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June 22nd, 2015

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“Quality” in infrastructure

development

- Lessons from Japan

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Public infrastructure ・・・

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Cheap/affordable Reliable Safe Disaster resilient Environmentally sustainable

Consider not just price, but quality with long-term perspective

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PwC Source: Kitakyushu city HP 5

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Detected

Seismometer

weak wave(P-wave)

major wave（ S-wave ）

SeismicCenter

Emergency brake was activated 70 seconds before the main shock

Other Infrastructure Systems related to Earthquake

Resilient Infrastructure - Tohoku Shinkansen (HSR)

No casualtiesNo derailmentNo destruction of viaducts or tunnel

Urgent Earthquake Detection and Alarm System

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Quick Recovery from 3.11 disaster

Infrastructure Recovery Rate as of Dec.

2011

Electricity 96%(2,469,000 out of 2,580,000)

Water 98%(2 ,255,000out of 2,300,000)

Road 99%

Rail 97%

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Japan’s Disaster-resistant technology is adopted around the World

Izmit Bay Bridge in TurkeyJapanese IHI was selected to build the 3 km suspension bridge to make it earthquake resilient

Izmit Bay Bridge

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“Lifecycle” cost perspective

11Source: Tokyo Metropolitan Government

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Lifecycle cost perspective

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Three major components for Quality of Infrastructure

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Quality

Pursuit of

Safety

LifecycleCost

Environmental and social

considerations

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O&MDesign ConstructionPlanning

Design Co Construction Co O&M CO

Bidding

Government

Private 　Company

(Government) 　 Monitoring and Payment

(Government) 　 Monitoring and Payment

(Government)

Planning

(Government)

Planning DesignDesign O&MO&M

Traditional Procurement

Bidding

Public-Private Partnership (PPP)

PPP

(Private Company)Construction

(Private Company)Construction

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Traditional procurement vs PPP ～ Profile of government expenditure

<Traditional Procurement>

EstimatedCapital

Cost

Estimated running costs

Construction phase

Operation and maintenance phase

5 10 15 20Years

CostOverruns

Tim

e o

verr

un

s

Payment based on performance

<PPP >

Construction phase

Operation and maintenance phase

5 10 15 20Years

UnexpectedCost overrun

AccidentNo payment bygovernment

until services become available

Cheap construction cost may lead to higher total cost

Lifecycle cost approachGovernment pays only if service

is available at required standard

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PPP Market Growth in Japan

Note :As of December, 2009Source:PFI Promotion Office, Cabinet Office, Government of Japan

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(e.g. hospitals, waste disposal facilities, etc)

(e.g. schools. libraries, etc)

(e.g. police, fire stations, etc)

(e.g. roads, airports, parks, etc)

(e.g. fishing ports, agricultural infrastructures etc)

(e.g. welfare facilities, nursing homes, etc)

Cumulative Number of Project

Year

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PPP Projects by sector and structure

Source: “PFI ALMANAC 2011”, published by Japan PFI Association

＜ By sector ＞

Education andCulture

31%

Health andEnvironment

18%

Government Buildingand Accommodation

15%

Town Development

10%

Public Safety 6%

Life and Welfare 4%

Industry 4%

Others 11%

＜ By Source of Project Revenue ＞

Service Fee Payments fromPublic Authority

89%

User Tariffs only5%

Combination ofUser Tariffs and

Government Supports 6%

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Typical Structure – Service Provision Scheme

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PublicSector

Private sector (SPV)

Users

Design Construction Operation Maintenance

XServiceprovision

Payment based on performance

Usertariff

Service provision

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Good Value for Money (VFM)

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Note: The VFMs above are the averages of 267 previous PPP projects conducted in Japan. For these 267 projects. The VFM (%) were calculated at the time when Project Company was selected for each project.

Source: “PFI ALMANAC 2011”, published by Japan PFI Association

LCC under

traditionalprocurement

(Public Sector Comparator)

LCCunder PPP

procurement

AverageVFM

(20.7%)

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4 Drivers of Value for Money

Value for Money(VFM)

Competitive Bidding

(Price and quality)

Optimal Risk Allocation

Performance Based

Contracts/Payments

LifecycleProcurement

based on Output

Specification

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Evaluation method is key for value for money --optimum balance of whole-life costs and quality

Some examples of Quality Evaluation Criteria•CO2 emission level and energy efficiency

•Contribution to the local economy

•Flexibility for future expansion needs

•Design solution—”a prison which does not look like a prison”, “matches with the neighboring environment”

•Vocational training program based on the current labor market to enable smooth return to the society of prisoners

•Methods to cope with unexpected events, such as accidents and natural disasters to protect prisoners and officers

•Business continuity plan

VFM

Step 1

Qualification

Step 2 –

Price and Quality Evaluations

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Optimal Risk Transfer and VFM

VFM

Risk Transfer to the Private Sector

Large

High

Conventional Public Sector Project

Optimal Point

Failure of PPP

Low

Small

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Institutional framework

PFI Promotion Law was enected as a diet member-initiated legislation in 1999.

PPP Promotion Law, in principle, supersedes some of the individual ministerial laws and works as a strong legal basis of promoting PFI / PPP projects in Japan.

In 2011, amendment to the PFI law was passed by the Diet which allowed wider variation of schemes as well as applicable sectors for PPP/PFI thereby strengthened market expectation for PPP/PFI further.

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Example of positive effect of PFI law introduction:-Allowing long term contract by the government

Conventional Government Procurement

Max. 5 years Max. 30 years

Procurement under PPP/PFI Law

Maximum terms of contract allowed for the government procurement

Introduction of PFI Law

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PPP Promotion Committee & Promotion Office

PFI Promotion Office • Established in the Cabinet Office and in charge of implementing

relevant policies and promoting PFI/PPP • Head and staffs are seconded from Ministries (MLIT, MIC, MOF

etc.)• Main roles of are :

Formulating and issuing PFI/PPP policies/ guidelines;Knowledge sharing and advocacy to promote PFI/PPP;Capacity building through funding F/S and advisory to local

authorities

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Cabinet Office

PFI Promotion

Office

PFI Project Promotion Committee

MLIT

MOF

MICPrivate Sector

The Prime Minister

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Lessons learned from Japanese PPP experience

1. “Value for Money (VFM)” .. not just price but quality

2.Lifecycle perspective

3.Optimal risk allocation

4.Proper institutional framework

5.Capacity building

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APEC Guidebook on Quality of Infrastructure Development and Investment

Description

• The 21st APEC Economic Leaders’ Declaration in 2013 recognized in addition to the initial price of procurement the importance of consideration of lifecycle cost (including performance and durability) and environment, elements such as safety and maintainability at the outset of procuring infrastructure (“quality of infrastructure”), and also the importance of enhancing the governments' ability to plan infrastructure projects based on the above and on comprehensive and holistic considerations.

•This Guidebook shares further details of these common recognitions with government officials and other stakeholders in the APEC economies that are engaged in infrastructure development and investment, so that such common recognitions are actually applied to projects.

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