Turning the tide

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Still rebuilding after the 2011 earthquake and tsunami, Japan’s water sector is struggling to cope with increasing urbanization and a stalling economy. Is it time to turn to the private sector? Kenichiro Fukuda reports.

Japan’s water sector faces considerable challenges, including:

  • Declining tariffs
  • Growth of new cities
  • Massive rebuild efforts in the wake of 2011’s natural disasters

Investment is urgently needed to renew the country’s aging water assets and ensure future security of supply. Opportunities for international utilities could promise great rewards – but significant barriers must be overcome.

Tariffs on the decline

Increasing urbanization and the spread of new cities are putting more pressure on the security of Japan’s water supply. Lower demand due to the economic downturn and declining population – set to shrink by 30% by 2060 – has reduced tariff revenue for water utilities.

Unfortunately, while tariffs are on the slide, the need for new investment in Japan’s water sector is at an all-time high.

Many of the country’s water systems were constructed during Japan’s economic boom of the 1960s and need urgent renewal. The earthquake and tsunami of 2011 also caused extensive damage to Japan’s infrastructure, including water pipes, sewers and plants.

While repairing and strengthening these assets is a Government spending priority, wider post-earthquake reconstruction efforts have decreased the available funding.

The crucial question now is how to ensure that these aging assets are ready to meet the challenges of Japan now and in future.

Radical reforms needed

While the newly-elected Liberal Democratic Government has pledged to increase public works spending in the next budget by 20%, the long-term sustainability of Japan’s water supply remains uncertain.

Radical reforms are needed. Authorities may consider putting in place one single, administrative body to oversee both water and wastewater services in a municipality or merging the water services in adjacent municipalities.

Merging the multiple bodies currently responsible for the sector would:

  • Enable economies of scale
  • Optimize assets
  • Ensure greater flexibility to respond to emergencies, including natural disasters

It also seems inevitable that the private sector will begin to play a bigger role in the renewal of Japan’s infrastructure, including its water industry. Increased private sector participation would:

  • Bring new insights
  • Introduce competition
  • Attract the investment necessary to upgrade assets

Japan’s politicians have traditionally been opposed to privatization, but current conditions may force sector transformation. Public/private partnerships in other infrastructure projects, including Osaka’s huge subway system and the Kansai International Airport, could pave the way for private participation in the water sector.

In 2011, the Private Finance Initiatives Act was amended to open up the sector to private investors, but these changes are yet to be harmonized with current water and wastewater regulation frameworks.

If these regulatory changes advance, the opportunities for international utilities to play a part in Japan’s water sector could be significant. Potential investors should watch this space – and seek careful advice before diving into Japan’s water sector.

How we can help

We have extensive experience in Japan’s water and wastewater sectors, advising on the development and management of many of the country’s key water projects. We are working with leading utility companies throughout the world, developing practical approaches to the challenges of changing market conditions.

Read the original article in Citizen Today.