I. Dawn of a new era of PPP in JapanThis year 2014 will mark the beginning of a new era for public-pri-vate partnerships (PPP) in Japan. Last year, there were significantmovements to improve the legal and regulatory framework of theJapanese PPP and the national government and the local govern-ments started studying the possibility of adopting the concessiontype of PPP to privatise their infrastructure.

This article features the efforts of the national government topromote PPPs in recent years and the latest developments in someasset classes.

II. Government’s moves to promote PPP

Introduction of PFI Act ConcessionThe recent trends for the promotion of PPPs started with the revi-sion of the Act on the Promotion of Private Finance Initiative (thePFI Act) in 2011. Since the original PFI Act was enacted in 1999,more than 400 PFI projects have been implemented. However, mostPFI projects in Japan have been BTO (build-transfer-operate) types,which rely on availability payments from the government for thepurpose of constructing limited kinds of social infrastructure suchas governmental buildings and local public facilities.

On the other hand, demands for new infrastructure are decreas-ing in Japan due to an aging and declining population. Furthermore,the Japanese government has ranked the maintenance and renova-tion of existing infrastructure under severe fiscal conditions as a na-tional priority. In addition, the government’s operation ofinfrastructure has often been perceived as poor or inefficient, andsupport from private sector, it is claimed, achieves a more efficientoperation.

Against the foregoing backdrop, the 2011 Revised PFI Act in-troduced concessions (the PFI Act Concession) as a new type of PFIproject in order to promote a “user-pay” type of projects in whichprivate entities operate and maintain existing infrastructure by fi-nancially relying on users’ fees rather than service fees or availabilitypayments from the government.

More specifically, under a PFI Act Concession, a public entitythat administers public facilities (the Public Authority) confers theright to operate those facilities (the Concession Right) on a privateentity (the Concessionaire).

The Concessionaire is allowed to charge the users fees for usingthe public facilities. This means that, in principle, the Concession-aire itself determines the fees and earns the collected fees as its ownincome, although fee determination may be subject to a concessionagreement with a Public Authority or to laws and regulations on thepertinent infrastructure business (e.g., the Airport Act, the Water

Supply Act and the Sewage Service Act.). From an accounting per-spective, a Concession Right is recognized as a depreciable asset.

Under the PFI Act, a PFI Act Concession project cannot relyonly on payments from a Public Authority. A PFI Act Concessionshould take the form of either a “user-pay” type of project, or a com-bination of user’s fees and payment from the Public Authority.

Revisions to guidelines for PFI ProjectsOn June 6 2013, the Cabinet Office revised the following PFI guide-lines.• Guidelines for Concession Right and Operation of Public Facil-

ities (new) (the Concession Guidelines)• Guidelines for the PFI Project Implementation Process (revised)

(the PFI Procurement Process Guidelines)• Guidelines for Contracts – Matters to be Considered in PFI Proj-

ect Contracts (revised) (the PFI Contract Guidelines)

1. Concession GuidelinesThe issuance of the Concession Guidelines, the first detailed guid-ance on PFI Act Concessions, is a very significant development inthe practice of Japanese PFI. (Actually, the fact that these guidelineswere not in place up to recently could partly explain why no PFIAct Concessions under the 2011 Revised PFI Act closed.) Describedbelow are some of the notable provisions of the Concession Guide-lines.

COUNTRY / PRACTICE

IFLR1000 / ENERGY & INFRASTRUCTURE 2014 1

Masanori Sato and Shigeki Okatani of Mori Hamada & Matsumoto in Tokyo reviewthe latest changes in Japan’s PPP environment

Recent developments in public-private partnerships(PPP) in Japan

“The Japanesegovernment has rankedthe maintenance andrenovation of existinginfrastructure undersevere fiscal conditions asa national priority”

(a) Expansions, renovation and construction of the facilitiesThe Concession Guidelines provide the scope of the measures thata Concessionaire is permitted to take in respect of the subject publicfacilities during the concession period.

According to the Concession Guidelines, generally speaking, aConcessionaire may make expansions or renovations that are neces-sary for the operation of the facilities, but the specific range of per-missible expansions or renovations in a specific project must bedetermined by the relevant Public Authority.

In contrast, the construction of new facilities and the completeremoval and redevelopment of existing facilities, which are outsidethe scope of a Concession Right, will be conducted through tradi-tional public works or conventional PFI projects (for example,build-transfer-operate (BTO) with availability payments).(b) Assignment and transfer of Concession RightsThe transfer of a Concession Right, including one following a fore-closure sale, requires the permission of the relevant Public Authorityunder the PFI Act. The Concession Guidelines suggest that if (i) thetransferee is not subject to any ground for disqualification and (ii)the transfer of the Concession Right is appropriate under the bidtender documents prepared by the Public Authority, then the PublicAuthority does not have any discretion and must permit the transfer.Any condition that a Public Authority may impose on the transferof a Concession Right must be provided in the tender documents.It can be said that the Concession Guidelines have improved thepredictability of granting permissions for the transfer of ConcessionRights although requirement (ii) above still suggests ambiguity.(c) Rescission of Concession RightsA Public Authority may rescind a Concession Right if certain eventsoccur with respect to the Concessionaire or if rescission is necessaryto protect public interest.

The Concession Guidelines suggest that Concessionaires whosuffer losses as a result of the rescission of its Concession Right dueto public interest will be compensated in accordance with the stan-dards of compensation for business as stipulated in the Standardsfor Compensation for Land Acquired for Public Use. They furthersuggest that the Public Authority must refund the portion of theconcession fee that corresponds to the remaining project term.

2. Revised PFI Contract Guidelines: transfer ofshares of Project CompanyIn past PFI projects in Japan, consortium members were requiredto be shareholders of the project company throughout the projectterm, and in many cases the transfer of shares of the project com-pany without the approval of the Public Authority was prohibitedin the basic agreement between the Public Authority and the con-sortium members as well as the PFI project agreements. However,the revised PFI Contract Guidelines clearly acknowledge that the

need to restrict share transfers depends on various factors such asthe content and phase of the project, and clarify that conditions tothe transfer of shares held by a consortium member must be kept tothe minimum extent necessary to appropriately implement the proj-ect, given the role of each such consortium member in the project.

Action plan for fundamental reforms of PPPs/PFIsThe Council for the Promotion of Private Finance Initiatives of theCabinet Office established the ‘Action Plan for Fundamental Re-forms of PPPs/PFIs’ on June 6 2013. This action plan aims to in-tensively promote PPP/PFI projects to achieve a more efficientoperation or renovation of infrastructure, enhance the level of serv-ices and reduce government fiscal burdens. The action plan presentsspecific project types and ambitious size targets (totaling ¥10–12trillion over the next ten years from 2013 to 2022) as follows:1. Concessions: ¥2–3 trillionRelevant authorities will actively promote PFI Act Concessions inairport, water and sewage projects2. Public facilities with income-producing facilities: ¥3–4 tril-lionPFI projects for the construction, renovation, maintenance or op-eration of public facilities, which, together with income-producingfacilities attached to them, may generate sufficient revenues to coverthe costs associated with those projects.

Relevant authorities will study the use of PPPs for the mainte-nance and renewal of public facilities such as expressways (especiallythe Shutoko Metropolitan Expressway, which requires major repairs)3. PPP projects based on private proposals: ¥2 trillionPPP projects that adopt proposals from the private sector, for exam-ple, for the effective utilisation of unused or underused public realestate.4. Other project types: ¥3 trillionOther conventional types of PPP projects in which measures to re-duce government fiscal burdens are to be pursued, such as structur-ing facility management fees based on revenues generated from theproject (i.e., as opposed to availability-based fee arrangement) orcombining the renovation and maintenance of multiple facilities.

Creation of an infrastructure fund co-sponsored bythe public and private sectorsThe Private Finance Initiative Promotion Corporation of Japan(PFIPCJ) was incorporated on October 7 2013 under the 2013 Re-vised PFI Act. The PFIPCJ is co-sponsored by the national govern-ment and private entities such as banks and insurance companies.The PFIPCJ is supposed to financially support PFI projects mainlyby mezzanine financing, which will primarily take the form of mez-zanine debt or preferred shares in project companies. It should benoted that, under the revised law, the PFIPCJ should focus on theuser-pay type of PFI projects.

The PFIPCJ is expected to promote equity investments in PFIprojects and nurture the infrastructure investment market by usingnational funds as seed money. User-pay PFI projects are expected toreduce the national deficit and create business opportunities for theprivate sector.

III. Development of PPP in each asset classes

Airports

1. Privatisation of national airportsThe Act for the Operation of Government Controlled Airports byPrivate Sector Entities (the Airport Concession Act) enacted in 2013enabled the government and local governments to privatise airportsthrough a PFI Act Concession. Later, in November 2013, the Min-istry of Land, Infrastructure, Transport and Tourism (MLIT) prom-

COUNTRY / PRACTICE

2 IFLR1000 / ENERGY & INFRASTRUCTURE 2014

“The central governmentintends to sell 30-50-yearConcession Rights fornational airports, which itowns and manages”

The year 2014 marks the beginning of a new era for public-private partnerships (PPP) in Japan, as a result of significant movements to improve the legal and regulatory framework of the Japanese PPP in recent years. Our lawyers have been and continue to be in the midst of all these developments. We have been involved in a number of leading infrastructure and PPP projects as counsel to foreign and domestic investors, sponsors, operators, financers and governments. Our accumulated experience and network enable us to provide the best solutions and the most up-to-date information and knowledge to meet each client’s needs in this field.

ulgated the Basic Policy on the Operation of Government Con-trolled Airports by Private Sector Entities (the Basic Policy on Air-port Concessions), which provides the basic framework forconcessions of national airports.

The central government intends to sell 30-50-year ConcessionRights for national airports, which it owns and manages, subject tothe consent of the local government of the region where the airportis located. With the strong support of the governor of Miyagi Pre-fecture, the government is now preparing the privatisation of SendaiAirport as the first case of a national airport concession.

The move towards privatisation is driven by increased demandfor the efficient management of airports: the government needs tomaintain airport facilities under severe fiscal conditions, and airlinesface a severe competitive environment and are demanding more flex-ible airport services at lower costs from airports.

In addition, in many airports in Japan, the government ownsbasic aeronautical facilities, such as runways, aprons and aeronauticalground lights, and manages aeronautical operations such as negoti-ating new routes, number of flights and arrival and departure timeswith airlines, while private or third sector entities own and managenon-aeronautical facilities such as airport terminals and car parkingfacilities. That division is believed to hinder Japanese airports fromtaking strategic approaches, such as offering lower airport chargesto airlines by generating income from non-aeronautical operations,to improve airport services and economics. According to the BasicPolicy on Airport Concessions, a Concessionaire will manage bothaeronautical and non-aeronautical operations by acquiring the own-ership of airport terminals and car parking facilities from the existingowners as well as acquiring the Concession Right on basic aeronau-tical facilities from the government.

As there has been no precedent for airport concessions in Japan,many issues need to be discussed, such as the scope of work to beprovided by the Concessionaire, the structure of concession fees(e.g., upfront or annual fee, fixed amount or revenue share), andwhether the government will compensate the Concessionaire for therenovation or upgrade of facilities. In addition, the risk allocationbetween the government and a Concessionaire in case of force ma-jeure events is one of several major legal issues. In this regard, theBasic Policy on Airport Concessions suggests the basic idea that theConcessionaire takes the risk covered by insurance, and the govern-ment takes the risk beyond insurance.

2. Privatisation of Kansai International Airport andItami AirportSeparately from the privatisation of national airports under the AirportConcession Act, the government is considering using a PFI Act Con-cession to privatise Kansai International Airport (Kanku) and Osaka(Itami) International Airport (Itami), the two main airports in the Kan-sai region, which is the second largest regional economy in Japan.

Kanku opened in 1994 off the coast of southern Osaka as an al-ternative to Itami, the main airport in the region and was over-crowded and suffered from noise issues. Kanku is still heavilyindebted due to its construction costs.

In 2010, MLIT adopted a policy to merge Kanku and Itami andprivatise both airports using a concession under the PFI Act in orderto repay Kanku’s debt and revitalize Kanku. In 2011, the govern-ment enacted a special legislation (the Kanku-Itami Act) to imple-ment the policy. In June 2012, MLIT published a set of basicprinciples for the operation of both airports, their merger and theconcession under the Kanku-Itami Act.

In July 2012, Kanku and Itami were merged into the New KansaiInternational Airport Co., Ltd. which is wholly owned by the na-tional government. The merged airport is now preparing for a bidprocess, which is expected to start in the middle of this year, to selecta Concessionaire.

WaterIn principle, water supply services are provided by municipalities.The water supply section of a municipality is deemed as a Local Pub-lic Corporation, which has a separate account from the general ac-count of the municipality. In general, Local Public Corporations forwater supply services cover their expenses through water charges.Although many parts of the operation, such as the operation of fil-tration plants, the checkup of pipes, meter reading and water chargecollection, have been separately outsourced to different private com-panies and some PFI projects have been implemented for the con-struction of filtration plants, there has been no project involving theprivatisation of the whole local water supply system.

However, the municipalities are facing a decline in water de-mands in parallel with the decline in population. In addition, thenumber of public personnel in charge of water supply operations isdecreasing due to severe fiscal conditions that local governments arefacing. At the same time, demand to renovate aging facilities is rap-idly growing. Not a few experts point out the need for municipalitiesto make their water supply business more efficient by combiningtheir water supply services with those of neighboring municipalities,and by privatising through PPPs. These developments have led tosome recent notable advances to utilise PPPs in the water sector.

On November 11 2013, Osaka City, the third largest city inJapan with a population of 2.6 million, decided to draft a basic pol-icy as early as March 2014 to privatise its water services by utilisinga PFI Act Concession. According to its preliminary report, the Citywill give the concession right to a project company as early as 2015.The project company will provide water services for around 30 yearsunder the concession agreement with the City. It will be whollyowned by the City at the beginning but will accept private invest-ments in five years.

Starting April 2014, Kanagawa prefecture is outsourcing its entirewater supply business in the Northern Hakone region to a privateconsortium led by JFE Engineering Corporation. This is the firstcase of a local government outsourcing all of its water supply busi-ness to a private entity.

SewageThe municipalities also provide sewage services. Unlike water supplyservices, however, the sewage service divisions of many municipali-ties receive financial support from the relevant municipality’s generalaccounts. Although it is more common for segments of sewage serv-ices to be outsourced, the issues faced by municipalities regardingtheir water supply services also apply to sewage services.

In March 31 2014, MLIT published the guidelines for sewageconcession, which reflected discussions of the Study Group on theUtilisation of PPP/PFI in the Operation of Sewage Facilities set upby MLIT in December 2012. The guidelines clarify the interpreta-tion of laws and regulations related to the sewage business and localgovernments, and are expected to help local governments considerconcessions as a possible answer to their problems in the manage-ment of sewage systems.

RoadsIn principle, only certain limited types of entities such as local gov-ernments, local road public corporations founded by local govern-ments, and certain highway companies are allowed to manage tollroads and collect tolls under the current laws. Highway companieswere incorporated about 10 years ago under laws on highway pri-vatisation but they are still owned by the national government andlocal governments. Unlike airports, water and sewage, new speciallegislation is necessary to allow private entities to manage toll roadsand collect tolls. However, despite such legislative hurdle, severe fis-cal conditions are forcing some local governments to consider PPPsfor road management and maintenance.

COUNTRY / PRACTICE

4 IFLR1000 / ENERGY & INFRASTRUCTURE 2014

For example, Aichi prefecture has been requesting the nationalgovernment to set up a special reform zone under the Act on SpecialZones for Structural Reform and allow the prefecture to use a PFIAct Concession to privatise its roads currently maintained by itslocal road public corporation. That act allows the government to setSpecial Reform Zones, which are excluded from the application ofcertain laws and regulations.

IV. ConclusionSignificant reforms in regulatory frameworks for PPPs in Japan, par-ticularly in the use of concessions to operate infrastructure facilities,have been put in place in recent years. The government has showna positive attitude towards PPPs with the hope of reducing its fiscaldeficit and stimulating the economy. The introduction of the PFIAct Concession in various infrastructure projects such as airports,roads, and water and sewage systems is being widely discussed. Ef-forts to enhance investments in infrastructure such as the creationof the PFIPCJ are also being made. These recent trends demonstrateencouraging and exciting times for PPPs and PFIs in Japan.

COUNTRY / PRACTICE

IFLR1000 / ENERGY & INFRASTRUCTURE 2014 5

About the authorMasanori is the head of MHM’s banking and structured financingpractice group. He advises across the board on structured financetransactions, both internationally and domestically, including PFI,project finance, REIT and syndicated loans. He has led teamsadvising on a number of high profile transactions, including thefirst Japanese publicly offered CMBS transaction, the securitisationof public loans originated by the Japanese government and wholebusiness securitisations in a number of sectors. Masanori waseducated at the University of Tokyo and the University of ChicagoLaw School.

Masanori SatoPartner

Mori Hamada & MatsumotoTokyoTel: +81 3 5223 7726Email: masanori.sato@mhmjapan.comWeb: www.mhmjapan.com

About the authorShigeki has expertise in PPP (public-private partnerships),particularly airport and water concessions, real estate law, financialregulations and trust law. He has advised foreign investors onrenewable energy projects in Japan and entities in the Japanesepublic sector on PPP projects. He is a core member of MHM’sinfrastructure practice group. Shigeki was educated at the Universityof Tokyo and the University of Virginia School of Law and has alsobeen seconded to the Ministry of Economy, Trade and Industry ofJapan.

Shigeki OkataniSenior associate

Mori Hamada & MatsumotoTokyoTel: +81 3 5220 1862Email: shigeki.okatani@mhmjapan.comWeb: www.mhmjapan.com