PPP/PFI is a promising method for simultaneously resolving various social issues and achieving economic growth. To accelerate its promotion, the government established a new action plan in 2023. One of the pillars of this plan is "Water PPP." What exactly is Water PPP? What are its benefits? What are the key points to consider when implementing it? Representatives from Water Agency and PACIFIC CONSULTANTS, both of which are actively working on this initiative on the private sector, discussed the matter, sharing case studies.
Water Agency Inc.
Founded in 1953, the company specializes in the operation and maintenance (O&M) of water supply and sewerage facilities and has been involved in the operation of many PPP projects in recent years. With a track record of managing over 300 water purification plants and over 240 sewage treatment plants, the company holds the top share in the domestic market. The company also develops and sells industrial chemicals, manufactures and sells water purifiers, and manufactures and sells ozone water generators.
https://water-agency.com/
INDEX
- What is Water PPP?
- Aging water and sewerage pipelines and facilities
- 10-year long-term contracts and management of maintenance and renewals are essential
- Joint venture contracted to handle integrated operation and maintenance of treatment plants and pipelines
- It is important for private companies to align their vectors
- How to proceed with the Water PPP
What is Water PPP?
PACIFIC CONSULTANTS (PC): The government's action plan for proactively promoting PPP/PFI sets numerical targets of 30 trillion yen in project scale over the 10-year period from 2022 to 2031, with a total of 575 for 10-year projects across priority areas. One of these priority areas is water PPPs in the water supply, sewerage, and industrial water supply sectors. The aim is to enable more flexible public-PPP to meet the needs of local governments that "do not require private companies to grant operating rights or collect usage fees, but would like to entrust management and renewal to private companies as a whole". To accelerate efforts, a requirement has been added for projects eligible for the "Comprehensive Social Capital Development Grant" for the reconstruction of wastewater pipes from fiscal 2027 onward that the implementation of water PPPs be decided. This is a situation in which efforts are essential.
Aging water and sewerage pipelines and facilities
PC: The background to the urgent need for water PPPs is the shortage of human resources (people), the aging of facilities (things), and financial difficulties (money) in the sustainable operation and management of water supply and sewerage purification plants, treatment facilities, and pipeline facilities. Regarding the aging of facilities, the accident in Yashio City, Saitama Prefecture, in January 2025 is still fresh in our memory, but in 2022 there were approximately 2,600 road collapses caused by sewerage pipelines, with 14% of the collapses exceeding 50 cm in depth. The length of sewerage culverts that have exceeded their standard service life of 50 years is currently approximately 30,000 km, or about 7% of the total length, but in 20 years it will reach approximately 200,000 km, or about 40%. (Source: "Sewerage Pipe Maintenance Annual Report 2023," October 2024 (Sewerage Business Division, Water and Disaster Management Bureau, Ministry of Land, Infrastructure, Transport and Tourism)). Even in water supply pipes, there are more than 20,000 leaks and damage accidents per year due to aging. (Source: "Nationwide Water Supply Section Manager Conference 2024," April 22, 2024 (Water Supply and Sewerage Business Assessment Director-General Group, Water Supply and Disaster Management Bureau, Ministry of Land, Infrastructure, Transport and Tourism))
Water Agency (WA): The aging of facilities is also noticeable, not just in pipelines. Only about 43% of water supply facilities and only about 47% of sewage treatment plants are earthquake-resistant. While updating mechanical and electrical equipment is important at sewage treatment plants, approximately 2,000 facilities, or 90% of all facilities, have exceeded their standard service life of 15 years. (Source: "Current Status of Earthquake Reinforcement of Water Supply and Sewerage Systems," July 2, 2024 (Ministry of Internal Affairs and Communications, Local Finance Bureau, Public Enterprise Management Office/Quasi-Public Enterprise Office)). Furthermore, there is a severe shortage of local government employees involved in operation and maintenance. The number of waterworks employees was approximately 55,100 in 2007, but by 2022, it had fallen by approximately 25% to approximately 42,700. Over the same period, the number of sewerage employees also fell by approximately 24%, from approximately 34,900 to approximately 26,600. (Source: "Current Status and Issues of Water Supply and Sewerage Businesses," September 2024 (Ministry of Internal Affairs and Communications, Local Finance Bureau, Public Enterprise Management Office/Quasi-Public Enterprise Office)). The aging of the infrastructure continues to progress year by year, yet the workforce continues to decline. Moreover, a large number of elderly employees are approaching retirement.
10-year long-term contracts and management of maintenance and renewals are essential
WA: As mentioned earlier, the Water PPP launched in 2023 is a new level 3.5 project between the previously known concession (Level 4) model, which offers the deepest level of private sector involvement, and the previous levels 1 to 3. These Level 3.5 and Level 4 projects are collectively referred to as "Water PPP." Specifically, the new Level 3.5 project extends contract periods from the previous three to five years to 10 years in principle. While fee collection and operating rights remain with local public organizations, private business sectors manage the maintenance and renewal of treatment plants, pumping stations, and pipelines in an integrated manner. Its distinctive features include the inclusion of renewal construction and renewal planning, as well as construction management, which are not included in Levels 1 to 3. Furthermore, it explicitly mandates performance-based ordering and incorporates profit sharing. If improvement proposals are accepted and contract fees are reduced, the reduction can be shared between the public and private sectors.
PC: I think the Water PPP is effective in furthering PPP.
WA: I think it's an effective approach. We have been awarded many contracts for comprehensive water supply and sewerage services under Levels 1 to 3, including Level 4. I believe the national government would like to actively promote Level 4. However, from the perspective of private business sectors, contracts with operating rights are quite burdensome. It must be said that the risk is relatively high when it comes to how private companies approach water supply and sewerage services, which face many challenges, such as population decline and aging facilities. In fact, the number of Level 4 concessions has not increased as the national government had hoped. The gap between Levels 3 and 4 is too large. Therefore, the national government created Level 3.5 as a stepping stone to gradually transition to Level 4. We also believe that Level 3.5 is easy to implement. First of all, the 10-year long-term contract is attractive. It allows us to approach neighboring municipalities and establish comprehensive management. The emphasis on performance-based ordering is also significant. While previously, contracts were often based on performance, contracts could only be accepted if the required personnel were available, resulting in a de facto specification-based ordering system. In water PPP, performance standards must be established, such as "the quality of treated water must meet the required standards" for treatment plant facilities, and "legal maintenance inspections must be carried out, leaving the personnel, timing, equipment, methods, etc. to the contractor," including a gradual transition, for pipeline facilities.
PC: We will be able to make a wide range of proposals and implementations, including plans and construction work for the renewal of treatment plants and pumping stations, as well as the formulation of plans for renewal, life extension, and repairs based on inspections, surveys, and analysis of pipelines. The fact that data obtained from operation and maintenance management can be used to propose renewals is a major attraction.
WA: That's right. By linking existing inspection data to facility risk assessments and health assessments, it will be possible to create proposed renewal plans and carry out renewal work. A large number of private companies, including electrical equipment manufacturers, are involved in the operation and maintenance of treatment plants and pumping stations, but I think that private business sectors can come together to propose improvements to facility management and renewal, contributing to the realization of sustainable water supply and sewerage businesses. In addition, with the introduction of a profit-sharing system, private business sectors can also expect to gain profit opportunities through operational improvements.
Joint venture contracted to handle integrated operation and maintenance of treatment plants and pipelines
PC: We are working in a joint venture with Water Agency Inc. to operate and maintain a wastewater treatment plant in Fuji City, Shizuoka Prefecture, and from the 6th round, the public bidding conditions have been upgraded to a level 3.5 water PPP.
WA: Fuji City's comprehensive private outsourcing began in fiscal 2004, and we had been independently managing the operation and maintenance of the treatment plant for three periods up to that point. However, the national government set out a direction for comprehensive private outsourcing that included patrol and inspection of pipeline facilities in addition to treatment plants, so we added patrol and inspection of pipeline facilities and began working with PACIFIC CONSULTANTS from the fourth period onwards. Although the level is 2.5, comprehensive private outsourcing that included patrol and inspection of pipelines for a municipality with a population of over 200,000 was a very new initiative at the time, and other municipalities came to inspect it.
PC: This patrol inspection is a large-scale undertaking, covering 100km per year, and involves developing a tablet-based inspection system to inspect the entire city, examining stock management implementation policies for overall optimization, and attempting to link this to efficient and effective maintenance of pipelines. In the current fifth phase, in addition to patrolling and inspecting pipeline facilities, we are also carrying out some repairs and renovations. As you mentioned, the sixth phase will be a 10-year level 3.5 project that includes the creation of renewal plans, so we hope to continue working with Water Agency Inc. on this contract.
Phases 1 to 3 were WA-only projects. From Phase 4, PC joined the project, and it became a project that integrated the treatment plant and pipelines. From Phase 6, it became a water PPP.
Source: "Fuji City Water PPP Implementation Initiative Explanatory Material" (Fuji City Water Supply & Sewage Division, Sewerage Facility Maintenance Department)
It is important for private companies to align their vectors
PC: What struck me most about working with Water Agency Inc. in Fuji City was the commonality in our approach to maintaining water supply and sewerage facilities. We are consultants, and Water Agency Inc.'s main business is the operation and maintenance of treatment plants, but neither of us is a manufacturing company. Building new facilities or delivering equipment is not our main business. I think both companies are not good at thinking from the perspective of what they have in mind. That's why I think they are able to take an approach that considers the life cycle cost of facilities and how to make water supply and sewerage businesses sustainable while spending money where it is truly needed. I think it can be said that they are companies that are well accustomed to receiving performance-based orders and working on water PPPs over a long period of 10 years.
WA: As you mentioned, equipment manufacturers are interested in introducing their own equipment, and construction companies are interested in new construction. That's natural, and it doesn't mean they can't handle operation and maintenance. However, I think we need to take a comprehensive perspective and consider how we can continue while reducing lifecycle costs. Japan's water supply and sewerage businesses are fragmented into numerous different entities. As a result, there are virtually no companies that can handle all aspects of operation, maintenance, investigation, inspection, planning, construction management, and renovation work, including pipelines and treatment plants. As water PPP expands, more private companies will become involved. I expect there will be more dialogue between private companies, but since many companies will be collaborating, it's important to ensure that we are aligned. Together with PACIFIC CONSULTANTS, we need to develop a clear vision for how to integrate facilities and pipelines in preparation for our contract with Fuji City for the sixth phase of the Water PPP project. While treatment plant facilities and pipeline facilities require the same maintenance, their characteristics are completely different, so how we can work together as a unified entity will be a key issue going forward.
PC: Pipes are facilities that extend over a wide area to reach every home. If we are to move to concessions in the future, it will be important to understand the risks, but how to grasp the risks that are invisible to the naked eye is also a difficult problem.
PC: We believe that one of the keywords for future PPP will be "wide area," and some of the Water Agency Inc.'s initiatives also aim to expand to wider areas.
WA: In the Kanan area of Osaka, we received a joint order from seven water utilities: Kawachinagano City, Tondabayashi City, Habikino City, Kashiwara City, and the Osaka Waterworks Agency (3 centers). It is clear that each of these municipalities has a significant shortage of personnel to operate and maintain waterworks facilities, and with a view to expanding water supply and sewerage services to a wider area in the future, we are working to strengthen PPP through wide-area collaboration.
PC: Although we are not a waterworks company, we are working on a "regional infrastructure cluster regeneration strategy management," also known as "cluster management," in Sanjo City, Niigata Prefecture, which encompasses the maintenance and management of different areas, such as roads, including bridges, parks, and waterways. A regional perspective is essential for maintaining the soundness of local social infrastructure.
How to proceed with the Water PPP
PC: What are Water Agency Inc.'s plans for the future?
WA: First of all, I would like to firmly establish a system for linking daily inspections and surveys to stock management and asset management, and for linking this to proposals that reduce lifecycle costs. Also, with the emergence of not only comprehensive management contracts but also PFI, DBO, and water PPP, opportunities for private companies to talk to each other have increased dramatically. I think it is important for private companies to join forces and solve problems in order to protect water infrastructure, rather than just talking about how to bring profits to their own companies.
PC: Water Agency Inc. is addressing the issue of how to ensure the sustainable operation and maintenance of water supply and sewerage facilities, and we believe that we must contribute by integrating our technologies to resolve the social issue of maintaining water infrastructure. In that respect, I believe we can contribute from a broader perspective. I feel that we ourselves must lead the way into a new era.
WA: I would like to work together to achieve a consensus and create a good precedent.
