REPORT
Research & Insights
The Inevitability of Rapid Growth in Social Infrastructure PPPs
As Japan enters an era of declining population, there are not many fields where market growth can be expected to increase steadily. Even if you look around at the construction and real estate industries, which have been directly hit by the new Corona, it's hard to find new businesses that will drive future growth. However, there is one area where growth can be expected in the future. This is social infrastructure development. </span
"Fixing our aging infrastructure. Who will fix our aging infrastructure? ", prefectures and municipalities own and operate infrastructure such as toll roads, water and sewage systems, and gymnasiums. Airports and expressways are under the direct control of the national government, but it is actually local governments that own most of the infrastructure in Japan. According to data from the Sumitomo Mitsui Trust Research Institute, the total value of this infrastructure amounts to approximately 750 trillion yen. </span
These infrastructures are aging, and we are approaching the time when they need to be renewed and renovated. However, given the accelerating decline in birthrates and aging society, and the deterioration of public finances in response to the new corona, it will be difficult to cover the maintenance and renovation of social infrastructure through fiscal spending alone. This is where Public Private Partnerships (PPP), or public-private partnerships in social infrastructure, are expected to come into play.
Japan-style PPP that binds the ingenuity of the private sector.
As I have often mentioned in previous articles, PPPs include concessions, in which the right to operate infrastructure and facilities is sold to a consortium of private companies for a certain period of time, and BTO (Build Transfer Operation), in which the private sector builds the facility and then transfers ownership of the facility to the government. PPPs include concessions, in which the rights to operate infrastructure and facilities are sold to a consortium of private companies for a certain period of time, and BTO (Build Transfer Operation), in which the private sector builds the facility, then transfers ownership of the facility to the government and the private sector takes over operation. </span
Overseas, PPPs are being used in various fields such as airports, toll roads, and arenas. There are some projects that do not pay for themselves with user fee income alone, but even in these cases, PPPs are realized by the government taking on a certain amount of financial expenditure (VGF). This is because even if the government bears a part of the financial burden, the total administrative burden can be reduced and efficiency can be improved by outsourcing the operation to the private sector. In contrast, Japan has achieved airport concessions, but other areas, such as water supply and sewerage and toll roads, are still in the middle of the road. </span
The main reason why PPPs have not spread in Japan is that "Why PFI has not spread in Japan? ," there is no mechanism for extracting good projects, there are still few private companies that proactively engage in PPPs as an investment, the environment for utilizing the creativity and ingenuity of the private sector (including consistency between the Local Autonomy Law and the PFI Law and interpretation of institutional aspects) and the human resources to promote it are not in place, and local government officials are This is due to a combination of factors, including the fact that local government officials are reluctant to take on new initiatives because they follow precedent, and that resistance to privatization exists among public corporations and other management bodies.
However, since there is no room in the government's finances, there is no other option but to efficiently maintain and renew the infrastructure by utilizing the know-how and funds of the private sector. Even if there are various obstacles now, they will be resolved sooner or later. Another reason why we think the PPP market is bound to expand is the aspect of pension management.
Secondary markets related to infrastructure are also essential
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Overseas, about 40 trillion yen has been invested in social infrastructure such as roads, water and sewage systems. The reason why so much private capital is poured into social infrastructure is because it is regarded as a long-term quality asset with medium risk and medium return.
The demand for social infrastructure, which is essential to citizens' lives, is stable and the impact of economic fluctuations is limited. While the users are residents, and therefore pricing must be carefully considered, relatively higher returns can be obtained than with public bonds. As the fact that 47% of the world's infrastructure investment is pension-related shows, it is an ideal investment for pension funds with long investment periods. </span
But infrastructure investment by the Government Pension Investment Fund (GPIF), which boasts assets under management of over 160 trillion yen, is tiny.
The GPIF's infrastructure investments are categorized as alternative assets, including private equity and real estate, but these alternative assets accounted for only 0.6% of the GPIF's total assets as of September 30, 2020, and all infrastructure investments are overseas.
Promote PPPs of good infrastructure in the country, and your own pension fund will invest in it, and the returns will help finance your pension - and so on. This cycle seems reasonable to anyone who looks at it. This is another reason why we believe that social infrastructure PPPs in Japan must be expanded. </span
To create such a system, returning to the previous point, the only way is to destroy the problems with Japanese-style PPPs and create successful examples of social infrastructure PPPs. On top of that, it is necessary to establish a secondary market for infrastructure investment and create a system that allows the free trading of the equity and debt of SPCs that acquire operating rights and engage in actual operations.
When social infrastructure is developed using the PPP method, an SPC established by a consortium of private companies is responsible for financing and operation. At present, however, the secondary market is underdeveloped, and in some cases the sale of equity is prohibited, so the companies and financial institutions that participate in the investment and financing must continue to hold equity and debt for 20 or 30 years. Many companies are reluctant to take part in social infrastructure PPPs because of this risk.
In July 2020, the Japanese government also revised its "PPP/PFI Promotion Action Plan in July 2020, setting out a project scale of 21 trillion yen over the 10-year period from 2013 to 2022. This means that there is that much potential infrastructure in Japan, and PPPs will make infrastructure maintenance and renewal more efficient. Institutional investors, such as pension funds, will invest in the projects created in this way and earn stable returns over the medium to long term. People's pensions will be invested in their own country's infrastructure. If this bouncing carriage starts to work well, I think we can realize a three-way good for the government, the people, and the companies.
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