REPORT
Research & Insights
Why has PFI not spread in Japan?
In my previous post, I wrote that the perspective of PPP (Public Private Partnership) should be included in future disaster recovery. This is not a story limited to disaster recovery. Considering the accelerating aging of society with a declining birthrate and the scale of economic measures to be taken in response to the new corona, it will become difficult to cover the maintenance and renovation of social infrastructure with fiscal expenditure alone. I think it is essential to utilize PPP for the maintenance and renovation of social infrastructure. </span
But compared to other countries, Japan is not as active in the use of PPPs. I'm sure you'll agree with me. However, the national government, and local governments in particular, may have a sense of caution and preconception that PPPs will lead to a reduction in authority and a reduction in the number of personnel in existing organizations.
However, one of the reasons why PPPs have not spread in Japan is that PPPs are not in the true sense a form of utilizing the technology and know-how of the private sector. In this article, I would like to delve deeper into the issue of PFI, a form of PPP.
Overall costs may increase.
Speaking of which, PFI stands for Private-Finance-Initiative. It is a form of public works that utilizes private sector capital, management capabilities, and technical expertise to construct, design, maintain, and operate public facilities. PFI was born in the UK in the early 1990s with the aim of efficiently providing high-quality public services. In Japan, the PFI Law was enacted in 1999, and according to the Cabinet Office According to the Cabinet Office, 740 PFI projects have been implemented to date.
The purpose of PFI is thus to efficiently promote the construction of public facilities, which tend to be inefficient, by using the wisdom and funds of the private sector. However, looking at the reality, there are not a few cases where PFI has become nothing more than a relatively expensive installment of construction costs.
In the case of PFI, the government pays the cost of construction, operation, maintenance and management to the SPC, the project entity, every year after the completion of the facility. But the cost is high, and if you look at the total cost for a 20-year operation period, there is no shortage of cases where the cost would be higher than what the local government would pay for a public works project.
In order to prevent this kind of situation, it is necessary to lower the cost of construction and operation through the ingenuity of the private sector, and at the same time, to suppress the overall cost by increasing project income (operation income). This should be the original purpose of PFI, but it is not always the case in the current PFI. </span
We believe that the biggest reason for this lies in the field-level operation, prior to the revision of the PFI Law, which takes into consideration the construction companies, facility maintenance and management companies, and other business expense recipients.
Conflicts of interest that tend to occur in PFI projects
When you look at the business entities of PFI, in many cases the names of the construction companies that build the facilities and the companies that handle maintenance and management are listed.
After all, there is a possibility of a serious conflict of interest here.
In essence, construction companies are responsible for constructing facilities that possess the functions necessary for their projects, while maintenance and management companies are responsible for providing maintenance and management services that are appropriate to support the projects. Of course, it goes without saying that both parties must provide high-quality services efficiently at an appropriate cost. </span
On the other hand, it is undeniable that the participation of such companies in PFI projects (investing in SPCs as representative companies or constituent companies) will create incentives to raise construction and maintenance costs as much as possible. As a result, the principle of competition will collapse, and there is a risk that the optimization of construction and maintenance costs will become impossible.
Because PFI is a kind of public project, there is a bidding process. Because PFI is a kind of public project, there is a bidding process. To win the bidding process, it is important to have technical skills and the ability to make proposals, but in Japan, more important than that is to keep costs within the budget set by the government. </span
Normally, loss-making orders are not acceptable, so construction and maintenance companies will not overreach unless the project is very important. However, it is a different story if the specifications and functions of the building are reviewed in the subsequent design phase, or if the specifications for maintenance and management operations are changed and can be recovered in operating costs over the years. </span
The initial cost is low, but what about the total cost?
Looking back at the PFI projects of the past, it seems to me that in many cases the initial cost tends to rise when the contractor, such as a construction company or maintenance and management company, is the main operator of the project. As a result, there are cases where the total amount to be paid by the government during the period of the PFI project is, in extreme cases, the same as the installment payment for a lease with a high interest rate. Although the government is able to suppress expenditures at the initial stage, this does not lead to the utilization of private sector vitality, which is the essence of PFI projects. </span
The client of the management company is the government, and the beneficiaries on the other side of the government are the residents. Normally, costs should be kept down through various management efforts, but such governance will be difficult to work if the client has the majority of the management of the management company. The result can be a situation where residents' usage fees go up, the level of service goes down, and the overall tax take goes up. There is nothing good for the residents. </span
Then, you might think that it would be a good idea to prevent the contractor from becoming the operating entity, but it is not that simple. This is because PFI projects implemented by many local governments are based on the premise that a construction company or maintenance and management company will be the operating entity, and the qualification requirements for the operating company often require the grade (rank) required for bidding on public works projects. It is difficult to understand why the grade required in public bidding for the selection of a constructor is required when bidding for a PFI operator, but this is a problem on the operational side for local governments that actually order public works through PFI.
In essence, PFI projects should focus on increasing income by reducing costs and renewing operations, and the selection of contractors for construction and maintenance should be the responsibility of the PFI operator selected in light of public works standards. Another issue is that social infrastructure such as roads and water systems have a history of being operated by the government, and there are few businesses in Japan with a track record of operating social infrastructure projects or companies willing to take on new ones. </span
In the future, it will be essential for the public, private, and beneficiary sectors to work together for the good of all three when developing aging social infrastructure in rural areas. In order to realize this, it is necessary to review the various issues surrounding PFI as I have described so far, create successful examples of projects at an early stage, and encourage the participation of companies. </span
Regulations of the Local Autonomy Act also fetter creativity
In addition, I think there is a problem with the consistency between the PFI Act and the Local Government Act.
As I am currently involved in the development of the Aichi Prefectural New Gymnasium (New Arena), there is a method of transferring ownership of a facility to the government after it has been built in order to reduce the cost burden on the private sector engaged in the construction and operation of the facility. In order to reduce the cost burden on the private sector that builds and operates the facilities, there is a method of transferring ownership of the facilities to the government after they are built (BTO = Build Transfer Operation, or BT Concession). </span
However, when the ownership of a facility is transferred to the public, the facility property is transferred to the local government and the Local Autonomy Law is applied. The Local Autonomy Law is a law that stipulates in detail the organization and operation of local governments. It imposes various regulations from the perspective of equality and equal opportunity, such as setting the fees for the use of public facilities by ordinance, selecting businesses to enter and exit the facilities through bidding for regularly occurring construction work, prohibiting private advertising without permission, and prohibiting the placement of vending machines. We impose a variety of regulations.
I respect the principle of the Local Autonomy Law, but from the perspective of PPP, it is undeniable that the regulations of the Local Autonomy Law limit the creativity of the private sector.
For example, when increasing the revenue of a facility such as an arena, a private operator can not only increase the number of visitors, but also change the usage fee according to the day of the week or time of day, place vending machines in the facility, and provide food
Another example that happened at the Aichi International Exhibition Hall concession is that the event organizer, GL Events (France), wanted to do the connection work to the distribution board themselves to get the electricity needed for the event. In Japan, it is customary for the organizer of the event to do the work, and it was not allowed for the management company to do the work. In Japan, it is customary for the event organizer to perform the work, and it is not acceptable for the management company to perform the work. When selecting an electrician, we had to place an order through a bidding process for a contractor that met the criteria of the local government, which was quite a complicated procedure considering the actual content of the work.
From the perspective of safety, efficiency and private sector vitality, it goes without saying that it is better for an operating company like GL Events to carry out the construction work in a lump sum. The ingenuity of the private sector starts from the point of choosing which contractor to subcontract the work to. If we make it a bidding process every time, we will not be able to cut costs. </span
Furthermore, ensuring the freedom to set fees is another key to the success of PFI and PPP. Of course, since these are highly public projects in which the right to operate a public asset is set and the revenue is earned by operating it over a long period of time, it is not possible to raise rates in the dark. From the standpoint of my theory of "three-way benefits for the public, the private sector and the beneficiaries," it is necessary to set upper limits on usage fees under local government ordinances for use that is attributable to public use and for the use of facilities by residents. However, from the perspective of the creativity and ingenuity of the private sector, I think that the private sector should be free to decide on other fee settings.
The purpose of PFI and PPP is to reduce the financial burden on local governments and improve the quality of services for beneficiaries by entrusting services that have been handled by the government to the private sector. For example, attracting international events and international sports to an arena could lead to the creation of new demand and local revitalization.
With regard to the sorting out of the PFI Law and the Local Autonomy Law, I think it is important to solve specific problems in the course of actually carrying out PFI and PPP projects and to visualize them as successful examples. I am currently searching for the best solution while consulting with the government and Aichi Prefecture. This may not be possible immediately, but it is an issue that cannot be avoided in order to promote PPP. </span
The precedent-setting mentality is also an obstacle.
Finally, as the third point, I would like to mention local governments that order public works. In order to utilize PPP in the development, renovation and operation of social infrastructure, local governments that own the assets need to be proactive in PPP. However, in general terms, there are many cases where local government officials, especially senior officials, are reluctant to do anything new or unprecedented. Concessions for roads, water and sewage systems, etc., also require coordination with the national government, so they are reluctant to take the initiative, basically. </span
If we work by following precedent, we may not make any mistakes, but from now on, local governments need to keep their wits about them and adopt new methods to maintain aging infrastructure. Every day, I am keenly aware of the need to lead conservative local governments together with leading chief executives, and to develop human resources both within and outside local governments who are capable of project management for social infrastructure PPPs. </span
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