Japan’s school consolidation plans spell opportunities for investors

Inside Infra 25 April

Japan’s school consolidation plans spell opportunities for investors

Local governments are turning to private investors to help them consolidate and modernize schools amid a decline in enrollment.

By Erina Chan

Japan’s shrinking school-age population is creating opportunities for private investors as local governments look for ways to efficiently consolidate and modernize educational facilities and nearby infrastructure, according to several sources and Infralogic data.

The focus on “integrating” some schools into others has accelerated as Japan’s population continues to age, and its school-age population declines. For instance, by 2040, Machida city in western Tokyo plans to reduce the number of elementary schools to 26 from 42 currently, and the number of junior high schools to 15 from 20. Many other cities have similar plans.

But officials aren’t simply shuffling students from one aging facility to another. They’re also taking opportunities to retrofit schools to better withstand earthquakes, and to modernize them with up-to-date technology and other facilities. They are also looking to redevelop shuttered properties — and, in some cases, to “bundle” other facilities near schools.

The projects have created a niche area in the PFI (private finance initiative) sector from which investors can profit, sources say. A belief by many governments that PFIs are the most cost-effective method to carry out this work has led to a proliferation of deals, particularly as knowledge grows among municipalities about the benefits of the procurement model.

Growing demand

Infralogic data show 30 live PPPs in the education sector in Japan, far and away the most among APAC nations. Education is one of the core sectors of the government’s PPP/PFI action plan, released last year:

Education projects in Japan’s PFI pipeline range from greenfield construction of new schools to renovation and adaptation of existing sites.

Many of the school PFIs involve consolidation. Japan’s population has declined for 11 years in a row, leading to some redundant infrastructure. In addition, many school facilities are outdated.

“School integration projects have been increasing,” said a senior project manager at Mitsubishi HC Capital Inc. “A lot of the schools were built in 1970-80 and it is time to redevelop after 40 years and many municipal governments are considering PFI to ease the financial burden.”

PFIs offer a means of developing modern facilities at reasonable cost, said another senior project manager at Mitsubishi HC Capital.

“Modern schools need new facilities such as a counselling room, afterschool care center and Wi-Fi, which we did not have in the past and such new proposals can be offered easily (through PFI),” said Yuki Katagiri, a senior associate at Nomura Research Institute.

The school consolidation plans are helped by a measure introduced in 2016 allowing the development of so-called compulsory education schools — which combine elementary and junior high schools. PFIs have been used for some of these projects. Japan’s government also launched the GIGA School Program in 2018 to ensure that the students would have computers and high-speed internet.

Add-on opportunities

Some municipalities are also looking “bundle” other government facilities near schools, Katagiri said. For example, Yokohama city is planning to launch a PFI to integrate an elementary school with a library, a nursery school and a community center.

Some municipalities feel community-focused facilities are more suitable near schools, said Takanori Fukushima, a general manager of the PPP & Infrastructure Investment Research Department at the Sumitomo Mitsui Trust Research Institute.

The desire to improving building earthquake resistance has also supported this focus on bundling. Japan is highly exposed to earthquake hazards and many schools are legally designated as evacuation centers.

More complex facilities come with a higher capex, helping to attract private investors to PFI tenders, the senior project manager said. Machida city is planning to redevelop elementary schools in four locations under one project, which will help to streamline and simplify the process. These combined tenders are likely to attract the investors with deeper pockets and could also increase efficiency and cut development time.

Additional potential investment opportunities emerge when old schools are demolished, leaving behind vacant land for other potential projects, Katagiri said. Such development could take place under a separate PFI contract, or under a clause in the primary contract.

Whereas educational facilities have lots of restrictions on what can and cannot be built, rules about developing vacant land are more flexible and thus can be more attractive to private investors, Fukushima said.

Procuring authorities have also created additional PFI investment opportunities by splitting up contracts. For instance, in 2019, Hamamatsu city in Shizuoka prefecture selected a consortium led by Nikkan for a PFI to maintain air conditioners for 80 schools in the region.

Not slam-dunks

Projects still must run the gauntlet of local approval processes, however, and not all sail through.

For instance, in September, the Koshigaya city assembly voted against the selection process for the Gamo and Kawayanagi Elementary and Junior High Schools PFI, citing a lack of transparency. Objectors argued that the selection board consisted of only three people, which they felt was too few to determine a preferred bidder.

 The board had initially appointed a consortium led by contractor Nakanoya but was forced to restart the tender. This generated negative publicity about the project, with objections from the local community that the re-tender would increase costs and delay the project.

This article is just one example of the many articles published daily by Infralogic’s global news and analysis team. For more information and to request a trial of our full news service – including our extensive databases of transactions, funds, investors, advisors, lenders and industry rankings – visit Infralogic.com

Infralogic is the only infrastructure service to combine news, data, and predictive analytics to help you win new deals.

Request a demo