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THE LAW AND FINANCE OF INFRASTRUCTURE
INVESTMENT
Daisuke Asaoka†
ABSTRACT
Institutional design facilitates the investment of private capital ininfrastructure. The Article deals with concessions, which have been amajor format for infrastructure privatization in Japan since their legislation in 2011. It argues that the Japanese government, faced withmounting public debt, walks a thin line between attracting private capital and securing public interest in infrastructure under private operation. By comparing concessions with stock sales, the mainstream formof privatization until the legislation, the Article shows that while concessions have advantages in terms of economics and public interest
control, they may hinder the strategic growth of private enterprises bylimiting operating flexibility. Stock sales give greater flexibility to privatized infrastructure and require more sophisticated regulations onentry, pricing, and equal footing than concessions, which provide amore controlled competitive environment.
To extract the best of these two worlds and promote the use ofprivate capital in infrastructure investment, the Article proposes theuse of concessions for corporatized infrastructure, which are government-owned corporations converted from government entities.
Through this two-layered form of privatization, the government canresume the privatization of corporatized infrastructure, whose stock
sales have lagged since the vigorous shareholder activism of the
2000s. The Article also argues that the use of limited partnerships as avehicle for concessions will promote investment by institutional investors, which have been discouraged by a requirement that concessionaires have operating capabilities. While providing investor protection for limited partners under fund governance, the vehicle will givethe most operating responsibilities to general partners. Further, to improve consistency among the design, building, and operation of†

Associate Professor of Corporate Law and Finance, Meiji University, and Adjunct
Associate Professor of Finance, Graduate School of Management, Kyoto University.

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infrastructure by means of private capital, the Article proposes that thepurview of concessions be expanded to include the building of new
infrastructure elements, as opposed to merely the operation of existingones.
TABLE OF CONTENTSI.
II.

INTRODUCTION ..........................................................................52
STRUCTURE OF CONCESSIONS ....................................................61
A. Overview ..........................................................................61
B. Required Standards ...........................................................63
C. Ownership.........................................................................66
D. Period ................................................................................67
E. Fair Value .........................................................................68
F. Disclosure .........................................................................71
G. Competitive Bidding ........................................................73
H. Force Majeure ...................................................................76
I. Profit Sharing....................................................................78
J. ESG Considerations..........................................................79
III. COMPARISON WITH STOCK SALES..............................................81
A. Overview ..........................................................................81
B. Economics ........................................................................85
C. Strategy .............................................................................88
D. Ownership.........................................................................93
E. Liquidity ...........................................................................97
F. Governance .......................................................................99
G. Equal Footing .................................................................101
H. Regulation for Pricing ....................................................104
IV. TOWARD AN EVOLUTION OF FORMATS ....................................107
A. Concessions over Corporatization ..................................107
B. Fund Structure ................................................................111
C. Extension to BTO ...........................................................114
V. CONCLUSION............................................................................117
APPENDIX.........................................................................................119
Infrastructure privatization with stock sales, concessions, andcorporatization, 2000-2020.............................................119
I. INTRODUCTION
The objective of the Article is to explore legal architectures forthe promotion of private capital investment in infrastructure and toAsaoka FINAL pp. 51-120.docx (Do Not Delete)

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make the argument that the Japanese government utilizes concessions
to navigate the thin line between promoting private investment in infrastructure and protecting the public interest in it. Both advanced anddeveloping countries face a growing need to expand and renew infrastructure in areas such as energy, telecommunications, and transport.
However, even advanced economies often lack sufficient funding tomeet demand. This is seen as governments address priorities for policy
agendas in fields ranging from social and national security to scienceand education – as well as public health, as made clear by the Covid19 pandemic. Given the long-term nature of infrastructure, which requires lump-sum outlays before providing long-term benefits, constituents often disagree on the timing of investments. A lack of consensus
leads to lagging investment, and meanwhile, people are left with old,often crumbling infrastructure.
Investment in infrastructure is on the rise globally and is predicted to amount to $78.8 trillion (about 10 quadrillion yen) between
2016 and 2040 in total.1 Demand for infrastructure investment exceeds
this amount by $14.9 trillion (about 2 quadrillion yen), driven by demand in areas such as electricity and transport in both advanced andemerging economies.2 Investors in such infrastructure include governments and institutional investors, such as pension funds, that seek
long-term assets to meet the needs for pension debt obligations andportfolio diversification.
In Japan, the Government Pension Investment Fund, a public pension fund with world-leading assets of $1.5 trillion (about 200 trillionyen), became involved in infrastructure investment in 2014 when it
committed $2.5 billion (about 330 billion yen) to a co-investment program with a Canadian pension fund, the Ontario Municipal Employees
Retirement System, in infrastructure in Organisation for Economic
Co-operation and Development countries. 3 By 2022, the Japanesepension fund had invested $8 billion (about 1 trillion yen) in infrastructure in the United Kingdom, the United States, Australia, Japan,
and continental Europe in fields including renewable energy, airports,
1 GLOB. INFRASTRUCTURE HUB, GLOBAL INFRASTRUCTURE OUTLOOK:INFRASTRUCTURE INVESTMENT NEEDS: 50 COUNTRIES, 7 SECTORS TO 2040 25(2017).
2 Id.
3 Ontario Municipal Employees Retirement System (OMERS), OMERS Enters
Co-Investment Agreement with Japan’s Government Pension Investment Fund andthe Development Bank of Japan (Mar. 3, 2014), https://www.omersinfrastructure.com/news/omers-enters-co-investment-agreement-with-japans-governmentpension/index.html [https://perma.cc/2EBE-H4N4].

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seaports, oil and gas pipelines, water supply and sewerage services,and telecommunications.4
Introducing private capital is a way to accelerate infrastructure
investment while mitigating the burden on public finance. Such investment opportunities, when properly structured, meet the demand of
long-term investors such as pension funds. While long-term bonds arealso a source of stable cash flow, they are prone to inflation risk in thelong term. Infrastructure assets offer a stable cash flow and protection
against inflation because cash flows from infrastructure users are adjusted for inflation; people pay more or less for electricity and water
bills according to general price levels. However, attracting private
capital requires stable legal structures to protect investors, in addition
to the overall stability of underlying businesses and predictable cash
flows.
Japan has the highest ratio of infrastructure assets to Gross Domestic Product (“GDP”) among the OECD countries and is the only
one with a ratio exceeding 100%.5 The country also has the highest
debt-to-GDP ratio of the advanced economies, even with other countries increasing their public deficits in response to the Covid-19 pandemic.6 The urgent need to renew public infrastructure amid mounting
public debt makes it unsustainable for Japan to invest in the same manner as it did in the second half of the twentieth century when the country built most of the public infrastructure that exists today.
In 2011, facing increasing public debt, the Japanese government
introduced the concession format by amending the Act on Promotionof Private Finance Initiative (“PFI Act”).7 A “concession” is definedin the PFI Act as the sale of the operating rights to an infrastructure
asset for a specified period, created by the government for specificinfrastructure assets under its ownership.8 While concessionaires, or
operators, own the operating rights, the government continues to own
4 GOV’T PENSION INV. FUND (GPIF), Orutanatibu Shisan no Un’yō towa [Whatis Alternative Asset Management?], https://www.gpif.go.jp/investment/alternative/[https://perma.cc/CK57-EYLB] (last visited Sept. 24, 2022) (Japan).
5 Jean Marc-Fournier, The Positive Effect of Public Investment on Potential
Growth 15 (OECD Econ. Dep’t, Working Paper No. 1347, 2017).
6 Marcus Walker & Peter Landers, Governments World-Wide Gorge on Record
Debt, Testing New Limits, WALL ST. J. (July 12, 2021, 12:16 PM),https://www.wsj.com/articles/governments-world-wide-gorge-onrecord-debt-testing-new-limits-11626106592?mod=djemCFO [https://perma.cc/6CQZ-MWE3].
7 Minkan Shikin-tō no Katsuyō ni yoru Kōkyōshisetsu-tō no Seibi-tō noSokushin ni Kansuru Hōritsu [Act on Promotion of Private Finance Initiative], Law
No. 117 of 1999, arts. 16-30 [hereinafter PFI Act] (Japan).
8 Id. at art. 2(6)-(7).

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the underlying assets. This combined form of ownership, under which
operating rights are owned by the private sector and underlying assets
by the public sector, is the basis of a private-public partnership.9 An“operating right” is defined in the PFI Act as a right in rem,10 whose
effect for the purpose of transactions is to permit that the right is mortgaged for financing and traded with the approval of the government.11
Concessions are a different mode of privatization from the outright sale of shares, which was the mainstream format during a waveof privatization in the 1980s and 1990s that saw the Japanese government sell its holdings in major infrastructure companies through initialpublic offerings (“IPO”). Examples of such sales include the IPOs of
Nippon Telephone and Telegraph (“NTT”), and three railway companies. The IPO of NTT in 1987 is still the largest in the country with avaluation of about $210 billion (about 25 trillion yen) at that time.12
Those of the three railway companies, Japan Railways (“JR”) East in
1993, JR West in 1996, and JR Central in 1997 resulted from the splitting up of the national railway operator, Japan National Railways(“JNR”), in 198513 and had more modest valuations of $14 billion (1.7
trillion yen), $6 billion (0.7 trillion yen), and $7 billion (0.8 trillion
yen) respectively. However, in the 2010s, with the wave of IPOs receding, Japan gradually shifted course to utilize concessions, which
replaced stock sales as the mainstream format for privatization.
Behind the shift are a series of investments in the 2000s by active
investment funds in publicly listed infrastructure companies. In thefield of transportation, for instance, a Japanese active fund managed
by MAC, an investment firm founded by a former official of the Ministry of Economy, Trade and Industry of Japan, invested in 2005 in
Hanshin Electric Railway Co., a railway company based in Osaka and9 CABINET OFF. OF JAPAN, PPP/PFI SUISHIN GAIDORAIN REIWA 4-NEN
KAITEIBAN [PPP/PFI PROMOTION GUIDELINE, 2022 REVISED ED.] (2022),
https://www8.cao.go.jp/pfi/actionplan/pdf/actionplan_r4_2.pdf[https://perma.cc/RP7K-DZ4J].
10 Id. at art. 24.
11 Id. at art. 25.
12 History, NIPPON TEL. & TEL. CORP., https://group.ntt/en/ir/shares/history.html[https://perma.cc/B2WQ-NALP] (Jan. 6, 2022).
13 JR Tōkai Kabushiki no Baikyaku Jōjō (9. 10. 8) [Sale and Listing of JR Tokai
Shares (Oct. 8, 1997)], MINISTRY OF TRANSP. OF JAPAN, UN’YU HAKUSHO, HEISEI 9
NENDO [WHITE PAPER ON TRANSPORT, FISCAL YEAR 1997] (1997),
https://www.mlit.go.jp/hakusyo/transport/heisei09/topic/17.html[https://perma.cc/8B46-4M6Q] (Japan); see also infra Part III(A).

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the owner of a namesake professional baseball team.14 The fund accumulated holdings of 52% by 2006 and demanded board seats and aspinoff of the baseball team subsidiary. 15 The company resorted tocalling upon its regional competitor, Hankyu Co., as a white knight,
and a merger of the two led to the fund’s unwinding of the investment.16
Similarly, in 2007 an investment fund managed by Australia’s
Macquarie Group invested in Japan Airport Terminal Co., owner andoperator of the airport terminal building at Haneda Airport, the largest
airport in the country and the fourth largest in the world.17 The airport
terminal building company listed its shares in 1990 amid a wave of
public listings of infrastructure promoted by the Japanese government.18 The Macquarie fund invested with the aim of holding 19.9%of the company’s shares, but it ended up selling all of its holdings backto the company through a tender offer (“TOB”) process conducted two
years later by the company itself,19 presumably because it found little
promise in engaging with the investee’s management. After observing
the face-off at the airport terminal building company, the government
suspended a planned sale of stocks in Narita International Airport Co.,
the operator of the country’s second-largest airport after Haneda. 20
The suspension occurred despite the fact that the company converted

14 Hankyūhanshin Tōgō 10-nen Kenshō (Jō) [A Review of the Decade Following
the Merger of Hankyu and Hanshin (1)], SANKEI SHIMBUN [SANKEI NEWSPAPER](Sept. 29, 2016, 5:00 AM), https://www.sankei.com/article/20160929W7AMYNLJWVPXHLLIBR6US7WYIY/ [https://perma.cc/RG63-PLHW] (Japan).
15 Id.; Hidetaka Kawakita & Rei Miyano, Investment Behavior and the Role ofthe Murakami Fund, 45 NISSAY KISOKEN SHOHO 4-5 (2007), https://www.nli-research.co.jp/files/topics/37019_ext_18_0.pdf [https://perma.cc/5FG4-7GLZ] (Japan).
16 SANKEI SHIMBUN, supra note 14.
17 AIRPORTS COUNCIL INT’L, ACI Reveals Top 20 Airports for Passenger Traffic,
Cargo, and Aircraft Movements (May 19, 2020), https://aci.aero/2020/05/19/aci-reveals-top-20-airports-for-passenger-traffic-cargo-and-aircraft-movements/[https://perma.cc/L5Q3-TCB2].
18 Company History, JAPAN AIRPORT TERMINAL CORP., https://www.tokyo-airport-bldg.co.jp/en/corporate_profile/history/history.html [https://perma.cc/8TBREQ89] (last visited Nov. 6, 2022).
19 Akihito Fukuda, Ōsutoraria Makkōrī: Nikku Biru Tōshi no Tettai Kanryō,
Hoyū Zenshu o TOB de Baikyaku [Macquarie Withdraws from Japan Airport Terminal, Selling its Holdings by TOB], BLOOMBERG (July 29, 2009, 1:36 PM),https://www.bloomberg.co.jp/news/articles/2009-07-29/KNJ0T10UQVI901[https://perma.cc/G229-XGHL] (Japan).
20 AIRPORTS COUNCIL INT’L, supra note 17.

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from a government agency to a corporation wholly owned by the government three years earlier in preparation for the sale of all its stock.21
In the field of energy, The Children’s Investment (“TCI”) fund in
the U.K. invested in J-Power Co., a wholesale power producer, in
2007, holding 9.9% of its shares.22 The energy company, founded in1952 with 66.7% ownership by the government and the remainder bymajor electricity power companies, was listed three years before the
TCI’s investment.23 Faced with the investment, the Japanese government issued its first rejection of the fund’s request to approve an increase in its holdings to up to 20% of the shares.24 The request andrejection processes were based on the Foreign Exchange and Foreign
Trade Act (“FEFTA”) at the time, which required government approval of cross-border investments in pre-specified key industries
holding 10% or more of the shares of investee companies.25 Following
the rejection, the fund unwound the investment and sold its entire
holdings back to the company a year later.26 FEFTA was amended in2019 to lower the threshold to 1%, with exemptions applied to passive

21 Japan to Privatize Narita Airport by ‘04, WALL ST. J. (Oct. 11, 2002, 1:00
AM),
https://www.wsj.com/articles/SB1034220275725039036[https://perma.cc/54WK-MDPS]; Dai 156-kai Kokkai Kokudo Kōtsū Iinkai Dai 22gō (Heisei 15-nen 5-gatsu 20-nichi (kayōbi)) [Minutes of the 20th Session of theCommittee on Land, Infrastructure, Transport and Tourism, 156th Ordinary Sessionof the Diet], HOUSE OF REPRESENTATIVES OF JAPAN (May 20, 2003),
https://www.shugiin.go.jp/internet/itdb_kaigirokua.nsf/html/kaigirokua/009915620030520022.htm#TopContents[https://perma.cc/3LE8-N9FA] (Japan).
22 Yoshihiro Shimoi, Hajimete Hajimete Hatsudō Sareta Gaitamehō ni Motodzuku Chūshi Meirei ~ TCI Fando ni Yoru J-Pawā Kabushiki no Tsuika Shutoku no
Jirei ni Tsuite [First Suspension Order Issued Based on the Foreign Exchange Act– Case of Additional Acquisition of J-Power’s Shares by TCI Fund], FIN. 22 (Dec.
2008), https://dl.ndl.go.jp/view/download/digidepo_1006427_po_f2012e.pdf?contentNo=1&itemId=info:ndljp/pid/1006427&__lang=en[https://perma.cc/W975WQLH] (Japan).
23 MINISTRY OF ECON., TRADE & INDUS., Dengen Kaihatsu no Min’eika ni Tsuite[On
Privatizationof
J-Power](Feb.
2003),
https://www.gyoukaku.go.jp/sanyo/dai10/10siryou2.pdf [https://perma.cc/7Y58DTPK] (Japan).
24 Shimoi, supra note 22.
25 Gaikoku Kawase oyobi Gaikoku Bōekihō [Foreign Exchange and Foreign
Trade Act], Law No. 228 of 1949, art. 27(5) (Japan).
26 Reiji Murai & Kentaro Hamada, J-Pawā ga Ei TCI Kara Jisha Kabu o Kaitorie, 9.9-Pāsento o Sōgaku 631 Oku-en de [J-Power to Buy Back Its Own Shares fromUK TCI, 9.9% for a Total of 63.1 Billion Yen], REUTERS (Oct. 31, 2008, 8:05 AM),https://jp.reuters.com/article/idJPJAPAN-34677920081031[https://perma.cc/FW8R-HD58] (Japan).

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investors,27 following similar amendments in the United States in 2018with no threshold, in Germany in 2018 with a 10% threshold, and in
the U.K. in 2021 and France in 2019 with a 25% threshold.28
Pressed with mounting public debt, Japan is caught in a double
bind between the need to regulate cross-border investments in core
infrastructure and to secure financing for those long-term assets. The
Article argues that the concession format provides an answer by allowing deals to be structured in line with the market for privatizing
infrastructure while addressing public concerns that arose at the timeof the activist funds’ investments. The format has been successful inattracting private capital, from both outside and inside the country,
without any major public backlash. Airport privatization has been at
the vanguard of the trend. The privatization of Osaka’s Kansai Airport,
the country’s third largest after Haneda and Narita, attracted capitalfrom a French operator, Vinci, in a partnership with a Japanese local
operator, Orix. 29 Fukuoka Airport, the country’s fourth largest, received investment from Changi Airport Group, a Singaporean airport
operator, along with other local partners including Nishi-Nippon Railroad Co.30 Proceeds obtained from selling the operating rights to thesefacilities have served to reduce the government’s public debt, as havecost savings on their future maintenance and expansion, the responsibilities for which are undertaken by the concessionaires.31
Having opened the way with airports, the country expanded theareas for concessions in the 2010s to include highways, hydropower
stations, educational facilities, stadiums, public housing, water supply
27 See infra Part III(D).
28 MINISTRY OF FIN. OF JAPAN, Gaikoku Kawase oyobi Gaikoku Bōekihō noIchibu o Kaisei Suru Hōritsu-an ni Tsuite Reiwa gan-nen 10-gatsu 25-nichi Kaitei[ON THE AMENDMENT TO THE FOREIGN EXCHANGE AND FOREIGN TRADE ACT] 9(2019) (Japan); MINISTRY OF INTERNAL AFFS. & COMMC’NS, JŌHŌ TSŪSHIN
BUN’YA NI OKERU GAISHI KISEI NO GENJŌ [THE CURRENT STATUS OF REGULATIONSON FOREIGN DIRECT INVESTMENT] 51 (2021) (Japan).
29 Orix Bets on Infrastructure Business for Growth, NIKKEI ASIA (Feb. 18, 2017,12:05 PM), https://asia.nikkei.com/Business/Finance/Orix-bets-on-infrastructurebusiness-for-growth [https://perma.cc/HF9M-NYWK].
30 Nia Tam, Japan Awards 30-Year Concession for Fukuoka Airport,
INFRASTRUCTURE INV. (June 27, 2018), https://www.infrastructureinvestor.com/japan-awards-30-year-concession-fukuoka-airport/ [https://perma.cc/KLW3-89WV].
31 CABINET OFF. OF JAPAN, KAKUGI-KETTEI MINKAN SHIKIN-TŌ NO KATSUYŌ NI
YORU KŌKYŌSHISETSU-TŌ NO SEIBI-TŌ NI KANSURU JIGYŌ NO JISSHI NI KANSURUKIHON-HŌSHIN [CABINET DECISION ON PRINCIPLES ON THE IMPLEMENTATION OF
PRIVATEFINANCEINITIATIVE]
(Oct.
23,
2018),
https://www8.cao.go.jp/pfi/hourei/kaisei/pdf/h30kaisei_kihonhoushin.pdf[https://perma.cc/MN7Z-GDH6].

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and sewage services, and convention centers, accomplishing thisthrough amendments to the Act on Promotion of Private Finance Initiative.32 Table 1 categorizes the number of infrastructure privatizations by format, stock sales, concessions, and corporatization (conversion into corporation) between 2000 and 2021.33 A complete list of
privatized infrastructure is provided in Appendix A.
Table 1. Number of infrastructure privatizations by format, 20002021
Sector \ Format
Stock Concessions
Corporatization
sales
Energy1
2
Transportation
Airport12
1
Seaport2
Railway
1
2
Road
1
4
Postal service
1
Banking/Insurance
2
3
Water and sewage
3
Convention center
2
Sport facility and6others
Total
5
30
12
Note: The table shows only projects that were concluded and does not include
infrastructure for which a privatization plan has only been announced. The counts
are mutually exclusive.

The table reveals that concessions are used far more than stock
sales. There were only five stock sales during the period: J-Power, JR
Kyushu, Japan Post Holdings, and Japan Post Holdings’ two subsidiaries.34 The table also shows that airports constitute the largest category of privatizations, followed by facilities such as art museums,
sports facilities, and water supply and sewage services.

32 PFI Act, supra 7, at art. 2(1)(iii)(v).
33 CABINET OFF. OF JAPAN, KŌKYŌ SHISETSU-TŌ UN’EI JIGYŌ NO OMONASHINCHOKU JŌKYŌ[ON
THE
PROGRESSOFCONCESSIONS](Apr.
9,2020),
https://www8.cao.go.jp/pfi/concession/pdf/concession.pdf [https://perma.cc/RNL3NT9B] (Japan).
34 See Table 1 and Appendix.

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Among these, Kansai Airport, which is counted as one of the concessions, is the only example of a hybrid format combining corporatization and concession.35 In this case, the government-owned Osaka International (Itami) Airport merged into a corporation that owns andoperates Kansai International Airport (corporatization). The corporation’s stocks were wholly owned by the government. The merged
company then sold the operating rights to the entire company, while
the government maintained full ownership of the stock (concession).36
It is noteworthy that the privatization was made not through stock
sales of the merged company, which would have been a traditional
step after corporatization, but through concession. Under this structure, the merged airport company, not the government, concluded aconcession contract with an operator, a Franco-Japanese joint venture
by Vinci and Orix. 37 Whereas a common concession format would
have the government and an operator conclude a concession contract
for an infrastructure asset owned by the government.38 Subsequent to
Kansai Airport’s privatization through concession, Kobe Airport, on
the outskirts of that city, was also privatized through concession, with
the Kobe City government holding the airport assets and selling its
operating rights.39 The operator of Kansai Airport won these rights
through its wholly owned subsidiary, essentially bundling the three
airports, Kansai International, Itami, and Kobe under one private umbrella. 40 This case also shows that corporations whose shares are
35 MINISTRY
OF
LAND, INFRASTRUCTURE, TRANSP. & TOURISM,
KANSAIKOKUSAIKŪKŌ OYOBI ITAMIKŪKŌ NO ITTAI-TEKI OYOBI KORITSU-TEKI NA
SECCHI OYOBI KANRI NI KANSURU KIHON-HOSHIN [PRINCIPLES ON THE INTEGRATEDAND EFFICIENT OPERATION OF KANSAI INTERNATIONAL AIRPORT AND OSAKAINTERNATIONAL AIRPORT] (2012), https://www.mlit.go.jp/common/000214479.pdf[https://perma.cc/W8RB-VXJX] (Japan).
36 MINISTRY
OF
LAND, INFRASTRUCTURE, TRANSP. & TOURISM,
KANSAIKOKUSAIKŪKŌ ITAMIKŪKŌ NO KEIEI TŌGŌ NI TSUITE [ON THE INTEGRATION
OF KANSAI INTERNATIONAL AIRPORT AND ITAMI AIRPORT] (2012),
https://www.mlit.go.jp/common/000218477.pdf[https://perma.cc/RZ7G-4UEP](Japan); Kansaikokusaikūkō oyobi Ōsakakokusaikūkō no Ittai-teki katsu Kōritsuteki na Un’ei ni Kansuru Hōritsu [Act on the Integrated and Efficient Operation of
Kansai International Airport and Osaka International Airport], Law No. 54 of 2011,
arts. 1, 9, 10 (Japan).
37 Id.
38 PFI Act, supra note 7, at arts. 2(1), (6).
39 KOBE CITY, KŌBEKŪKŌ NO KONSESSHON NI TSUITE [ON THE CONCESSION OF
KOBE AIRPORT], https://www.city.kobe.lg.jp/a11380/kurashi/access/airport/archives/08/index.html [https://perma.cc/YH8R-2LQP] (Japan) (Aug. 20, 2021).
40 Kōbekūkō 18-nen 4-gatsu ni Min’eika Shi to Orikkusu Jin’ei ga Keiyaku [KobeAirport to be Privatized in April 2018: Contract Signed by City and Orix Consortium],
NIKKEI(Sept.
26,
2017,
4:16
PM),

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owned by the government can still be privatized through concessions.41
Based on the rapid adoption of concessions after the airport examples, the Article analyzes the format’s contractual structures andregulatory design, makes comparisons with stock sales, and discusses
agendas for the further development of infrastructure privatization andthe attraction of private capital for that purpose. This should serve as
an analytical framework for infrastructure investment through privatization and contribute to the discussion of how best to secure public
interest in infrastructure. It examines how matters such as national security, resilience to natural disasters, and user safety and utility interact with the promotion of private investment.
The remainder of the Article is constructed as follows. Part II analyzes the contractual and regulatory structures of infrastructure concessions based on some leading examples. Part III compares concessions and stock sales as formats for privatization. Part IV discusses
agendas for the development of a contractual and regulatory design.
Part V concludes the Article.
II. STRUCTURE OF CONCESSIONSThis section analyzes the major contractual and regulatory structures for concessions adopted in Japanese infrastructure. Since airports
are the prime example in terms of case numbers, their success has
meant that their practices have become standard in subsequent concession projects. Therefore, most arrangements draw from airport projects unless otherwise noted.
A. Overview
While private finance initiatives (“PFI”) have been used to outsource works in the public domain, such as the construction and operation of public infrastructure at the cost and risk of the government,42
concessions are a new and significantly different format in that theprivate sector undertakes the financial risks and rewards of the existing
infrastructure assets while the government maintains ownership of theunderlying assets.43 The private sector obtains the full right to receive
https://www.nikkei.com/article/DGXLASJB26H3Q_W7A920C1000000/[https://perma.cc/AFF3-5MSH] (Japan).
41 See infra Part IV(A).
42 PFI Act, supra note 7, at arts. 2(2), 5.
43 Id. at art. 2(6).

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cash flows generated from the assets’ operation, with discretion overthe pricing of fares and charges, along with the responsibility to makeinvestments for the assets’ maintenance.44 The term of operation for
an infrastructure asset (“operating period”) is not stipulated in the PFI
Act, but the principles published by the government and specificallyapplied to airports prespecified a term of between thirty to fifty years,45
during which time the concessionaires recover their investments.
The government solicits competitive bids for the sale of operatingrights.46 Bidders are required to submit legally binding proposals forvarious aspects of operation, including investment, financing, andgovernance of the infrastructure during the operating period, as wellas the bidding price for the operating right.47 Proposals are typicallymade by a consortium of companies with different skill sets.48 The
payment for the right can be a lump-sum payment upfront or annual
payments, depending on the design of the terms and conditions forindividual deals. 49 A government-appointed committee reviews the
proposals and makes a recommendation to the government. 50 Bothquantitative aspects, such as the bidding price for the right and committed capital investments, and qualitative ones, such as operating andmarketing plans for the period, are evaluated and given numerical
grades.51 The Minister of Land, Infrastructure, Transport and Tourism,
who is the Minister in charge, makes a final decision based on the recommendation.52
44 Id.
45 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, MINKAN NONŌRYOKU O KATSUYŌ SHITA KUNI-KANRI KŪKŌ-TŌ NO UN’EI-TŌ NI KANSURUKIHON-HŌSHIN [PUBLIC NOTICE ON THE PRINCIPLES OF AIRPORT CONCESSIONSUTILIZING PRIVATE CAPABILITY] II-2 (2013) [hereinafter PRINCIPLES],
https://www.mlit.go.jp/common/001018628.pdf [https://perma.cc/G34Y-BCXE](Japan).
46 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, SENDAI KŪKŌTOKUTEI UN’EI JIGYŌ-TŌ JISSHI HŌSHIN [IMPLEMENTATION POLICY ON THE
CONCESSION OF SENDAI AIRPORT] III-1 (2014) [hereinafter IMPLEMENTATIONPOLICY], https://www.mlit.go.jp/common/001037649.pdf [https://perma.cc/8P6UVFRD] (Japan).
47 Id. at II-1-8, 13, 16.
48 Id. at III-3-1.
49 Id. at II-1-16.
50 Id. at III-2-1.
51 Id. at III-2; MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM,SENDAI KŪKŌ TOKUTEI UN’EI JIGYŌ-TŌ SHINSA KŌHYŌ [THE EVALUATION OF THE
PROPOSALS FOR THE CONCESSION OF SENDAI AIRPORT] 2(1), 2(2) (2015),
https://www.mlit.go.jp/common/001106922.pdf [https://perma.cc/9FC3-FUXW](Japan).
52 IMPLEMENTATION POLICY, supra note 46, at III-2-6.

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The selected consortium establishes a special purpose vehicle(“SPV”) to purchase the operating right from the government, financing it with an equity investment by the consortium members and bankborrowings backed by the right.53 An SPV is used because of a rulethat prohibits the holder of the operating right from working on projects other than the operation of the specified infrastructure.54 The rule
requires that it be bankruptcy-remote from the possible failure of otherprojects that the sponsors of the SPV might undertake.55 If the concessionaire defaults on its obligations, the government can terminate thecontract and recover control of the infrastructure asset while claiming
damages relating to the default from the concessionaire.56
Concessions are different from stock sales in several ways. 57
While stock sales involve the permanent transfer of ownership in its
entirety, concessions transfer operating rights only for a finite period.58
In addition, concessionaires are restricted from making investments
outside the specified infrastructure, while companies privatizedthrough stock sales typically are not.59 The latter is expected to explore
new markets and build new capabilities for growth.60 While stock sales
are executed in the capital markets through IPO for general investors,
concessions are executed through a competitive bidding process to select a specific concessionaire, although the process itself is open to all
candidates both in and out of the country.61 The differences between
the two formats are further analyzed in Part III.
B. Required Standards
The public nature of infrastructure gives rise to both positive andnegative externalities. While infrastructure provides functions that users can benefit from with minimal or no marginal costs (positive externalities), it also causes undesirable effects that both users and non53 Id. at III-2-9.
54 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, SENDAI KŪKŌTOKUTEI UN’EI JIGYŌ-TŌ KŌKYŌ SHISETSU-TŌ UN’EI-KEN JISSHI KEIYAKUSHO[CONCESSION CONTRACT FOR SENDAI AIRPORT] art. 26 (2015) [hereinafter
CONTRACT],
https://www.mlit.go.jp/common/001111789.pdf[https://perma.cc/QP76-HAVU] (Japan).
55 Id. at art. 56.
56 Id. at art. 68.
57 See infra Part III.
58 Id. at (D).
59 Id. at (C).
60 Id. at (A), (D).
61 Id.

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users must come to terms with (negative externalities).62 These aspects
are mirrored in the contractual and regulatory design of concessions
that stipulate minimum standards for the functions an infrastructure
asset is expected to provide, while also stipulating maximum standards
for the negative effects it can produce – such as emissions, noises, vibration, and other byproducts.63 These constitute the required standards to which concessionaires must agree upon the transfer of an operating right. They include both quantitative and qualitative
specifications. When qualitative standards are set in the form of language, as opposed to numerical metrics, uncertainty can arise regarding the interpretation of such language. However, this does not createmuch of a problem for concessions because infrastructure assets chosen for concessions tend to be established kinds, such as airports andtoll roads, which have a track record of operations and practices.64 Operators can look at similar assets for reference, thus providing predictable levels of quality.
Because concessionaires are likely to face a trade-off between
quality and cost, and thus financial return, these standards give themclarity as to how much they need to invest. When operating an infrastructure asset, a concessionaire may have incentives to cut back on
investing in, for example, the replacement of equipment or pollution
mitigation, in order to obtain an improved return. Indeed, empiricalevidence shows that managers reduce investments to meet earnings
targets.65 The required standards, either maximum or minimum, forma basis for the expectations of the government and the concessionaire,
and thus for the latter’s investment budgets estimated at the time ofbidding.66 Investment budgets for maintenance are essentially a sliceof a pie that concessionaires share with the government by operating
the infrastructure asset, as the government saves that amount in addition to receiving payment for the operating right.
62 ARNO SCHROTEN, HUIB VAN ESSEN, LISANNE VAN WIJNGAARDEN, DANIELSUTTER, & ELLA ANDREW, SUSTAINABLE TRANSPORT INFRASTRUCTURE CHARGINGAND INTERNALISATION OF TRANSPORT EXTERNALITIES: EXECUTIVE SUMMARY(2019), https://data.europa.eu/doi/10.2832/246834 [https://perma.cc/T8R2-4HY7].
63 PRINCIPLES, supra note 45, at II-3.
64 ORG. FOR ECON. COOP. & DEV. (OECD), POOLING OF INSTITUTIONALINVESTORS CAPITAL – SELECTED CASE STUDIES IN UNLISTED EQUITYINFRASTRUCTURE, 10, 26 (Apr. 2014), https://www.oecd.org/finance/OECDPooling-Institutional-Investors-Capital-Unlisted-Equity-Infrastructure.pdf[https://perma.cc/9L7Z-B4C2].
65 John R. Graham, Campbell R. Harvey & Shiva Rajgopal, The Economic Implications of Corporate Financial Reporting, 40 J. ACCT. & ECON. 3, 32, 39 (2005).
66 IMPLEMENTATION POLICY, supra note 46, at II-1-11.

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Maximum standards typically do not include specific limits on
pricing, except in reference to laws applied in general to the infrastructure of specific categories. In the case of airports, maximum charges
are not stipulated in the required standards, nor are individual pricelists subject to approval by the government.67 They are, however, subject to a law that prohibits unfair and discriminatory pricing for particular users, as well as markedly inappropriate pricing that would
make the infrastructure extremely difficult to use in light of social or
economic conditions.68 Past examples illustrate this flexibility. An airport concessionaire at Sendai introduced a risk-sharing pricing schemethat involved lowering a fixed portion of the charge for airliners while
increasing a variable portion so that low demand would lead to lower
charges and vice versa.69 The result was an increase in the number ofroutes and passengers thanks to better risk-sharing between airliners
and the airport concessionaire.70 Other examples are discounts offeredto deal with early-phase uncertainty during the first few years after the
opening of new routes, or for the addition of routes in and out of the
airport.71 Such flexibility in pricing for the purpose of increasing demand is one of the advantages of concessions. Concessionaires tailor
their strategies to the needs of individual assets, while the government
may be restrained from taking similar initiatives by needing to emphasize equality among its airports and having little economic incentive
to increase traffic.
During the operating period, the government monitors concessionaires to check that they meet the required standards and are implementing their operating proposals, which are legally binding. If it finds
a breach of those requirements, the government can order the concessionaire to fix it, or proceed to terminate the concession contract after
a cure period normally lasting 120 days.72 Such monitoring is not newfor the government, since it performs the dual role of operator andregulator for the infrastructure assets it operates itself. When a
67 IMPLEMENTATION POLICY, supra note 46, at II-1-8.
68 Kūkō Hō [Airport Act], Law No. 80 of 1956, art. 13(2)(i)(ii) (Japan).
69 SENDAI INT’L AIRPORT CO., SENDAI KŪKŌ NO 30-NEN-GO NO SHŌRAI IMĒJI
<MASUTĀPURAN> [MASTER PLAN FOR SENDAI AIRPORT] 2 (2016),
https://www.sendai-airport.co.jp/pdf/master-plan.pdf[https://perma.cc/DZ2U46PU] (Japan).
70 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, SENDAI KŪKŌNO UN’EI ITAKU NI YORU SEIKA [RESULTS OF THE CONCESSION OF SENDAI AIRPORT],
https://www.mlit.go.jp/common/001231163.pdf[https://perma.cc/9B8U-2ECC](Japan).
71 SENDAI INT’L AIRPORT CO. supra note 69.
72 CONTRACT, supra note 54, at art. 52.

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concession is arranged, the government focuses on the latter role basedon its contract with the concessionaire.
C. Ownership
The main reason that the Japanese government retains ownershipof underlying infrastructure assets throughout a concession is its success in gathering public support for privatizing infrastructure, despite
the economic rights that generally derive from ownership being transferred to contracted concessionaires. However, this is not just for appearance because ownership of the underlying assets gives the government bargaining power, even if the same economic position could
be created through a contract.73 Although a contractual breach may be
cured through court proceedings,74 enforcement of a contract withoutownership would involve greater uncertainty and thus costs. Ownership of the underlying assets allows the government to restore its original status by unwinding the contract,75 which it could not achievethrough stock sales as it would lack both ownership and a continued
contractual relationship.
The government’s ownership also relates to the issue of control
in the event of a natural disaster or other extraordinary events – not ahypothetical consideration but a real need in a country that regularly
experiences earthquakes, typhoons, landslides, and heavy rains. In
such situations, the government may order concessionaires to cooperate with public authorities in urgent responses to such events withproper compensation for lost profits.76 A case in point is Sendai Airport in Japan’s northeastern region, nearest to the epicenter of theGreat East Japan Earthquake of 2011.77 People caught in the terminalbuilding at the time of the earthquake survived by eating food fromthe shelves of retail outlets that the airport operator bought; the building’s operator offered the food for free while working to get the airport

73 Albert H. Choi & George G. Triantis, The Effect of Bargaining Power on Contract Design, 98 VA. L. REV. 1665, 1702-10 (2012).
74 CONTRACT, supra note 54, at art. 94.
75 Id. at art. 77.
76 PFI Act, supra note 7, at art. 29; PRINCIPLES, supra note 45, at III-2(2);CONTRACT, supra note 54, at art. 53.
77 COMM. ON CONSTR. MGMT., JAPAN SOC’Y OF CIV. ENG’RS, KOTŌ TO KASHITAKŪKŌ BIRU HINAN-SHA NO ANZEN KAKUHO - SENDAI KŪKŌ TĀMINARUBIRUSHACHŌ NO KŌDŌ [SAFETY MEASURES FOR EVACUEES LEFT ISOLATED AT THE
SENDAI AIRPORT BUILDING] (2014), https://committees.jsce.or.jp/s_research/system/files/25.2-8.pdf [https://perma.cc/WRE8-VFKC] (Japan).

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up and running again for the transport of relief goods and personnel.78
The airport resumed operation five days after the earthquake andserved as a hub for the movement of emergency relief goods and rescue personnel to devastated areas.79 Four years later, Sendai Airport
became the first example of an airport concession directly owned by
the central government with a stipulation to provide emergency responses.80 The concession was won by a consortium led by Tokyu Co.,a domestic railway and real estate operator.81
D. Period
The operating period is prespecified by the government between
thirty and fifty years.82 The setting of a finite period is a hallmark ofconcessions, distinguishing the format from stock sales and producing
different incentives.83 It may come with an extension option, which theoperator can exercise under prespecified conditions.84 Even before theend of the operating period, the government can terminate a contract
if certain events occur that are stipulated in the contract, such as failure
by a concessionaire to satisfy the required standards even after the cure
period.85 Compared with an outright sale of stock, such a terminationmeans that the government maintains stronger control over the infrastructure assets as a monitor and party to the contract.86
To a concessionaire, a finite period also implies that it will commit to the contract for the duration of the period. Although an exit frominvestment during the operating period is possible (with the approvalof the government) through the sale of stakes in the SPV that owns theoperating right, such approval requires continuity of operation before
78 Id.
79 Id.
80 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, SENDAI KŪKŌTOKUTEI UN’EI JIGYŌ-TŌ NO YŪSEN KŌSHŌ-KEN-SHA NO SENTEI NI TSUITE [ON THE
SELECTION OF THE PREFERRED NEGOTIATION PARTY FOR THE CONCESSION OF
SENDAI AIRPORT] (2015), https://www.mlit.go.jp/common/001103817.pdf[https://perma.cc/JD5L-WDCR] (Japan).
81 Id.
82 PRINCIPLES, supra note 45, at II-2.
83 Id.
84 CONTRACT, supra note 54, at art. 62(1)(ii).
85 Id. at art. 52(4).
86 CABINET OFF. OF JAPAN, KŌKYŌ SHISETSU-TŌ UN’EI-KEN OYOBI KŌKYŌSHISETSU-TŌ UN’EI JIGYO NI KANSURU GAIDORAIN [GUIDELINES ON THE RIGHT TO
OPERATE THE PUBLIC FACILITY, ETC. AND THE PUBLIC FACILITY, ETC. OPERATINGPROJECT]47(2021),
https://www8.cao.go.jp/pfi/hourei/guideline/pdf/uneiken_guideline.pdf [https://perma.cc/V9NR-3QUR] (Japan).

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and after the sale.87 This requirement may undermine the liquidity of
an investment, especially at an early phase of operation88 However, inpractice concessionaires are unwilling to divest at this point because
this is precisely the phase at which they typically make capital investments, the effects of which appear later in the period for improved
valuation.
E. Fair Value
Given that the privatization of infrastructure is a trade between
the government and a private concessionaire, rules concerning fairvalue are key to transparency and predictability. A fundamental approach is for the fair value of the operating right to be decided in the
open market through competitive bidding, the fair value being the present value of future cash inflows derived from operating an infrastructure asset minus the present value of future cash outflows made tomaintain the asset.89
In addition to operating rights, some assets are traded at the beginning and the end of the operating period.90 With most airport concessions, all stock in the company which owns the airport terminalbuilding is sold to the concessionaire, rather than an operating rightbeing created on the building. 91 This practice means that the company’s workforce is taken over by the concessionaire.92 It is done because the stock in the terminal building company is not owned by thegovernment, unlike the runways and lands underlying them. 93 The
stock is typically owned by private companies such as local businesses
and airline carriers, as well as municipal governments where the airport is located.94 Other ancillary assets owned by the government, suchas vehicles used within the site and in-house power generators, are also

87 IMPLEMENTATION POLICY, supra note 46, at IV-4-2.
88 See infra Part III(E).
89 RICHARD A. BREALEY, STEWART C. MYERS, FRANKLIN ALLEN & ALEXEDMANS, PRINCIPLES OF CORPORATE FINANCE 159 (14th ed. 2022).
90 IMPLEMENTATION POLICY, supra note 46, at II-1-7 (B).
91 Id.
92 Id.
93 IMPLEMENTATION POLICY, supra note 46, at III-2-13.
94 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, KONSESSHON-TŌNI KANSURU WĀKINGU GURŪPU (DAI 1-KAI) SETSUMEI SHIRYŌ [MATERIAL FOR THE
WORKINGGROUPONCONCESSIONS]
3
(Feb.
21,
2022),
https://www.cas.go.jp/jp/seisaku/atarashii_sihonsyugi/wgkaisai/concession_dai1/siryou2.pdf [https://perma.cc/64LU-LCQN].

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sold to the concessionaire because they are too short-lived to merit thecreation of an operating right.95
The selling of terminal building companies ties in with the development trajectory of Japanese airports. When the Japanese government started reconstructing transportation infrastructure after thecountry’s defeat in World War II (“WWII”), it dealt with a chroniclack of capital by letting private businesses create corporations tobuild, own, and operate the land-side terminal buildings, which produced profits through commercial operations such as retail outlets andrestaurants.96 Meanwhile, the government spent its scarce capital on
the air-side runways, which were relatively unprofitable or even lossmaking.97 Because of this path-dependent mode of development, thegovernment would acquire an interest in land-side commercial building companies prior to a concession, with the aim of integrating themwith air-side operations.98 From this perspective, Japanese airport concessions have an added policy implication of integrating the air andland sides of an airport.99
Thus, the government negotiates contracts with all shareholdersof the corporation that owns and operates an airport terminal building
for the right to purchase all their holdings.100 By doing so, the government packages ownership of air- and land-side assets, for competitive
bids along with the operating rights for airside runways.101 The contract, typically with representations and warranties, stipulates a fixedpurchase price.102 This means that any changes between the signingand the final closing, which takes place several months or even over a
year after the signing, will not be reflected in the price unless all parties agree to the change. The government transfers the contract to thewinning bidder, which exercises the right to purchase the shares fromthe original shareholders. 103 In this way, the government transfers

95 Id.
96 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, KŪKŌ KEIEIKAIKAKU NO JITSUGEN NI MUKETE [TOWARD REALIZATION OF AIRPORTMANAGEMENT REFORM] 3 (2011), https://www.mlit.go.jp/common/000161960.pdf[https://perma.cc/YC55-F6Q9] (Japan).
97 Id.
98 PRINCIPLES, supra note 45, at III-2.
99 Id.
100 IMPLEMENTATION POLICY, supra note 46, at II-1-7(B).
101 Id.
102 Id.
103 Id.

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ownership of the terminal building from existing shareholders to theselected concessionaire.
In this setting, airport concessions require a fair-value assessmentof the stock of the terminal building company at both the beginningand end of the operating period.104 In the beginning, this involves private negotiations between the government and the original shareholders, a rare practice for a government that normally relies on the open
market to decide the fair value of a trade.105 Therefore, support is provided by financial advisors who conduct due diligence and valuationof the terminal building company. The government may have an incentive to lower the price of the stock because the lower it is, thehigher will be the proceeds from the sale of the operating right. Thisis because bidders typically estimate the value of the integrated assets
and allocate to the operating right the difference between that value
and the prefixed price for the stocks.
There is a possibility that shareholders will refuse to sell theirholdings even at a value they believe is fair. In this case, the government will have the de facto upper hand in negotiations, as it has theauthority to renew the license of the terminal building company to operate the building every three years. The building typically stands on
government-owned land, and the government explicitly conditions therenewal upon “cooperation with airport management reform,” which
implies the integration of air- and land-side operations through concessions.106 However, the process is not one-sided because the central
government, in initiating concessions, is required to obtain the consent
of the municipal government where the airport is located. The municipal government represents the interests of local constituencies, which
include shareholders of the terminal building company.107 For this reason, the central government often negotiates with municipal governments, which weighs the pros and cons of concession-led privatization. This can include benefits to the regional economy from anincrease in inbound tourists and a possible renewal of assets, againstconcerns over a possible deterioration in the quality of the assets anda rise in prices, all of which are conceivable when altering a

104 Id. at II-1-7(B), (D).
105 Id. at II-1-7(B).
106 PRINCIPLES, supra note 45, at III-2(2).
107 Id. at II-9.

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government operation with a half-century of history.108 This process isoften a central part of decision-making on concessions.109
Fair value is a key issue arising at the end of the operating period.
When the government decides to hold another competitive bidding
process to renew a concession, the concessionaire will sell the terminalbuilding to the next concessionaire; otherwise, the government canpurchase the terminal building company by itself.110 The government
also prescribes an arbitration process to determine the price of transferred assets when a buyer, presumably the new concessionaire, and aseller, the existing one, disagree on the issue. Arbitrators consider theoffer and bidding prices, as well as a valuation by a third party, agreed
to by both the seller and the buyer.111
F. Disclosure
The concession process requires the disclosure of information on
any infrastructure assets whose operating rights are to be transferred.112 This step is necessary in order to resolve information gaps
between the government and private bidders. A central element of fairvalue is fair disclosure, covering basic information on physical assets,
operations, and financials.113 Also included is sensitive information,such as security information on restricted airport areas, which is disclosed after candidates have been narrowed down by means of a firstscreening.114 On-site visits are typically scheduled as well, often on
multiple occasions.115
The disclosure process also includes a “competitive dialogue”
where bidders, one by one, can examine the feasibility of possible operating ideas before formally proposing them in a bid.116 Requests regarding the terms and conditions of concession contracts can also be

108 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, supra 96, at 7.
109 Id.
110 CONTRACT, supra note 54, at art. 64.
111 Id. at app. 14 (defining “Fair Value”).
112 PRINCIPLES, supra note 45, at V.
113 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, SENDAI KŪKŌTOKUTEI UN’EI JIGYŌ-TŌ BOSHŪ YŌKŌ [BIDDING AND SELECTION PROCEDURES ON
THE CONCESSION OF SENDAI AIRPORT] III-2(F) (2017) [hereinafter PROCEDURES],
https://www.mlit.go.jp/common/001184836.pdf [https://perma.cc/78T9-DYGA](Japan).
114 Id. at III-2(I).
115 Id.
116 Id. at III-2(K).

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conveyed to the government.117 This is tailored more to specific bidders than the conventional process of “market sounding,” which is
conducted by the government prior to competitive bidding to gauge
the interest of potential bidders in specific infrastructure assets undertentative terms and conditions.118 Ideas shared with the government
during a competitive dialogue are kept confidential from competingbidders.119 The time required for disclosure and competitive dialogue
is a major reason why concession deals take over a year from inception
to closing.120
Once selected, concessionaires must deal with the obligation of
disclosure. Disclosure requirements include a summary of the proposed operating plan, an annual operating plan, and semiannual reviews and financial results.121 The aim of disclosure is to provide thepublic with information on the privatized infrastructure. However, a
disclosure made by concessionaires often lacks the granularity required for listed companies and is not comparable to what is typically
included in annual reports corresponding to 10-K filings in the UnitedStates. In the case of airports, 10-K equivalent disclosures are filed
only by the Narita Airport Co. and Central Japan International Airport
Co. (“Centrair”), both of which are unlisted but required to file underJapanese financial regulations as they issue government-guaranteedbonds to general investors.122 Disclosure by concessionaires should be
improved to a 10-K equivalent level in order to maintain competitive
pressure on the winner, even during the operating period, when potential future challengers are kept informed of replacements or other concession-related opportunities.123

117 Id.
118 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, SENDAI KŪKŌTOKUTEI UN’EI JIGYŌ NO JISSHI NI KAKARU MAKETTO SAUNDINGU NO GOAN’NAI[NOTICE ON MARKET SOUNDING ON THE CONCESSION OF SENDAI AIRPORT] (Nov.
13,2013),
https://www.mlit.go.jp/common/001018611.pdf[https://perma.cc/8LKV-MLKY] (Japan).
119 PROCEDURES, supra note 113, at III-2(K).
120 Id. at III-2(A).
121 CONTRACT, supra note 54, at arts. 31, 33-37.
122 Kin’yū Shōhin Torihiki-hō [Financial Instruments and Exchange Act], Law
No. 25 of 1948, art. 4(6) (Japan).
123 Daisuke Asaoka, The Financial Effect of Airport Concessions: An Empirical
Analysis, 46 INT’L J. TRANSP. ECON. 9 (2020).

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G. Competitive Bidding
In a competitive bid, participants are required to submit quantitative and qualitative proposals. Quantitative proposals including a bidding price for the operating right and capital expenditure plans for theoperating period. Qualitative proposals include plans to operate theinfrastructure assets and changes to the layouts and services provided.124 Both types of proposals are legally binding unless noted otherwise, in which case they are given less consideration in evaluations.125 In the case of airport concessions, capital expenditure plans
usually cover the expansion of retail outlets, restaurants, and available
departures and arrival gates, along with an overhaul of traffic lines toshorten the time required for check-in and boarding procedures.126
A competitive environment is a key factor in keeping the qualityof infrastructure under concessions equal to or even better than that
under government operation given that competition incentivizes bidders to submit the best possible plans and bidding prices. Withoutcompetition, the quality of infrastructure can deteriorate under private
operation, with negative outcomes including higher prices for lowerquality services.127 This can occur when the operator has bargaining
power over a government that lacks alternative bidders. When Kansai
Airport was privatized in 2015, only one consortium, led by Vinci ofFrance, ended up participating in the final round of bidding.128 Backed
by this strong bargaining power, the sole bidder not only successfully
landed the contract but also made the government adopt contractualchanges after the entries were closed.129 Among other stipulations, the124 PROCEDURES, supra note 113, at IX-3.
125 IMPLEMENTATION POLICY, supra note 46, at III-2-15.
126 SENDAI INT’L AIRPORT CO., supra note 69.
127 Heather Boushey & Helen Knudsen, The Importance of Competition for theAmericanEconomy,
WHITE
HOUSE
(July
9,
2021),
https://www.whitehouse.gov/cea/written-materials/2021/07/09/the-importance-ofcompetition-for-the-american-economy/#:~:text=When%20there%20is%20insufficient%20competition,cannot%20become%20new%20goods%20and[https://perma.cc/MC7Q-VRXJ].
128 NEWKANSAI INT’L AIRPORT CO., KANSAIKOKUSAIKŪKŌ OYOBIŌSAKAKOKUSAIKŪKŌ TOKUTEI KŪKŌ UN’EI JIGYŌ-TŌ’ NO YŪSEN-KŌSHŌ-KENSHANO SENTEI NI TSUITE [ON THE SELECTION OF THE PREFERRED NEGOTIATION PARTY
FOR THE CONCESSION OF KANSAI INTERNATIONAL AIRPORT AND OSAKAINTERNATIONALAIRPORT](2015)[hereinafter
SELECTION],
http://www.nkiac.co.jp/concession/second/pdf/second.pdf [https://perma.cc/SBB8CJGR] (Japan).
129 NEW KANSAI INT’L AIRPORT CO., JISSHI KEIYAKU NO GAIYŌ NI TSUITE [ONTHE
SUMMARYOF
THE
CONCESSIONCONTRACT](2015),

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amendment gave the concessionaire an explicit right to terminate thecontract without penalty in the event of material adverse events.130 It
was a big win for the concessionaire, considering that the absence ofsuch protection had discouraged other candidates from participatingin the bidding process for a project with a long operating period of
forty-four years.131 Further, the concessionaire reduced some disclosures on airport usage which had been made before privatization, albeit the reduction was not a breach of the contract.132 The degree ofcompetitive pressure and bargaining power was different from what it
would have been if at least one other bidder had participated.133
In a regular competitive bidding process with multiple bidders,
the transparency and predictability of the grading criteria are key because they affect the candidates’ proposals and overall willingness toparticipate. 134 Between the qualitative and quantitative criteria, theweight of the latter matters in terms of predictability as it leaves noroom for exercising discretion in grading.135 The quantitative weight
ranges from 12% to 40% for airports and other types of concessions.136
Arguably, however, a desirable weight would be at least more thanhalf, considering the degree of subjective judgment involved in grading qualitative proposals.
http://www.nkiac.co.jp/concession/content/pdf/content01.pdf[https://perma.cc/XJ4X-MZ4B] (Japan).
130 Id.
131 NEWKANSAI INT’L AIRPORT CO., KANSAIKOKUSAIKŪKŌ OYOBIŌSAKAKOKUSAIKŪKŌ TOKUTEI KŪKŌ UN’EI JIGYŌ-TŌ’ BOSHŪ YŌKŌ [BIDDING
AND SELECTION PROCEDURES ON THE CONCESSION OF KANSAI INTERNATIONALAIRPORT AND OSAKA INTERNATIONAL AIRPORT] II-2 (Nov. 12, 2014),
http://www.nkiac.co.jp/concession/content/pdf/content02.pdf[https://perma.cc/AM5Q-F5JB] (Japan).
132 Tadayuki Yoshikawa, Kūkō Min’ei-ka de Sābisu Teika no Hiniku [Irony ofPoor Quality After Concession], NIKKEI BUS. (Aug. 31, 2017), https://business.nikkei.com/atcl/report/15/246820/082900064/ [https://perma.cc/UGS6-G56B] (Japan).
133 Masahiro Nakagawa, Kankū Shin-toppu ga Akasu “2-cho-en rakusatsu” no
Shōsan: Orikkusu-ryū Keiei de Nippon no Kūkō wa kawaruka [The New CEO of
Kansai Int’l Airport Reveals Winning Prospects of the “2-trillion-yen” Bidding:Will Japanese Airports Change by Orix’s Management?], TOKYO KEIZAI ONLINE(Jan. 15, 2016), https://toyokeizai.net/articles/-/100417 [https://perma.cc/3B73LWN7].
134 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, MINKAN ITAKUKŪKŌ JŌKYŌ FORŌAPPU KAIGI TORIMATOME HŌKOKUSHO) [THE FOLLOW-UPREPORT ON THE STATUS OF AIRPORTS UNDER CONCESSIONS)] 5 (2022) [hereinafter
FOLLOW-UP],
https://www.mlit.go.jp/koku/content/001469293.pdf[https://perma.cc/Z8WQ-9SEU] (Japan).
135 Id.
136 Asaoka, supra note 123, at 11.

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Also, when “incumbent” shareholders of a terminal building
company decide to participate in the bidding process, which is often
the case, potential bidders may find there is a gap in experience andlocal knowledge that works against them. The importance of fair disclosure in this regard is to ensure fairness not only between sellers andbuyers but also between competing buyers. One possible cure is toprohibit incumbent shareholders from participating altogether, although that might undermine equality of opportunity in an open bid.
Alternatively, one might mandate that the airport terminal building
company provide sufficient disclosure to resolve the information gap
between incumbents and challengers, and prohibit the company fromallowing its shareholders to access private information which affects
competition. The latter fair-disclosure approach has been adopted inpractice, but incumbent shareholders will often participate in and win,a bid by allying with third-party partners with more experience in operating infrastructure assets.137 Cases like this include Fukuoka Airport; Kumamoto Airport, the country’s fifteenth largest; Hiroshima
Airport, the seventeenth largest; and Hokkaido Airports, a bundle ofseven airports in the Hokkaido region including six which are lossmaking, and Shin-Chitose Airport, the country’s fifth largest, whichmakes up for their deficits.138 The concession of Kansai Airport did
not have the incumbent-challenger problem, but the winning consortium added thirty local partners after passing the first screening andlearning that it was the only remaining bidder; these, which included

137 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, FUKUOKA KŪKŌTOKUTEI UN’EI JIGYŌ-TŌ NO YŪSEN KŌSHŌ-KEN-SHA SENTEI NI KAKARUKYAKKANTEKI HYŌKA KEKKA-TŌ NO KŌHYŌ NI TSUITE [ON THE SELECTION OF THE
PREFERRED NEGOTIATION PARTY FOR THE CONCESSION OF FUKUOKA AIRPORT](2018), https://www.mlit.go.jp/common/001245372.pdf [https://perma.cc/LJ2D38PC] (Japan); MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM,KUMAMOTO KŪKŌ TOKUTEI UN’EI JIGYŌ-TŌ NO YŪSEN KŌSHŌ-KEN-SHA NO SENTEINI TSUITE [ON THE SELECTION OF THE PREFERRED NEGOTIATION PARTY FOR THE
CONCESSION OF KUMAMOTO AIRPORT] (2019), https://www.mlit.go.jp/common/001282097.pdf [https://perma.cc/PYN4-WSEL] (Japan); MINISTRY OF LAND,INFRASTRUCTURE, TRANSP. & TOURISM, HIROSHIMA KŪKŌ TOKUTEI UN’EI JIGYŌTŌ NO YŪSEN KŌSHŌ-KEN-SHA NO SENTEI NI TSUITE [ON THE SELECTION OF THE
PREFERRED NEGOTIATION PARTY FOR THE CONCESSION OF HIROSHIMA AIRPORT](2020), https://www.mlit.go.jp/common/001362494.pdf [https://perma.cc/GNA4RVCE] (Japan); MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM,
HOKKAIDŌ-NAI 7 KŪKŌ TOKUTEI UN’EI JIGYŌ-TŌ NO YŪSEN KŌSHŌ-KEN-SHA NOSENTEI NI TSUITE [ON THE SELECTION OF THE PREFERRED NEGOTIATION PARTY FOR
THE CONCESSION OF HOKKAIDO AIRPORTS] (2019), https://www.mlit.go.jp/common/001296784.pdf [https://perma.cc/7PJP-PDE2] (Japan).
138 Id.

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Panasonic and Nippon Life Insurance, own a total of 20% of the stockof the concessionaire SPV.139
If potential outside bidders find that the addition of incumbent
shareholders to their consortium increases their chances to win a bid
because of an actual or perceived informational advantage, it can leadto the undesirable result of having potential bidders vie for the incumbents’ participation in their consortium, potentially giving them unfair
weight at an entry point. Incumbent shareholders may also have an
incentive to negotiate a higher value for their shareholdings in the airport terminal building company. This is because winning the bid results only in their repurchasing the stock they had agreed to sell, losing
it brings them higher proceeds. It also raises an entry barrier for challengers, who must accept the higher value to participate. However, thefact that the government has an incentive to agree to a lower price forthe stock likely offsets such an incentive.
H. Force Majeure
For Japan, having experienced the Great East Japan Earthquake
in 2011 and the Covid-19 pandemic less than a decade later, risk allocation during natural disasters or pandemics is not a hypothetical issue.140 Based on the public nature of infrastructure, the government
accepts unlimited liability when infrastructure repairs caused by force
majeure cost more than the amount covered by the insurance requiredof the concessionaire, thereby protecting investors through the concession contract.141 This is a fair arrangement, given that concessionaires
are expected to operate and maintain infrastructure in the government’s place on the assumption that the assets are operative.
However, the effect of force majeure on the physical usability of
infrastructure is one thing; its effect on financial performance is another. While the government assumes ultimate responsibility for theoperability of infrastructure, it does not normally guarantee a level ofdemand, which is the core financial risk for an infrastructure operator.142 The Covid-19 pandemic significantly affected the overall economic calculus of such investments, particularly those that depend for
139 SELECTION, supra 128.
140 MINISTRY OF ECON., TRADE & INDUS., TSŪSHŌ HAKUSHO 2021 [WHITE PAPER

INTERNATIONAL ECONOMY AND TRADE 2021]
https://www.meti.go.jp/report/tsuhaku2021/pdf/02-01-02.pdf[https://perma.cc/K3WK-3HLM] (Japan).
141 CONTRACT, supra note 54, at art. 46(3).
142 Id. at art. 48(1).
ON

91,

93

(n.d.),

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revenue on the movement of people, notably the inbound tourists
whose numbers plunged to abnormally low levels during the lockdowns.143 It also raised awareness of the need for a fair allocation ofrisk between public and private through contractual and regulatory design.144
In fact, the government gave only limited support to the concessionaires of airports that continued operating during the pandemic.
The concessionaire of Fukuoka Airport fell into insolvency in 2021,145
its debt exceeding its assets by $30 million (3.6 billion yen), althoughadditional bank borrowings carried it through the pandemic. The government agreed to allow it to delay the timing of pledged capital expenditures and annual operating right payments at no additional cost,essentially providing the troubled concessionaire with bridge financing. In the case of the Fukuoka and Hokkaido airports, the government
additionally agreed to extend the operating period by one year, meaning that the concessionaires will earn an annual profit from operating
the airports without additional payment.146 This was made possible under a clause originally intended for government compensation cases
allowing an extension of the agreement on a yearly basis for up to five
years.147
The ex-ante possibility of concessionaires falling into financial
instability is something to be accepted when a concessionaire undertakes financial risk in place of the government. If the government were
143 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, supra note 94, at

13.

144 FOLLOW-UP, supra note 134, at 8.
145 FUKUOKA INT’L AIRPORT CO., DAI 3-NENDO NENJI HŌKOKU-SHO [ANNUALREPORT FOR THE 3RD FISCAL YEAR] 13 (2020), https://www.fukuoka-airport.co.jp/uploads/2021/06/fiac_2020_.pdf [https://perma.cc/C8AK-MDTL] (Japan).
146 See generally MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM,
KORONA JIDAI NO KŌKŪ KŪKŌ NO KEIEI KIBAN KYŌKA NI MUKETA SHIEN SHISAKUPAKKĒJI [THE SUPPORT POLICY PACKAGE FOR AIRPORTS UNDER THE COVID-19
PANDEMIC] (2020), https://www.mlit.go.jp/report/press/content/001379362.pdf[https://perma.cc/3JZX-CHBQ] (Japan); see also Kei Shirakawa, Konsesshon Kūkō
Shien Pakkēji [Support Package for Airports under Concession], 25 MORI HAMADA& MATSUMOTO ENERGY & INFRASTRUCTURE BULL. 1 (Nov. 2020),
https://www.mhmjapan.com/content/files/00043638/EI%20Bulletin%20vol25_202011.pdf [https://perma.cc/86GPX969] (Japan).
147 See, e.g., MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM,FUKUOKA KŪKŌ TOKUTEI UN’EI JIGYŌ-TŌ KŌKYŌ SHISETSU-TŌ UN’EI-KEN JISSHIKEIYAKUSHO [CONCESSION CONTRACT FOR FUKUOKA AIRPORT], arts. 48(2), 62(2)(2018) [hereinafter FUKUOKA CONTRACT], https://www.mlit.go.jp/common/001246377.pdf [https://perma.cc/6YTY-34B2] (Japan).

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to decide ex-post to take on most of the burden of force majeure beyond the requirements stipulated in a contract, it would make private
investors immune from such extraordinary events and make infrastructure more resilient to events such as natural disasters and pandemics. However, such ex-post behavior would undermine discipline
and affect the perception of concessionaires, potentially causing themto seek to negotiate room during downturns at the taxpayer’s expense.
In its actual responses, the government seems to be trying to balancesuch conflicting effects. While lending support during the unprecedented pandemic, it has sought to maintain discipline by sticking to
the letter of the contract and providing a certain level of funds. One of
the government’s perceived roles is to keep the country’s infrastructure functioning soundly overall, even during a crisis.148 But an expectation of government support during a crisis could easily lead to moral
hazard, should concessionaires lose the incentive to prepare for severe
economic downturns. It might also have an additional, subtle effect on
the government that could regain its influence when turned to by concessionaires as a last resort, even with overall government policy moving in the direction of privatization.
I. Profit Sharing
While the government and operators share risks, they may shareprofits as well. Some arrangements prescribe that a share of profits
exceeding a specified threshold be paid to the government. Such arrangements were adopted in the concessions of Kansai Airport, Fukuoka Airport, and Hokkaido Airports, as these are relatively large facilities and the upsides of privatization can be significant. 149 This
arrangement, combined with that for force majeure, moderates therisks of infrastructure investment by keeping the profits and losses of

148 CABINET OFF. OF JAPAN, BOSAI HAKUSHO REIWA 3-NEN [WHITE PAPER ON
DISASTER MANAGEMENT 2021] 102 (n.d.) https://www.bousai.go.jp/kaigirep/hakusho/pdf/r3_dai1bu1-2.pdf [https://perma.cc/D4T6-KRW8].
149 NEW KANSAI INT’L AIRPORT CO., supra note 131, at II-8; MINISTRY OF LAND,INFRASTRUCTURE, TRANSP. & TOURISM, FUKUOKA KŪKŌ TOKUTEI UN’EI JIGYŌ-TŌBOSHŪ YŌKŌ [BIDDING AND SELECTION PROCEDURES ON THE CONCESSION OFFUKUOKA AIRPORT] II-17 (2017) [hereinafter FUKUOKA PROCEDURES],
https://www.mlit.go.jp/common/001184836.pdf [https://perma.cc/8FUM-SN8B](Japan); MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, HOKKAIDONAI 7 KŪKŌ TOKUTEI UN’EI JIGYŌ-TŌ BOSHŪ YŌKŌ [BIDDING AND SELECTIONPROCEDURES ON THE CONCESSION OF HOKKAIDO 7 AIRPORT] II-16 (2018),
https://www.mlit.go.jp/common/001232803.pdf[https://perma.cc/P7N5-8EQE](Japan).

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private investors within a reasonably predictable range.150 The effectis similar to that of an earnout, which is often found in merger andacquisition contracts to adjust the target firm’s value to outcomes occurring after the closing of the transaction.151 The uncertainty of future
events translates into conditional payment, thereby facilitating agreements made under conditions of uncertainty.152
A more controlled version of risk limitation is seen in the case of
Aichi Toll Roads, a local network of toll roads in Aichi Prefecture incentral Japan.153 In this unique case, the government takes all profitsthat result from road traffic exceeding 106% of the projected demand
set at the beginning of the operating period, while compensating for
all losses that result from road traffic falling below 94% of the projection.154 Under the arrangement, a concessionaire assumes the risk ofdemand only within this range, while the government undertakes therest.155 In this case, the government essentially pays for the availabilityof toll roads by only partially transferring the financial risks and rewards to the concessionaire.
J. ESG Considerations
Given the public nature of infrastructure assets, their ESG impacts are multi-faceted. Their operation may have a considerable environmental impact, for example, and through their operation, they
may create substantial local employment, often as key employers intheir region. To encourage concessionaires in their ESG initiatives,competitive bidding processes typically include the evaluation of proposals from an ESG perspective.156 Proposals for airport concessions
include measures for noise reduction, a serious concern for airports
located in a downtown area. 157 Fukuoka Airport, for example,
150 Id.
151 Albert H. Choi, Addressing Informational Challenges with Earnouts in Mergers & Acquisitions, in RESEARCH HANDBOOK ON MERGERS AND ACQUISITIONS
154, at 154 (Claire A. Hill & Steven Davidoff Solomon eds., 2016).
152 Id.
153 AICHI PREFECTURAL ROAD PUB. CORP., AICHI YŪRYŌ DŌRO NO KONSESSHONKEIYAKU NI TSUITE [ON THE CONCESSION CONTRACT FOR AICHI TOLL ROADS](2016), http://www.aichi-dourokousha.or.jp/wp-content/uploads/2016/08/2-gaiyoushuusei.pdf [https://perma.cc/3E7R-XMCX] (Japan).
154 Id.
155 Id.
156 FUKUOKA PROCEDURES, supra note 149, at II-10I, (D); FUKUOKA CONTRACT,
supra note 147, at art. 26-4.
157 FUKUOKA PROCEDURES, supra note 149, at II-10I, (D); FUKUOKA CONTRACT,
supra note 147, at art. 26-4.

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connects to the city center by subway in only five minutes, and thus
causes significant noise and vibration in the neighborhood.158 The airport has made a number of efforts to benefit nearby residents, including building parks, providing free medical checkups, and donating air
conditioners to homes whose windows must be kept closed due tonoise.159 In addition, the government continues to provide a budget forthe purchase of residents’ land at their request.160 Both the central andmunicipal governments had performed these roles even before the airport’s privatization, but the transfer to the private sector seems to haveincreased their flexibility in dealing with such issues. Other proposals
could include plans to support local industries and communities
through local sourcing and employment opportunities for residents.
Gender diversity has also been emphasized, notably, since the enactment of the Basic Act for a Gender Equal Society in 1999.161 Although the government failed to achieve a goal set in 2010 to increase
the ratio of women in managerial positions to 30% by 2020, its overall
policy direction is to correct the gender-related aspects of social injustice.162 In fact, the ratio of women managers at private firms in 2021
was a mere 13.2%, well below the ratios of 41.1% in the United States,
36.8% in the U.K., 34.2% in France, and 29.4% in Germany.163 Within
the government, the ratio is even lower at 4.2% for top officials and4.9% for middle managerial positions.164 While the gap remains substantial, concessions have had a moderating effect on gender inequality by promoting proposals that would work to correct imbalances.
Because bid proposals typically include governance architecture,
a concession’s operation is self-monitored and designed to augment
government inspections conducted with and without notice. 165 Selfmonitoring is an important design element in that privatization removes the government’s access to first-hand, real-time information on
158 FUKUOKA INT’L AIRPORT CO., FUKUOKA KŪKŌ KANKYŌ SEIBI JOSEI JIGYŌ
JISSHI YŌRYŌ [SUMMARY OF ENVIRONMENTAL SUPPORT AT FUKUOKA] (2019),
https://www.fukuoka-airport.jp/assets/social/pdf/01_guidelines.pdf[https://perma.cc/E25H-V7NN] (Japan).
159 Id.
160 Id.
161 CABINET OFF. OF JAPAN, JENDĀ BYŌDŌ NI KANSURU HAKUSHO [THE WHITE
PAPER
ON
GENDEREQUALITY
2022](2022),
https://www.gender.go.jp/about_danjo/whitepaper/r04/zentai/pdf/r04_print.pdf[https://perma.cc/FG87-3C5G] (Japan).
162 Id.
163 Id.
164 Id.
165 CONTRACT, supra note 54, arts. 51-52.

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an infrastructure asset. 166 Self-monitoring is normally conducted
through internal committees which examine compliance, safety, andquality of operation, and is often reinforced by independent third-party
monitors supported by consultants.167 However, since concessionaires,or the SPVs that own the concession’s operating rights, are unlisted
corporations, their boards tend to be filled with the representatives of
consortium members, which leaves little room for independent outside
directors.168 This stands in contrast to the situation at the sponsor level.
Sponsors have often listed companies, which are required under theJapanese corporate governance code introduced in 2015 and amended
in 2021, to have at least two independent board directors or even athird to qualify for a prime listing on the Tokyo Stock Exchange.169
As with the bidding price for the operating rights, the fundamental assumption on the ESG front is that competition incentivizes bidders to come up with better ESG initiatives that go beyond the minimum levels required by the government. Therefore, a competitiveenvironment for selecting concessionaires is essential to promoting
better ESG initiatives as well.
III. COMPARISON WITH STOCK SALES
A. Overview
Even after the introduction of concessions, stock sales continued
to be used as a format for privatization. However, there have been only
two cases: (1) the privatization of the Japan Post group, including its
two subsidiaries; and (2) Japan Railway (“JR”) Kyushu. And even inthese two cases, the government had already decided on using stock
sales before the legislation of concessions in 2011.170 The same is trueof a stock sale planned for Tokyo Metro Co., a major subway operator,
which was corporatized in 2004 with a stock sales plan albeit without
166 Id.
167 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, MONITARINGUNI TSUITE [ON MONITORING] (n.d.), https://www.mlit.go.jp/mizukokudo/sewer-age/content/001429232.pdf [https://perma.cc/PD9X-4EHS] (Japan).
168 SENDAI INT’L AIRPORT CO., DAI-7-KI JIGYŌ HŌKOKU [ANNUAL REPORT, 7TH
FISCAL YEAR] 7 (n.d.), https://www.sendai-airport.co.jp/wp/wp-content/uploads/2022/06/2021jigyou.pdf [https://perma.cc/47HB-SBQB] (Japan).
169 TOKYO STOCK EXCH., JAPAN’S CORPORATE GOVERNANCE CODE: SEEKINGSUSTAINABLE CORPORATE GROWTH AND INCREASED CORPORATE VALUE OVER THE
MID- TO LONG-TERM 23 (2021), https://www.jpx.co.jp/ 81 ilt 81 u 81 /equities/listing/cg/tvdivq0000008jdy-att/20210611.pdf [https://perma.cc/DHQ5-QCZ2].
170 See Table 1 and Appendix.

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a specific deadline.171 After the 2011 earthquake, the government decided that proceeds from the stock sale would be spent on the redemption of bonds issued to finance earthquake reconstruction.172 In 2021,
seventeen years after the company’s corporatization, a government
panel approved the sale of half its stock.173
In the case of the Japan Post group, the use of a stock sale had
been decided in 2005 under the Koizumi administration, six years before the concession format was legislated.174 Corporatization of thegroup was completed in 2007, followed by a stock sale held in 2015
through simultaneous IPO by Japan Post Holdings Co. and its subsidiaries, Japan Post Bank and Japan Post Insurance.175 The result was theprivatization of a conglomerate offering postal, banking, and insurance services through a local network of 24,284 post offices employing 389,000 people.176
Under the group’s privatization program, the government must
hold more than a third of the shares of Japan Post Holdings Co., theholding company. 177 As of May 2022, seven years after its initial
171 Tōkyō Metoro Kabushikigaisha-hō [Act on Tokyo Metro Corporation], Law
No. 188 of 2002, Supp. Provision art. 2 (Japan).
172 Higashi-nihon Dai-shinsai Fukkō Zaigen Kakuho-hō [Act on Securing Financefor Recovery from the Great East Japan Earthquake], Law No. 117 of 2011, art. 72(Japan).
173 COUNCIL ON TRANSP. POL’Y OF JAPAN, TŌKYŌ-KEN NI OKERU KONGO NO
CHIKATETSU NETTOWĀKU NO ARIKATA-TŌ NI TSUITE [ON THE SUBWAY NETWORKSERVING THE TOKYO METROPOLITAN AREA] 9 (2021), https://www.mlit.go.jp/policy/shingikai/content/001414998.pdf [https://perma.cc/7PKG-W88R] (Japan); Emi
Urabe, Tōkyō Metoro Jōjō e Kabu Baikyaku, Kuni to To ga Gōi – Shinsen Seibi de
Renkei [Central Government and Tokyo Metropolitan Government Agree on Stock
Sales for Tokyo Metro], BLOOMBERG (July 15, 2021, 6:44 PM), https://www.bloomberg.co.jp/news/articles/2021-07-15/QWA0JMT0AFB601 [https://perma.cc/E7J6RX6U] (Japan).
174 Yūsei Min’eikahō [Postal Service Privatization Act], Law No. 97 of 2005, art.
7 (Japan).
175 Mai Omori, Nihon-Yūsei Gurūpu 3-sha no Kabushiki Jōjō to Kongo no Kadai[Initial Public Offerings of the Three Companies of Japan Post Group and the Future Issues], 371 RIPPŌ TO CHŌSA [LEGIS. AND RSCH.] 133, 133, 138 (Dec. 2015),
https://www.sangiin.go.jp/
82
ilt
82
u
82
e/annai/chousa/rippou_chousa/backnumber/2015pdf/20151201133.pdf [https://perma.cc/P57J-JVV4].
176 JAPAN POST GRP., NENJI KAIJI 2022 [ANNUAL DISCLOSURE 2022] 14 (2022),
https://www.japanpost.jp/ir/library/disclosure/2022/pdf/int_all_01.pdf[https://perma.cc/H4AX-LP5E] (Japan).
177 Yūsei Min’eikahō [Postal Service Privatization Act], Law No. 97 of 2005, art.
7 (Japan); see also MINISTRY OF INTERNAL AFFS. AND COMMC’NS, DEJITARU JIDAINI OKERU YŪSEI JIGYŌ NO ARIKATA NI TSUITE [POSTAL SERVICES IN THE DIGITAL
ERA](2021),
https://www.soumu.go.jp/main_content/000716907.pdf[https://perma.cc/6FM9-46GQ] (Japan).

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public offering, the government owned 34.3% of the shares.178 The requirement is slightly different from that for NTT, where the government must hold a third of shares or more.179 The difference between“more than a third” and “a third or more” is significant in that underJapanese corporate law, key decisions such as mergers, asset sales, andother reorganizations, as well as amendments to articles of incorporation, require approval by two-thirds of shareholders.180 The partiallyprivatized holding company is required to hold 100% of Japan Post
Co., a subsidiary offering postal and delivery services.181 This meansthat the government maintains indirect ownership of more than a thirdof the postal arm through its ownership of the parent.
In contrast to the requirement for the postal arm, the holding company is required to sell all of its holdings in its banking subsidiary,
Japan Post Bank Co., and its insurance subsidiary, Japan Post Insurance Co., albeit without an explicit deadline.182 The holding company
has an intermediate goal of reducing its ownership of the two subsidiaries to 50%, below which threshold the government loses the authority to approve the subsidiaries’ entry into new businesses.183 In May
2021, the holding company bought back 14.58% of shares in the insurance subsidiary, which resulted in holdings of 49.90% andachieved the intermediate goal.184 It announced that it would lower its
holdings in the banking subsidiary as well, from 89% to 50% or less,soon after the start of its five-year management plan starting in thesame year.185
The other stock sale, for JR Kyushu, occurred in 2016, one year
after the IPO of the Japan Post group.186 The choice of format dates
back to 1985 when the state-owned JNR was mired in myriad labor
178 See JAPAN POST GRP., supra note 176, at 36.
179 Nippon Denshin Denwa-hō [Nippon Telegraph and Telephone Act], Law No.
85 of 1984, art. 4 (Japan).
180 Kaisha-hō [Companies Act], Law No. 86 of 2005, art. 309(2) (Japan).
181 Yūsei Min’eikahō [Postal Service Privatization Act], Law No. 97 of 2005, art.
6 (Japan).
182 Id. at art. 7.
183 Id. at arts. 110, 110-2(1), 138, 138-2(1).
184 See JAPAN POST GRP., supra note 176, at 36-37.
185 JAPAN
POST GRP., JP BIJON 2025 [JP VISION 2025] (2021),
https://www.japanpost.jp/ir/strategy/pdf/20210514_01_st.pdf[https://perma.cc/DEE6-47LR] (Japan).
186 Keiji Hatano & Izumi Akai, Kyushu Railway Completes Japan’s Largest IPO
by Offering Size of 2016, SULLIVAN & CROMWELL LLP (Oct. 25, 2016),
https://www.sullcrom.com/ 83 ilt 83 u-railway-company-completes-japans-largestipo-2016 [https://perma.cc/6Q4U-XV79].

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disputes.187 The government decided to solve the deadlocks by splitting the company into six regional JR companies that year, their stock
to be sold through listings.188 The three most profitable, JR East, JR
West, and JR Central, listed their stock in 1993, 1996, and 1997 respectively, and completed the government’s full stock sales by 2002,
2004, and 2006.189
The JR Kyushu listing was fourth out of the six. The two remaining regional railway companies, JR Hokkaido and JR Shikoku, haveno prospect of a public listing because their operations are loss-making, serve less populated areas than the other four, and are supported
by government subsidies.190 The two received additional subsidies of$1.1 billion (130.2 billion yen) and $0.8 billion (102.5 billion yen) respectively during the Covid-19 pandemic, while the others did not.191
The listing of JR Kyushu, whose entire stocks were sold at once at a
valuation of $3 billion (0.4 trillion yen), was possible only after thecompany grew its non-railway divisions, such as real estate, to compensate for the losses of its railway business.192 The rare listing of apublic infrastructure company confirmed a general trend that had beenconspicuous since the 2000s – an activist fund, Fir Tree, had accumulated holdings in the company shortly after the initial public offering
to demand the appointment of three independent directors based on its
proposals.193 While Institutional Shareholders Services supported two
187 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, KOKUTETSU NO
BUNKATSU MIN’EIKA KARA 30-NEN O MUKAETE [30 YEARS AFTER THE
PRIVATIZATIONOFJAPANNATIONAL
RAILWAYS](2017),
https://www.mlit.go.jp/common/001242868.pdf [https://perma.cc/F8CV-CBPH](Japan); see also MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM,
IWAYURU 1047-MEI MONDAI NI KANSURU WAKAI NO SEIRITSU NI TSUITE [THESETTLEMENT OF LABOR DISPUTES] (n.d.), https://www.mlit.go.jp/common/000117516.pdf [https://perma.cc/2QQ2-7CSE] (Japan).
188 Id.
189 JR Kabushiki no Shobun [Stock Sales of Japan Railways], JAPAN RY. CONSTR.,
TRANSP. & TECH. AGENCY, https://www.jrtt.go.jp/settlement/share.html[https://perma.cc/2NHN-SE5R] (last visited Sept. 24, 2022) (Japan).
190 Press Release, Ministry of Land, Infrastructure, Transp. and Tourism, JR Hokkaidō, JR Shikoku-tō ni Taisuru Shien o Keizoku Kakujū Shimasu [We will
Continue and Expand Support for JR Hokkaido, JR Shikoku, etc.] (Dec. 25, 2020),
https://www.mlit.go.jp/report/press/content/001380813.pdf[https://perma.cc/GN2V-R595] (Japan).
191 Id.
192 Daisuke Asaoka & Yoshihisa Sugimura, The Effect of Privatization on Performance and Return: The Case of Japanese Railway Company, 2019 GLOB. BUS.
ECON. ANTHOL. 16, 22 (2019).
193 GIKETSUKEN KŌSHI JOGEN KAISHA (ISS) NO REPŌTO NI TAISURU TŌSHA NO
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85of them,194 all three candidates were rejected in 2020 at the company’s
shareholders’ meeting, with approval rates ranging from 15.1% to32.6%.195
Along with being a means of promoting privatization, the introduction of concessions in 2011 seems to have been in response to thesurge in stock market activism of the 2000s.196 But that was not the
only factor. It is worthwhile to compare the formats, as is done in theremaining part of this section, noting the obvious difference between
public and private transactions.
B. Economics
The first viewpoint focuses on the proceeds that the government
secures through privatization.197 Given that a fundamental motivation
for privatization is to mitigate the burden of debt taken on by the public, maximizing proceeds is an integral factor in choosing a format. If
the government fails to maximize proceeds by choosing a concession
over a stock sale, it means it has compromised on proceeds for thesake of securing control. However, as shown below, concessions tend
to be superior to stock sales in terms of expected proceeds.198 The exception would be in a high-interest rate environment, which is the opposite of Japan’s reality.199
Under the principle of corporate finance, the value that the government receives through stock sales or concessions is determined by
the present value of future cash flows.200 Suppose that a project to be
RY. KYUSHU (June 10, 2020), https://www.jrkyushu.co.jp/company/ir/stock/meeting/__icsFiles/afieldfile/2020/06/10/9142_viewonIssreport_jp_1.pdf[https://perma.cc/66JG-BHGF] (Japan).
194 Id.
195 RINJI-HŌKOKUSHO NO TEISEI-HŌKOKUSHO [ON THE CORRECTION OF ERRORSIN THE FILING OF EXTRAORDINARY REPORTS], JAPAN RY. KYUSHU (2020),
https://www.jrkyushu.co.jp/company/ir/stock/meeting/__icsFiles/afieldfile/2020/10/12/rinji_33rd_02.pdf [https://perma.cc/7H75-MEEN] (Japan).
196 Supra Part I.
197 CABINET OFF. OF JAPAN, KŌKYŌ SHISETSU-TŌ UN’EI-KEN OYOBI KŌKYŌSHISETSU-TŌ UN’EI JIGYŌ NI KANSURU GAIDORAIN [GUIDELINES FOR PUBLIC
FACILITIES OPERATING RIGHT AND PUBLIC FACILITIES OPERATING BUSINESS] 7-1(2021),
https://www8.cao.go.jp/pfi/hourei/guideline/pdf/uneiken_guideline.pdf[https://perma.cc/9X29-AQ6G].
198 Infra Part III(B).
199 Kin’yū Seisaku no Gaiyō [The Summary of Monetary Policy], BANK OF JAPAN,
https://www.boj.or.jp/mopo/outline/index.htm/ [https://perma.cc/58X4-RAP6] (lastvisited Nov. 1, 2022) (Japan).
200 BREALEY, MYERS, ALLEN & EDMANS, supra note 89, at 23.

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privatized generates an annual after-tax free cash flow of 100, and thediscount rate is 8%. With a stock sale, the government receives thevalue of a perpetuity, which is 100/.08 or 1,250. With a concession,
the government receives the present value of future cash flows for aprespecified period. When the operating period is thirty years, it receives the value of an annuity of 100 during that period, whose present
value is 100×(1 – 1/1.0830)/.08 or 1,126, by applying the formula foran annuity. 201 The stock sale appears to give a higher value, at
1,250>1,126 under the discount rate of 8%.
However, a government that chooses concessions can enjoy a“double dip” by reselling the operating right to the same infrastructure
through another round of concessions after the first operating period
ends.202 If one assumes that the business risk is unchanged, future cash
flows during the second period are discounted by the same 8%, andthe government again receives 1,126 at the beginning of the second
operating period or thirty years from the present.203 To further discountthe value of the proceeds back to the present, the government applies
a lower discount rate than 8%.204 It does so because its uncertainty
concerns not its business risk, but its own decision to have a second
round – an issue that has nothing to do with intrinsic business risk.
This is where the difference between the private and the public becomes apparent: when making financing and other decisions, the government generally faces a lower discount rate than the private sector.205
If one assumes a rate of 2%, meaning that a thirty-year government
bond is issued at that rate, the present value of the two rounds of concessions is 1,126+1,126/1.0230 or 1,747, which is higher than the onetime proceeds of 1,250 for stock sales. The difference becomes greater
as the government seeks further rounds of concessions, though its marginal contribution becomes smaller. More importantly, even if thegovernment does not seek one or more further rounds of concessions,the economic effect is the same.206 As long as it regains economic interest in the infrastructure after the first operating period, it receives
the value regardless of whether the asset is privatized again or remains
under its own operation.207
201 Id. (Or, 100/1.08+100/1.082…+100/1.0830 = 1,126).
202 See id. at 122.
203 See id. at 23.
204 Id.
205 See id. at 74.
206 See BREALEY, MYERS, ALLEN & EDMANS, supra note 89, at 37-38.
207 Id.

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The break-even discount rate for the government in this example– where the value for the two formats is equal – is 7.6%, where 1,250= 1,126+1,126/1.07630. This rate is unreasonably high for the government of an advanced economy, and in particular for Japan, which has
been operating in a chronically low, or even negative, interest environment.208 Hence, it is reasonable in terms of economics for the Japanese government to prefer concessions over stock sales when it sees
the need to privatize. Alternatively, if one assumes a government bondrate of 2%, the break-even discount rate for risky future cash flows is
3.5%, or 100/.035 = {100×(1 – 1/1.03530)/.035}/1.02.30, it is not unreasonable to assume a discount rate above this figure for the businessrisk of cash flows generated from an infrastructure asset such as an
airport, making concessions more desirable.
Concessions have an additional benefit in respect of proceeds.
This derives from the depreciation and accompanying tax deductions
allowed for the operating right under Generally Accepted Accounting
Principles (“GAAP”).209 In a fairly priced deal, a concessionaire pays
the present value of future tax shields and enjoys the benefits later.210
In this example, the government essentially borrows from the concessionaire in the form of a prepayment of the value of the tax shields andrepays the amount in the form of a corresponding tax break later.
When the corporate tax rate is 30%, the discount rate 8%, and the pricefor the operating right x, the concessionaire receives an annual tax
break of x/30×30% under straight-line depreciation. If one assumes
that the amount of depreciation for accounting purposes is equal tothat for tax purposes, the price for the operating right with such tax
breakssatisfiesanequationofx=(100+x/30×30%)/1.08+(100+x/30×30%)/1.082+…+(100+x/30×30%)/1.0830, which returns x = 1,269. From this result, the annual tax
break is 1,269/30×30%, or 13. In total, the concessionaire pays 1,269
to receive over thirty years an annual cash flow of 100, and a tax breakof thirteen, for a total of 113. The difference between 1,269 and the
208 BANK OF JAPAN, supra note 199.
209 Joanne Flood, ASC 853: Service Concession Arrangements, in WILEY GAAP
2020: INTERPRETATION AND APPLICATION OF GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES, ch. 61 (2020); IAS 16 Property, Plant and Equipment, IFRS FOUND.,
https://www.ifrs.org/issued-standards/list-of-standards/ias-16-property-plant-andequipment/ [https://perma.cc/PT6B-GM64] (last visited Sept. 24, 2022); IFRIC 12
Service Concession Arrangements, IFRS FOUND., https://www.ifrs.org/supportingimplementation/supporting-materials-by-ifrs-standards/ifric-12[https://perma.cc/U4Q2-LZJV] (last visited Sept. 24, 2022).
210 See BREALEY, MYERS, ALLEN & EDMANS, supra note 89, at 28.

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value without tax breaks, 1,126, is the present value of the annuity ofthe tax breaks,211 or 13×(1 – 1/1.0830)/.08, resulting in 143.
However, this borrowing is costly for a government. Since a government generally has a higher credit than a concessionaire, and thus
a lower borrowing rate, it does not make sense to borrow at a higher
rate that reflects a concessionaire’s lower credit.212 In calculating thepresent value of future tax breaks, the concessionaire applies a higher
discount rate than the government, as the discount rate reflects thebusiness risk of its failure to generate sufficient taxable income tomatch deductions through depreciation, which is 8% in the above example.213 In essence, this means that the government chooses to borrow at the same rate as a private concessionaire.214 Thus, it is financially unreasonable for the government to allow a tax deduction for
depreciation of the operating right, even if the depreciation is allowed
for accounting purposes, to the extent that the deduction is reflected in
the bidding price for the depreciable operating right.
In total, these calculations reveal that concessions are a superior
format to stock sales in terms of economics in that the former brings
greater proceeds to the government’s coffers. However, by allowing
tax deductions the government also lets itself borrow at an unreasonably higher rate than its own debt cost.
C. Strategy
One of the major advantages of privatization is the flexibility it
gives to investment decisions compared to those made under the control of a government tied to annual fiscal budgets.215 It may be hard fora government official to postpone investments once a budget is allocated, as such a move could weaken arguments for future budget reallocation. It may also be hard to make preventative investments – investments made in maintenance before an asset deteriorates – even if
they could lower total investment costs over the years, as the case forinvesting in evidently deteriorating assets looks more compelling as
211 Or, 13/1.08+13/1.082…+13/1.0830 = 143. Values do not match exactly due torounding.
212 See BREALEY, MYERS, ALLEN & EDMANS, supra note 89, at 75-76.
213 See id. at 158.
214 BREALEY, MYERS, ALLEN & EDMANS, supra note 89.
215 MINISTRY OF FIN. OF JAPAN, KURIKOSHI GAIDOBUKKU, KAITEI-BAN[GUIDEBOOKONCARRY-OVER](reviseded.,June2020),
https://www.mof.go.jp/policy/budget/topics/kurikoshi/r2guidebook/r2guidebook_all.pdf [https://perma.cc/R9EK-X4JM] (Japan).

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89

part of an annual budget allocation process.216 Private concessionaires
find it easier to see things in terms of life-cycle cost, as they have astronger incentive to minimize total costs than to justify annual budget
allocations.217
There are still differences in the degree of flexibility given byconcessions and stock sales in relation to investment choices. With
concessions, any material change to an infrastructure asset is subject
to government approval to ensure that the intended functions of infrastructure are maintained.218 This points to the format’s current use in
the “as-is” operation of existing assets. 219 The practice is common
across all asset classes of infrastructure, including airports, toll roads,
and power stations.220 The approval requirement is fundamental to thepredictability of future cash flows, but it is also a constraint on thegrowth of concessionaires.221 Similarly, concessionaire SPVs for individual infrastructure assets are restricted from investing in other businesses, in order that the former to be unaffected by any failures in thelatter.222 Instead, their sponsors are allowed to own and operate multiple SPVs for individual infrastructure assets under one umbrella, andthereby pursue growth in parallel with specific ones.223
This constraint is less severe in the case of stock sales, where privatized infrastructure companies have more flexibility. One result isdifferences in the growth trajectories of privatized companies. 224 A
case in point is Japan Railway Kyushu (“JR Kyushu”), which was

216 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, YOBŌ-HOZEN NI
YORU MENTENANSU ENO TENKAN NI TSUITE [ON THE CONVERSION TO
MAINTENANCE BY PREVENTION] (Dec. 3, 2020), https://www.mlit.go.jp/policy/shingikai/content/001375673.pdf [https://perma.cc/DVD5-ZSYZ].
217 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, KOKUDO-KŌTSŪ
HAKUSHO 2014 [WHITE PAPER ON LAND, INFRASTRUCTURE, TRANSPORT AND
TOURISM 2014] 77-78, https://www.mlit.go.jp/hakusyo/ 89 ilt/h25/hakusho/h26/pdf/np102000.pdf [https://perma.cc/FE3L-V9Y2] (last visited Nov. 1,2022) (Japan).
218 CONTRACT, supra note 54, at art. 40.
219 Id.
220 PFI Act, supra note 7, at art. 2(6); see e.g., AICHI PREFECTURAL ROAD PUBLICCORPORATION, supra note 153, at ch. 3-4; TOTTORI PREFECTURE, TOKUTEI JIGYŌKEIYAKU NO OMONA NAIYŌ NI TSUITE [ON THE CONCESSION CONTRACT] ch. 5(2020),
https://www.pref.tottori.lg.jp/secure/1215196/contract.pdf[https://perma.cc/ZLC3-DZ85] (Japan).
221 CONTRACT, supra note 54.
222 Id. at art. 26.
223 IMPLEMENTATION POLICY, supra note 46, at II-1(7).
224 Asaoka & Sugimura, supra note 192, at 22.

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privatized in 2016.225 After the government sold all its stock in thecompany, JR Kyushu no longer needed the government’s approval toenter into new businesses.226 Thus, it gained the flexibility to make investment decisions, a prerequisite for accelerating its growth in nonrailway businesses as a means of improving profitability.227 While infrastructure privatized through stock sales is still regulated throughsuch industry-specific laws as the Railway Business Act, Civil Aeronautics Act, Airport Act, and Telecommunications Business Act, theseregulations apply equally to all firms in the industry concerned,
whether government-owned or private.228
Further, concessions have an inherent underinvestment problem
in relation to capital expenditures.229 Being unable to enjoy financial
returns from their capital investments after the end of the operating
period, concessionaires have little incentive to make additional investments as the period draws to a close.230 They prefer to make investments upfront, early in the operating period, and to restrain them later
for a full recovery before the end of the period.231 To mitigate the underinvestment problem, concession contracts typically include arrangements allowing operators to recoup their investments at the endof the operating period by selling their assets at fair value to the government or the next concessionaire. 232 However, assets eligible forsuch arrangements are limited to tangible ones that can be recorded ona balance sheet, such as buildings and equipment, and exclude intangibles such as investments in human capital or research and development.233 Many aspects of infrastructure assets have intangible value,
as seen in developments in technology to predict and manage demand
225 Id. at 16.
226 Id. at 19.
227 Id. at 20.
228 Tetsudō Jigyō-hō [Railway Business Act], Law No. 9 of 1986, art. 2; Kōkū-hō[Civil Aeronautics Act], Law No. 231 of 1952, art. 2; Kūkō-hō [Airport Act], Law
No. 80 of 1956, art. 2; Denki Tsūshin Jigyō-hō [Telecommunications Business Act],
Law No. 86 of 1984, art. 2 (Japan).
229 Claude Crampes & Antonio Estache, Regulatory Trade-Offs in the Design ofConcession Contracts, 7 UTILS. POL’Y 1, 1 (1998).
230 Balanced Concessions for the Airport Industry: Delivering Win-Win Outcome
for Successful Airport Concession Contracts 28, IATA, https://www.iata.org/contentassets/4eae6e82b7b948b58370eb6413bd8d88/balanced-concession-for-the-airport-industry.pdf [https://perma.cc/3EGR-RMDY] (last visited Nov. 1, 2022) (Japan).
231 Id.
232 CONTRACT, supra note 54, at art. 64.
233 Id.

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for energy or transportation.234 Similarly, the capacity to design sophisticated interfaces with users has translated into consistently highrankings for the amenities and usability of Japanese airports.235 Investments in intangible assets are an essential part of building and sustaining an increasingly “smart” infrastructure. Concessionaires face therisk that investments in those fields may not be recovered because of
the lack of such an arrangement. Even if one exists, there may be uncertainty concerning the valuation of those intangibles.
In contrast, stock sales do not have an underinvestment problem,
because the investment period for the privatized enterprise is infinite
under the assumption of a going concern.236 This gives listed companies more flexibility in making capital investments than would be possible when an asset is under concession.237 Infrastructure companies,
which have privatized through stock sales, have invested in expanding
their business base to meet shareholder expectations.238 Major railway
companies privatized from the 1980s through the 1990s have diversified by developing commercial and residential buildings along theirrailway lines.239 Passengers buy groceries and clothing at retail outlets,
dine at restaurants, and reside in houses and apartments, all of which
are owned by railway companies and their subsidiaries.240 Indeed, realestate is a major component of their business, even larger than railways themselves.241 This diversified expansion is only made possibleby having an infinite management period in which to pursue growth.242
Japan’s telecommunication giant, Nippon Telegraph and Telephone (“NTT”), has also diversified into mobile phones, data communication, and real estate since its listing in 1985.243 Its mobile phone
234 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, ARATANA JIDAIO KIZUKU JIZOKU KANŌ DE SHITSU NO TAKAI SHAKAI-SHIHON SEIBI [SUSTAINABLE
AND HIGH-QUALITY INFRASTRUCTURE FOR THE NEW ERA] (Aug. 21, 2020),

https://www.mlit.go.jp/policy/shingikai/content/001359594.pdf[https://perma.cc/8C53-C8CS] (Japan).
235 See, e.g., The World’s Top 10 Airports of 2022, SKYTRAX: WORLD AIRPORTAWARDS,https://www.worldairportawards.com/the-worlds-top-10-airports-of2022// [https://perma.cc/W72N-XVHZ] (last visited Sept. 24, 2022).
236 BREALEY, MYERS, ALLEN & EDMANS, supra note 89, at 6.
237 IMPLEMENTATION POLICY, supra note 46, at II-1(10).
238 Asaoka & Sugimura, supra note 192, at 22.
239 Id.
240 Id.
241 Id.
242 Id.
243 NTT Group History, NTT CORP., https://www.global.ntt/our-history.html[https://perma.cc/M3PH-7497] (last visited Nov 16, 2022).

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subsidiary, NTT DoCoMo, listed in 1998 with the parent maintaining
a majority, grew into the leader of Japan’s mobile market.244 In 2020,
the subsidiary was delisted as the parent made it a wholly owned subsidiary at a valuation of $36 billion (4.25 trillion yen), the largest tender offer in the country.245 Similarly, electric power companies werelisted as early as 1951 after the split of a nationwide electric firm intonine regional companies under a decree intended to unwind a concentration of power in the industry.246 The regional firms have diversified
over decades into businesses such as telecommunications, real estate,
and construction. 247 Although excessive diversification in unrelatedareas may cause a conglomerate discount,248 it may also prompt thegrowth of new businesses, possibly leading to a premium instead.249
For the privatized companies, these expansion initiatives have beenpossible only with the stock sale format, which places few restrictions
on the scope of their business.250
This kind of flexibility may bring expectations for the growth of
future cash flows.251 In the above example of a stock sale, the value
can be improved from 100/.08, or 1,250, to 100/(.08 – g), where gdenotes the expected growth rate of future cash flows.252 While thesame can happen with a concession as demand for its services increases, a stock sale may raise expectations to a higher level provided
244 Id.
245 Kabuiski-gaisha NTT Dokomo Kabushiki-tō (Shōken-kōdo 9437) ni Taisuru
Kōkai Kaitsuke no Kekka ni Kansuru Oshirase [Results of a Takeover Bid for NTT
DoCoMo (Securities Code 9437)], NIPPON TEL. & TEL. CORP. (Nov. 17, 2020),
https://group.ntt/jp/newsrelease/2020/11/17/pdf/201117a/201117a.pdf[https://perma.cc/TKZ3-ZUYY] (Japan); Grace Huang & Gearoid Reidy, NTT to
Take Mobile Unit Docomo Private for $38 billion, BLOOMBERG (Sept. 29, 2020),
https://www.bloomberg.com/news/articles/2020-09-28/ntt-to-take-mobile-unit-docomo-private-for-38b-nikkei-reports [https://perma.cc/3LE8-ELUV].
246 Order to Reorganize the Electric Power Business, NAT’L ARCHIVES OF JAPAN
(Nov.
24,
1950),
https://www.digital.archives.go.jp/DAS/meta/listPhoto?LANG=default&BID=F0000000000000105246&ID=&TYPE= [https://perma.cc/6PGE-55FC] (Japan).
247 History,
TOKYO ELECTRIC POWER CO. HOLDINGS (May 2017),
https://www.tepco.co.jp/en/hd/about/corporate/history-e.html[https://perma.cc/P8JA-QHPM].
248 Larry H. P. Lang & René M. Stulz, Tobin’s q, Corporate Diversification, andFirm Performance, 102 J. POL. ECON. 1248 (1994); Philip G. Berger & Eli Ofek,
Diversification’s Effect on Firm Value, 37 J. FIN. ECON. 39 (1995).
249 See generally Belen Villalonga, Diversification Discount or Premium? New
Evidence from the Business Information Tracking Series, 59 J. FIN. 479 (2004).
250 IMPLEMENTATION POLICY, supra note 46, at II-1(10).
251 See supra Part III(B).
252 Id.

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that growth outside a given asset is feasible and is reflected in thegrowth rate.253 However, such expectations may be partly offset by thehigher risk associated with such expansion, which results in a higher
discount rate.254
Given these differences, it is necessary for the government tomake tradeoffs between stability and flexibility.255 While concessions
bring the government more proceeds as well as more control over privatized assets, stock sales give privatized companies greater long-term
flexibility in developing their own strategies.256 Stock sales likely create more value for shareholders as well, as shareholders anticipate at
the time of listing the stock.257 Although concessions have been thedominant format since the 2010s across all sectors of transportation,energy, and water services, this may mean that the government is, in
effect, prioritizing its own short-term proceeds rather than promoting
the long-term growth of privatized companies and thereby the economy overall – in the end, a more important matter for the government
itself.258
D. Ownership
The difference between the two formats regarding ownership ofunderlying infrastructure assets involves another difference, one thatconcerns restrictions placed on stock ownership. With a concession,underlying assets remain under government ownership, but in return,there is no restriction on the ownership of operating rights. This gives
rise to clear differences in ownership by foreign investors.259 For instance, Vinci of France owns a 40% stake in the SPV for the Kansai
Airport concession, something which might not have been possible
under a stock sale.260 There was no major public backlash observed forthis cross-border investment, as there had been for investments in
Haneda Airport’s terminal building company several years earlier.261
This is an interesting twist, given that the concession format was a
253 See BREALEY, MYERS, ALLEN & EDMANS, supra note 89, at 98-99.
254 Id.
255 Daisuke Asaoka, Infura Min’eika Shuhō to Kachi: Kabushiki Baikyaku to
Konsesshon [Privatization Methodology and the Value of Infrastructure: Stock Sales
and Concessions] 31 JICPA J. 117, 122 (2018).
256 Id.
257 Id.
258 Id.
259 PROCEDURES, supra note 113 at V.
260 See SELECTION, supra note 128.
261 Fukuda, supra note 19.

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response to a series of shareholder actions against listed infrastructurecompanies in the 2000s.262 The apparent lack of opposition was partly
because Vinci was a strategic investor with operating capabilities, as
opposed to a financial investor, but mostly because the format puts theconcessionaire in a contractual relationship with the government, theasset owner, for a finite timeframe.263 In addition to giving both sides
predictability, it essentially allows the government to experiment withthe format by giving it the option to unwind the program after the operating period ends, should it perceive any drawbacks or public backlash.264
In contrast, stock sales result in a permanent transfer of ownership, with the government often setting legal restrictions on foreign
ownership.265 Under an amendment to FEFTA in 2019,266 investments
in 1% or more of the shares of firms in designated industries, including
infrastructure sectors, became subject to government reporting requirements.267 Based on its examination of the reports, the government
has the authority to block an investment or request a change in its content.268 Following a backlash from institutional investors, however, thegovernment set broad exemptions to the regulation.269 Specifically, it
made passive investors exempt from such requirements, even strategic
investors provided they had no access to the key technologies of an
262 Id.
263 See supra Part II(D).
264 Id.
265 Saikin no Gaitame-hō Kaisei [Recent Amendment of the Foreign Exchange andForeign Trade Act], MINISTRY OF FIN. OF JAPAN, https://www.mof.go.jp/international_policy/gaitame_kawase/gaitame/recent_revised/index.html[https://perma.cc/7JU5-FE5J] (last visited Sept. 24, 2021).
266 Id.
267 Designated sectors include weapons, aircraft, nuclear facilities, space, dual-use
technologies, cybersecurity, electricity, gas, telecommunications, water supply, railways, oil, heat supply, broadcasting, public transportation, biological chemicals, security services, agriculture, forestry and fisheries, leather manufacture, air transportation, and maritime transportation. See Amendment of the Ministerial Ordinanceand Notice for the Foreign Exchange and Foreign Trade Act, MINISTRY OF FIN. OF
JAPAN (Mar. 25, 2020), https://www.mof.go.jp/policy/international_policy/gaitame_kawase/press_release/kanrenshiryou_20200325.pdf[https://perma.cc/N559-B3FK]; see also Yosuke Higashi, Ministerial Ordinanceand Notice for the Amended Foreign Exchange and Foreign Trade Act, 32 MORI
HAMADA & MATSUMOTO CORP. NEWSL. 1 (Mar. 2020), https://www.mhmjapan.com/content/files/00041588/CORPORATE%20NEWSLETTER%20(Vol.32).pdf[https://perma.cc/V4BB-NCGY].
268 MINISTRY OF FIN. OF JAPAN, supra note 265.
269 Id.

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investee firm or a seat on its board.270 In 2021, there were 2,859 suchreports submitted and none were blocked.271 However, an investment
in 2021 by the Chinese firm Tencent, in 3.65% of the shares of
Rakuten, a Japanese e-commerce platformer, was criticized as having
utilized a regulatory loophole which exempted Tencent from the reporting obligations based on their explanation that the firm would notaccess Rakuten’s key technologies or sit on its board.272
Other than FEFTA, there are a number of laws that categoricallylimit foreign ownership in certain industries. Under a law specificallyapplied to NTT, for example, foreign ownership in the telecommunications giant is limited to a third.273 The government further obliges
itself to keep a third or more of the company’s shares.274 Such foreign
ownership restrictions are also seen in other key industries. Foreign
ownership of airliners and freight forwarders is limited to a third of
shares, 275 and in broadcasters and the Japan Exchange Group, thecountry’s largest stock exchange, to a fifth.276 Such regulations may
not have been strictly enforced, though: in 2021, Fuji Media Holdings,
one of the major Japanese broadcasters, and its supervisor, the Ministry of Internal Affairs and Telecommunications, were blamed for failing to disclose that the former had violated the regulation by temporarily allowing its foreign ownership to exceed a fifth, from20.00042% to 20.00083%, between 2012 and 2014, which the company attributed to mistakes in calculating the ownership percentage.277
270 Id.
271 Tainai Chokusetsu Tōshi-tō ni Kansuru Jizen Todokede Kensū-tō ni Tsuite(Reiwa 3-nendo/2021-nendo-ban) [Regarding the Number of Advance Notifications,etc. on Inward Direct Investment, etc.(Fiscal Year 2021 version)], MINISTRY OF FIN.
OF JAPAN (June 2022), https://www.mof.go.jp/policy/international_policy/gaitame_kawase/press_release/20220610.pdf [https://perma.cc/VUX2-6XLD] (Japan).
272 See Kaisei Gaitamehō, Jizen Shinsa Manugare Chūgoku Tensento no Rakuten
Shusshi [Revised Foreign Exchange Act Exempts from Pre-examination Rakuten
Investment by Ch’na’s Tencent], NIKKEI (Apr. 20, 2021, 5:38 AM), https://www.nikkei.com/article/DGXZQOUA0781S0X00C21A4000000/?unlock=1[https://perma.cc/TDL9-GL3X] (Japan).
273 Nippon Denshin Denwa-hō [Nippon Telegraph and Telephone Act], Law No.
85 of 1984, art. 6 (Japan).
274 Id. at art. 4.
275 Kōkū-hō [Aviation Act], Law No. 231 of 1952, art. 120-2 (Japan); KamotsuRiyō Unsō Jigyō-hō [Consigned Freight Forwarding Business Act], Law No. 82 of1989, art. 6(v) (Japan).
276 Hōsō-hō [Broadcast Act], Law No. 132 of 1950, arts. 93(1)(vi), 159(2)(v) (Japan); Denpa-hō [Radio Act], Law No. 131 of 1950, art. 5(4) (Japan).
277 See Fuji HD Gaishi Kisei Ihan Mitomeru Sōmushō ni 14-nen Hokoku [Fuji HD
Admits Violation of Broadcast Law, Violation Reported to the Ministry of Internal
Affairs and Telecommunication in 2014], NIKKEI (Apr. 9, 2021, 5:13 AM),

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Although the ministry should have repealed Fuji Media’s broadcasting
license for violating the law,278 it did not because the company notified
the ministry after correcting the breach itself.279 This naturally led to
the law’s amendment to widen the scope of timely disclosure on ownership by licensed broadcasters.280
In contrast, railway companies have no regulation other than the
FEFTA requirement that limits foreign ownership in the industry.281
The absence is perhaps a reflection of the decision to split and privatize the former nationwide railway company as an antidote to the myriad labor disputes that occurred under government ownership, which
made the government reluctant to retain any ownership but willing to
let investors own the split-up companies.282 In line with the absence ofregulations, both the government and the public have seemed rather
accommodating to the listing of JR Kyushu, and, unlike in the 2000s,
even to the shareholder activism directed toward the company.283 Thatmay also reflect change in perceptions toward activism that accompanied the introduction of the Japanese stewardship code in 2014284 andthe corporate governance code in 2015285 as part of the corporate governance reforms introduced by the Abe administration. Similarly,
there is no specific restriction on the ownership of electric power companies, again except for FEFTA.286 This also reflects their origin in thehttps://www.nikkei.com/article/DGXZQOUC086L00Y1A400C2000000/[https://perma.cc/57AB-MFCP].
278 See Broadcast Act, supra note 276.
279 Press Release, Ministry of Internal Affairs & Communications, Takeda Sōmu
Daijin Kakugi-go Kisha-kaiken no gaiyō [Overview of the Post-Cabinet Press Conference by Minister for Internal Affairs and Communications Takeda] (Apr. 6,2021),
https://www.soumu.go.jp/menu_news/kaiken/01koho01_02001009.html[https://perma.cc/29UY-6D48] (Japan).
280 Shinji Akiyama, Tomohiro Takeda, Hirokane Enoki, Yuki Motomura,Tomoyuki Honda, Satoshi Tojo & Shoichi Iwatsubo, On the Act to Partially Amend
the Radio Act and the Broadcasting Act, 6 J. INFO. & COMMC’NS POL’Y IV-1(Aug.
5,2022),
https://www.soumu.go.jp/main_content/000828892.pdf[https://perma.cc/VH57-2LC3].
281 Tetsudō Jigyō-hō [Railway Business Act], Law No. 9 of 1986, art. 3.
282 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, supra note 187.
283 JAPAN RY. KYUSHU, supra note 193.
284 Principles for Responsible Institutional Investors <<Japan’s Stewardship
Code>> - To Promote Sustainable Growth of Companies Through Investment and
Dialogue (FY2019), THE COUNCIL OF EXPERTS ON THE STEWARDSHIP CODE (Mar.
24, 2020), https://www.fsa.go.jp/en/refer/councils/stewardship/20200324/01.pdf[https://perma.cc/3A49-M2L6].
285 See TOKYO STOCK EXCH., supra note 169.
286 Gaikoku Kawase oyobi Gaikoku Bōekihō [Foreign Exchange and Foreign
Trade Act], Law No. 228 of 1949, art. 27(5) (Japan).

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splitting, in 1951, of a government-controlled power company intonine private regional ones. 287 These examples show that ownershipregulations are not an a priori policy proposition, but a reflection ofmultiple factors that include the industry’s path-dependent growth trajectory.
E. Liquidity
When a stock sale is conducted through an IPO, investors enjoy
the liquidity of shares listed on the stock exchange.288 In contrast, concessions provide only limited liquidity since stocks of concessionaire
SPVs are unlisted and the transfer of their ownership requires government approval.289 The approval requirement exists because of the lackof human capital in concessionaire SPVs, at least when arranging concessions, and the possibility that a transfer of ownership will affect theconcessionaire’s operating capability. 290 The concession format involves replacing the government officials who would otherwise operate the infrastructure with employees of the concessionaire.291 For thisreason, the government requires operating capability at the level ofsponsors, who fill vacancies in human capital at the outset.292
For better liquidity of investments, the conditions required forgovernment approval must be clearly defined in order that approval is
not unreasonably withheld. 293 In practice, the terms of concessions
stipulate that the government must approve the transfer of ownershipunless operations are not hindered by the transfer.294 However, given
its emphasis on the operating capability of concessionaires following
the replacement of public officials, the government may still prefer acandidate willing to hold a stake in a concessionaire SPV over the longterm to one planning to sell it down immediately after being selected.295
This stands in contrast to stock sales, where companies alreadyhave operating capabilities at the firm level.296 When corporatization
287 See NAT’L ARCHIVES OF JAPAN, supra note 246.
288 Asaoka, supra note 255.
289 IMPLEMENTATION POLICY, supra note 46, at IV-4-2.
290 Asaoka, supra note 255.
291 Id.
292 Id.
293 IMPLEMENTATION POLICY, supra note 46, at IV-4-2.
294 Id.
295 Id.
296 Asaoka, supra note 255.

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is followed by a stock sale, it is often the case that former government
officials become employees of a corporation wholly owned by thegovernment. In this capacity, they maintain the company’s operations,the change in ownership at the shareholder level having no effect on
operations at the company level.297 While a concession-led transition
from government to private operation can be complemented by thesecondment of government officials for up to five years at the concessionaire’s request, as is possible under the PFI Act,298 support from theconcessionaire’s sponsors is essential in the early phases. 299 A decrease in sponsor ownership may negatively affect operations, forcing
a tradeoff with the benefits of the liquidity provided by the investments.
The requirement that operating capability be tied to ownershipalso hinders participation by institutional investors. For their investments, the use of non-voting stock is listed by the government as an
example of a class of stock that an SPV can issue for institutional investors while voting stock is held by sponsors.300 If financial investors
are only seeking economic returns from an infrastructure asset, thisclass of non-voting stock may work. However, given that institutional
investors are increasingly expected to influence investees by exercising voting rights under the stewardship code introduced in 2014,301
non-voting shares are adopted only rarely. Preferred stock issued by
Ito-En Co., Japan’s top producer of green tea, is the only example oflisted non-voting shares in Japan.302 Reflecting its unpopularity among
investors, the share price of the company’s non-voting preferred stock
is just about a third of the price of a voting share, despite its preferred
dividend being set at 125% of the price of the voting share.303
Therefore, a structure is still needed to make prospective concessionaires commit to continued operations while having the freedom toliquidate at least part of their financial investment, just as a corporation
allows for the separation of management and ownership. A possible

297 Id.
298 PFI Act, supra note 7, at arts. 22(1)(iv), 78-79.
299 SENDAI INT’L AIRPORT CO., supra note 69.
300 IMPLEMENTATION POLICY, supra note 46, at III-2-6.
301 See COUNCIL OF EXPERTS ON THE STEWARDSHIP CODE, supra note 284.
302 Shinki-jōjō Meigara Gaiyō [The Summary of the Initial Public Offering Stock],
TOKYO STOCK EXCH., https://www.jpx.co.jp/equities/products/preferred-stocks/issues/tvdivq0000007usm-att/25935g.pdf [https://perma.cc/AF44-49YY] (last visited
Aug. 12, 2021).
303 Id.

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solution would be to promote the use of limited partnerships, as discussed in Part IV.304
It is likely, however, that concessionaire SPVs will accumulate
human capital over the years and achieve sufficient operating capability on their own. In such a scenario, there will be no need for operating
capability at the sponsor level, and the concession format will become
similar to a stock sale, in which operating capability is already embedded within the infrastructure assets. Likewise, the bidding process forconcessions will be more like a competition over closely held stock
sales, with improved liquidity provided.
F. Governance
Governance structure also differs between the two formats.305 In
a stock sale, the government, lacking ownership, regulates privatizedcompanies only within the purview of laws and regulations applied
equally within the industry concerned.306 In addition to government
regulation, companies privatized by stock sales are subject to provisions of the corporate governance code applied to listed companies,
covering matters ranging from board independence and diversity tocompensation policy and internal controls. 307 They must deal withgeneral shareholders in the public markets as well, including not only
active investors but passive ones, the latter being increasingly willingto exercise their voting rights and voice their concerns under the Japanese stewardship code.308 Under Japanese corporate law, the shareholders of listed companies are entitled to wide-ranging proxy access.309 A shareholder having a 1% stake in a company for at least six
months is entitled to submit proposals for voting at a shareholders’meeting at the company’s cost.310 There is no limit on the scope ofsuch proposals unless the same ones have been rejected for the past
three years with an approval rate of 10% or less.311 A shareholder canthus include various agendas, including the appointment of directors,
payment of dividends, and divestment of assets.
304 See infra Part IV(B).
305 Asaoka, supra note 255.
306 Id.
307 TOKYO STOCK EXCH., supra note 169.
308 THE COUNCIL OF EXPERTS ON THE STEWARDSHIP CODE, supra note 284.
309 See Kaisha-hō [Companies Act], Law No. 86 of 2005, arts. 303(2), 305(1) (Ja-pan).

310 Id.
311 Id. at art. 304.

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Even when conducting a stock sale, the government can havewider discretion if the sale is only partial, in which case it will haveinfluence as a major shareholder as well as a supervisory authority.
The practice of cross-shareholding is persistent in the Japanese market, but it is also noteworthy that stock ownership per shareholder isdispersed at a level equivalent to that of the U.S. and the U.K. whenmeasured by the ownership concentration of the top three shareholders.312 This gives the government shareholder power without competing block holders. A significant level of government ownership under
this dispersed ownership structure would give the government exceptional influence, possibly even with less of an incentive to increase theequity value of the privatized company than general shareholders, inaddition to the authority to approve the appointment of board directors, articles of incorporation, annual management plans, new shareissues, and sales of key assets.313 Such influence could give the managers of a privatized company an incentive to build a close relationshipwith the government, since it is the government, as opposed to the collective will of public investors, that has the key say in management
decisions. Such a joint ownership structure could hinder the growth ofthe company’s value and lead instead to its stagnation.
With a concession, the government may be the owner of the underlying assets, but the transparency and clarity of its authority as aparty to the contract serve to curb its discretion.314 Since a concessionaire SPV is privately owned by sponsors in a consortium, it is not subject to the governance requirements for listed firms, and the sponsors’
public shareholders have only an indirect say in the course of the privately held vehicle.315 While the vehicle has autonomy in that financial
risks and rewards are transferred to the private sector, the monitoringrole of the government is important in ensuring that required standards
are established, including that concessionaires may be replaced in theevent of a material breach of a contract.316 Such monitoring is indispensable to securing the public’s interest in infrastructure under a concession.317 Here, there is a social shift toward faith in contracts and
312 Gur Aminadav & Elias Papaioannou, Corporate Control Around the World,
75 J. FIN. 1191, Table 1 (2020).
313 See, e.g., Nippon Denshin Denwa-hō [Nippon Telegraph and Telephone Act],
Law No. 85 of 1984, arts. 4 (stock issuance), 10 (board appointment), 11 (articles ofincorporation), 12 (annual management plan), 14 (asset sales) (Japan).
314 See generally CONTRACT, supra 54.
315 TOKYO STOCK EXCH., supra note 169.
316 CONTRACT, supra note 54, at art. 68.
317 Id. at art. 52.

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their enforcement under the rule of law, rather than in ambiguous relationships with the government.318
G. Equal Footing
As a corollary to the flexibility provided by stock sales, government regulation requires additional consideration as to the competitiveenvironment of the market.319 A prime example is equal footing accorded to all competitors in an industry.320 It is often the case for a
privatized company to have a monopolistic or oligopolistic position inits market. Regulations matter here to ensure that competitors and newentrants are given equal footing.321
Electric power companies, for instance, have a regional monopoly on the transmission lines connecting power producers with end
users.322 The discussion on fair access gained importance with the progress of deregulation.323 Entry by wholesale power producers was allowed in 1995, and by retail power producers in a gradual process from2000 to 2016.324 Deregulation accelerated after the 2011 disaster at the
Fukushima nuclear power plant, as criticism surged against the inertiaof Tokyo Electric Power Co., the regional monopoly for Fukushima
and the rest of the country’s northeastern region. 325 Deregulation
caused the incumbent power companies to lose their regional monopolies in both the wholesale and retail power markets, although as of2021 they still maintained a market share of 80% in total. 326 Theircompetitors’ access to the transmission lines was improved in 2020 bycarveouts of regional transmission line businesses into either
318 Id.
319 Asaoka, supra note 255.
320 Koichi Hirohara, Denryoku no Zenmen Jiyūka [Full Deregulation of ElectricPower], 377 RIPPŌ TO CHŌSA [LEGISLATION AND RESEARCH] 2 (2016) (Japan).
321 Id.
322 Id.
323 Id.
324 MINISTRY OF ECON., TRADE & INDUS., DENRYOKU SHISUTEMU KAIKAKUSENMON IINKAI HŌKOKUSHO [ELECTRICITY SYSTEM REFORM EXPERT COMMITTEEREPORT] (Feb. 2013), https://www.meti.go.jp/shingikai/enecho/kihon_seisaku/denryoku_system/seido_sekkei/pdf/01_s01_00.pdf[https://perma.cc/G9UB-UFZL](Japan).
325 Id.
326 MINISTRY OF ECON., TRADE & INDUS., DENRYOKU GASU KOURI ZENMEN JIYŪKA NO SHINCHOKU JŌKYŌ NI TSUITE [PROGRESS OF THE FULL LIBERALIZATION OF
THE
ELECTRICITY AND GAS RETAIL MARKET] (Apr. 28, 2021),
https://www.meti.go.jp/shingikai/enecho/denryoku_gas/denryoku_gas/pdf/034_03_00.pdf [https://perma.cc/ATB8-QP8L] (Japan).

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subsidiary of each regional electric power company or a sister company under the same corporate umbrella.327 However, the incumbents’
full capital ties to the carved-out entities remains a hindrance to faircompetition. A spin-off of the subsidiaries would be necessary to create a level playing field, one where transmission line businesses are
owned by general shareholders in the public markets and the transmission lines are independent of the incumbents.328
Such competition issues are also apparent in the privatization ofJapan Post Holdings and its subsidiaries, Japan Post, Japan Post Bank,and Japan Post Insurance. In addition to an authorized monopoly on
mail delivery, Japan Post has an oligopolistic position in package delivery services with a third-place share of 22.5%.329 Japan Post Bank
has a dominant position in retail banking as well, with the top share of
27.7% in retail deposits.330 Japan Post Insurance also holds the third
position, with a share of 16.3%, in terms of life insurance premium
revenues.331 Given its strong position in each segment of its wide rangeof services, its competitors are naturally cautious about the group’s
moves under the government’s gradual sale of its holdings under ongoing privatization.332 One focal regulation has been that which limits
the number of deposits that Japan Post Bank may accept per customer
to $210,000 (26 million yen)333 while imposing no such limit on deposits for commercial banks. The limit exists because, with the government’s controlling ownership, deposits at the postal bank are

327 MINISTRY OF ECON., TRADE & INDUS., HŌTEKI BUNRI (2020-NEN 4-GATSU 1NICHI) IKŌ NO KAKUSHA NO JIGYŌ KEITAI [BUSINESS STRUCTURE OF EACH
COMPANY AFTER LEGAL UNBUNDLING (APR. 1, 2020)] (2019),

https://www.meti.go.jp/press/2019/03/20200313008/20200313008-1.pdf[https://perma.cc/6G6S-2BAT] (Japan).
328 Koichiro Ito, Keitō’un’yō, Kōteki Kikan e Ikō o Hassō-den Bunri no Kadai[Grid Operation, Transition to Public Institutions Issues in Separating Power Generation and Transmission], RSCH. INST. OF ECON., TRADE & INDUS. (Apr. 15, 2020),
https://www.rieti.go.jp/jp/papers/contribution/ito-koichiro/05.html[https://perma.cc/U27W-79AV] (Japan).
329 MINISTRY OF INTERNAL AFFS. & COMMC’NS, supra note 177, at 30.
330 Id. at 31.
331 Id.
332 Yūcho Gink no Shinki Gyōmu ni Kakaru Ninka Shinsei ni Tsuite [On the Application for Approval for New Businesses by Japan Post Bank], ZENKOKU GINKO
KYOKAI(JAPANESE
BANKERSASSOCIATION)(Dec.
3,2021),
https://www.zenginkyo.or.jp/news/2021/n120301/ [https://perma.cc/3P4E-KCYN](Japan).
333 Yūsei Min’eika-hō Sekō-rei [Order for Enforcement of the Postal Service Privatization Act], Order No. 342 of 2005, art. 2(2)(i) (Japan).

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deemed to be backed by an implicit government guarantee,334 which
exceeds the amount of the deposit insurance of $80,000 (10 million
yen) provided for deposits at commercial banks.335 Given that Japan
Post Bank has the top share in deposits, the ceiling requires a balanced
effort to smoothly privatize the bank while making competition workon equal footing.336
Meanwhile, Japan Post Holdings and its wholly-owned subsidiary, Japan Post, have a universal service obligation under which they
are required to keep outposts for postal services available throughout
the country.337 These facilities are shared to provide the banking andinsurance services of Japan Post Bank, and Japan Post Insurance. This
does not mean that services are maintained at the same level as before
privatization.338 In October 2021, amid the partial privatization, Japan
Post Holdings and Japan Post stopped delivering regular mail on Saturdays in addition to Sundays and started to take two days, rather thanone, to deliver regular mail.339 This was in response to a surge in demand for package delivery that was intensified by the pandemic andexacerbated by a labor shortage.340 Packages continue to be delivered
seven days a week.341 The apparent reduction in services is often attributed to the effects of privatization, as consumers tend to expect atleast the same level of service they enjoyed before. 342 However,

334 Yūcho Gendo-gaku, 2600-man-en ni Baizō Kakugi Kettei [Cabinet Decision]
Cabinet Decision To Double Postal Savings Limit To 26 Million Yen], NIKKEI (Mar.
8, 2019), https://www.nikkei.com/article/DGXMZO42145900X00C19A3EAF000/[https://perma.cc/G7CM-7QK5] (Japan).
335 Mangaichi ‘in’yū-kikan ga Hatan Shita Toki [When a Financial Institution
Goes
Bankrupt],
DEPOSITINS.
CORP.
JAPAN,
https://www.dic.go.jp/yokinsha/page_000134.html[https://perma.cc/QZ9RHVZQ] (last visited Sept. 24, 2022) (Japan).
336 ZENKOKU GINKO KYOKAI (JAPANESE BANKERS ASSOCIATION), supra note
332.
337 Yūsei ‘in’eika-hō [Postal Service Privatization Act], Law No. 97 of 2005, art.
7-2 (Japan); Nippon Yūsei-hō [Act on Japan Post Holdings Company], Law No. 98
of 2005, art. 5(1) (Japan); Nippon Yūbin-hō [Act on Japan Post Company], Law No.
100 of 2005, art. 5 (Japan).
338 Id.
339 Nippon Yūbin ni Okeru Sābisu no Minaoshi [Review of the Services at Japan
Post], MINISTRY OF INTERNAL AFFS. & COMMC’NS (Sept. 17, 2021),
https://www.soumu.go.jp/menu_news/s-news/01ryutsu14_02000110.html[https://perma.cc/6ZX6-T7RR] (last visited Sept. 24, 2022) (Japan).
340 Id.
341 Id.
342 Id.

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similar streamlining might have occurred even under government operation given the chronic labor shortages in the market.343
In contrast to the tight regulations imposed on stock sales to ensure equal footing, concessions are saddled with fewer such requirements in return for limits on the scope of their operations.344 The government even provides concessionaires with a degree of protection
against competition, typically by agreeing to compensate concessionaires for policy changes that would materially affect their competitiveenvironment.345 These might include the development of similar infrastructure in a nearby location or of a kind that affects only the concessionaire as opposed to all players in the industry.346 In this sense, concessions can be viewed as privatization in a more controlledenvironment. However, in response to criticism that the limits on theoperation were too restrictive and deprived concessionaires of reasonable opportunities for growth, the government started discussions inJune 2021 on deregulation which would allow concessionaires to add
new infrastructure assets to existing ones and otherwise expand theirrange of business.347 These will likely lead to a discussion on equal
footing as well, given that concessionaires still maintain a certain monopolistic power over the original assets while aiming for expansion.348
H. Regulation for Pricing
The monopolistic position of privatized companies makes pricing
regulations critical, although privatized firms have basic discretionover the pricing of goods and services within both the stock sale andconcession formats. 349 Such regulations exist because infrastructure
assets, given their market position, can generally improve profitability
by raising prices or slashing maintenance investment without affecting

343 Id.
344 IMPLEMENTATION POLICY, supra note 46, at II-1(10).
345 CONTRACT, supra note 54, at arts. 45, 62(2).
346 Id.
347 PPP/PFI Suishin Akushon Puran (Reiwa 3-nen Kaiteiban) [PPP/PFI Promotion Action Plan (Revised in 2021)], CABINET OFF. OF JAPAN (June 18, 2021),
https://www8.cao.go.jp/pfi/actionplan/pdf/actionplan2.pdf[https://perma.cc/YS6M-3CYL] (Japan).
348 ORG. FOR ECON. CO-OPERATION & DEV., COMPETITION POLICY AND
CONCESSIONS, POLICY BRIEF (May 2007), https://www.oecd.org/daf/competition/sectors/38706036.pdf [https://perma.cc/TA2J-2CCG].
349 PRINCIPLES, supra note 45, at II-8.

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demand.350 This would essentially be a transfer of wealth from users
rather than an improvement in productivity.351 For instance, the telecommunications industry is an oligopoly of the partially privatized
NTT and its private competitors with limited availability of bandwidthand fiber optic cables, making the upper limit of their pricing subject
to government approval.352 Similarly, railway companies are regionalmonopolies or oligopolies comprising JR companies and their regional
competitors and are subject to similar regulation.353
The caution against price hikes is more conspicuous in concessions than in stock sales, presumably because of the relatively narrow
scope of privatized infrastructure users. Hamamatsu, a city in the central prefecture of Shizuoka, solicited concession candidates for its
sewage services in 2018. 354 However, the selected concessionaire,
whose investors included the French operator Veolia, faced a civic
campaign by local residents concerned about a potential deteriorationof water quality under private operation.355 Price changes require approval by the city’s assembly in this case and thus are kept under control,356 but the residents were concerned about a typical strategy to improve profitability, namely rationalizing investments to reduce
costs.357 In 2019, in the face of this opposition, the municipal government indefinitely postponed a planned concession of its water supply
service, originally set to follow the concession of its sewage service,
and contracted with a third-party monitor to tighten monitoring of theconcessionaire.358 This may not be the harbinger of a general trend,
however, as the northeastern Miyagi Prefecture, home to Sendai Airport, concluded in 2021 the concession contracts for both water supply

350 Id.
351 Id.
352 Denki Tsūshin Jigyō-hō [Telecommunications Business Act], Law No. 86 of
1984, arts. 21(1), 33(2) (Japan).
353 Tetsudō Jigyō-hō [Railway Business Act], Law No. 92 of 1986, art. 16 (Japan).
354 Hamamatsu-shi Kōkyō Gesuidō Shumatsu-shorijo (Seien Shori-ku) Un’ei
Jigyō [Hamamatsu Public Sewage Treatment Plant (Seien Treatment Area)
Operation Project], HAMAMATSU CITY (Feb. 1, 2021), https://www.city.hamamatsu.shizuoka.jp/g-sisetu/gesui/seien/pfi.html [https://perma.cc/6EDR-YH2R] (Japan).
355 Id.
356 Id.
357 Id.
358 Id.

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and sewage services with a consortium led by Metawater, a Japanesewater supplier, joined by Veolia.359
Most of the privatized airports carried excess capacity at the timeof privatization, which means that lowering, rather than raising, prices
has been a common strategy used to increase traffic and attendant consumption at retail outlets and restaurants in terminal buildings. 360
However, in some cases, including such major downtown airports as
Itami Airport in Kansai and Fukuoka Airport, there has been a chronic
excess of demand over supply, the pandemic period being an exception.361 This enables concessionaires to improve profits merely by raising prices within the limits of laws restricting discriminatory or unreasonable pricing. 362 The possibility that concessionaires will raise
prices for an infrastructure asset whose demand exceeds supply relates
to the government’s proceeds from selling the asset’s operating rights,
as well as the willingness of investors to participate in the competitive
bidding process.363 Thus, the government shares, to some extent, provide incentives to allow flexible price increases for the purpose of improving proceeds.364 This again requires that the government strike abalance between securing investment opportunities for private capitalin an effort to reduce public debt and protect the interests of public
users by addressing perceived fairness in pricing before and after privatization.365

359 Miyagi-ken Jo-ko-gesui Ittai Kan-min Renkei Un’ei Jigyo (Miyagi-gata Kanri
Un’ei Hōshiki) Yūsen-kōshō-kensha no Sentei Kekka ni Tsuite [Miyagi Prefecture
Water Works and Sewerage Integrated Public-Private Partnership Operation
Project (Miyagi-type Management and Operation Method) Selection Result ofPreferential Negotiating Right Holder], MIYAGI PREFECTURE GOV’T (Mar. 15,2021),
https://www.pref.miyagi.jp/site/miyagigata/sentei2.html[https://perma.cc/6225-LYJZ] (Japan).
360 PRINCIPLES, supra note 45, at I-1.
361 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, KONZATSUKŪKŌ O SHIYŌ SHITE UNKŌ O OKONAU KOTO NO KYOKA [APPROVAL TO USE THE
CONGESTEDAIRPORTS](Jan.
10,2020),
https://www.mlit.go.jp/report/press/kouku04_hh_000210.html [https://perma.cc/Z8PF-U297] (Japan).
362 Kūkō Hō [Airport Act], Law No. 80 of 1956, art. 13.
363 See supra Part III(B).
364 Id.
365 PRINCIPLES, supra note 45, at I-1(2).

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IV. TOWARD AN EVOLUTION OF FORMATS
A. Concessions over Corporatization
Building on the success of concessions amid the relatively slow
progress, or apparent suspension, of stock sales, it is arguable that the
government can resume the privatization of corporatized infrastructure assets through concessions. Itami Airport in Osaka, which is now
a part of the bundled Kansai Airport, is the only current example ofsuch a combination of the two formats. Since the concession format
was unavailable during the wave of corporatization in the 2000s, thedeal required writing a case-specific law for the corporatization of
Itami Airport through a merger with Kansai Airport and the subsequent concession of the merged corporation in 2015. 366 While thiscase-specific law does not apply to other concessions, a framework
allowing concessions on corporatized infrastructure can be extended
to various infrastructure assets including airports, toll roads, seaports,
and power stations by further amending the PFI Act.367
The combination of corporatization, the conversion of government agencies into government-owned corporations, and concessions,the creation, and sale of operating rights on government-owned assets,
would offer the best of the two formats in one package by resolving
concerns that discourage the government from selling stock in already
corporatized infrastructure.368 If concessions were introduced to further privatize corporatized infrastructure companies under government ownership, market discipline would be an added benefit.369 Business would be carried out by private concessionaires, while
government monitoring, under contractual relationships based on
stock ownership, would protect the public interest. 370 The format
would also bring proceeds to the government’s coffers, while corporatized infrastructure would remain unmonetized under the suspended
stock sales.371

366 Kansaikokusaikūkō oyobi Ōsakakokusaikūkō no Ittai-teki katsu Kōritsutekina Un’ei ni Kansuru Hōritsu [Act on the Integrated and Efficient Operation of
Kansai International Airport and Osaka International Airport], Law No. 54 of 2011,
arts. 1, 9, 10 (Japan); see also MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. &TOURISM OF JAPAN, supra note 35.
367 Id.
368 Supra Part III(D)(F).
369 Id.
370 Supra Part III(J).
371 Supra Part III(B).

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One can make a good argument that adding concessions to corporatized infrastructure will achieve privatization, and thereby reduce
the fiscal burdens of the government while resolving concerns overthe sale of stock in corporatized infrastructure.372 Firstly, the combination will mitigate the conflicts between the public interest and market
discipline regarding infrastructure which were behind the suspensionof the stock sale of the corporatized Narita Airport.373 The government’s entering a contractual relationship with a concessionaire will
lend a higher level of predictability to the operation of privatized infrastructure than would a stock sale.374 Such a contractual arrangement
will give the government flexibility in the design of regulatory architecture, something which is hard to achieve through other alternatives
such as the writing of laws to apply specifically to a privatized company.375 However, achieving predictability does not mean undermining shareholder value, since the concessionaire, unlike the government, is driven by the profit motive and governed by its own
shareholders accordingly.376
Secondly, given the finite privatization period achieved throughconcessions alone, a combined format will give the government theoption to experiment with, and if necessary unwind its privatization
program.377 Otherwise, unwinding would require it to take once-listedcompanies private by obtaining the consent of public shareholders, anunlikely prospect for a debt-laden government and a dispersed ownership structure.378 With concessions, the government will have room toreconfigure and improve its regulatory architecture, at least at the endof the operating period, based on what it has learned during the period.379 This will include the public’s, as well as the investor’s, response to privatized infrastructure.380 Since stock sales are permanent,such reconfiguration through after-the-fact legislation would involve372 Id.
373 Id.
374 Supra Part II(B).
375 Id.
376 Supra Part III(B).
377 CONTRACT, supra note 54, at arts. 68, 70.
378 Annual Report on the Japanese Economy and Public Finance 2022 (Report by
Minister of State for Economic and Fiscal Policy), CABINET OFF. OF JAPAN (July2022),
https://www5.cao.go.jp/keizai3/2022/0729wp-keizai/setsumei-e2022.pdf[https://perma.cc/MBS4-JGT8].
379 CONTRACT, supra note 54, at art. 77.
380 Kenji Hashimoto, Yūsei Min’eika no Kenshō Sono Meritto o Chūshinto Shite[Evaluation of the Privatization of Japan Post: Mainly on its Benefits], 346 RIPPŌ
TO CHŌSA [LEGISLATION AND RESEARCH] 69, 87-88 (2013).

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a loss of credibility from the investor community as well as from concessionaires, who might even demand compensation.381 Such a prospect could lead the government to suspend stock sales altogether, delaying the overall privatization program and sacrificing the proceedsthat would come with it.382
Lastly, another benefit of the format is that it fills any vacuum of
governance caused by the corporatizing of infrastructure.383 After corporatization, the government still owns the stakes, but it usually shifts
to an indirect, hands-off approach in which operating responsibilities
are delegated to the corporation’s managers.384 In a typical corporatization structure, the government has the authority to approve eachyear’s management plan and the lineup of directors, rather than directing the day-to-day operation of the company.385 An unlisted company
under government ownership does not need to deal with general shareholder pressure as it would in the public markets. Government officials are also known for working long hours, as labor protection law
applied to the private sector does not apply to them.386 If the government has insufficient time to monitor, managers will have considerable latitude of discretion without a corresponding level of monitoringby the public shareholders who hold them accountable.387 In this way,
corporatization can give birth to a vacuum of governance.388 Becauseof this structure and the possible time constraints of government officials, managers enjoy a certain degree of independence from government control while shielding themselves from the pressures of the public market. It would not be inconceivable, then, for managers to havean incentive to preserve their economic rent by looking to the same
government officials who monitor their activities – and are the only
ones who do so – with an indirect hand but without an incentive forvalue growth.389
Concessions will expose them to market discipline by profitdriven concessionaires, who themselves are under competitive
381 Id.
382 Id.
383 Supra Part III(F).
384 Id.
385 See, e.g., Nippon Telegraph and Telephone Act, supra note 179.
386 NAT’L PERS. AUTH. OF JAPAN, ANNUAL REPORT 2020 ch. 5 (n.d.),https://www.jinji.go.jp/hakusho/pdf/1-3-5.pdf[https://perma.cc/X73E-8JM7].
387 Supra Part III(F).
388 Id.
389 Id.

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pressure.390 The format has the supplementary benefit of avoiding partial stock sales, where the government retains a significant stake, by
fully transferring the business’s financial risks and rewards and clarifying managerial responsibilities.391 Where there is dispersed ownership with a strong government influence, partial privatization may also
give rise to a governance vacuum in the sense that indirect control by
the government coincides with minority shareholders lacking the incentive to monitor management.392 A clear division of ownership andoperating responsibilities will fill such a vacuum and enable a more
incentive-compatible style of infrastructure management.393
Some cases of corporatized infrastructure, such as Narita Airport
and Tokyo Metro, have had their stock sales suspended,394 but there
are others that have none planned at all. Noteworthy among the latterare toll roads and seaports.395 The corporatization of major toll roads
was achieved in 2005 by splitting a network of highways throughout
the Japanese mainland into three regional companies, East Nippon Expressway Co. (E-Nexco), Central Nippon Expressway Co. (C-Nexco),
and West Nippon Expressway Co. (W-Nexco),396 and by establishing
Metropolitan Express Co. to cover Tokyo’s highway network.397 This
followed the corporatization of Narita Airport a year earlier; both took
place under the reformist Koizumi administration. 398 Similarly, thetwo major seaports of Osaka and Kobe, in the western part of the country, were bundled for corporatization into the Kobe-Osaka390 Supra Part III(B).
391 PRINCIPLES, supra note 45, at III-2.
392 Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial
Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305, 306 (1976).
393 Id.
394 NARITA INT’ L AIRPORT CORP., NARITA KŪKŌ SONO YAKUWARI TO GENJŌ
2019-NENDO [NARITA AIRPORT: ITS ROLE AND STATUS, FISCAL YEAR 2019] 103(2019),
https://www.naa.jp/jp/issue/yakuwarigenjyo/2019/pdf/3_all.pdf[https://perma.cc/N4ST-HWKM]; Tōkyō Chikatetsu Kabushiki-kaisha no Kabushiki
no Shobun ni Tsuite [On Stock Sales of Tokyo Metro Corp.], MINISTRY OF FIN. OF
JAPAN (Mar. 28, 2022), https://www.mof.go.jp/about_mof/councils/fiscal_system_council/sub-of_national_property/report/toushin20220328a.pdf[https://perma.cc/769U-BH38].
395 See Appendix.
396 Nobuhiro Yamagoshi, Dōro Kankei Yon-kōdan Min’eika no Kenshō [Evaluation of the Privatization of Four Toll-Road Companies], 260 RIPPŌ TO CHŌSA[LEGISLATION AND RESEARCH] 35, 35-36 (2006) (Japan).
397 Id.
398 Yasuhiro Atsumi, “Koizumi Kōzō-Kaikaku” Naru Gainen ni Tsuite no Shokōsatsu [Thoughts on the Concept of “Koizumi Structural Reform”], PRIDISCUSSION PAPER SERIES (No. 06A-28) (Sept. 2009) (Japan).

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International Port Co. in 2014, and those of Yokohama and Kawasaki,in the eastern region, into the Yokohama-Kawasaki International Port
Co. in 2016.399 But despite the concession format already being available, there was no explicit discussion of either stock sales or concessions at that time.400 If the government aims to proceed with privatization while addressing the concerns that accompany stock sales, theconcession format could be applied to further the privatization of corporatized toll roads and seaport infrastructure.
B. Fund Structure
In the competitive bidding process for concessions, the requirement that candidates have operating capability serves to limit thescope of investors, leading to the de facto exclusion of institutional
money managers, at least in the role of lead investor.401 This stands incontrast to stock sales, where institutional investors, particularly sophisticated ones, are major shareholders that lead the valuation of thestock of privatized companies.402 Such limits on the participants forconcessions can result in a lack of capital and limit the size of deals.
In fact, one of the reasons that the concession of Kansai Airport had
only one bidder consortium, led by Vinci and its local partners, is thatits minimum bidding price, at a total of about $14 billion (1.64 trillion
yen) for 44 years of operation, exceeded most candidates’ risk-taking
capacity. 403 The amount would not be a problem for capital-rich

399 12-gatsu 26-nichi, Hanshin-Kokusai-Kōwan Kabushikikaisha ni Taishite Kuni
ga Shusshi Shimashita [Government Invests in Kobe-Osaka Int’l Port Co. on Dec.
26], MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM (Dec. 2016),
https://www.mlit.go.jp/kowan/kowan_tk2_000012.html [https://perma.cc/8NDXBV8R]; Yokohama-Kawasaki Kokusai Kowan Kabushikikaisha ni Taishite Kuni ga
Shusshi Shimashita [Government Invests in Yokohama-Kawasaki Int’l Port Co.],TTILIT (Mar. 2016), https://www.mlit.go.jp/kowan/kowan_tk2_000016.html[https://perma.cc/22PQ-HB2U].
400 Id.
401 IMPLEMENTATION POLICY, supra note 46, at III-3.
402 Kenji Hashimoto, Kabushiki Jōjō ni Muketa Yūsei Jigyō no Kadai, Yunibāsaru
Sābisu no Kakuho, Keiei Kiban no Kyōka to no Chōwa [Issues of Japan Post for
Stock Listing: Coordination of Providing Universal Services and Strengthening Managerial Base etc.], 360 RIPPŌ TO CHŌSA [LEGISLATION AND RESEARCH] 13, 24(2015).
403 See NEW KANSAI INT’L AIRPORT CO., supra note 128; see also, The Privatization of Airports by Concession, SUMITOMO MITSUI TR. RSCH. INST. (Aug. 19, 2016),
https://www.smtri.jp/report_column/infra_ivst/pdf/InfraUPDATES_Concession.pdf [https://perma.cc/PY6B-QSFF] (Japan).

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institutional money managers, who look for infrastructure investment
opportunities in advanced economies with legal stability.404
A solution to this problem is to promote a fund structure, withconcessionaires forming an investment vehicle such as a limited partnership based on the Limited Partnership Act for Investment of 1998,
which itself is modeled on U.S. limited partnerships and is regularly
used for institutional investors in private equity and venture capitalfunds in Japan.405 So far, direct investments by corporations with operating capabilities have been preferred in competitive bids for concessions, even where the use of limited partnership is allowed.406 Under a limited partnership structure, a consortium of sponsors forms ageneral partner entity, after which it forms a limited partnership toraise funds from limited partners.407 Along with the consortium’s own
investment, these funds are used to finance the purchase of the operating right, which may be bridged by bank loans.408 In this structure,
the general partner has full responsibility for operating the infrastructure, in line with the government’s requirement that concessionaires
have operating capabilities for infrastructure assets.409
Institutional investors are given protection as limited partners, unlike investors in non-voting shares.410 Limited partners also enjoy liquidity, as the government makes clear that its approval is unnecessary
for the transfer of their interests when approved by general partners.411
A fund governance structure typically gives limited partners the rightto access disclosure, vote on changes in the terms and conditions of
404 GLOB. INFRASTRUCTURE HUB, supra note 1.
405 IMPLEMENTATION POLICY, supra note 46, at III-2(9); Tōshi Jigyō Yūgen Sekinin Kumiai Keiyaku ni Kansuru Hōritsu [Limited Partnership Act for Investment],
Law No. 90 of 1998.
406 See CABINET OFF. OF JAPAN, KŌKYŌ SHISETSU-TŌ UN’EI-KEN OYOBI KŌKYŌSHISETSU-TŌ UN’EI JIGYŌ NI KANSURU GAIDORAIN [GUIDELINES FOR PUBLIC
FACILITIES OPERATING RIGHT AND PUBLIC FACILITIES OPERATING BUSINESS] 13-24 (2021), https://www8.cao.go.jp/pfi/hourei/guideline/pdf/uneiken_guideline.pdf[https://perma.cc/9X29-AQ6G] (Japan); see also Masanori Sato, Issues and Prospects for Concessions/PPP, 13 MORI HAMADA & MATSUMOTO ENERGY &INFRASTRUCTURE BULL. 1 (2018) (Japan).
407 CABINET OFF. OF JAPAN, KŌKYŌ SHISETSU-TŌ UN’EI-KEN OYOBI KŌKYŌSHISETSU-TŌ UN’EI JIGYŌ NI KANSURU GAIDORAIN [GUIDELINES FOR PUBLIC
FACILITIES OPERATING RIGHT AND PUBLIC FACILITIES OPERATING BUSINESS] 13-24 (2021), https://www8.cao.go.jp/pfi/hourei/guideline/pdf/uneiken_guideline.pdf[https://perma.cc/9X29-AQ6G] (Japan).
408 Id.
409 IMPLEMENTATION POLICY, supra note 46, at III-3.
410 Id. at IV-4(2).
411 CABINET OFF. OF JAPAN, supra note 406.

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113fund investments, and replace general partners by collective vote.412
While the replacement right may be at odds with the government’s
emphasis on operating capabilities, past practice shows that banks
providing financing for the purchase of an operating right secure amortgage on it.413 This entitles them to sell the right if a borrower concessionaire defaults on debt, potentially leading to a change in concessionaires.414
In this way, operating capabilities remain with the general partner
entity which has responsibility for operations, while institutional investors, which lack operating capabilities, participate with protectionin the fund structure but without a requirement that they have operating capabilities. Compared to direct investments by sponsors, thestructure allows a substantial part of an investment to be liquidated
through limited partner investments, thus enabling a private equity investment in long-term assets. Liquidity may be created even at thegeneral partner level if an operation is outsourced by a limited partnership through contracts with operating companies, in which case thegeneral partner’s responsibility extends only to the selection and monitoring of those operating companies.415
So far, there has been no case of the limited partnership structure
being used by the sponsors of a concession. Part of the reason for its
absence is its unfamiliarity to both the government and sponsors in
relation to concessions. This stands in contrast to commercial real estate investments, where the structure is already prevalent, and to renewable energy investments, which use an investment trust structure
based on the Investment Trust Act as well as limited partnerships.416
Wider adoption of the fund structure will improve the investment
capacity of sponsors, who would be reluctant to sell their voting sharesfor liquidity even with government approval, as the move might damage their reputation as long-term operators and have a negative impact
on future opportunities in competitive bids for concessions. The useof a limited partnership provides such concessionaires with avenues
412 Sato, supra note 406.
413 CONTRACT, supra note 54, at art. 58.
414 Id.
415 TRADE & INDUS. MINISTRY OF ECON., TŌSHI JIGYŌ YŪGEN SEKININ KUMIAI
MODERU KEIYAKU [LIMITED PARTNERSHIP MODEL CONTRACT] art. 14 (Nov. 2010),
https://www.meti.go.jp/policy/economy/keiei_innovation/sangyokinyu/lps_model2211.pdf [https://perma.cc/BC5E-3NK4] (Japan).
416 NISHIMURA ASAHI HŌRITU JIMUSHO [NISHIMURA & ASAHI], 2 FAINANSU HŌTAIZEN (JŌ) ZENTEI-BAN [CORPUS JURIS FINANCE (VOL. I), REVISED ED.] 346, n.319(2017).

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for liquidating a substantial part of their investments while maintaining operating responsibility in the long run. It also enables participation by institutional investors and expands the pool of available private
capital, which the government hopes to utilize through its privatization
agendas.
C. Extension to BTO
Concessions have principally been used in operating existing infrastructure assets, but they can also be effective in building new
ones.417 This is facilitated by using the fund structure, which enablesraising a large amount of capital from institutional investors.418 At present, the construction of new infrastructure assets with private capitalfor later operation by the private sector is largely conducted under thebuild-transfer-operate (“BTO”) model, which is part of the private finance initiative (“PFI”) format for outsourcing the building and operation of public facilities at the cost and risk of the government.419 Under the BTO model, the private sector builds infrastructure, transfers
the assets to the government, and operates them on behalf of the government during a contracted period. Unlike a concession, the private
operator assumes no financial risk for the underlying assets.420
Currently, concessions are structured mainly for competitive bids
for the operation of existing assets, rather than the building of new
ones. A rare exception is the concession of faculty residences for a
public university, where construction costs are offset by payments forthe operating rights, and the concessionaire recovers its investment
through future rent payments as with a commercial real estate investment. 421 Under current practice, the government typically builds an

417 Teruyuki Yamamoto, Kōkyo Shisetsu Shinsetsu no Atarashii PFI Jigyō Ruikei“BT-Konsesshon” [A New PFI Format to Build New Public Facilities: BT Concession], RONZA (Dec. 8, 2021), https://webronza.asahi.com/judiciary/articles/2021120600003.html?page=1 [https://perma.cc/G6R6-T3M7] (Japan).
418 Supra Part IV(B).
419 CABINET OFF. OF JAPAN, KEIYAKU NI KANSURU GAIDORAIN - PFI JIGYŌKEIYAKU NI OKERU RYŪI-JIKŌ NI TSUITE - [CONTRACT GUIDELINES - POINTS TOCONSIDER
IN
PFI
BUSINESSCONTRACTS]
2-4-1(2021),
https://www8.cao.go.jp/pfi/hourei/guideline/pdf/keiyaku_guideline.pdf[https://perma.cc/FJ6V-8FMH] (Japan).
420 Yamamoto, supra note 417.
421 OKINAWA INST. SCI. & TECH. GRADUATE UNIV., OKINAWA KAGAKU GIJUTSUDAIGAKUIN KIBO KAKUCHŌ NI TOMONAU SHUKUSHA SEIBI UN’EI JIGYŌ BOSHŪ
YŌKŌ [APPLICATION GUIDELINES FOR RESIDENTIAL BUILDING CONCESSIONS] (Aug.
2018),
https://oist-prod-www.s3-ap-northeast-1.amazonaws.com/s3fs-

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infrastructure asset either by itself or by outsourcing it and subsequently creates an operating right on it for concession.422 This practicedoubles the required processes, time, and costs. Further, the possibilityof the two phases being undertaken by separate consortiums reduces
the incentive of a potential concessionaire to participate, as its designand operation ideas can be appropriated by a competitor if it wins in
the building phase but loses in the operation phase.423 Similarly, a concessionaire who loses in the former phase but wins in the latter willfind the asset awkward to operate, as designs will be incompatible with
its own ideas and styles.424 That existing infrastructure is not optimallyconfigured for operation is apparent in the fact that concessionaires,without exception, invest significantly at the outset to make the assets
they operate more attractive to users and commercially viable.425
Instead, the concession format should be expanded to include thebuilding of new infrastructure assets rather than limited to the operation of existing ones. This will enable concessionaires to design, build,and operate the infrastructure at their own cost and risk throughout theoperating period. When combined with the fund structure, risk will beshared by institutional investors, as is regularly done for commercial
real estate investments.426 To achieve this will require amending the
PFI Act, which currently defines concessions as the operations of existing assets, and requires a case-specific interpretation to include thebuilding of new assets. 427 This stands in contrast to concessions incountries of origin, such as France and the United States, which havebuilt canals and toll roads using concessions. 428 The amendment
should permit concessionaires to design and build infrastructure before operating it for recovery of their initial investments. This will not
only incentivize potential candidates to design, build, and operate
public/procurement/1.%20Guidelines%20for%20Applicants.pdf[https://perma.cc/6UES-RN3K].
422 PFI Act, supra note 7, at art. 2(6).
423 Yamamoto, supra note 417.
424 Id.
425 Id.
426 Press Release, Ministry of Land, Infrastructure, Transp. & Tourism, Reiwa 3nendo no Shōkenka Taisho Fudōsan no Shisan Sōgaku wa Yaku 46.8-cho en [RealEstate Assets for Securitization amounts to 46.8 trillion yen in Fiscal Year 2021](Aug. 1, 2022), https://www.mlit.go.jp/report/press/content/001493195.pdf[https://perma.cc/MQJ9-2JQH] (Japan).
427 CABINET OFF. OF JAPAN, supra note 419, at 1(16); see also CONTRACT, supranote 54, at art. 40.
428 EDWARD R. YESCOMBE & EDWARD FARQUHARSON, PUBLIC-PRIVATEPARTNERSHIPS IN INFRASTRUCTURE 12, 38 (2d ed. 2018).

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infrastructure in a consistent manner but reduce the government’s burdens in financing infrastructure construction. And, to the extent that
this consistency lessens additional investments at the outset of the operation, it will save the taxpayer money.
Accentuating the need for this change is the fact that the government already announces concessions for infrastructure before the completion of construction.429 A case in point is the stadium used as themain arena for the Tokyo Olympics, held in 2021 after a one-year
postponement due to the pandemic.430 Even before the stadium’s completion at a cost of $1.3 billion (156.9 billion yen), the government
made its intentions public, and schedule for a concession contract after
the conclusion of the games to recover, even if not fully, its investmentin the stadium.431 However, if the government had arranged for boththe construction and operation of the stadium to be carried out by aconcessionaire, this would have incentivized candidates to design,build, and operate better and more commercially feasible infrastructure from a long-term perspective.
The reason that infrastructure construction has continued to be
the purview of the government rather than the private sector may reflect a combination of factors: assets such as roads and seaports tend
to be unprofitable; they require a political process for their budgetingand construction; and the government, both central and municipal, hasa group of its own officials and engineers involved in the undertakingof such public works.432 The change would thus have a far from negligible impact in a country with a traditionally illiquid labor market,433
possibly leading to a greater transfer of employment from the public
sector to the private. However, as the operation moves increasingly tothe private sector through concessions and the government builds infrastructure with privatization in mind, it will be a logical extension

429 KOKURITSU KYŌGIJŌ TOKUTEI UN’EI JIGYŌ-TŌ NO JISSHI NI KAKARU PUREHIARINGU [PRE-HEARING ON THE CONCESSION OF JAPAN NATIONAL STADIUM], JAPANSPORT COUNCIL (Nov. 5, 2021), https://www.jpnsport.go.jp/kokuritu/tabid/452/De-

fault.aspx [https://perma.cc/QG6G-YYR2].
430 Id.
431 Id.
432 REIWA 4-NENDO YOSAN KETTEI GAIYŌ [THE SUMMARY OF THE BUDGET OFFISCAL YEAR 2022], MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM(Dec.
2021),
https://www.mlit.go.jp/page/content/001447029.pdf[https://perma.cc/NW5C-KZ86] (Japan).
433 CABINET OFF. OF JAPAN, HEISEI 30-NENDO NENJI KEIZAI ZAISEI HOKOKU[ANNUAL REPORT ON THE JAPANESE ECONOMY AND PUBLIC FINANCE FISCAL YEAR
2018] ch. 2 (Aug. 2018).

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for the government to deploy concessions from the outset through theconstruction and operation phases.
V. CONCLUSION
The Article argued that the Japanese government, having introduced concessions in 2011, has expanded privatization through theformat over the past decade while limiting it through stock sales which
had been the mainstream format until then. Given the policy advantages of concessions over stock sales, the government’s apparent
policy is a reasonable one: concessions bring the greater proceeds itneeds to mitigate its fiscal burdens in the current environment and offer contractual flexibility over the degree of government involvement,
the option to unwind privatization after a finite period, and less conflict between public interest and shareholder activism involving infrastructure assets.434 This last factor was presumably a trigger for introducing the format, although, with the introduction of the stewardshipcode in 2014 and the corporate governance code in 2015,435 the public
seems more accommodating to shareholder activism than in the 2000s.
However, concessions are not without costs and the format is often accompanied by underinvestment toward the end of the finite operating period. The problem becomes more severe with investments inintangible assets, as their valuation is more uncertain than tangible
ones, which can be booked and resold at the end of the period. With
infrastructure featuring more and more intangible aspects, as seen in
the myriad of “smart” technologies,436 the risk of being unable to recover one’s investments in those intangibles could hinder the development of quality infrastructure merely because of the choice of format.
At the same time, the use of concessions requires the government
to be bound by contracts, giving it less discretion over supervision.437
This is a relatively new avenue for governing infrastructure assets andadministering public services in general. It reflects a shift in a maturesociety that puts faith in contracts and their enforcement through institutional proceedings under the rule of law. The Japanese government will tread a thin line between protecting the public interest andthereby maintaining well-functioning infrastructure and protecting the
434 Supra Part II(B)(C)(D), Part III(B).
435 THE COUNCIL OF EXPERTS ON THE STEWARDSHIP CODE, supra note 284;
TOKYO STOCK EXCH., supra note 169.
436 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, supra note 234.
437 Supra Part III(F).

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investor’s interest and thereby mitigating its own fiscal burden for theassets’ maintenance. With higher expenditures on welfare policies
looming for the rapidly aging country,438 the day is not too far aheadwhen the government, after its wide-ranging spending during the pandemic, will face greater fiscal constraints and rely even more on private capital for infrastructure investments.439
Concessions can be encouraged by drawing upon the format’s advantages. It would be worthwhile to consider expanding the measurestaken for the $15 billion (2 trillion yen) privatization of Kansai Airport
to offer concessions on corporatized infrastructure assets.440 Combining the formats will promote the privatization of existing corporatized
infrastructure which presumably had been meant to undergo a stock
sale at the time of conversion but remained under government ownership after the wave of shareholder activism. To support large-scale privatization programs drawing on capital from institutional investors, itis necessary to promote the use of limited partnerships as a vehicle forinvesting in the operating rights of infrastructure, with the responsibility for operations concentrated on a general partner formed by sponsors.441 With this vehicle, institutional investors that take part in privatization would not need to have operating capability for underlying
assets but would have protection as limited partners under a fund-governance structure. And, with greater participation by institutional investors, the concession format could, and should, be extended to include the construction of new infrastructure assets as opposed tomerely operating existing ones, thus further reducing the government’s need to finance infrastructure and improving consistency
across the design, construction, and operation phases. 442 These arechanges that will accelerate infrastructure investments using private
capital. For a debt-laden Japanese government in need of infrastructure investments, this will be an important item on the agenda.

438 MINISTRY OF LAND, INFRASTRUCTURE, TRANSP. & TOURISM, supra note 216.
439 Id.
440 Supra Part IV(A).
441 Supra Part IV(B).
442 Supra Part IV(C).

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APPENDIX
Infrastructure privatization with stock sales, concessions, andcorporatization, 2000-2020“Year” shows the time when stock sales or concession contracts
were concluded for transfer to the private sector, or when a corporation was established for the corporatization of a government agency.
Format

Stock
sales

Concessio
nsSectorEntityJ-Power Co. (Wholesale power
Energyproducer)Railway
Japan Railway (JR) Kyushu Co.
PostalJapan Post Holdings Co. (Parent
serviceof Japan Post, Bank, andInsurance)
Banking Japan Post Bank Co.
Insurance Japan Post Insurance Co.
Water Power, Tottori Pref.
EnergyOtsu City Gas, Shiga Pref.
Tajima Airport, Hyogo Pref.
Kansai International Airport,
Osaka Pref.
Sendai Airport, Miyagi Pref.
Takamatsu Airport, Kochi Pref.
Kobe Airport, Hyogo Pref.
Tottori Airport, Tottori Pref.
Fukuoka Airport, Fukuoka Pref.
AirportShizuoka Airport, Shizuoka Pref.
Nanki-Shirahama
Airport,Wakayama Pref.
Kumamoto Airport, Kumamoto
Pref.
Seven
Hokkaido
Airports,
Hokkaido.
Hiroshima Airport, Hiroshima
Pref.
Road
Aichi Toll Road, Aichi Pref.
Hamamatsu
City
Sewage,Water
Shizuoka Pref.
and
Suzaki City Sewage, Kochi Pref.
sewageMiyagi Pref. Water and Sewage

Year
2004
2016
2015
2015
2015
2020
2018
2015
2015
2015
2017
2017
2018
2018
2018
2018
2019
2019
2020
2016
2017
2019
2021

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Conventi
on center
Educationalfacility
Facultyresidence
StationbuildingArt
facilitySportsarena
Artmuseum
Airport
Seaport
SubwayCorporatiz
ation
Road

Banking[Vol. 6:1

Yokohama-Minatomirai
International Convention Center, 2017
Kanagawa Pref.
Aichi International Convention
2019
and Exhibition Center, Aichi Pref.
Former Nara Prison, Nara Pref.
2017
Okinawa Institute of Science andTechnology Graduate University, 2020
Okinawa Pref.
Tagawa Station, Fukuoka Pref.
2018
Artists & Entrepreneurs Center,2017
Fukuoka Pref.
Ariake Arena, Tokyo
2019
Nakanoshima Museum, Osaka
Narita Airport Co.
Yokohama-Kawasaki
International Port Co.
Kobe-Osaka International Port
Co.
Tokyo Metro Co.
Osaka Metro Co.
East Nippon Expressway Co.
West Nippon Expressway Co.
Central Nippon Expressway Co.
Metropolitan Expressway Co.
Japan Finance Corporation Co.
Development Bank of Japan Co.
Japan Bank for International
Cooperation Co.

2020
2004
2016
2014
2004
2017
2005
2005
2005
2005
2008
2008
2008