Creating collateral security packages

Types of collateral

What types of collateral and security interests are available?

Japanese law does not provide a general, overall form of security analogous to the security granted under an English-style floating charge or US-style blanket lien pursuant to which the grantor can grant a security interest over all, or substantially all, of its assets. Security in Japan in principle must be granted on an asset-by-asset basis.

Japanese law has, however, created several special forms of security interest, which can attach to multiple assets. The first of these is a form of mortgage known as a foundation mortgage, which may be established over certain types of groups of facilities such as plants or factories. A factory foundation mortgage groups together certain movable and immovable assets, and can cover land (including land-use rights), buildings, machinery, tools, patents and other assets connected with the facility; however, it does not include inventory. The second type of security interest is one that covers all assets of an issuer of a bond under the Secured Bond Trust Act. In addition, it is possible under Japanese law to create a single security interest over certain groups of movable assets located within a specified area (typically, inventories in warehouses), and multiple present and future receivables.

The security package for project finance transactions in Japan generally includes all assets owned by the project company and all shares issued by the project company. The basic security package commonly includes:

  • security assignments of movable assets;
  • security assignments or pledges of present and future receivables and other contractual rights (eg, leaseholds, rights under an energy, procurement and construction agreement, an operation and maintenance agreement, power purchase agreement, concession agreement or fuel supply agreement);
  • pledges of bank accounts, shares in the project company and insurance proceeds;
  • mortgages of real property (land and buildings) or foundation mortgages over certain types of facilities; and
  • mortgages of concession rights to maintain and operate public facilities granted pursuant to the PFI Act (Concession Rights).

In addition, an option to assign the borrower’s contractual status under the project contracts is also commonly used, which is similar to a novation under UK law. Technically, however, this is not a combination of cancellation of the existing contracts and execution of new contracts, but, simply a transfer of the borrower’s contractual status as it is.

Collateral perfecting

How is a security interest in each type of collateral perfected and how is its priority established? Are any fees, taxes or other charges payable to perfect a security interest and, if so, are there lawful techniques to minimise them? May a corporate entity, in the capacity of agent or trustee, hold collateral on behalf of the project lenders as the secured party? Is it necessary for the security agent and trustee to hold any licences to hold or enforce such security?

The priority of persons with security interests in the same asset is determined by the order in which the person’s interests were perfected. The method for perfecting security differs by security type and underlying asset.

Security assignments or pledges over receivables and pledges over bank accounts and insurance proceeds are perfected by:

  • providing a date-certified notice to the underlying obligor;
  • obtaining a date-certified consent from the underlying obligor; or
  • registering the assignment or pledge at the relevant legal affairs bureau.

Clauses prohibiting assignments are often included in commercial contracts in Japan. Without a waiver, a contractual prohibition on assignment would currently invalidate the creation of security over the contractual rights in such contract. This rule will be relaxed in favour of assignees (ie, the secured parties) under an amendment to the Civil Code, which will take effect from April 2020, but an assignee or secured party that was actually aware (or should have been aware) of such prohibition will not be protected under the amended Civil Code and the underlying obligor will have the right to refuse to perform its obligations as regards that assignee or secured party. Given that lenders will usually be aware of (and are expected to investigate) such prohibitions on assignment in the ordinary course of their due diligence, the current practice of obtaining waivers from the underling obligor as to the creation of security interests will remain advisable notwithstanding the 2020 amendment to the Civil Code. Thus, among the perfection options listed above, a date certified consent is usually preferred as it will also include a waiver of any such prohibition. Registration of an assignment or pledge requires the payment of a nominal fee.

Security assignments over movable assets are perfected by either delivery of the assets to the secured party or registration of the security assignment at the relevant legal affairs bureau. The registration requires a nominal fee.

The method of perfection for share pledges depends on the types of the shares being pledged. If physical share certificates are issued, the share pledge is perfected by the pledgee’s continuous possession of such certificates. If physical share certificates are not issued, the pledge needs to be registered on the shareholders’ register maintained by the issuer to be perfected. Registration is also possible where physical share certificates are issued. If a share pledge is registered, the pledgee can enjoy certain shareholder’s rights (including the right to receive dividends) without further action. A different regime exists for dematerialised shares of listed companies, although dematerialised shares are not generally seen in project finance transactions because the borrowers are usually special purpose companies that are not normally listed.

Mortgages of real estate (including foundation mortgages) must be perfected by registration at the relevant legal affairs bureau. The registration tax for fixed mortgages is 0.4 per cent of the amount secured by the mortgage. Mortgages are therefore sometimes only registered on a provisional basis as provisional registration involves only nominal costs and secures the priority of the mortgage. Payment of the full registration fee, however, is required prior to enforcement and provisional registration may therefore shift additional risk to the secured party.

A mortgage of concession rights is perfected by registration at the special register established pursuant to the PFI Act.

Under the Trust Act, security packages can be made in favour of a licensed security trustee. In return, the secured creditors will receive a beneficial interest in the relevant secured claims. The entrusted collateral is excluded from the estate of the security trustee in the event of its insolvency. Nonetheless, owing to a lack of judicial precedent involving security trustees and the high costs involved with appointing a security trustee, security trust structures are uncommon in the market. Parallel debt has not been established in Japan despite strong arguments supporting its theoretical possibility.

Assuring absence of liens

How can a creditor assure itself as to the absence of liens with priority to the creditor’s lien?

To the extent a security interest must be registered, a register search at the relevant legal affairs bureau should reveal the existence of such security interests. However, as many forms of security are not registered, complete third-party confirmation of the absence or existence of such liens is not possible.

Creditors in Japan therefore rely heavily on the representations and warranties of the debtor or security provider, as well as on using a newly established special purpose company (SPC) as the project company and including a negative pledge clause in the relevant finance documents.

Enforcing collateral rights

Outside the context of a bankruptcy proceeding, what steps should a project lender take to enforce its rights as a secured party over the collateral?

Security interests may be enforced outside bankruptcy proceedings either in accordance with the Civil Execution Act or, if the parties have agreed on an alternative method of enforcement, in accordance with that alternative method. The Civil Execution Act requires a public auction of the mortgaged or pledged assets that may be time-consuming and may not generate an appropriate return. In addition, the lender cannot control who acquires the asset if a public auction is commenced. Public auctions are therefore not a popular method for enforcement of security interests.

As such, security agreements in project finance transactions in Japan generally provide that the secured party may sell the collateral assets by private means (either via private sales or private auctions). In a private sale or private auction, the secured parties may themselves purchase the collateral assets. The counterparties’ consent is necessary to effectuate such a transfer of the contractual status under the project contracts.

Public-private partnerships also generally provide step-in rights for the lenders under direct agreements between the relevant public entities and the lenders. Lenders usually seek pre-agreed criteria for the potential transferee of the shares of a project company or the concession rights to be provided in the direct agreement, because a transfer of such shares and concession rights will be subject to the consent of the relevant public authority under the PFI Act or the relevant guidelines.

Public auctions under the Civil Execution Act are denominated in Japanese yen, while private sales can be conducted in foreign currencies.

Enforcing collateral rights following bankruptcy

How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the collateral? Are there any preference periods, clawback rights or other preferential creditors’ rights with respect to the collateral? What entities are excluded from bankruptcy proceedings and what legislation applies to them? What processes other than court proceedings are available to seize the assets of the project company in an enforcement?

There are several types of insolvency proceedings in Japan, such as:

  • terminal proceedings - bankruptcy proceedings and special liquidation;
  • rehabilitation proceedings - civil rehabilitation and corporate reorganisation; and
  • voluntary insolvency proceedings - business restructuring alternative dispute resolution (ADR), (which is an out-of-court restructuring procedure to which all parties must agree).

Almost all legal entities are subject to the above proceedings, however, special liquidation and corporate reorganisation proceedings only apply to stock companies.

Secured creditors may generally enforce their security outside of bankruptcy, civil rehabilitation and special liquidation proceedings. However, the courts usually restrict the enforcement of security in corporate reorganisation proceedings and may, in very limited circumstances, restrict or bar the enforcement of security in other court proceedings. To minimise this risk, a Japanese LLC (Godo Kaisha (GK)) may be used as the special purpose vehicle (SPV) in project finance transactions as a GK is not subject to corporate reorganisation. In this regard, however, it should be noted that if a corporate reorganisation is commenced in connection with a sponsor, any exercise of a share pledge may be subject to this restriction under the Corporate Reorganisation Act because the shares constitute part of the assets of the sponsor.

Transactions may be declared void (and amounts in relation to those clawed back) by an insolvency administrator if the transaction is deemed to be a preference transaction. The preference period under Japanese law begins, in principle, from the first date on which the creditor had knowledge of the debtor’s actual or impending insolvency. Regardless of whether the creditor has such knowledge, fraudulent conveyances (eg, where the consideration received by the insolvent entity is clearly inappropriate) are also subject to mandatory preference periods of six months prior to the date on which the debtor became unable to pay its debts as they became due or insolvency proceedings were commenced.

The claims of foreign creditors are treated the same as the claims of local creditors.

Foreign exchange and withholding tax issues

Restrictions, controls, fees and taxes

What are the restrictions, controls, fees, taxes or other charges on foreign currency exchange?

In principle, there are no taxes or significant restrictions imposed on foreign currency exchange in Japan, other than an after-the-fact report to be filed with the relevant minister. An entity or individual may be exempt from this filing requirement if the sum of the remittance is relatively small.

Investment returns

What are the restrictions, controls, fees and taxes on remittances of investment returns (dividends and capital) or payments of principal, interest or premiums on loans or bonds to parties in other jurisdictions?

There are no general controls on remittances, investment returns, loan or bond payments to parties in other jurisdictions. However, when a payment is remitted or wired to or from another country, a report of the content thereof must be filed with the relevant minister if the remittance exceeds ¥30 million.

Withholding taxes may apply on cross-border payments such as dividends, distributions and loan interest. The domestic tax rate on such payments is 20.42 per cent, but may be reduced or exempted depending on the applicable tax treaty. Japanese transfer pricing rules, thin capitalisation tax rules or earnings stripping rules may also apply.

Foreign earnings

Must project companies repatriate foreign earnings? If so, must they be converted to local currency and what further restrictions exist over their use?

Project companies are not required to repatriate foreign earnings.

May project companies establish and maintain foreign currency accounts in other jurisdictions and locally?

Japan does not prohibit offshore accounts, but a report must be filed with the relevant minister in relation to each offshore account holding more than ¥100 million (or its equivalent). There are typically no restrictions on the establishment of onshore foreign currency accounts.

Foreign investment issues

Investment restrictions

What restrictions, fees and taxes exist on foreign investment in or ownership of a project and related companies? Do the restrictions also apply to foreign investors or creditors in the event of foreclosure on the project and related companies? Are there any bilateral investment treaties with key nation states or other international treaties that may afford relief from such restrictions? Would such activities require registration with any government authority?

If a foreign investor has acquired shares or equity in a Japanese corporation that exceeds certain thresholds, it must report such holdings to the relevant minister. If the Japanese corporation is engaged in certain restricted industries or industry sectors, a foreign investor intending to make a direct investment in such a corporation must provide advanced notice pursuant to the relevant cabinet order to the relevant minister setting out the details of the proposed investment. Depending on the industry sector (eg, telecommunications, airlines or broadcasting), certain maximum foreign ownership restrictions may also apply.

No specific taxes or fees apply to foreign ownership of project companies, but transfer pricing rules, thin capitalisation tax rules or earnings stripping rules may apply to related party transactions.

Japan has entered into bilateral investment treaties with several countries (principally in Asia). However, these bilateral investment treaties typically do not provide exemptions to current foreign ownership restrictions.

Insurance restrictions

What restrictions, fees and taxes exist on insurance policies over project assets provided or guaranteed by foreign insurance companies? May such policies be payable to foreign secured creditors?

Although a licence and a local presence are required for any company (including any foreign insurance company) to carry out insurance business activities in Japan, there are no other restrictions or fees on insurance policies over project assets provided by foreign insurance companies. However, payments above a certain threshold amount by a foreign insurance company to a Japanese company need to be reported to the Finance Minister under the Foreign Exchange and Foreign Trade Control Law.

Proceeds from insurance policies over project assets located in Japan may be categorised as Japanese-source income even if the relevant recipient is located offshore and has no permanent establishment in Japan, and therefore may be subject to tax in Japan. Exemptions may apply depending on the applicable tax treaty.

Local insurance is not required under Japanese law. Insurance policies over project assets provided by foreign insurance companies may be payable to foreign secured creditors.

Worker restrictions

What restrictions exist on bringing in foreign workers, technicians or executives to work on a project?

Foreign workers, technicians or executives will require an appropriate visa to work in Japan. The visa requirements vary depending on a number of factors, including the type of work to be carried out by the relevant foreign employee.

Executives are required to have at least three years’ experience in the operation or management of a business, or both (including any period of graduate studies majoring in business operations or management, or both) and must be paid a salary at least equivalent to that of a Japanese national performing equivalent or comparable work.

Technicians are required to have graduated from or completed a college or university level programme or otherwise acquired the equivalent education (eg, majoring in a subject relevant to the skills or knowledge, or both, necessary for performing the job concerned) or have at least 10 years’ experience relevant to the job to be performed (including the period spent studying the relevant skills or knowledge, or both, in college or university, upper secondary school or a specialised course of study at an advanced vocational school), and must be paid a salary at least equivalent to that of a Japanese national performing equivalent or comparable work.

Requirements in relation to foreign workers vary considerably depending on their job description.

Equipment restrictions

What restrictions exist on the importation of project equipment?

Importation of project equipment is subject to general import and export restrictions under Japanese law, and as such, certain items may be subject to import restrictions pursuant to the Foreign Exchange and Foreign Trade Control Act. There are otherwise no overall restrictions or limitations on the importation of typical project equipment, provided that import duties may apply to the importation of certain equipment from specified countries.

Nationalisation laws

What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected (from nationalisation or expropriation)?

The Japanese Constitution provides that private property cannot be nationalised or expropriated without just compensation. Accordingly, the Compulsory Purchase of Land Act (Act No. 219 of 1951) provides that a person who has ownership of or rights in land that is nationalised or expropriated is entitled to compensation. Such compensation may include compensation for business losses and other damages in addition to the value of the property nationalised or expropriated.

There are, however, no rights of ownership or any other property rights that would preclude the nationalisation or expropriation of project companies or assets, and no forms of investment are specially protected from nationalisation or expropriation.

The public guidance on Concession Rights suggests that compensation for the cancellation of Concession Rights for public purposes would be determined based on the Compulsory Purchase of Land Act, which may not be sufficient to cover the private sector’s damage. In this regard, however, the PFI Act and guidance do not restrict the formula of such compensation if differently agreed between the public and private sectors.

Fiscal treatment of foreign investment


What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration?

There are no Japanese tax incentives provided specifically to foreign investors or creditors. Foreign investors should generally be treated in a similar manner to domestic investors for Japanese tax purposes. Stamp duty is payable on loan agreements and certain other documents executed in Japan and registration taxes apply to mortgages; however, there is no separate registration tax or stamp duty regime applicable only to foreign investors in connection with the effectiveness or registration of investments, loans or other security documents.

Government authorities

Relevant authorities

What are the relevant government agencies or departments with authority over projects in the typical project sectors? What is the nature and extent of their authority? What is the history of state ownership in these sectors?

A wide variety of governmental agencies and departments have authority over typical project finance transactions. Such agencies typically govern and monitor environmental, health and safety issues. The authority granted to such agencies varies; however, they generally enjoy fairly broad discretion in their monitoring and enforcement activities.

National government agencies and local governments may be contracting parties in connection with projects carried out within their prefectures or municipalities under the PFI Act.

The Ministry of the Environment (MOE) has authority over matters in relation to various environmental laws and standards.

The Ministry of Economy, Trade and Industry (METI) regulates safety standards for businesses involved in power generation pursuant to the Electricity Business Act. The METI also oversees renewable energy projects (including licensing and determination of the feed in tariff price), together with the Agency for Natural Resources and Energy.

The Ministry of Land, Infrastructure, Transportation and Tourism (MLIT) is the principal supervisory authority in relation to construction projects, and sets the minimum standards for construction designs pursuant to the Building Standards Act. The MLIT also has regulatory power with respect to the granting of Concession Rights relating to the transport sector.

Prefectural and municipal governments also monitor the legality of building structures in accordance with the Building Standards Act and environmental investigation and, in many cases, land development licensing.

Water facilities are owned by local government entities. Roads, ports and airports are also owned by national or regional governments or various government-related entities. Otherwise, the Japanese government has not, over the past 20 years, maintained significant levels of ownership in typical project finance industry sectors.

Regulation of natural resources


Who has title to natural resources? What rights may private parties acquire to these resources and what obligations does the holder have? May foreign parties acquire such rights?

The general position in Japan is that the state has title to natural resources, and as such, the extraction of natural resources is regulated by various acts depending on the resource in question (eg, the Mining Act or the Quarrying Rights Act). Any private party who wishes to extract natural resources must first obtain approval or apply for registration, or both, as required under the relevant act.

A licence under the Mining Act must be obtained prior to the extraction of minerals and other geological materials (including oil and gas). Licences are only granted to Japanese persons (whether natural or legal). The application process usually takes several years and environmental impact assessments would also need to be made.

Any quarrying activity would require registration under the Quarrying Rights Act. Foreign entities can be registered; however, as the registration requirements may be subject to municipal regulations, the relevant municipal government should be consulted in advance.

A separate licence is required prior to the extraction of underground or above-ground water. Restrictions on water extraction vary depending on the region, purpose of extraction and category of river or body of water. Municipal regulations may also apply. Although foreign entities can obtain this licence, a condition to granting the licence is that the extraction of water would contribute towards the advancement of the Japanese economy or the lives of Japanese citizens.

There are very few indigenous peoples in Japan and the extraction of natural recourses is generally not affected by their rights.

Royalties and taxes

What royalties and taxes are payable on the extraction of natural resources, and are they revenue- or profit-based?

The Japanese government does not charge royalties on the extraction of natural resources; however, certain licensing fees and taxes will apply. Domestic and foreign entities extracting resources in Japan are generally subject to prefectural and municipal mining taxes in addition to the generally applicable taxes (such as corporate income tax and consumption tax, if applicable). The rates for these taxes may vary depending on the location and the resource. Taxes include a mining allotment tax (a prefectural tax) levied on mining right holders (the standard annual rate is ¥200 to ¥400 per hectare of mining allotment area) and a mining product tax (a municipal tax) levied on mining operators, which is generally equivalent to 1 per cent of the revenues generated by the relevant mineral resource.

If a domestic or foreign party extracts natural resources from land belonging to a third party, the domestic or foreign party would also need to enter into a lease agreement with such third party for the purposes of the extraction. It is common for certain fees akin to royalties to be paid under such an agreement. If the extraction of resources from land belonging to a third party falls under the Quarrying Rights Act, the payment of compensation in relation thereto is required by law. Such compensation is generally calculated based on the revenues generated by the sale of the relevant resources, but the amount payable can usually be determined by the parties and may incorporate ratchet mechanisms depending on the value or volume of minerals extracted.

Export restrictions

What restrictions, fees or taxes exist on the export of natural resources?

There are no general restrictions on fees related to the export of natural resources. However, permission to export is required in relation to any natural resources that may be used for military purposes or any mineral fuels or minerals listed in the Foreign Exchange and Foreign Trade Control Act, the Export Trade Control Ordinance or the Customs Tariff Act.

No tax (including Japanese consumption tax) is imposed on the export of natural resources.

Legal issues of general application

Government permission

What government approvals are required for typical project finance transactions? What fees and other charges apply?

There are no general government approvals or any related fees or charges that would be required across all typical project finance transactions. However, depending on the type of project being contemplated, certain licences may be required to carry out the project in question (eg, the METI’s authorisation under the Renewable Energy Act, permits under the Electricity Business Act or Construction Industry Act). In addition, with respect to certain types of investments, loans, operations and remittances by foreign parties, reporting to the Finance Minister or the relevant competent authorities, or both, may be required under the Foreign Exchange and Foreign Trade Control Act.

Registration of financing

Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable?

Financing or project documents do not need to be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable. However, the payment of stamp duty may be required depending on the nature of financing or project documents unless they are executed outside Japan.

Arbitration awards

How are international arbitration contractual provisions and awards recognised by local courts? Is the jurisdiction a member of the ICSID Convention or other prominent dispute resolution conventions? Are any types of disputes not arbitrable? Are any types of disputes subject to automatic domestic arbitration?

Under the Arbitration Act (Act No. 138 of 2003), arbitral awards, including arbitral awards where the seat of arbitration is not in Japan, are deemed to be final and binding by the courts. To enforce an arbitral award, an individual must prepare a copy of the award along with a Japanese translation and present these to the courts. There are no types of commercial disputes common to project finance transactions that cannot, by agreement, be made subject to arbitration.

Japan is a member of both the ICSID Convention and the New York Convention.

Law governing agreements

Which jurisdiction’s law typically governs project agreements? Which jurisdiction’s law typically governs financing agreements? Which matters are governed by domestic law?

Project agreements and financing agreements are typically governed by the laws of Japan. Project agreements may also be subject to certain prefectural or municipal ordinances.

Japanese law does not have exclusive jurisdiction over any matter other than security over assets located in Japan or receivables governed by Japanese law, and parties are otherwise free to agree on the governing law of any agreement. That being said, any enforcement in Japan will be required to conform to Japanese civil procedures and any decisions of a foreign court that violate Japanese doctrines of public policy or good morals will not be enforceable in Japan. In addition, matters of insolvency, consumer protection and employment will be subject to mandatory provisions of Japanese law.

Submission to foreign jurisdiction

Is a submission to a foreign jurisdiction and a waiver of immunity effective and enforceable?

Japanese companies and government entities may validly submit to the courts of a foreign jurisdiction. While sovereign immunity in relation to certain matters may not be waived under the Japanese Constitution, a waiver of immunity by a Japanese government entity in relation to commercial transactions should generally be effective under Japanese law.

Pursuant to the Act on the Civil Jurisdiction of Japan with Respect to a Foreign State, etc (Law No. 24 of 2009), which came into force on 1 April 2010, a foreign government shall be subject to the jurisdiction of the Japanese courts provided that such foreign government has expressly submitted thereto. Even without the express submission to jurisdiction on the part of a foreign government, it is possible to commence civil proceedings against foreign governments in the context of certain commercial transactions (eg, a sale and purchase under civil or commercial law, commercial loans), labour contracts, physical injuries or property damage.

Where a foreign government expressly consents or where it has provided collateral as part of a project finance transaction, a temporary injunction or civil enforcement procedure may be carried out against the assets of such a foreign government. Even if no explicit consent has been given, the commercial assets of a foreign government that are located in Japan may be subject to civil enforcement procedures.

There are limited court precedents in relation to waiver of immunity clauses, but the Supreme Court has previously held that waiver of immunity clauses were effective in relation to acts of foreign governments other than any sovereign acts or functions of government.

Environmental, health and safety laws

Applicable regulations

What laws or regulations apply to typical project sectors? What regulatory bodies administer those laws?

A wide variety of laws govern environmental, health and safety issues. Occupational health and safety is generally administered by the Ministry of Health, Labour and Welfare pursuant to the Labour Standards Act and the Industrial Safety and Health Act. Other key laws applicable to typical project sectors include the following:

  • the Soil Contamination Prevention Act creates an obligation on the occupant and manager of a property to conduct investigations for contamination and implement remedial measures if necessary and the Waste Management and Public Cleansing Act aims to improve public health through controlling the disposal of industrial waste (these environmental laws are administered primarily by the MOE);
  • the Electricity Business Act, administered mainly by the METI, regulates safety standards for electricity, including power generation; and
  • the Building Standards Act sets the minimum standards for construction, design and use, etc, of most facilities and is relevant to all sectors in terms of construction safety (the MLIT is the principal supervisory authority in this area).

Project companies

Principal business structures

What are the principal business structures of project companies? What are the principal sources of financing available to project companies?

Project finance transactions are typically structured with a single special purpose vehicle acting as the project company to provide bankruptcy remoteness from the sponsors and a single point of liability for the creditors. In practice, joint stock companies) are the most common choice of vehicle used due partly to the relative ease in establishing security over its shares. A GK vehicle is another common choice given the relaxed management rules and exemption from corporate reorganisation as mentioned in question 5. It should be noted that a ‘TK-GK structure’, which has been frequently used for real estate finance transactions in Japan, has become more popular, in particular for solar power projects under the Renewable Energy Act. A tokumei kumiai (TK) is a silent partnership where TK investors provide the GK (the project company) with funds, and generally, only has passive rights to receive distributions from the GK. Under the TK-GK structure, foreign TK investors may be able to enjoy tax merits, including exemption from Japanese corporate tax and withholding tax on distributions, depending on the relevant tax treaty and the substance of the TK-GK structure.

The funding structure comprises equity and, most often, subordinated loans provided by sponsors, as well as senior and, sometimes, mezzanine finance provided by various financial institutions. The Development Bank of Japan, sponsored by the Japanese government, is also a key player in terms of both equity investment and the provision of senior or mezzanine finance, or both. Thin capitalisation rules, earnings stripping rules and the requirement of a moneylending licence need to be carefully addressed if foreign sponsors extend subordinated loans to the GK project company.

The public-private joint infrafund established under the PFI Act in 2013 is expected to be a significant funds provider to concession type or non-government payment-type projects (ie, projects involving market risks) as mentioned in question 27. The metropolitan government of Tokyo also established a framework for public-private joint infrafunds in 2012 to encourage private investment in power projects.

The issuance of bonds to raise funding is not often seen in Japanese project finance transactions due to significant initial costs and relatively strict legal restrictions on the structure of bonds secured by project assets. However, a trust-based investment product similar to project bonds (ie, where the project assets are placed in trust by the project company and beneficial interests in that trust are sold to investors) was recently used to raise funds from institutional investors in Japan, and several solar projects have subsequently been financed using similar trust schemes.

Public-private partnership legislation

Applicable legislation

Has PPP-enabling legislation been enacted and, if so, at what level of government and is the legislation industry-specific?

The PFI Act was enacted by the national government in 1999, with the goal of contributing to the sound development of the national economy by enabling the effective and efficient building of infrastructure and other public facilities through the use of private sector capital, management skills and technical competencies, thereby ensuring a supply of relatively inexpensive and high-quality services to the Japanese people. Public-private finance in Japan has generally followed the PFI structure to date.

The PFI Act is a general law covering a wide range of public facilities, including roads, railways, airports, parks and sewage facilities, government facilities, medical facilities and information technology and communication facilities. There are no industry-specific PFI or PPP laws in Japan. The PFI Act was amended in August 2005, due to certain issues that began arising in the course of PFI projects under the law. The scope of the amendments included the following:

  • expanding the scope of transactions subject to the PFI Act to include operation-intensive projects;
  • specifying that one of the purposes of the PFI Act was to ensure the efficient operation of the government and use of government land;
  • allowing third parties to sell or assign projects developed through PFI transactions to mitigate the risk of critical services or project developments being interrupted;
  • increasing the importance of providing quality services (rather than merely price) to evaluate the operators of facilities for outsourcing; and
  • revising the bidding process and documentation to lower documentation and bid costs and thereby incentivise the use of PFI transactions.

The PFI Act was further amended in 2011 and 2013. The amendment in 2011 introduced a concession system. Under this new system, private operators will be granted concession rights to manage public facilities in Japan (as opposed to merely operating them under the direction of the government) and are now able to set fees within a certain range and collect fees directly from users as their own income. This right can be mortgaged and amortised over the contract period, adding to the ease in which such operators will be able to obtain financial accommodation from lenders. Further, private operators benefit from exemptions to municipal taxes on real estate through ownership of such rights.

In addition to the introduction of the concession system, the amendment in 2011 also laid out the following:

  • increased the range of facilities in relation to which PFI projects may be carried out (including rental housing and transportation such as ships, aircraft and satellites);
  • introduced a system whereby private businesses are encouraged to develop and submit their own proposals (non-solicitation projects);
  • introduced a system for the secondment of government officials to the private sector to share public sector know-how; and
  • introduced a specialised department to encourage projects using private funds.

The public-private joint infrafund backed by the national government was established pursuant to the amended PFI Act in 2013 for the purpose of stimulating private investment in projects entailing market risks (ie, concession type or non-government payment type projects) for certain periods (the fund is scheduled to be closed in 15 years).

An amendment to the PFI Act was enacted in 2018 to achieve the target amount of ¥21 trillion, set by the PFI Promotion Department of the Office of the Cabinet, for domestic PFI and PPP projects for the 10-year period beginning from 2013. The key changes are as follows:

  • the government will create a principal point of contact to receive PFI/PPP-related enquiries to provide faster integrated support between local governments and investors;
  • it creates an exception that allows a private sector concessionaire who is also a designated administrator under the Local Autonomy Act to:
    • in certain circumstances, amend the usage or service fee under the concession without the prior approval of the local government; and
    • transfer its concession rights without the prior approval of the relevant local council (subject to the filing of an after-the-fact report); and
  • the government will enable local governments to pay off loans from the government without a prepayment penalty when it assigns a newly created concession right in relation to water and sewage services. This amendment is likely to promote concessions in some sectors, including water and sewage, by eliminating some of the time-consuming and complicated bureaucratic procedures. This in turn may attract more private operators.

PPP - limitations

Legal limitations

What, if any, are the practical and legal limitations on PPP transactions?

The limitations are the same as with other civil law countries - there are a few existing laws and regulations in connection with management of public facilities in Japan that are not necessarily consistent with the PFI scheme. The PFI Act is not intended to wholly supersede such existing laws and regulations.

The interplay between the public facility management laws (the laws governing the management of public facilities belonging to the national, prefectural and municipal governments as well as those of the Japanese Self Defence Forces) and the PFI Act suggests that, while the ultimate authority and responsibility for the operation of critical infrastructure facilities must remain with the relevant public agency charged with the administration of such infrastructure (eg, the Ministry of Transport in relation to roads), the day-to-day operation of such facilities can be outsourced to third-party providers such as the project company in a PFI structure. The amendment to the PFI Act in 2011 expanded the scope of the sectors that can apply the PFI scheme, as mentioned in question 27, and created a concession system where the private sector can collect service fees or tolls from the end users. However, in respect of toll roads, the necessary amendment to the Act on Special Measures concerning Road Construction and Improvement - the act that governs toll rolls in Japan, which will implement the concession system for toll roads - has not yet been enacted, except for a few special cases. In addition, rules on the public procurement and the budget under the Fiscal Act for national government or the Local Autonomy Act for regional governments, approvals and scope of business under the various sector specific regulations or operational policies of the relevant authorities need to be considered.

PPP - transactions

Significant transactions

What have been the most significant PPP transactions completed to date in your jurisdiction?

As previously mentioned, 20 years have passed since the PFI Act was enacted.

According to the PFI Promotion Department of the Office of the Cabinet, there were 666 project policies announced up to the end of March 2018. This includes 79 national government PFI projects (these include the Haneda International Airport passenger terminal, cargo terminal and apron PFI, and the PFI project for the construction of new buildings for the House of Representatives and the House of Council) and 541 local government and government-related organisation PFIs (some projects are run by both national government and local government or government-related organisations and as such, the total number of project policies above does not correspond to the sum of the figures for national government PFI projects and local government or government-related organisation PFIs). Sector-wise, PFI projects include museums, libraries, aquariums, government office buildings, university buildings, schools, water treatment facilities, school lunch preparation facilities, prisons and hospitals. Most of these, however, are business-transfer-operate-type projects focusing on construction of the public facilities where private investments will be recouped by service payments paid by the relevant government or governmental entities. The Haneda International Airport project is a notable example of a non-government payment type build-operate-transfer project in Japan.

The PPP model, other than projects under the PFI Act, is not yet prevalent in Japan. The Nakano Sun Plaza reconstruction project in 2004 became the first project finance transaction in Japan to follow the PPP model.

Under the new PFI Act, which introduced the relevant concession system, PFI schemes are expected to be used for several new areas such as transportation and water projects as mentioned in question 27. In this regard, the most notable of such projects is the Kansai/Osaka International Airport project, with a 45-year concession period, which was ultimately awarded to a consortium led by ORIX Corporation and the French firm Vinci Airports for over ¥2.2 trillion. The concessionaire began operating in April 2016. In addition, there are now eight airport concession projects in operation, including the Fukuoka Airport Concession Project sponsored by a consortium consisting of Fukuoka Airport Holdings Ltd, Nishi - Nippon Railroad Co, Ltd, Mitsubishi Corporation, Kyushu Electric Power Co, Inc, and Changi Airports International Pte Ltd. The concession projects for eight public toll roads in Aichi prefecture - the first toll road concession projects in Japan - are also noteworthy, which has been in operation since October 2016. In addition, a concession project to manage part of the waste water and sewage facilities in Hamamatsu City, located in Shizuoka prefecture, sponsored by a consortium including Veolia, has been in operation since April 2018. Furthermore, the waste water and sewage facilities project in Susaki City, located in Kochi prefecture, was announced in August 2018, and is expected to commence operations in January 2020.


Recent developments

In addition to the above, are there any emerging trends or ‘hot topics’ in project finance in your jurisdiction?

Key developments of the past year30 In addition to the above, are there any emerging trends or ‘hot topics’ in project finance in your jurisdiction?

On 1 April 2019, a new Japanese law for the promotion of offshore wind projects in Japan came into force. The Offshore Wind Promotion Law (Law No. 89 of 2018) sets out the framework for expanded use of Japan’s general waters for offshore wind projects. As further clarified in the government interim report dated 22 April 2019, the framework includes measures for the designation of special promotion areas for offshore wind development and an auction bidding process, under which developers must compete on both electricity supply price and other factors to secure rights to build projects in such areas.

While the Offshore Wind Promotion Law sets out the framework for offshore wind development in Japan, many details of the criteria and rules to be applied in practice remain unclear. New draft guidelines recently issued by the government have clarified the selection process for promotion areas and the general auction criteria and represent a welcome step towards understanding the rules that will apply to offshore wind project development in Japan, but a number of issues still need to be resolved and a key missing piece in the puzzle is a strong quantifiable development target for offshore wind power development from the Japanese national government. Nonetheless, the first auctions under the Offshore Wind Promotion Law are expected to take place in the first or second quarter of 2020. It is hoped that the Japanese national government will have announced ambitious renewable energy targets for offshore wind projects by such time.