Introduction
In Japan, in order to maintain appropriate public services given its aging public facilities, severe financial conditions of national and local governments, and population decline, administrators of public facilities there is need to improve efficiency of costs related to reconstruction, renovation, repair, and operation of public facilities, for instance in relation to management and consolidation of public facilities etc.. The use of PPPs Public-Private-Partnerships (PPPs) is considered to be effective as one of the means to achieve these goals. In Japan, the Act on Promotion of Private Finance Initiative (PFI Act) was enacted in July 1999, and the PPP method that complies with this law is called PFI (Private-Finance-Initiative). As of the end of March 2022, there have been 932 projects nationwide that are planning to carry out public works using the PFI method (implementation policies have been announced), including those of the national and local governments. Some projects have already completed construction and started their operation, while some have reached the end of their project periods.
General Framework
1. PFI
The underlying law for PFI is the PFI Act, and the Basic Policy on the implementation of PFI projects was published (last revised in 2018) in March 2000. Since then, the Cabinet Office has published successive guidelines on PFI; and in some cases, other ministries and agencies in charge of public facilities have also established PFI guidelines based on characteristics of relevant public facilities. PFI is a system in which private business operators compete with each other to propose how to design, construct, and operate public facilities. The most efficient and effective private business operators are then selected, and they perform whole or part of everything from design to operation, including raising funds by themselves. The facilities subject to the PFI regime are limited to "public facilities" as defined under the PFI Act. The PFI Act stipulates special measures, such as the ability to lend national and local administrative assets to PFI projects. PFI has the following four project types:
Service purchase type - A form in which a private business operator provides and operates public facilities, and an administrator of public facilities pays the private business operator for the service;
Independently profitable type - A form in which a private business operator receives a business license from an administrator of public facilities to provide and operate such public facilities using fee income from users; and
Mixed type - A form in which the provision and operation of public facilities is based on both service consideration revenue from service purchase type and fee revenue from users.
Even if it is a service-purchase-type project, there are some projects that allow for implementation of ancillary projects other than the original projects, so as to improve services by utilizing innovation of private business operators.
2. PPP
In additional to the PFI projects, PPP more generally can also include the following models:
Designated manager system - This is a system that introduces know-how from the private sector, for the purpose of efficiently providing higher quality public services in the operation of "public facilities" stipulated in the Local Autonomy Act.
Comprehensive private outsourcing - Whereas conventional outsourcing to private business operators was on a single-year order for each operation, this is a method of outsourcing based on the concept of "performance ordering" and "comprehensive ordering", so as to carry out more effective and efficient operations. For public facilities such as sewers, roads, rivers, parks, airports, and ports, facility managers are appointed under their respective public property management laws; and among these facility management-related operations, routine on-site operations have been outsourced for a long time.
DBO (Design-Build-Operate) method - This is a business method similar to PFI, in which each stage of design, construction, subsequent maintenance and operation is tendered to a private business operator in a cash lump sum. In some cases, financing is provided by administrators of public facilities through bonds, and facility provision costs are generally paid to private business operators on and before the date of completion, similar to arrangements under conventional construction contracts. Although it is a business method that does not fall under the category of qualified projects under the PFI Act, it is a business method that is often implemented in accordance with PFI procedures.
Public offering establishment management system (Park-PFI) - Based on the Urban Park Act, this is a system that selects through public tendering persons who will establish park facilities that improve park user’s experience and convenience, such as restaurants and shops, and who will use the proceeds generated from such facilities to provide and renovate qualified park facilities that can be used by general park users, such as paths and plazas in the vicinity.
3. Main Steps
PFI projects are implemented in accordance with the PFI Act and follow the steps below.
(a) Proposal of a project that may be implemented as a PFI project
The projects to be considered are organized based on priority study regulations for the introduction of PFI, prepared in advance by administrators of public facilities and proposals from private business operators.
(b) Implementation of PFI feasibility study
Under this step, it is considered whether the project is feasible to implement as a PFI project. In addition to determining whether it is feasible as PFI through a simple examination, project methods are considered through detailed examination. The project method, project scope, project period etc. are set out and Value for Money (“VFM’) simulations and interviews with private business operators are conducted. VFM is a percentage that indicates the percentage of cost reduction compared to conventional public works when implemented with PFI. The costs of both projects in Live Cycle Cost (“LCC”) terms, which is the cost required for the entire project from planning to facility design, construction, maintenance, operation, repair, and project termination are compared.
(c) Selection of a private business operator to implement a PFI project
Under the comprehensive evaluation method for general competitive bidding, among those who tendered within the planned budget, not only the price but also other conditions (service level of maintenance, management and operation, technical capabilities etc.) are comprehensively considered, and the successful bidder is determined. In addition, for public tendering proposals and contracts, proposals are solicited by public tendering, and the best proposal is identified according to the evaluation criteria indicated in advance, and a contract is concluded with the tenderer with such proposal. In doing so, a private business operator is selected. The actual VFM is calculated from the contents of the proposal of the selected business operator and announced in the selection results of the private business operator. In public procurement based on proposals from private business operators, bidders who make proposals have their score individually tallied up for evaluation at the time of bidding.
(d) Implementation of a PFI project
A contract is concluded with a selected private business operator and the project is implemented. An administrator of public facilities will continue to monitor the private business operator. Since the quality of services may gradually decline over a long project period, the administrator of public facilities needs to monitor whether the private business operator is doing its jobs properly. This is called monitoring.
The flow of procedures based on the PFI Act for PFI projects that cover design, construction, and operation is as follows:
As for the right to operate public facilities (i.e. the concession method), which is described below, the PFI Act prescribes matters to be described in the implementation policy and registration of the right to operate public facilities, as specific procedures relate to the establishment of the right to operate public facilities.
4. Project Methods
PFI adopts the following five project methods. The project method to be adopted for an individual project is being considered in the PFI feasibility study. It is comprehensively assessed and determined based on laws and regulations, institutional restrictions, and characteristics of the project.
BTO (Build-Transfer-Operate) method - A project method in which a private business operator constructs a facility, transfers ownership to the administrator of public facilities immediately after the completion of the facility, and maintains, manages, and operates it.
BOT (Build-Operate-Transfer) method - A project method in which a private business operator constructs, maintains, manages, and operates a facility , and transfers the ownership of the facility to the administrator of public facilities after completion of the project.
BOO (Build-Own-Operate) method - A business method in which a private business operator constructs, maintains, manages, and operates a facility, and the private business operator dismantles or removes the facility upon termination of the project.
RO (Rehabilitate-Operate) method - A method in which a private business operator renovates a facility, and then maintains and operates it until termination of the project
Right to operate public facilities, etc. (concession) method - A method in which the right to operate public facilities is granted to a private business operator for a certain period of time while the public owns the ownership of the facility. The facility collects usage fees, and the private business operator proactively maintains, manages, and operates the facility.
To avoid a decline in the quality of services or interruption of a PFI project due to sluggish performance of the non-PFI business, most PFI projects are carried out by SPCs (Special Purpose Companies), which are companies established solely for the purpose of carrying out specific businesses. In PFI projects, it is common for SPCs to procure part of the funds required for design and construction from financial institutions through project finance.
SPCs without management capabilities can go bankrupt. In preparation for such a case, an administrator of public facilities and a financial institution will enter into an agreement called a "direct agreement" in advance, monitor the SPC to prevent it from failing, and create a mechanism for discussion so that the PFI project can be carried out until the end even if the SPC fails. A direct agreement is an agreement concluded between a financial institution that provides loans to a private business operator and an administrator of public facilities. It stipulates the right of the financial institution to intervene in the PFI project if it does not proceed smoothly.
There have been 932 PFI projects nationwide (as of the end of March 2022). Of these, 780 projects were operated by local governments and 152 projects were operated by the national government. PFI projects operated by local governments include projects related to "education and culture" such as social education facilities and cultural facilities (268 projects), projects related to "community development" such as roads, parks, sewerage facilities, and port facilities in (207 projects). Of those operated by local governments, the BTO method is the most common (used in 580 projects).
5. Key Issues for International Investors
WTO Agreement on Government Procurement
The WTO Agreement on Government Procurement is an agreement on government procurement, prepared in Marrakech in April 1994 and entered into force on January 1, 1996. The Amendment Protocol was adopted on March 30, 2012 and entered into force on April 6, 2014, under which Japan is also a Party. The WTO Agreement on Government Procurement provides for the principle of national treatment (not to impose discriminatory treatment on goods and services and suppliers of any other Party as compared to treatment given to domestic goods and services and suppliers) and the principle of non-discriminatory treatment (not to impose discriminatory treatment given to goods and services and suppliers of one Party as compared to the treatment given to goods and services and suppliers of another Party) for the procurement of goods and services by government agencies. Since the WTO Agreement on Government Procurement covers procurement contracts that exceed the applicable threshold amounts which are being tendered by not only the national Japanese government but also by prefectures, ordinance-designated cities, and government-related organizations, the "Cabinet Order Specifying Special Provisions for Procurement Procedures for Goods, or Specified Services of Local Governments" was enacted to ensure the procedures stipulated in the WTO Agreement on Government Procurement are implemented. This special ordinance also applies to PFI projects. Some local governments, prefectures and ordinance-designated cities fall within the scope of the ordinance, whereas other municipalities, some administrative associations, and wide-area unions do not. In addition, it does not apply to all PFI projects conducted by prefectures and ordinance-designated cities. PFI is understood as a mixed contract for design, construction, maintenance, and operation, and a PFI project will be within the scope of the ordinance if the planned budget reaches the applicable threshold amount for the procurement item, which is the main purpose of the contract. For example, if the main purpose of a PFI contract is construction work, an applicable threshold of 2.28 billion yen or more (from April 1, 2022 to March 31, 2024) will apply, but it does not apply to projects whose main purpose is not construction work, or other specified services under the WTO Agreement on Government Procurement.
Schedule until Facility Sharing
Compared to conventional projects, the period to select a private business operator is often longer due to procedures such as PFI feasibility studies, selection of qualified projects, resolution of local government assemblies in setting debt burden acts and concluding business contracts, and securing a proposal period from private business operators. However, the design, construction, maintenance, and operation procedures are simplified by placing bulk orders, and the design and construction period is shortened based on the know-how of private operators, such that the schedule until facility sharing is not greatly affected.
Participation Qualifications, Rules and Required Levels
In PFI projects, it is desirable to open the door widely to applicant companies in order to increase competitiveness, but the participation qualifications process required for project implementation is the same as when implementing the project using conventional methods. In addition, in order to ensure that selected business operators comply with certain rules and required standard, there is a need for a solid implementation policy, requirement/standard specification document, and business contract, in addition to active monitoring conducted even after commencement of the project.
Risk Allocation
It is not possible to accurately predict any events such as accidents, fluctuations in demand, natural disasters, changes in economic conditions such as price rises etc. that may occur during the project period of PFI projects, and if these events do materialize, the expenses required for the project or the income derived from the project may be affected. With regard to the risk allocation of PFI projects, it is necessary to clarify potential risks as much as possible and to make arrangements in agreements based on the idea that "the person who can best manage the risks will bear the risks."
Subsidy
Subsidies can also be granted to PFI projects, but in order to obtain subsidies, it is necessary to confirm that the subsidy is granted to the PFI project in the individual subsidy system, and it is important to note that PFI projects are not automatically eligible to such subsidy.
6. The Way Forward
Outline of the 2022 Amendment to the PFI Act
(a) Expansion of public facilities, subject to PFI projects (Effective date: Date of promulgation (December 16, 2022))
Sports facilities and assembly facilities have been added to the definition of "public facilities" subject to PFI projects.
(b) Establishment of procedures for changing the implementation policy for public facilities, etc. operating project (Effective date: June 15, 2023)
In order to be able to flexibly carry out facility renovation work based on changes in circumstances during the project period, procedures have been established such that it has now become possible to change the scale and layout of public facilities, or operation of such project as stipulated in the implementation policy.
(c) Addition of businesses of the Private Finance Initiative Promotion Corporation of Japan (PFI Promotion Corporation) and extension of the deadline for disposal of shareholdings, (Effective date: January 16, 2023 (the extension is effective from the date of promulgation)
PFI Promotion Corporation is an organization established in October 2013 to promote PFI projects with investment from the government and the private sector based on the PFI Act. In accordance with the support standards set by the Prime Minister, for PFI projects (note, however, that all or part of the costs required for the project are collected by means of user fee), PFI Promotion Corporation invests and finances acquisition of preferred shares and subordinated bonds, and provides consulting services for project formation. As a result of the amendment, PFI Promotion Corporation has advised and dispatched experts to private business operators (such as regional banks) to support PFI projects, and the deadline for claims and disposal of shares held by PFI Promotion Corporation has been extended by five years (by March 31, 2033)
Outline of the 2023 Version of PPP/PFI Promotion Action Plan
The PPP/PFI Promotion Action Plan is an action plan for national systems and support the promotion of PPP/PFI formulated by the Council for the Promotion of Private Finance Initiatives (PFI Promotion Council). Since its formulation in 2016, it has been revised in accordance with new PPP/PFI promotion measures and changes in the business environment. In the 2023 version, the Action Plan is revised based on the following pillars in order to enhance both the quality and quantity of PFI, so as to achieve the business scale target of 30 trillion yen over the 10 years starting in financial year 2022:
(a) Setting a 10-year target for the number of projects
A 10-year target for the number of projects that is aimed to materialize in 10 years in priority areas has been newly set.
(b) Developing new fields
In order to expand the areas where PFI can be used, new fields such as hydroelectric power generation (hybrid dams) will be developed and projects will be formed.
(c) Evolution and diversification of PPP/PFI methods
In order to spread PFI in a wide range of local governments, "local PFI" that brings many benefits to the local economy and society will be promoted
Introduction of a system for securing the stable provision of specified social infrastructure services based on the Economic Security Promotion Act
According to the "Act on the Promotion of Ensuring National Security through Integrated Implementation of Economic Measures in an Integrated Manner" enacted in May 2022, when a specified social infrastructure business operator introduces specified important equipment from another business operator or entrusts another business operator with the maintenance, management and operation of specified important equipment, as prescribed by the ordinance of the competent ministry, it must prepare in advance a plan for the introduction and the entrustment of maintenance, management of the specified important equipment, and notify it to the competent minister with the documents stipulated by the ordinance of the competent ministry. This provision is scheduled to come into force on February 17, 2024. Specified social infrastructure business operators may include local governments and public corporations.
