PPP Contract Design After COVID — New Standards for Force Majeure and Demand Risk Clauses

In 2020, the global spread of COVID-19 shattered the foundational assumptions of PPP/PFI projects. Airport concession operations suffered the most severe impact.

According to Tokyo Shoko Research, the combined revenue of 46 airport building companies for the fiscal year ending March 2021 collapsed to ¥86.4 billion — a 62.6% decline from the previous year, representing a ¥145.1 billion drop. Passenger numbers plunged 72.9% to 41.2 million. Twenty-five of the 46 companies (54.3%) fell into net deficit.

Among concession airports, revenue declines were approximately 51% at Takamatsu Airport, 57% at Sendai International Airport, and 66% at Fukuoka International Airport. Kansai Airports recorded a ¥34.5 billion net loss for FY2020, its first deficit since privatization. With annual concession fee payments of approximately ¥37 billion continuing amid revenue collapse, the very survival of the business was at stake.

This shock confronted the PPP sector with a fundamental question: how do contracts spanning over 20 years handle a pandemic?

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Pre-COVID Japanese PFI contracts contained two structural vulnerabilities.

First, inadequate force majeure clause design. Most contracts listed "natural disasters," "riots," and "war" as force majeure events but did not explicitly include "infectious diseases," "pandemics," or "epidemic outbreaks." Some contracts lacked even the broader term "disease." This made it difficult to determine whether COVID legally qualified as force majeure, creating risks of prolonged damage allocation negotiations.

Second, excessive demand risk concentration on the private sector. In independent-revenue and hybrid concession contracts, demand fluctuation risk was borne by private operators as a matter of principle. Risk mitigation mechanisms such as banding (public compensation when demand falls below a defined range), minimum revenue guarantees, and revenue-linked concession fees were virtually absent from Japanese concession contracts.

Furthermore, legal questions remained unresolved: whether state-of-emergency declarations or voluntary restraint requests constituted force majeure triggers, and whether voluntary closures based on administrative guidance fell under "regulatory change" or "force majeure." Contracts spanning more than 20 years were unprepared for these unforeseen risks.

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July 2020: Force Majeure Recognition

The Cabinet Office's PPP/PFI Promotion Office issued a notification on July 7, 2020, stating that impacts on PFI projects from COVID should be considered "fundamentally attributable to force majeure." This was a landmark declaration. The notification called on local governments to renegotiate damage allocation with operators and to utilize available subsidy programs.

June 2021: Triple Guideline Revision

On June 18, 2021, the PPP/PFI Promotion Council simultaneously revised three guidelines:

1. Guidelines on Risk Allocation in PFI Projects
2. Guidelines on PFI Contracts
3. Guidelines on Public Facility Operating Rights and Operations

The core of the revision was explicitly stating that infectious diseases may be included as force majeure. The revision also recommended defining specific force majeure criteria in contracts, clarified that losses subject to allocation between administrators and operators "include damages beyond physical property," and established the principle that "when significant changes in the business environment render contract terms or performance standards significantly inappropriate, flexible and appropriate response is desirable."

Support Measures for Airport Concessions

The Ministry of Land, Infrastructure, Transport and Tourism's support package included:

• Landing fee reductions: In FY2021, combined landing fees, parking charges, and navigation aid facility fees for domestic flights were reduced by 90% (approximately ¥90 billion in relief)
• Concession fee payment deferrals: Hokkaido Airport received a 2-year deferral on FY2020-2021 payments, restructured into 5-year installments from FY2023. Fukuoka International Airport also received payment deferrals
• Interest-free loans: Interest-free financing for airport facility improvements

These emergency measures retroactively filled institutional gaps. Conversely, had appropriate risk allocation mechanisms been designed at the contract stage, such ad hoc responses would have been unnecessary.

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The UK government (Infrastructure and Projects Authority) took a contrasting approach in April 2020.

It explicitly declared that "COVID-19 is not, and is not to be, regarded as an event of force majeure."

While this might appear harsh toward the private sector, the government simultaneously implemented the following:

• Unitary charge maintenance: Regular payments between public and private parties (unitary charges) would continue, with the most recent 3 months established as baseline
• Penalty moratorium: Temporary suspension of penalty points and deductions until June 30, 2020
• Open-book cost adjustment: Additional costs from enhanced sanitization and similar measures could be settled through open-book accounting

The rationale behind this design philosophy was clear. Recognizing force majeure would temporarily discharge contractual obligations, undermining project finance stability. The UK chose to maintain operators' best-effort service obligations while guaranteeing cash flow stability — enabling business continuity without force majeure recognition.

Where Japan took the approach of "recognizing force majeure and then negotiating damage allocation," the UK chose to "not recognize force majeure and instead provide concrete mitigation measures immediately." This is not a question of which approach is superior but rather a compelling illustration of fundamentally different design philosophies for crisis response in long-term contracts.

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Drawing on COVID lessons, the following improvements in PPP/PFI contract design are essential.

1. Explicit Listing of Pandemics and Infectious Diseases

Force majeure clauses must explicitly list "infectious disease outbreaks," "pandemic conditions," and "epidemic outbreaks." Broad language such as "disease" invites conflicting interpretations over applicability. Activation triggers such as government emergency declarations and facility closure orders should also be specified in contracts.

2. Revenue-Linked Concession Fees

Fixed concession fees hit operators directly during demand collapse. The improvements proposed by the Ministry of Land, Infrastructure, Transport and Tourism include consideration of fee structures linked to revenue and passenger volumes. A bidirectional mechanism is effective: profit-sharing during strong performance periods and loss-sharing with government bearing partial risk during severe revenue decline.

3. Standardization of Renegotiation Clauses

PPP contracts are inherently incomplete contracts — it is impossible to fully specify terms for a 20-to-30-year period. Contracts should incorporate "renegotiation triggers" imposing mutual obligations to commence renegotiation when demand falls below a defined threshold (e.g., 50% of baseline), maximum consultation periods with conditions for escalation to mediation or arbitration, and open-book financial disclosure obligations.

4. Utilizing the 2022 PFI Act Amendment

The 2022 PFI Act amendment (promulgated December 2022) established new procedures for amending implementation policies in public facility operating rights projects. This is significant because it provides clear institutional grounds for contract modification when significant changes in the business environment occur, such as pandemics. Flexible contract management utilizing these procedures will be the key going forward.

5. Introducing Demand-Based Force Majeure

Conventional force majeure clauses primarily covered physical damage (destruction of buildings and equipment). Clauses covering demand and revenue declines without physical damage — as occurred with COVID — must be added as compensable events.

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The PPP/PFI Promotion Action Plan (2025 revision) is structured around four pillars. The most notable is the fourth: "Public-private partnerships incorporating a phase-free perspective."

"Phase-free" refers to a design philosophy that does not distinguish between normal and disaster phases. It embeds resilience into contract structures so that PPP/PFI projects remain functional during crises. This represents an institutional response to the problem exposed by COVID: contracts premised on normalcy failing during emergencies.

Cabinet Office data shows that PFI implementation policy publications, which fell to 59 in FY2020, recovered to 69 in FY2022, with a cumulative total of 1,004 (including 48 concession projects). The project volume target for FY2022-2031 is set at ¥30 trillion.

Achieving this recovery and growth target requires embedding COVID lessons into contract design and standardizing "contracts that function during crises." The phase-free concept has the potential to mark a turning point toward contract design that encompasses not only disaster response but also pandemic preparedness.

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The fundamental question COVID posed to PPP/PFI contracts is this: how can the inherent incompleteness of long-term contracts be institutionally addressed?

It is impossible to predict the timing, scale, or duration of a pandemic within a 20-plus-year contract. What matters is embedding frameworks into contract structures that enable public and private parties to consult rapidly and fairly when unforeseen events occur. Explicit listing of infectious diseases in force majeure clauses, revenue-linked concession fee design, standardization of renegotiation provisions, and utilization of the 2022 PFI Act amendment's implementation policy amendment procedures — these are not individual improvements but should be integrated under a single design philosophy of "institutionalizing consultation."

As the World Bank recommends, what post-pandemic PPP contract design requires is not a structure that pushes risk onto one party, but mechanisms through which both public and private sectors jointly visualize risks and make adjustments as conditions change. The public sector's role in making private risk-taking sustainable is precisely what is being tested today.

Recommended Reading

Infrastructure Investment: PPP/PFI/Concession Systems, Contracts and Practice — A comprehensive guide to the legal framework, contract structures, and practical processes of PPP/PFI/concession projects, including force majeure clauses and risk allocation design.

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References

Response to the Impact of COVID-19 on PFI Projects — Cabinet Office, PPP/PFI Promotion Office (2020)

Guidelines on Risk Allocation in PFI Projects (Revised June 2021) — Cabinet Office, PPP/PFI Promotion Council (2021)

Supporting vital service provision in PFI/PF2 contracts during the COVID-19 emergency — UK Infrastructure and Projects Authority (2020)

COVID-19 and Public-Private Partnerships Practice Notes — World Bank PPP Resource Center (2020)

Airport Building Companies: COVID Devastation Cuts Revenue 60%, Over Half Fall Into Deficit — Tokyo Shoko Research (2021)