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Dilemma: How to shed white elephants’ red ink?

by Kazuaki Nagata

Staff Writer

Last in a series

For decades, public works projects have carried the connotation of corruption and politicians, bureaucrats and contractors have been slammed for cozy ties and vested interests in building unnecessary infrastructure that hemorrhages money.

So in the government’s latest growth strategy, Prime Minister Shinzo Abe is pushing for an alternative type of public works project known as a private finance initiative, which allows private-sector entities to finance, construct and then operate infrastructure facilities in a more cost-effective and profitable way.

The government aims to increase PFI projects to the tune of ¥10 trillion to ¥12 trillion in the next 10 years. But how smoothly the plan will proceed is anyone’s guess, given the difficulty in breaking an entrenched, long-time culture of vested interests when it comes to public works spending.

“The government no longer has abundant funds to carry out project after project,” said Yasuaki Kodama, deputy director of the Cabinet Office’s PFI promotion division. “We can’t really (build and maintain) public works in the traditional manner.”

The costs of keeping aging infrastructure in top shape are likely to jump in the coming years, because much of it was completed during the economic boom times from the late 1960s to early 1970s. In response, the debt-plagued government, scrambling for new sources of funding to build or replace infrastructure, has embraced the PFI concept.

Experts say Japan should make far greater use of this approach, because the private sector has more know-how and expertise in efficient operations and turning a profit.

Although 418 projects worth a combined ¥4.1 trillion have been undertaken since the 1999 introduction of PFI projects, analysts say the government has yet to fully capitalize on them. In over 70 percent of these projects, private contractors were designated to construct public facilities like government offices, for instance, and to take care of their upkeep.

The concession PFI, or the right of a private firm to operate a public facility, was not an option until the 2011 revision to the PFI law.

Though the sale of concessions would generate extra funds for the public sector while keeping such facilities in the black, the key, according to experts, will be how widely concessions — or the right to operate infrastructure — will spread among private companies.

“If the public sector continues its role of running the facilities, it’s not making the best use of PFI because the concept’s real advantage and value come from operating and maintenance, not the construction” phase, said Masaaki Anma, a visiting lecturer on project finance at Kyoto University’s Graduate School of Management.

For example, nearly 100 public airports have been built nationwide, often in remote and hard-to-access locations, and almost all of them are losing money amid low demand.

They simply can’t survive without regular injections of public funds — in other words, taxpayer money.

Whether private companies really want to get their hands dirty through money-losing businesses like airports is another matter.

Still, “if concessions for airports are brought to the table, there will be many (firms) wanting to purchase them” because they feel they can turn their operations around, said Shingo Mochimaru, group manager of Nomura Research Institute’s infrastructure and asset finance group.

At present, New Kansai International Airport Co., the state-owned operator of Kansai International and Itami airports in Osaka Prefecture, is planning to sell the concessions for the two facilities. The proceeds, projected to come to around ¥600 billion to ¥800 billion, would help cover the company’s mammoth debt of ¥1.2 trillion.

But it’s not just airports that Abe is targeting. Water and sewerage systems, and especially toll roads, all of which guarantee stable long-term returns, also have businesses salivating at the prospect of winning concessions.

Mochimaru pointed out that many countries sell PFI toll road concessions to the private sector, and urged the government to explore this option.

Yet he noted that water and sewerage systems are currently operated by local governments and selling their concessions requires the approval of the municipal assemblies.

A stable political base would be a prerequisite to realizing such sweeping reform, a potentially very steep hurdle, Mochimaru warned.

The government aims to sell ¥2 trillion to ¥3 trillion worth of public infrastructure concessions over the next 10 years.

Mochimaru, however, said he is unsure at this point about the feasibility of this goal because the private sector could perceive the purchasing process as too cumbersome and bogged down in red tape.

The government’s target therefore hinges on how committed it is to promoting PFI infrastructure.

Some analysts said allowing Japanese firms to gain experience in operating public infrastructure would give them a better chance at penetrating markets in fast-growing Asian economies, another plank of Abe’s growth strategy.

Anma, the project finance lecturer, explained that there are a stack of lucrative PFI opportunities, for instance, to develop and run water and sewerage networks in other Asian economies, but since Japanese private firms lack the know-how, they can’t competitively bid for contracts without teaming up with experienced foreign operators through joint ventures.

The first obstacle will be eradicating the postwar pilfering of public works projects by those who have profited from the state’s enormous annual spending.

And the cosy network of politicians, bureaucrats and contractors with strong vested interests in maintaining the status quo is certain to mount a bitter counteroffensive, said one expert who requested anonymity.

That is one of the principal reasons why Japan has been slow to adopt the PFI model, he explained, since a radical shift from the public to private sectors “would completely change the rules of the game.”

Such reforms are essential, but the government also will need to take care not to promote PFI concessions too hastily, because the impact would be huge and likely to result in substantial layoffs among those employed under the existing bureaucracy-heavy structure, he cautioned.

  • poster123

    replacing unelected, corrupt bureaucrats with unaccountable, profit-driven private corporations…

    • phu

      At least they’re consistent: Poor, reactionary decisions across the board. Insane and pointless monetary easing, pork barrel public works spending, why not keep going all the way to unbridled privatization? They’re creating more problems as they go anyway. I have to wonder if Abe and his cronies see this as going out with a bang or if they truly are so ignorant as to think these things are good policy.