Building a Consensus Supporting the Idea of "Creative Destruction" of Public Infrastructure by 2010
NRI estimates that a shortage of maintenance and replacement funds for roads,
sewerage systems, and flood control will emerge from 2025
December 16, 2005
Nomura Research Institute, Ltd.
Nomura Research Institute, Ltd. (NRI: Tokyo, Akihisa Fujinuma, President, CEO & COO) has performed an estimate of the funds required for maintenance and replacement of infrastructure in Japan. This estimate showed that should the current level of fiscal austerity be continued, reserve capacity for new investment in the three principal areas of infrastructure, i.e. roads, sewerage systems, and flood control, will be depleted in 2025 and will probably no longer cover the cost of maintaining and replacing infrastructure (see graph). Coping with this shortage will require not only a shift from expansion to contraction of the scale of infrastructure, but also a drastic rebuilding of infrastructure geared to the needs of a mature society—a program of "creative destruction" as it were. After 2010, large-scale replacement of existing infrastructure will be required. NRI believes that it is crucial to build, within the next few years, a social consensus concerning the optimal infrastructure for the future Japanese society.
A shortage in funds and personnel for maintenance and replacement of ¥900 trillion in infrastructure is assured
Following the era of high economic growth in the 1970s, the stock of public infrastructure grew steadily in step with GDP and population growth. Since the 1990s, however, population and GDP have peaked, and only public infrastructure has continued to expand. The aggregate value of public infrastructure as estimated by NRI according to the estimation method used in the Cabinet Office's Nihon no shakai shihon (Japan's Public Infrastructure) published in 2002 was approximately \932 trillion as of fiscal 2003, twice the amount of real GDP in fiscal 2003. If the stock continues growing, NRI believes that three "mismatches" will likely become issues in a society where the population declines: (1) the scale of public infrastructure will become excessive compared to the size of the population and their activities; (2) the existing public infrastructure of direct importance to people will not meet the changing demands of the maturing population, such as social services and medical facilities; and (3) the gap between regions with excess public infrastructure and regions with too little public infrastructure will widen due to migrations associated with the retirement of the baby-boom generation and other developments.
It is also certain that the money and personnel for maintenance of public infrastructure will not be available as 2010 approaches. Estimates by NRI assuming that infrastructure-related budgets will be cut by three percent each year indicate that in the three areas of roads, sewerage systems, and flood control it will no longer be possible to cover the total amount of maintenance and replacement costs from 2025. In other words, if austerity budgets are continued, it is highly likely that even the maintenance and replacement of existing infrastructure will no longer be possible. In addition, with the retirement of the baby-boom generation, there will be a shortage of technical personnel required for building and maintaining infrastructure. If this shortage is not dealt with, infrastructure will become severely deteriorated, leading to malfunctioning infrastructure that may exert a serious impact on Japanese socio-economic conditions and regional communities.
Estimate of funds required for building and maintaining infrastructure in Japan (total for roads, sewerage systems, and flood control)
Acceptance of the idea of "management according to need" will be necessary from now on
NRI's solution to the problem outlined above could be termed "creative destruction" of public infrastructure. In the years ahead, management solely for the purpose of appropriate maintenance of existing infrastructure stock will no longer be sufficient. Rather, the problem should be approached keeping in mind the need to cut maintenance costs and thin out and remove infrastructure in response to decreases in population and in the number of people using infrastructure, an approach that may be termed "management according to need." In other words, "build-down," while revamping planning and construction of new public infrastructure. Also required, in addition to curtailing wasteful costs, is investment aimed at increasing the added value of public infrastructure, such as investment to enhance safety.
In NRI's view, the following measures will be required in order to support and encourage "creative destruction" of public infrastructure heading toward 2010: (1) creating plans for encouraging build-down of public infrastructure; (2) revamping policy assessment systems; (3) developing incentive schemes to encourage the breakdown and rejuvenation of public infrastructure; (4) encouraging investment and funding by third parties; (5) creating budget and accounting systems to support public infrastructure stock; and (6) fostering entrepreneurship to produce out-of-the-box thinking.
NRI will keep an eye on Japanese public infrastructure issues and search for effective solutions. The proposals offered in this news release will be included in a book entitled 2010-nen no Nihon (Japan in 2010) to be published by Toyo Keizai on December 20.
[For general inquiries, please contact:]
Yukako Seto / Takeshi Nomura
Corporate Communications Department
Nomura Research Institute, Ltd.
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