Infrastructure investments in Japan

Mitsuhiro Teraoka Director of Research Division

Budget Bureau Ministry of Finance, JAPAN

19th December 2014 10th Meeting of ASIAN Senior Budget Officials

Basic Concept of Social Infrastructure Investment

Severe fiscal situation

Improved level of social infrastructure

Rapid decline of total population in the future

Need to effectively allocate public funds to highly prioritized public works. Need to conduct the investment in more deliberate and efficient manner.

● New Investment: Need to evaluate the cost effectiveness of projects and select them carefully, while focusing on the projects for enhancing the international competitiveness and for preventing and/or reducing the damage from natural disasters.

● Encouraging the private investments and private funds through PPP/PFI

● Implementing the PDCA cycle

Public Finance Act

Article 4 (Limitations on issue of public bonds and borrowings)

(1) The expenditure of the State shall have financial sources in the revenue excluding public bonds or borrowings. However, for the financial source of public works expenses, equity investments and loans, it shall be permitted to issue public bonds or make borrowings within the limits of the amounts of money approved by the Diet resolution.

● Overview

1

Development Body

Central Government

Local Government

Private Sector

Fund Resources

Public Fund

Fiscal Investment and loan

Contributions by beneficiaries

Maintenance Body

Central Government

Local Government

Private Sector

Division of Roles in Social Infrastructure Improvements in Japan

River

Sewage Airport

Railway

Examples

2

Change in Socio-economic Conditions and Progress of Social Infrastructure Improvement

Economic growth and population dynamic etc.

CY1990 CY2012 Change GDP (Nominal, trillion yen)

442.8 ⇒ 472.6 (+6.7%)

Component rate of GDP by type of economic activity ・Primary industries (%) ・Secondary

industries(%) ・Tertiary industries (%)

2.4 35.4 62.2

⇒ ⇒ ⇒

1.2 23.9 74.9

(-50.0%) (-32.5%) (+20.4%)

National income per capita (Nominal(FY), thousand yen)

2,808 ⇒ 2,754 (-1.9%)

Population (thousand people)

123,61 ⇒ 127,50 (+3.1%)

Progress of social infrastructure development

FY1990 FY 2013 Change Number of dams 313 ⇒ 572 (+83%)

Total road length (High- standard road)(km)

5,281 ⇒ 10,490 ※FY 2012

(+107%)

Number of quays at major ports (Number of locations)

7 ⇒ 73 (+943%)

Sewage diffusion rate(%)

62 ※FY 1997

⇒

88.1 ※FY 2012

(+42%)

Developed farming areas (10,000 hectares)

260

⇒ 311 ※FY 2011

(+20%)

3

Public works-related expenditures in FY2014 initial budget: \5968.5 billion (up \ 683.2 billion or 12.9%, on a year-on-year basis)

7.3 7.3 7.7 8.1 8.5 8.9 9.2 9.6 9.7 9.0 9.4 9.4 9.4

8.4 8.1 7.8 7.5 7.2 6.9 6.7 7.1 5.8

5.0 4.6 5.3

6.0

8.5 8.1

8.5

9.9

12.5

10.5

14.2

11.2

10.5

14.9

12.2 11.5 11.3

10.0

8.3 8.9

8.0 7.8 7.4 7.3

8.8

6.4

7.8

7.0 6.3

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

(trillion yen)

(FY)

(FY)

Initial budget

Supplementary budget

Trend in Public Works-related Expenditures

4

Trend of General Government Fixed Capital Formation

Japan has been taking a sharp downward trend, but still keeps a higher level than major advanced countries.

4.8 4.8 5.0

5.7

6.3 6.0

6.2 5.9

5.5 5.7 5.6

5.1 4.9

4.6 4.2

3.7 3.6 3.3

3.1 3.0

3.5 3.2 3.2 3.1

2.3 2.4

2.5 2.4 2.3 2.3 2.3 2.4 2.4 2.4 2.4 2.5 2.5 2.6 2.5 2.4 2.4 2.4 2.4 2.6

2.6 2.5

2.3

2.2

2.3

2.2 2.2 2.1 2.1 1.9 1.5

1.2 1.3 1.3 1.2 1.5 1.6

1.6 1.8 1.9

1.8 1.9 2.3

2.7

2.5 2.2

2.2 2.0

2.3

2.2

2.6 2.8

2.7 2.5

2.2 2.1 1.9 1.9 2.0 1.9 1.8 1.8

1.6 1.5 1.4 1.5 1.5 1.6 1.8 1.7 1.7 1.5 1.6

3.4 3.4 3.6 3.6 3.5 3.4

3.2 3.1 2.9 2.8

2.9 3.1 3.0 2.9 3.0 3.1 3.3 3.2 3.3 3.2

3.4 3.1 3.1 3.2

3.2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

(Note) The calculation is based on the numbers of 93 SNA standard. (Source) Japan: Cabinet Office “National Accounts” (fiscal year basis) Other countries: OECD “National Accounts” (OECD Stat Extracts) (calendar year basis), “Economic Outlook 70” (1989-1990 data for Germany) (calendar year basis)

(CY/FY)

(%)

Japan

France

U.K. Germany

U.S.

5

Weighing on Maintenance and Renewal

● Increasing needs for maintenance and renewal of social infrastructures

● Need to encourage the private investments under the current deteriorated fiscal situation in Japan

FY Projection result

FY2013 Approx. \3.6 trillion※

FY2023 Approx. \4.3 ～ \5.1 trillion

FY2033 Approx. \4.6 ～ \5.5 trillion ※FY2013 data is estimated data(not the actual data) ※Coverage: 10 areas (road, water conservation, sewage,

port, public housing, park, coast, airport, aid to navigation, governmental facility)

※Maintenance body: Central and local governments, etc.

Projection of the cost for maintenance and renewal of social infrastructures in the future

(Ministry of Land, Infrastructure, Transport and Tourism)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

～19

20

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

The number of bridges divided by construction year

municipalities

prefectures

government-designated city

central government expressway company

(FY)

6

New Investment

● Need to evaluate the cost effectiveness of projects and select them carefully (value for money)

● Focusing on the projects to address the following issues;

－ To enhance the international competitiveness of Japan

－ To prevent and/or reduce the damage from natural disasters (earthquake, typhoon, etc.)

7

3 10

27

47

45

45

41 38 41 33

29

15 20

20 26

0 36

118

185

354

218

584

560 545

672

303

139 119

391

94 0

100

200

300

400

500

600

700

800

05

101520253035404550

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

The number of projects (per year)

Total amount of project(per year)

Overview of the PPP/PFI in Japan

(FY)

The number of PFI projects has been sluggish in recent years compared with early 2000’s. ⇒ Possible reasons have been pointed out as follows:

⇒ PFI has not fully utilized currently and need to promote it further.

8 (Note) the date: as the end of FY2013 (Source) The Cabinet Office

Less room for utilizing the private sector’s ideas and know-how Small number of projects for maintenance and management ⇒ Low incentives for private sector to participate in PFI projects ⇒ Amendment of PFI Act (Introducing Concession scheme, etc.)

(billion yen)

(1) Concession PFI : 2-3 trillion yen < Concrete action plan > • Introducing a concession PFI in the fields of airport, water supply and sewage etc.

(2) PFI projects collecting construction costs through utilizing the revenue from commercial facilities built on / in / public facilities: 3-4 trillion yen < Concrete action plan > • Introducing PPP method for rehabilitation of public facilities such as expressway (especially Metropolitan

Expressway which requires a large-scale rehabilitation).

(3) PPP projects utilizing the private sector’s proposals such as effective use of public real estate : 2 trillion yen < Concrete action plan > • Issuance of a guideline on the private sector’s proposals and establishment of a contact to receive them. • Establishment of public-private cooperation system in order to support formulation of PFI projects in cross-

cutting approach which Infrastructure UK has already adopted.

(4) Others (Introducing performance-linked revenue system, bundling the same type of several public facilities etc.): 3 trillion yen <Concrete efforts for (1) ～(4)> • Prioritizing subsidies and grants based on the appropriate evaluation toward government ministries and

agencies and local governments from the point of how much effort on Action Plan is made.

Action Plan toward Fundamental Reform of PPP/PFI (decided by the Council for the Promotion of PFI on June 6th, 2013)

Projects in the following 4 categories are to be focused on toward achievement of total 12 trillion yen of PPP/PFI projects in 10 years (2013-2022) as attractive to the private and local areas. The size and concrete action for each category are indicated below.

9

To accelerate “Action Plan toward fundamental reform of PPP/PFI” and achieve the creation of local business opportunities and the efficient administration of infrastructure and the improvement in infrastructure service and the economic growth led by leveraging of private investment, set the period of intensive enhancement and the priority area and the numerical targets and accelerate the scale objective of the “Action Plan” (2-3 trillion yen for next 3 years) by the government as a whole.

Period of Intensive Effort of “Action Plan” (decided by the Council for the Promotion of PFI on June 16th, 2014)

(1)Scale objective： 2-3 trillion yen (2)Number objective： 6 airport, 6 water supply and sewage, 1 road

○ the priority area and the numerical targets the period of intensive

enhancement Next 3 years（2014/4-2016/3）

the priority area airport, water supply and sewage, road

the numerical targets

(1) This target is not set on the precise accumulation of PFI project pipeline. (2) This target include consideration of introduction of concession 10

１

(Adoption of a new project) (Undertaken) (Completed)

(Within 5 years of completion)

Evaluation at adoption of a new project Revaluation Ex-post evaluation

(Not undertaken for 3 years)

(Continued for 5 years)

(Every 3 years after revaluation)

Planning-stage evaluation

In service Project implementation Planning stage

1. Planning-stage evaluation Clarify policy targets, and compare and evaluate several project proposals 2. Evaluation at adoption of a new project Evaluate the necessity of a new project to decide whether to launch the project 3. Revaluation Review the necessity of a project to decide whether to continue or discontinue the project 4. Ex-post evaluation Check the effects and environmental impacts of a project after its completion and, if

necessary, discuss more proper measures and planning to apply to future projects

Implementing the PDCA Cycle(Central Government)

11

Outline of the Calculation of Benefit by Cost (B/C) in the Road Development Project

Calculation of Benefits Calculation of Costs

○ Development cost ○ Total maintenance cost for 50 years

usage

Total costs

Evaluating the monetary value by measuring the value of time for people and traffic

Calculation of B/C

○ Social discount rate (4%) ○ To remove the price fluctuation (deflator)

○ Benefits from driving time reduction = The value of time per vehicle × Reduced driving time × Traffic volume ○ Benefits from driving costs reduction = Reduced driving costs by road development × Driving distance × Traffic volume ○ Benefits from traffic accidents reduction = Reduced the number of traffic accidents causing injury or death by road development × The average amount of loss per traffic accident (taking into account human loss, property damage and the loss by traffic jam)

○ Benefits from driving time reduction ○ Benefits from driving costs reduction ○ Benefits from traffic accidents reduction

Total benefits

Calculation method

Estimating the flow of traffic ○ Traffic volume ○ The speed of traffic flow etc.

12