REPORT
Research & Insights
How Japan's First Toll Road PPP (Public-Private Partnership) Was Realized
Road public corporation reform in the middle of the road.
As a result of the privatization of the Japan Highway Public Corporation in 2005, the former public road corporation was split into three companies: East Japan, Central Japan and West Japan NEXCO. This is a great way to get the most out of your business. Sales at service areas (SAs) and parking areas (PAs) are increasing, but unfortunately, the initial plan to go public has not been realized.
The streamlining of the three NEXCO companies is often talked about in the context of "privatization," but when you look at the actual situation, you can see that they have only changed their organizational form from a special corporation to a joint-stock company (a special company under the Expressway Company Law), and it does not seem that full-scale privatization has been realized. I don't think that full-scale privatization has been realized.
In contrast, the Aichi Prefectural Toll Road Concession (a method of privatization in which the right to operate infrastructure is granted to a private company for a certain period of time) promoted by Aichi Prefecture has achieved as much privatization as possible within the current legal framework, although there are many things that could not be achieved. In this sense, it is the most successful privatization scheme to date. In this sense, we can say that it is the most successful privatization project to date.
As a policy advisor to Aichi Prefecture, I was deeply involved in the Aichi Toll Road Concession. As a policy advisor to Aichi Prefecture, I was deeply involved in the Aichi Toll Road concession project, which is why I have strong feelings about this project.
The process of realizing the first road concession will be helpful for future concessions, and I will explain how we achieved privatization.
Rate revenues significantly exceed 10% growth.
Aichi Prefecture Toll Roads are toll roads covering eight routes totaling 72.5 kilometers, including the Chita Peninsula Road from Nagoya City to the Central Japan International Airport and the Sanage Green Road connecting Nagoya City to the eastern hills. It was originally operated by the Aichi Prefectural Road Public Corporation, but as the first concession in roads, Aichi Prefecture decided to sell the 30-year operating rights in 2016.
A group led by Maeda Corporation won the tender for 137.7 billion yen, and the Aichi Road Concession (ARC), in which Maeda Corporation, Mori Trust, Daiwa House Group and others have invested, is currently operating the project. The minimum bid price set in advance by the Corporation was approximately 121.9 billion yen, so the Corporation judged that it could expect to increase revenue by more than that amount not only through road revenue and cost reductions, but also through the expansion of SA/PAs and development along the route.
It's been nearly five years since we sold the rights to operate our toll roads, and so far we've achieved more than we ever imagined.
The rules for allocating toll revenue are determined by the public and private sectors, with revenue increases or decreases of up to plus or minus 6% of the toll revenue assumed in advance by the public corporation going to ARC, and the portion exceeding plus or minus 6% belonging to the public corporation (or borne by the public corporation in the case of revenue decreases). Looking at the actual results for the fourth year, there was a large excess of 10% over the fee revenue assumed by the public corporation, and the upward revision of about 1 billion yen will be paid to the public corporation.
There are two reasons why toll road revenues have grown significantly. One reason is cost reduction, with more efficient and less costly maintenance and lower labor costs contributing. In addition to reducing costs through the use of state-of-the-art technology, maintenance has also improved the efficiency of management standards and specifications for roads, which tend to be somewhat excessive, while maintaining quality. In addition, the management organization had about 100 employees involved in operations when the public corporation was running the project, but ARC has about 50. We have determined that we can operate with that many people, and we are working to streamline the organization in stages.
Users are 1.5 times more likely to use the service than in the days of the Corporation!
Then, what did we do with the personnel we reduced? Those seconded from the prefectural government were returned to the prefectural government, and many of the rest were reassigned to other projects launched by ARC as regional development projects. I think this was beneficial to both ARC and the prefectural government in that we were able to optimize human resources through reassignment without restructuring.
When I write this, you may feel that we just cut costs and restructured, but of course there is not only an improvement in the bottom line through headcount reduction, but also an improvement in the top line.
After acquiring the operating rights, ARC began to improve the attractiveness of the SA/PA. After acquiring the management rights, ARC began to improve the attractiveness of its SA/PAs.
The idea is to create a PA that is not just a stopover while driving, but a final destination for everyone. These efforts have just begun, but sales have increased 1.5 times compared to when the public corporation was operating.
In addition to this, a luxury hotel will be built next to the International Exhibition Hall at Central Japan International Airport. In the future, we will continue to develop the railway line by building a new commercial complex next to Agui PA, which will increase traffic while revitalizing neighboring municipalities. It is significant to promote such regional development through private sector vitality at the time of infrastructure privatization.
Why privatize surplus roads.
It was back in 2012 that Aichi Prefecture started thinking about privatizing its toll roads. When it comes to privatizing roads, many people might think that they were in the red, but at the time, the Toll Road Public Corporation was in the black with 10.7 billion yen. It is understandable that some people questioned whether it was necessary to privatize a public corporation that was in the black.
However, private companies raise their hands because they think the target infrastructure is going to be profitable. If it is not profitable, no one will raise their hand. Concessions are based on the premise that the infrastructure is generating revenue in the form of tolls, user fees, etc.
Governor Hideaki Omura's intention in promoting the concession of toll roads was to improve the overall quality of government services and increase profitability beyond what it is now by privatizing profitable infrastructure, and to achieve regional revitalization through private sector activities. In this sense, the governor's plan is a good one. In this sense, it can be said that the governor's plan has come to fruition. However, the road to this point has been full of mountains and valleys.
There are three things we wanted to achieve with the Aichi Toll Road concession. There are three things we wanted to achieve with the Aichi Prefecture toll road concession: to stop the reimbursement principle, to secure profit, and to realize freedom of toll. Let me explain about each of them.
The reimbursement principle is the concept that funds borrowed for road construction and annual maintenance costs are repaid through toll revenues within a set period of time.
Road construction under the Road Act is based on public works based on general financial resources, and there is a principle that roads should be provided free of charge after completion. However, since it takes a long time to build roads using only general financial resources, a system was established in which roads are built with borrowed money, toll revenues are used to repay the loans, and the roads are opened to the public free of charge after redemption. This is a toll road based on the Road Improvement Special Measures Law. There are four types of toll roads: expressways, urban expressways, Honshu-Shikoku Bridge Expressway, and general toll roads, and the Aichi Toll Road is the fourth general toll road.
As long as roads are built with borrowings, the concept of reimbursement is understandable. However, since the idea of making a profit is not at the base of the project, in principle, the amount of money after excluding maintenance and management costs and personnel costs must be used to repay the debt. This would not provide an incentive for private companies to enter the market.
The highway problem of "reimbursement".
In addition, because of the fee pooling system, if there are deficit lines or new lines are built, the problem of reimbursement will not end anytime soon.
The toll pooling system refers to a system in which expressways are regarded as a single road throughout the country and the cost of the entire system is covered by the overall toll revenue. It is not surprising that the Tomei Expressway, which has been completed for 50 years, has been redeemed and is now free. But it is still toll-free. This is also because the toll pooling system has allowed new road construction to continue.
While the toll pooling system has made it possible to build expressways in rural areas that would not be profitable on their own, increasing convenience for rural areas, it has also been criticized by many as an easy way to build roads for political gain and increasing the number of routes with deficits.
Under the Road Improvement Special Measures Law, the entities that can collect tolls through the construction or reconstruction of roads are limited to road administrators such as prefectures, local road public corporations and expressway companies, and private companies cannot operate toll roads.
In this context, in order to realize road concessions, it is necessary to amend the Road Improvement Special Measures Law, but it has been difficult to go so far as to amend the law, partly because of the past history of the construction of toll highways all at once through the reimbursement principle and the pooling system. However, because of the past history of the construction of toll highways through the reimbursement system and the pooling system, it was difficult to go as far as amending the law. It is also true that a senior official of the Ministry of Land, Infrastructure, Transport and Tourism told us, "Mr. Uemura, you'd better not go that far.
That's why we took advantage of the national strategic special zone system for the Aichi Toll Road. Aichi Prefecture was designated as a National Strategic Special Zone in 2015, and we decided to utilize that framework. However, although the use of the national strategic special zone made road concessions possible, it did not stop the reimbursement principle that is the foundation of road administration.
But to some extent, the other two - ensuring profit margins and achieving toll flexibility - have been achieved. As mentioned earlier, under the reimbursement principle, it is not assumed that the operator will make a profit, so with very few exceptions, it is not possible to make a profit from toll revenues.
That very few exceptions are also limited to plus or minus 1% of the toll revenue, which is pre-accumulated by the government and belongs to the operator. No private company will raise its hand if the upside is capped at just 1%.
But in the case of Aichi Prefecture, we were able to raise the portion attributable to the management company to plus or minus 6%.
In designing the system to realize Japan's first road project by a private company, securing profits was the highest hurdle. In fact, the discussions with the government were extremely difficult, but securing the profit was the most important factor in establishing this concession. We could not afford to back down.
Fortunately, the government had begun to move toward airport concessions to privatize infrastructure projects. Fortunately, the government was beginning to move toward privatization of infrastructure projects, and we were able to clear the biggest hurdle of securing profits, thanks to the fact that we had executives with flexible and innovative ideas in charge of various areas. If we tried to do the same thing again, we would probably not be able to achieve it. I always think that projects that are said to be unfeasible can only be realized if they are blessed with wisdom, power, passion, timing, and the cooperation of the right people at the right time.
In this way, in terms of toll flexibility, we can set tolls to a certain extent.
Based on the reimbursement principle and toll pooling system, expressway tolls are set so that borrowing and interest are paid off within the reimbursement period. Moreover, since the whole country is regarded as one expressway, tolls are basically the same throughout the country (24.6 yen per kilometer for a standard car). If you want to change the toll, you need to apply for and receive approval from the Minister of Land, Infrastructure, Transport and Tourism for the change.
But if we consider the principle of economics that prices are determined by supply and demand, it would be strange to have the same rates for congested roads and empty roads. There should be a way to raise the fee if there is a lot of demand and lower it if there is little demand. That is what we call freedom of management.
The Aichi Toll Road Concession has been able to achieve this as well. It is annotated that the annual reimbursement amount will be maintained and the permission of the Minister will be obtained, but the ARC has actually changed the toll rates according to the prosperity.
How to achieve sampo yoshi with social infrastructure.
Of course, none of the other two are perfect.
I said that the toll revenue for the redemption period would be determined based on the traffic volume accumulated by the government, but the traffic volume estimate by the Road Public Corporation at that time was lower than the current situation. One reason why is that the Chita Peninsula Expressway, which has the highest revenue among the targeted routes, is a key route leading to the Central Japan International Airport, and the traffic volume has been increasing along with the growing demand for air travel.
But if the initial traffic volume is set low, it can be reimbursed reliably even if it fluctuates due to disaster or economic risk. In addition, the upside will be pooled with the Corporation as a surplus, which can be used for future renovation costs.
This money cannot be spent for anything other than the reimbursement of roads, but it will be able to be accounted for in the general management costs of the public corporation, which could be a factor in undermining the management of the corporation. In the future, we should consider designing a system that allows local governments to use the surplus from toll roads for a wide range of necessary financial resources.
The consideration of approximately 121.9 billion yen (i.e., the lowest bid price) set by the Aichi Prefectural Road Public Corporation was determined based on the toll revenue during the redemption period. However, this was a very low estimate, as the Maeda Construction Industry Group offered a much higher price of 137.7 billion yen. I thought at the time that if we revised our traffic volume estimates, we could originally realize a consideration of 140-150 billion yen.
In this regard, reviewing the existing traffic volume estimates is a high hurdle because it involves the aforementioned theory of reviewing reimbursement, and unfortunately we were unable to achieve this at the time. However, now that more than three years have passed since the privatization, it is necessary to review the development plan of the Chita Peninsula Expressway in order to further strengthen the Central Japan International Airport. In order to realize the new investment with private funds, further reforms must be carried out, such as reviewing traffic volume estimates, extending the redemption period, and securing profit margins that exceed the 6% cap.
Social infrastructure, including roads, is a public asset. The business of generating revenue by utilizing that public asset is the infrastructure PPP or concession. In order to provide optimal services to the beneficiaries while maintaining transparency for the private sector operating the business over a long period of time, it is necessary to fairly distribute risks and profits among the three parties (the public, private, and beneficiaries), including the government that owns the infrastructure. The question is whether it is possible to establish such a mechanism. That is where I think the future of social infrastructure PPPs lies.
Despite these various hardships, the Aichi Toll Road was eventually converted to operation by a private group through a concession. As I wrote in "Infrastructure Concessions Increasing in Emerging and Developing Countries, infrastructure investment in Asia, Africa, and even developed countries including the United States is increasing. As I wrote in my article "Infrastructure Concessions Increasing in Emerging and Developing Countries", PPPs and concessions will become the mainstream for infrastructure investment in Asia, Africa, and even developed countries including the United States. I am struggling every day to apply the Aichi model, which I have practiced in Aichi Prefecture, to infrastructure construction overseas.
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