What is Public-Private Partnership (PPP)?

INDEX

• What is Public-Private Partnership (PPP)?
• Increasingly activated PPP/PFI initiatives
• The key to success in PPP/PFI is high-quality sounding
• PACIFIC CONSULTANTS' Initiatives

What is Public-Private Partnership (PPP)?

Public Private Partnership (PPP) is a general term for a mechanism to utilize the funds and know-how of private business operators to provide public services that were previously led by public organizations. It started in the UK, and in Japan, a law with a long name, the Act on Promotion of Development of Public Facilities, etc., Using Private Funds, etc. (Act on Promotion of Private Finance Initiative), was enacted by parliamentary legislation in July 1999. This PFI (Private Finance Initiative) focuses particularly on the utilization of private funds.

In addition to utilizing private funds, PFI has three main features that set it apart from conventional PFIs.
The first is to entrust work to "long-term" contracts rather than on a single fiscal year basis; the second is to "comprehensively" handle each task, such as design, construction, maintenance, and operation, rather than entrusting them separately; and the third is to specify the performance that should be achieved through "function-based definition" rather than determining in too detailed (specifications), thereby increasing the freedom of approach.

Public-private partnership can be a solution to two problems: the "supply-side problem" of public services, such as the aging and decline of public organization employees (especially technical positions), and the "demand-side problem," such as the diversifying needs for public services due to changes in social conditions and the need to address the aging of a huge amount of social infrastructure (existing roads, bridges, water and sewerage systems, etc.). This is because, in addition to being expected to reduce the burden on public organization employees (ordering workload and on-site work volume) over the entire project period, private business operators can also systematically utilize their own various business know-how and the effects of cross-industry collaboration to provide public services that meet needs.

In this way, the creation of an environment that makes it easier for private business operators to introduce their capabilities in areas other than fundraising has progressed, and public-private partnership, which began as PFI, has begun to spread to public works projects that do not require fundraising of the private business operators. New frameworks such as designated management and comprehensive entrustment to private sector was also born as part of this trend. Public-private partnership, including PFI, has spread widely from various public facilities known as "hakomono (box buildings)" to social infrastructure such as roads, bridges, parks, and water and sewerage systems. As traditional methods of public work projects have become more difficult, the application of PPP, which was previously just one option, has become more common, and the issue has shifted to "what kind of PPP should we have?"

In fact, the cumulative number of PFI projects since its introduction in 1999 has continued to grow to 1,071; and the actual scale of PPP/PFI projects in FY2022 has expanded to 3.9 trillion yen. In addition, the Japanese government has announced that it will focus on PPP/PFI as a means to solve social issues and drive a growth-oriented economy amid tight government finances, a shrinking working-age population, and aging infrastructure, and will actively promote PPP/PFI further. The Action Plan revised in FY2024 calls for expanding the scale of PPP/PFI projects to 30 trillion yen in the 10 years from 2022, making PPP/PFI one of the hottest growth strategies in Japan today.

Increasingly activated PPP/PFI initiatives

・Representative fields

Ingenious PPP/PFI projects are being rolled out all over the country. School lunch centers are a typical example of PPP/PFI for public facilities, also known as "hakomono (box buildings)". School lunch facilities were rapidly established in the wake of the baby boom in the early 1970s, but as they have become increasingly dilapidated and the number of children and students has decreased, the number of center-based PPP/PFI projects has increased as an effective means of rebuilding. Some of the larger facilities handle the cooking and delivery of more than 10,000 meals a day, so collaboration with private companies with ample experience in the construction and operation of large-scale cooking facilities has been a major advantage.

In addition, initiatives related to public housing (including utilization of surplus land), waste disposal facilities, stadiums/arenas, etc. are also increasing. In these areas, too, private business operators has accumulated the know-how necessary to promote projects, and the effects of public-private partnership are expected. Recently, the demand for cremation has been increasing due to the aging of the population and the high number of deaths in our society, and the promotion of cremation facilities through PPP/PFI is also indicated in the Action Plan for Promotion of PPP/PFI presented by the Cabinet Office.

・Other social infrastructure fields

PPP/PFI is also being promoted for the maintenance, management, and operation of social infrastructures other than hakomono (box buildings), such as roads, bridges, water and sewage systems, and parks. Some of these include PFI projects to eliminate utility poles. Since collapsed utility poles can cause power outages and block road traffic, they are becoming increasingly important not only for landscape maintenance but also from the perspective of disaster prevention. However, this is not an easy task because of the wide variety of tasks and the large number of people involved, including coordination with the managers of occupied properties such as water, sewer, and gas pipes that are already buried underground, removal of existing buried structures and installation of new joint ditches, and the pulling of the pipes into each household by the respective companies. However, if the project is carried out as a PFI, a series of tasks can be comprehensively integrated and a lump-sum order can be placed. Based on the Act on Promotion of Overhead to Underground Conversion (enacted in December 2016), the government has formulated the "Plan for the Promotion of Overhead to Underground Conversion" (Ministry of Land, Infrastructure, Transport and Tourism) in 2021, and is actively promoting it.

In addition, PPP initiatives in the form of ""comprehensive entrustment to private sector" are also increasing. This is a form of entrustment to private sector for the management of roads, bridges, water supply and sewage systems, parks, and other facilities, whereby the project period is extended, the area is expanded, or different types of facilities are covered, in a variety of ways to make it easier for private business operators to undertake the project. For private business operators, which is entrusted with the project, the fact that it has a certain scale of operations and can take a systematic approach while utilizing its own know-how is a major advantage. In addition, when a local company receives an order for comprehensive entrustment to private sector, it has a greater ripple effect on the local economy than before, leading to regional revitalization, and it is expected that the number of such cases will increase in the future. In recent years, the management and renewal of water and sewage systems has been promoted as an integrated management method (commonly known as "water PPP").

[What is Comprehensive Entrustment of Infrastructure to  Private Sector?]

・Business methods and fields continue to expand

With the government's proactive promotion of PPP/PFI, the development of new business methods and an expansion of the business fields covered are progressing.

For example, one business method that is being actively utilized is the concession (public facility management concession system). In this system, the public entity retains ownership of the facility and sets the right to operate it to private business operators. If introduced successfully, public organizations can expand the expression of private business operators' know-how without having to relinquish their facilities. The private business operators can also fully demonstrate its own operational ingenuity based on the needs of the users and increase its business revenues.

A new method called LABV (Local Asset Backed Vehicle) is also emerging. This is a method suitable for utilizing public real estate. Public organizations invests in public land and private business operators invests funds to create a public-private joint venture, which integrates and manages public facilities and private profit-earning facilities such as commercial facilities, hotels, and office buildings. The project is not limited to the development of a single facility, but can create liveliness through the development of the area as a whole.

[Strategic Use of Public Real Estate (PRE) for Urban Development]

As these business methods are developed, the business fields are expanding. For example, we are utilizing vacant green spaces around ports (commonly known as Minato Green Space PPP) and revitalizing urban parks through Park-PFI (commonly known as Park PFI).

・Initiatives underway not only in urban areas but also in regional cities

You may have the impression that PPP/PFI is something that is undertaken in prefectures, government-designated cities, regional core cities, and other places with large populations. However, various initiatives are also being undertaken in smaller municipalities.

For example, Date City in Hokkaido (population: approx. 31,000 as of December 2024) newly constructed a school lunch center under a PFI project. A restaurant for promoting the health of citizens and local foodstuffs and for dietary education is operated on the second floor of the school lunch center as a project proposal, and is attracting attention as an advanced PFI project. In Fukuroi City, Shizuoka Prefecture (population 88,000 as of December 2024), a café was established and operated by an operator that leased land from the city as an ancillary project in conjunction with the construction and operation of the city's general gymnasium. The café is operated by a business operator that leased the land from the city.

The key to success in PPP/PFI is high-quality sounding

・Start by showing what you're thinking now

About 25 years have passed since its introduction in 1999, and PPP/PFI is attracting renewed attention. The key to its success is making effective use of the sounding opportunity, which is the first meeting point between the public and private sectors.

Soundings are an initiative to communicate between public organizations and private business operators, close perception gaps, etc., for the realization of public-private partnership. It is sometimes referred to as market research. The content and expected results vary depending on the phase of the targeted public project study.
However, I have the impression that the current situation is not making good use of such opportunities. In particular, there are many cases where the public organizations side approaches the project with a blank sheet of paper and the stance of "Do you have any good ideas?

However, the subject is public works projects and public lands. If the public service's provider does not know what they want to do, private business operators has no way to provide input. It will end up doing nothing more than introducing their products, services, and past initiatives. As the public organizations side, we are currently thinking about this or that, or we don't want to do this - either is fine. It is natural that there may be areas that have not yet been finalized, and it is important to include these and specifically state that you would like to consider these points together.

If public organizations presents such a hypothesis, private business operators can make "red notes" such as "Isn't that project period too long?", "If we narrow the scope of work that much, the number of companies that can participate will be limited," or "That area is difficult to operate commercially, so perhaps it would be better not to make it a scheme that expects profits." That is the outcome of sounding. If the business plan is finalized through this process, private companies will be more likely to raise their hands as partners to work with public organizations on PPP projects.

Public-private partnership is not about relying on the private sector. The key to successful public-private partnership is to achieve fruitful communication through soundings. To achieve this, it is extremely important for the public organizations to first come up with their own proposals and take on the challenge.

[What is Sounding?]

PACIFIC CONSULTANTS' Initiatives

・Leading the spread of public-private partnership through "multi-region x multi-sector x multi-method"

PACIFIC CONSULTANTS has been actively engaged in PPP/PFI consulting services since PFI was introduced in Japan in 1999, and has a track record of 128 PFI advisory cases to date, the most in Japan (PFI Yearbook 2024 Edition, published by the Japan PFI/PPP Association). The company has been conducting various research since before the Act on Promotion of PFI was enacted, and has been developing and improving various business schemes since the dawn of PFI business. It has also produced expert members for the Cabinet Office's PFI Promotion Committee, pioneering the field of public-private partnership as a leading company and continuing to lead its spread. The distinctive feature of its efforts is not simply the number of cases it handles. Its specific support scope covers "multi-region, multi-field, and multi-method."

If a consultant providing PPP/PFI advisory services provides advice based on biased knowledge, such as only having experience in metropolitan areas, only having experience with school lunch centers or public housing, or only having experience with a specific business method, they will not be able to propose the optimal business scheme based on the characteristics of the business. While supporting the creation of national guidelines, we have also been providing PPP/PFI consulting services in a variety of fields and business methods to the national government and local governments of various regions and scales for many years. Furthermore, we have a technical department that can handle any type of infrastructure, and we also have members who specialize in legal affairs and finance. This allows us to provide optimal consulting based on our knowledge of "multi-region x multi-field x multi-method".

・Lessons learned from monitoring will be utilized in the future

Advisory services for PPP/PFI project are completed when public organizations decides on the details of the project, recruits and selects a partner which is a private business operator, and concludes a project contract. However, we also focus on monitoring support services to check whether the PPP/PFI project is actually implemented as originally planned at the stage after the project has actually started.

There may not be many consultants who continue to support public organizations in monitoring. However, by supporting monitoring, it is possible to grasp various problems that tend to occur on-site after the start of a project. The cycle of applying these lessons to the next advisory work is one of the sources of improving the quality of consulting. Our track record, the largest in Japan, is not simply a result of the large number of cases, but of the great value of the accumulated lessons learned from each case.

In the future, PPP/PFI will expand to many more fields, including green transformation and carbon neutrality, and will move towards initiatives involving wide-area collaboration rather than just one local government. PACIFIC CONSULTANTS, as a leading company with the most extensive track record, will continue to support public-private partnership projects.