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CEO Blog
Beyond Privatization, We Are Entering a New Era of Public-Private Partnerships
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The use of private-sector funds and know-how for public and social infrastructure has gradually spread in Japan since the establishment of the PFI Law in 1999. In reality, there are some issues with conventional PFI (social infrastructure development using private-sector funds), such as the lack of a form that takes advantage of private-sector know-how and management capabilities, but the system is becoming one that promotes public-private partnership initiatives through subsequent amendments, such as the introduction of concessions in the 2011 amendment.
In line with this, public-private partnerships that used to focus solely on "construction" have begun to shift their focus to O&M (Operation & Management).
Two examples are reconstructions of Aichi International Arena by Aichi Prefecture and Chichibunomiya Rugby Stadium by Japan Sport Council(JSC). Private-sector funds and know-how were utilized during the investment and development phases, and private-sector vitality was maximized during the O&M phase with the "BT (Build Transfer) + Concession" method.
To maintain high-quality water supply system meanwhile, control the cost for users
Of course, if residents accept the rate increase, the current status would be acceptable; however, given the growing disparity and the growing number of needy people, this will be different. And the only way to improve the efficiency of waterworks operations is to introduce private-sector funds and management know-how into the world of waterworks.
The factor is most likely the number of employees. Waterworks projects in other countries are highly digitally transformed and have far fewer personnel on site. While it is necessary to create new projects to reallocate personnel, improving the efficiency of waterworks projects is unavoidable.
Of course, it is also necessary to create employment opportunities for personnel who will be made redundant by the digital transformation of the water supply business through public-private partnerships.
Furthermore, public-private partnerships in water projects should aim to achieve carbon neutrality. Energy conservation and energy generation at waterworks and sewage treatment plants, beginning with the digitalization of dams for hydropower generation, should be a priority for energy policy.
A new era of public-private partnerships that reinvest project profits in the community
Bidding and ordering of public-private partnerships have significantly improved. Instead of so-called privatization, each investment, development, and operation stage has become more transparent, allowing for appropriate roles and risks to be shared between the public and private sectors. This is why the article title is "a new era of public-private partnerships".
As I previously stated, we live in a time when residents can participate in the operation of the water supply business. A private consortium comprised of residents and local businesses could take over the management of the waterworks, filling the gaps left by large corporations and the public sector. This is exactly what we want to achieve.
If a proper public-private partnership system is implemented, the public deficit compensation associated with facility operation will be eliminated, and the public burden for maintenance will be reduced. For this to happen, the private sector must be allowed to operate freely.
In line with this, public-private partnerships that used to focus solely on "construction" have begun to shift their focus to O&M (Operation & Management).
Two examples are reconstructions of Aichi International Arena by Aichi Prefecture and Chichibunomiya Rugby Stadium by Japan Sport Council(JSC). Private-sector funds and know-how were utilized during the investment and development phases, and private-sector vitality was maximized during the O&M phase with the "BT (Build Transfer) + Concession" method.
"BT + Concession" is a method in which ownership is transferred to the public after the private consortium has built the facility, and the consortium manages the facility in the long term (30 years in the case of Aichi International Arena and Chichibunomiya Rugby Stadium).
It aims to increase profit by utilizing the private sector's management skills and to promote regional revitalization through sports and entertainment activities.
For a long time, concessions only applied to social infrastructures such as airports, water and sewer systems, and roads. The Japanese government has created a PPP/PFI action plan that includes short-term targets for cultural and social education facilities such as stadiums, arenas, museums, national universities, transportation terminals, parks, and other facilities beginning in June 2022. These are familiar and straightforward tasks for local governments that can easily lead to regional development.
The growing number of public-private partnerships in facilities and infrastructure is a favorable development scenario for the region.
To maintain high-quality water supply system meanwhile, control the cost for users
PPP started to be shaped as a method that not only uses the private sector's funds and know-how but also embeds the perspective of solving social issues into these partnerships.
Waterworks is an easily understood example.
Waterworks infrastructure is aging, and in some areas, replacement is required. However, with an aging and declining population, national and local governments' financial resources are limited. As long as the financial burden is limited, a future rate increase is possible.
How can we maintain a high-quality water supply system while keeping the user burden low at the same time?
Of course, if residents accept the rate increase, the current status would be acceptable; however, given the growing disparity and the growing number of needy people, this will be different. And the only way to improve the efficiency of waterworks operations is to introduce private-sector funds and management know-how into the world of waterworks.
I have had the opportunity to speak with managers of overseas companies operating water services. And there is a significant difference in terms of efficiency and cost between companies operating water services in Europe & U.S. and local governments operating water services in Japan.
The factor is most likely the number of employees. Waterworks projects in other countries are highly digitally transformed and have far fewer personnel on site. While it is necessary to create new projects to reallocate personnel, improving the efficiency of waterworks projects is unavoidable.
On top of that, there should be a mechanism for local beneficiaries to benefit from the efficiency gains.
Public-Private Partnerships needed for water supply business
The water supply business is an excellent long-term investment for long-term investors, such as pension funds, because it provides consistent returns over the medium to long term. The water supply business concessions have begun, but no pension funds have yet entered the market. I believe it is a natural investment for pension funds to invest in infrastructure in their home countries and earn returns.
Alternatively, local residents could take the initiative in creating and funding the projects, with water supply companies participating in the process.
The private consortium that acquires the water business should generate a reasonable amount of revenue if it is managed efficiently and transparently. This entails not only maintaining or lowering user fees but also redistributing the proceeds to the community. It can be achieved by developing a capital structure for the private consortium.
Of course, it is also necessary to create employment opportunities for personnel who will be made redundant by the digital transformation of the water supply business through public-private partnerships.
There is still widespread concern that concessions for social infrastructures, such as water utilities, will raise prices and degrade service.
However, this can be solved by putting in binding provisions regarding rate setting and service quality, such as "In the case of unavoidable price increases, reasons must be given and approved by the council must be obtained. Because water is directly related to residents' lives, the government will also need to monitor quality standards continuously.
Companies that believe they can make a profit in the waterworks business through various innovations, such as more efficient maintenance and management, will participate in the bidding process under these conditions. When a company signs a contract, it must manage its business in accordance with the terms of the contract.
Furthermore, public-private partnerships in water projects should aim to achieve carbon neutrality. Energy conservation and energy generation at waterworks and sewage treatment plants, beginning with the digitalization of dams for hydropower generation, should be a priority for energy policy.
A new era of public-private partnerships that reinvest project profits in the community
Bidding and ordering of public-private partnerships have significantly improved. Instead of so-called privatization, each investment, development, and operation stage has become more transparent, allowing for appropriate roles and risks to be shared between the public and private sectors. This is why the article title is "a new era of public-private partnerships".
As I previously stated, we live in a time when residents can participate in the operation of the water supply business. A private consortium comprised of residents and local businesses could take over the management of the waterworks, filling the gaps left by large corporations and the public sector. This is exactly what we want to achieve.
Of course, the scope is broader than the water supply business.
For stadiums and arenas, a consortium of local companies, professional sports organizations, and financial institutions would form to support local professional sports organizations and propose regional revitalization to prefectural and local governments through entertainment. If it is an art museum or museum, it will host international events or collaborate with local artists to improve its ability to communicate internationally.
Cultural facilities, such as stadiums, arenas, and museums, will help to boost the local economy and culture. This would increase the number of people wanting to live in the area as well as the number of tourists, resulting in new economic benefits. Furthermore, not only would the facilities be constructed, but local businesses, organizations, and residents would be able to earn a consistent income from operation and management.
If a proper public-private partnership system is implemented, the public deficit compensation associated with facility operation will be eliminated, and the public burden for maintenance will be reduced. For this to happen, the private sector must be allowed to operate freely.
I believe that, in the face of an aging and shrinking population, Japan can achieve both sustainable social infrastructure operation and regional development by leveraging public-private partnerships.