Japanese airports

Japan’s efficient and dependable infrastructure is world famous. Unusually, much of it, including airports, is still publicly owned and operated.

However, debt associated with infrastructure construction, macroeconomic conditions and a lack of competitiveness led the New Kansai International Airport Company (NKIAC), a Japanese government-owned subsidiary, to call on Freshfields to help privatise both Kansai and Osaka international airports in a ‘mega-concession’.

A new investment framework needed

A change in Japan’s private finance initiative (PFI) law made concession-style public–private partnerships (PPPs) possible. However, Japan had never undertaken infrastructure privatisation of this type or scale.

Indeed, the procurement process for non-Japanese private involvement in airport management was entirely new in Japan. Before Kansai, most infrastructure investments were small, BTO-type (build-transfer-operate). These relied on payments from the government to construct social infrastructure, such as schools and hospitals, where the private sector doesn’t bear market risk.

As such, the domestic-focussed government policy documentation for these projects is extremely hard for international investors to navigate.

There were also no structures for a brownfield operating asset concession where a private-sector organisation ‘purchases’ a concession right, enjoys the freedom to operate the asset, and bears demand and price inflation risk.

A tailoring of the PFI framework in Japan was therefore required to comply with experienced international investors’ expectations.

Importing M&A techniques

Eschewing inappropriate standard contracts, Freshfields helped NKIAC to create  an entirely bespoke framework for Japanese infrastructure privatisation.

It’s incredibly unusual for the Japanese government to use an international law firm for a transaction involving public assets.

Japanese PFI law was set up to frame infrastructure concessions as BTO deals. Freshfields instead imported concepts and techniques usually seen in M&A transactions, drawing on its world-leading strength in corporate law, and infrastructure concessions and projects around the world.

Freshfields also drew on its familiarity with international investors’ demands  and a deep understanding of Japan’s legal systems (as well as its economy and culture) to judiciously meld international and domestic systems and create a unique solution acceptable to both sides. The inclusive process included advising NKIAC about what international investors would expect.

Personal training

Freshfields lawyers ran a series of workshops and consultations with senior government officials to advise on specific points of the concession and the running of the process, helping to shape the concession framework at each step. 

Key topics included:

• the structuring of termination compensation;
• striking a balance between operational freedom and airport security;
• risk allocation (including earthquake and uninsurable risks);
• maintaining competitive tension throughout the bidding process;
• running a smooth and transparent bidding process;
• Japanese PFI-style documentation, particularly how to avoid the potential ambiguities that could arise when drafting; and
• general bankability issues.

A PPP template to follow

The deal was successful and met the Japanese government’s aims. The New Kansai concessionaire, a consortium of ORIX Corporation and VINCI Airports, signed a 44-year concession agreement for the operation of the two airports on 15 December 2015. (Transfer of operations took place on 1 April 2016.) Over the concession term, New Kansai will pay JPY2.2trn ($18bn) to NKIAC, Japan’s largest PPP to date.

There was significant international interest in the assets. Eleven international operators – including Changi Airports International, Ferrovial Aeropuertos, Global Infrastructure Management and Macquarie Capital Group – passed the initial bid screening and many other international operators were eager to place a bid.

This was despite early concerns over the perceived high barriers to inbound investment in key public infrastructure in Japan, as well as the unusually high minimum concession fees demanded by the Japanese government. This reflects favourably on Freshfields’ efforts to make such privatisations attractive.

Having opened the market to privatisation and, in particular, to overseas bidders, the transaction and its tender process are likely to serve as a template for privatisations in future where the Japanese government wishes to attract overseas infrastructure investors and help reshape the country’s economy for a prosperous future.

Indeed, our pioneering work was recognised when the transaction won the 'Real Estate Deal of the Year' and 'Projects, Energy and Infrastructure Deal of the Year' accolades at the Asian Legal Business Japan Law Awards 2016 and 2017 respectively.

It was also classed as a 'standout' deal in the 2017 FT Asia-Pacific Innovative Lawyers category 'Unlocking & Delivering Value'.