Japan to open water sector to private players

The cities of Osaka and Hamamatsu will likely spearhead moves to privatise water infrastructure, according to Moody’s, with small municipalities set to follow suit.

Japan is planning to change its water utility legal framework to enable private investment in infrastructure assets in a bid to reduce the financial burden of regional and local governments. 

The proposed regulatory changes would enable the use of PPPs and PFIs, implying the privatisation of assets through concessions, for the provision of water services to households and commercial users as well as the operation and maintenance of pipelines and drains. 

Few private operators can get involved in the business under the current Water Act, which states that the operator has to be a local government – a city, council or village – or an entity approved by a local government.

Rating agency Moody’s said in a report that the new approach would ease the infrastructure funding burden of regional and local governments and provide standardised concession agreements under by a stable, transparent regulatory framework. The agency pointed out that Japan’s municipal water systems carry debt worth about three times revenues on average, requiring authorities to raise debt every year and seek support from tax revenues. 

To support its proposed measures, the central government in 2018 will start waiving redemption charges on the early repayment of loans it advanced to regional and local governments when interest rates were higher if they open public infrastructure to private capital through concessions. 

“Such a development will in turn help the regional and local governments meet their substantial infrastructure maintenance and replacement costs and promote the operational efficiency of infrastructure systems,” commented Kumiko Kakimoto, a Moody’s vice-president based in Tokyo. 

As the systems age, the Japanese government estimated that it will need 1 trillion yen ($8.86 billion; €8.11 billion) per year until 2050 to meet maintenance and replacement costs. 

The cities of Osaka and Hamamatsu will be the reforms’ main beneficiaries, Moody’s expected, given their experience in transferring public infrastructure to private capital. Small municipalities will likely follow suit. 

The proposal, submitted to the parliament on 7 March, is expected to be approved by June at the earliest. The proposed reforms are part of policy measures designed to encourage the use of private capital to refinance local government infrastructure debt, Moody’s said.