gradually developing this into full package
concessions. Additionally, to encourage introduction of concessions, MLIT drew up
Guidelines for the Implementation of Business Operations, etc. of Public Facilities, etc.
in Sewerage Works (draft) in March 2014, and also set up the “sewerage project for thepromotion of private sector vitality and innovation,” which is a subsidy program tosupport sewage projects utilizing PPP/PFI.
Nonetheless, the only two projects being examined in earnest at the present time are
Hamamatsu City’s Seien Basin sewage project and Osaka City’s sewage project, and,as is the case with water systems, the target of six concession PFI projects by the endof FY2016 is in danger of not being met.

6-1 Hamamatsu City Seien sewage treatment plant
Background
Hamamatsu City’s sewage works has many treatment areas and facilities and, at thesame time, it was faced with the challenges of (i) meeting long-term demand for funds
to strengthen the earthquake resistance of facilities and replace aging facilities, (ii) slow
growth in user-fee revenues mainly due to the declining population, and (iii) concerns
over technology transfer due to the decrease in and aging of employees. Under suchconditions, the Seien Basin sewage works will be transferred from Shizuoka prefecture30

to Hamamatsu City at the end of March 2016, and it was decided to examine operation
based on an new public-private partnership technique with the aim of improving
business efficiency and creating a sustainable structure.

Project scheme (planned)
Hamamatsu City decided that, in FY2018, it will introduce a joint venture-typeconcession for the Seien Basin sewage works whereby a private-sector business
operator will itself collect fees, while Hamamatsu City will also have a certain degree of
involvement. The subject facilities include the Seien purification center, two relay pumpstations, and the trunk pipeline.
It is assumed that as many operations as possible, including maintenance andadministration of the purification center and pump stations, reconstruction andreplacement work, planning, and collection of service charges, will be transferred to theprivate-sector business operator, while sources of revenue for reconstruction andreplacement will be procured by Hamamatsu City, and maintenance and administration
and reconstruction and replacement of the trunk pipeline will also be undertaken by thecity.
The project agreement period is 20 years. It is assumed that reconstruction andreplacement work will be carried out in line with a plan for extending the life of
infrastructure and will be reviewed every five years.
Fig. 2.17 Scheme of concession project for
Hamamatsu City Seien sewage treatment plant
Users
Sewer user fees

Funds
- National
government
finance- Issue ofbonds- Transfers

Operating right
implementationagreement

Hamamatsu City
- Acquisition of license- Monitoring- Collection of user fees*(to fund bondredemptions)

Transfer of as many
operation as possible toprivate sector

Operating right holder- Maintenance andadministration- Reconstruction andreplacement work
- Planning- Collection of service charges

Maintenance andadministration
Reconstruction andreplacement

Maintenance andadministration
Reconstruction andreplacement

Facilities to be transferred

The portion of sewer user feesthat will be collected byHamamatsu City is referred toas “sewer user fees”, and the
portion collected by the operatingright holder is referred to as
sewerage service charges”

Treatment plants andpump stations

Trunk pipeline

Source: Data of committee meeting to examine management issues ofHamamatsu City Sewage Works (November 10, 2014)31

Points for attention in the future
When the work of selecting a business operator started in FY2015, the city aimed tostart operations based on the concession system in FY2018. However, there has still
not been any announcement of the details of the project and all eyes are on whether
the project will proceed smoothly according to the estimate schedule in the future.

6-2 Osaka City Sewage Works
Background
For Osaka City’s sewage works, the business environment is expected to grow morechallenging because, in recent years, water consumption (user fees) have been
trending downward (decrease of around 14% in user-fee revenues over the eight years
to FY2013), and the need for reconstruction, replacement, etc. will increase in the
future.
The Bureau of Construction of Osaka City, therefore, drew up “Management Reform of
Osaka City Sewage Works ~ Basic Policy and Implementation Plan ~ (Draft)” in
November 2012, aimed mainly at ensuring the sustainability of sewage works. It
decided to continue with a review of the management format based on introduction of
the scheme of separating infrastructure and operation.
Then, from April 2013, the bureau comprehensively outsourced operation,
maintenance and administration operations for sewage facilities under the jurisdictionof the western office to the Urban Infrastructure Technology Center Foundation. From
FY2014, the bureau also outsourced the maintenance and administration operations ofsewage facilities across the entire city. Such outsourcing was positioned as a trial stage(phase 1) with an eye on the establishment of a new organization and, in the future, thebureau plans to switch to the establishment of a new organization, including thetransfer of city employees (phase 2). It is assumed that the new organization will have astructure enabling business expansion inside and outside of Japan through theprovision of comprehensive sewage services, and at the same time, the bureau has
also decided that, in the phase 2 period, it will examine the funding scheme including
subsidies and general account transfers which are an issue when it comes tointroduction of a concession scheme.

Project scheme (planned)
The Osaka City Sewage Works project assumes adoption of a joint-venture typeconcession. This is because Osaka City uses a combined sewer system (where
sewage and rainwater flow through the same pipes) and there will, therefore, be
operating rights combining publicly funded (general account transfers, etc.) operations

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relating to the rainwater and privately funded (user fees) operations relating to sewage.
Other detailed concession conditions have yet to be presented, but the projectagreement period is said to be around 20 to 30 years.
Fig. 2.18 Scheme of Osaka City Sewage Works’ concession project
Operating right

Taxes

Public sector

Citizens

Consideration for
operating rightOperating right holder

Publicfunds

Rainwater drainage business
etc.
Publicly funded(Service payments)
General accounttransfers
Grants(General account transfers, grants)

Sewage treatment business,
etc.
Privately funded

Privatefunds(User fees)

Users(Sewer user fees)

Source: Basic Policy for Review of Management Format of Osaka Waterworks Business (Draft)

Points for attention in the future
Like the water system, the success or failure of this project may also be determined bypolitical developments in Osaka City. However, the Basic Policy (Draft) for this project
was just announced in February 2015 and the public had until April 24 to comment.
Final introduction of the concession system (phase 3) is assumed to take place during
FY2018 at the earliest, but there are still various issues and matters for consultation
and adjustment, and twists and turns are expected.

6-3 Other sewage projects currently under examination
Besides Hamamatsu City’s Seien Basin sewage project and the Osaka City sewage
project, Otsu City and Nara City are currently examining introduction of concessions
covering both the water and sewage systems, as mentioned in the section on water
systems, and Narashino City is examining introduction for the sewage system alone. In
all cases, examination seems to be in the initial stages and it is expected to take sometime before the projects are examined in earnest.
Judging from the current situation, the target of six projects by the end of FY2016 is indanger of not being met. However, an increasing number of private-sector enterprises
are acquiring ISO55000s certification, the international standard for asset management
only just released in January 2014, in order to tap into the maintenance andadministration business, suggesting that interest in the sewage works business is by nomeans going to fade. The introduction of concessions is expected to increase inconnection with this trend.

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III Issues of Concession PFI in Japan
Promotion of project creation
As described above, with regard to the introduction of the concession system for public
infrastructure in Japan, a reasonable number of projects are in progress, including the
Sendai Airport and Kansai International Airport and Osaka International Airport (KansaiInternational/Itami) concessions for which bids for the operating rights have alreadybeen invited. However, none of the projects have reached the agreement stage and it isfair to say that the pace of introduction needs stepping up further.
A more serious issue is that there is little expectation of a flurry of new projects in the
future, and there is also concern over just how long investors will remain interested inJapanese infrastructure. The creation of projects will require energetic efforts on thelocal authorities that currently own and operate the infrastructure and it may, therefore,
be an effective strategy to offer some kind of incentives or to ensure that public andprivate sectors are on an equal footing.

More proactive initiatives for road projects
It seems strange that, as explained earlier, there is only one road project currently
under consideration in Aichi prefecture when there are many cases of privatization
overseas. If the Japanese concession system is to be applied only to toll roads, thenthe government should promote system reforms to allow examination of private-sector
operation without using the system of special zones so that the kind of initiative seen in
Aichi prefecture spreads to other regions, and the government should also stop treating
expressway companies like Metropolitan Expressway, which can, in fact, hardly becalled privatized, as sacred, and promote initiatives to enable the granting ofconcessions.

Introduction of availability-based infrastructure projects
The introduction of availability-based concessions with more emphasis on maintenanceand administration might be an effective strategy in the sense of increasing possibilities
for project creation because it would broaden the scope of projects to include toll-freegeneral roads in the case of roads and public infrastructure that does not generateuser-fee revenues in the case of other types of infrastructure.
Availability-based infrastructure projects ought to be afforded more attention in thesense that they also meet the needs of investors who do not want to take on excessive
business risks. What investors expect from infrastructure in Japan, a mature nation with34

a well-established legal system, is probably not an amazing growth story but rather
long-term steady cash flows. If this is the case, then availability-based infrastructure
projects may well be the perfect way to make use of private-sector capital in Japan’s
aging public infrastructure.

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