Why Diversifying Financing Is Essential
Aging public facilities and fiscal constraints make it necessary to move beyond traditional municipal bonds
Annual pace of school closures (MEXT project page)
450 schools/yr
MEXT year-by-year survey: 298 in FY2023; no year has reached 450 since FY2016
Domestic green bond issuance (2023)
¥3T
Corporate hometown tax donations (FY2024)
¥63.1B
PPP/PFI Action Plan 10-year target
¥30T
MEXT states that approximately 450 schools are abandoned each year across Japan. Its own survey, read year by year, shows 279 to 405 closures a year since FY2016, never reaching 450, with 298 in FY2023. Public facilities built over 40 years ago are simultaneously reaching their renewal period. Meanwhile, municipal finances face the dual pressure of rising social security costs and shrinking tax revenues from population decline. Traditional general revenue and municipal bonds alone cannot cover this renewal demand.
The Cabinet Office's PPP/PFI Action Plan aims for 40 trillion yen in project volume over the ten years from FY2022 to FY2031 (2026 revision). Recorded project volume was 3.9 trillion yen in FY2022 and 4.5 trillion yen in FY2023. What is now required is diversification of financing methods themselves.
This article systematically covers five financing streams—green bonds, SIBs, hometown tax, project finance, and public subsidies—and presents a selection framework based on project phase and scale.
Green Bonds and Social Bonds for Public Facility Renovation
Tokyo's pioneering example, JFM joint bonds, and the connection to ZEB retrofitting
Rapid Development of Municipal Green Bonds
Japan's municipal green bond market began when Tokyo became the first municipality to issue a green bond in October 2017. The seventh issuance (FY2023) allocated a total of ¥50.3 billion, with ¥20.6 billion for energy efficiency and renewable energy and ¥20.5 billion for climate adaptation measures. In FY2024, the program evolved into the "Tokyo Green-Blue Bond," incorporating ocean environmental conservation.
Looking at the domestic market as a whole, issuance exceeded ¥3 trillion in 2023. The Ministry of the Environment published its 2024 edition guidelines, advancing the issuance environment.
Birth of JFM Joint Green Bonds
A notable development is the Japan Finance Organization for Municipalities (JFM) issuing its first joint green bond in FY2023. 42 municipalities expressed interest in participating, opening ESG bond market access to smaller municipalities that cannot secure sufficient issuance volume on their own.
Connection to ZEB Retrofitting
ZEB (Net Zero Energy Building) retrofitting of public facilities is an eligible use of proceeds for green bonds. The Ministry of Internal Affairs and Communications' Public Facility Management Promotion Bonds offer a 90% appropriation rate and a 50% local allocation tax offset rate, enabling multi-layered financing structures when combined with green bonds.
SIBs and Public Asset Utilization
The pay-for-success mechanism, domestic track record, and potential application to public facilities
The Pay-for-Success Mechanism
Among PPP/PFI methods, Social Impact Bonds (SIBs) occupy a distinctive position. As a form of PFS (Pay For Success), SIBs involve private operators raising capital from investors, with government paying outcome-based rewards. The Cabinet Office has established institutional foundations through its "Common Guidelines for Outcome-Based Commissioning (PFS)."
Domestic Track Record and Sector Concentration
Domestic PFS projects have reached 379 as of the end of FY2025, 42 more than the year before, though only 19 of these involve SIB-style private investor capital. The majority are concentrated in healthcare, wellness, and elderly care. Direct application to public facility maintenance or abandoned school utilization remains limited.
Specific examples include a sports and health promotion program run by Tokushima Vortis in Mima City, Tokushima Prefecture (five years from 2019 to 2024). In Nishikawa Town, Yamagata Prefecture, PoliPoli's "Municipal Co-creation Fund" launched its first project in November 2024 in partnership with Timee and UPSIDER to increase the town's associated population.
Potential Application to Public Facilities
The Ministry of Land, Infrastructure, Transport and Tourism is exploring "PFS utilization in urban development." SIB schemes designed around social enterprise use of abandoned schools as community problem-solving hubs are now at a designable stage. SIIF is also advancing SIB frontier expansion, positioning public facility utilization as the next target domain.
Strategic Use of Hometown Tax and GCF
GCF and corporate hometown tax performance, with examples of abandoned school revitalization
Government Crowdfunding (GCF)
GCF (Government Crowd Funding) is a mechanism where municipalities raise project funds online, with donors receiving hometown tax deductions. It operates through platforms such as Furusato Choice and READYFOR.
Furusato Choice reports cumulative GCF donations of 26,937,156,788 yen, more than 880 participating municipalities and more than 5,200 projects. As a "sympathy-driven" fundraising method independent of return gifts, GCF has strong compatibility with public facility renovation and abandoned school revitalization.
Key examples:
| Municipality | Project | Amount Raised |
|---|---|---|
| Kofu City, Yamanashi | GCF project | Approx. ¥290 million (exceeded target) |
| Yubari City, Hokkaido | Post-bankruptcy abandoned school → library | Approx. ¥1.94 million (127 donors) |
| Tokamachi City, Niigata | "Snow Field School Project" (Kaino Elementary renovation) | Opened 2024 |
Rapid Growth of Corporate Hometown Tax
The corporate hometown tax (Regional Revitalization Support Tax System) provides companies with up to approximately 90% reduction in corporate taxes for donations. FY2024 donations reached ¥63.14 billion (1.3x year-on-year), from 8,464 companies across 1,590 municipalities.
Of particular note is the expansion of the talent dispatch program. With 157 people across 119 organizations, municipalities can secure specialized talent in DX, decarbonization, and other fields at virtually no cost. This is an effective mechanism for addressing the chronic shortage of specialized human resources in public asset revitalization. The FY2025 ruling party tax reform outline confirmed a three-year extension through FY2027.
Private Financing Options
How to choose between project finance, mezzanine finance, and crowdfunding
Project Finance Fundamentals
In PFI projects, private operators establish an SPC (Special Purpose Company) and raise funds secured solely by project cash flows through project finance. This presupposes a consortium sponsor structure providing long-term comprehensive services.
Mezzanine Finance and Project Scale
For larger PFI projects, senior-subordinated structures combine senior loans, mezzanine loans (subordinated debt), and leases. However, for abandoned school revitalization and small concession projects under ¥1 billion, the structuring costs of mezzanine finance are not justified, making regional financial institution senior loans the primary funding source.
Crowdfunding (Investment Type)
Operators licensed under the Real Estate Specified Joint Enterprise Act can acquire idle real estate (including abandoned schools), operate them, and distribute rental income and capital gains. Platforms specializing in regional vacant property and idle real estate utilization, such as Hello! RENOVATION, exist and have strong affinity with small-scale projects.
Latest Trends in Public Subsidies and Grants
Key support programs from MIC, MLIT, MOE, and MEXT
MIC: Public Facility Management Promotion Bonds
The Public Facility Management Promotion Bonds, established in FY2017, feature a generous structure with 90% appropriation rate and 30-50% local allocation tax offset. Eligible projects include consolidation, conversion, demolition, life extension, and universal design improvements. In FY2025, multi-municipality collaborative facility consolidation was newly added as an eligible project type.
MLIT: Small Concession Support
The MLIT's Leading Public-Private Partnership Support Program (FY2024) prioritizes small concession selection. It primarily targets municipalities with populations under 200,000 and provides expert dispatch support. In August 2024, four working groups were established covering awareness-raising, talent development, project methodology, and financing.
Approved cases include the conversion of a former school building in Miyawaka City, Fukuoka Prefecture, into an AI development center, and the renovation of traditional buildings in Tsuyama City, Okayama Prefecture, into a single-building rental hotel.
MOE: Decarbonization Leading Region Grants
102 proposals across 133 municipalities in 45 prefectures (across 38 prefectures) have been selected as decarbonization leading regions. The Regional Decarbonization Transition and Renewable Energy Promotion Grant supports solar installation and LED/high-efficiency HVAC introduction in public facilities. In Nagasaki City, "Nagasaki Sustain Energy" supplies power to 44 public facilities.
MEXT: Everyone's Abandoned School Project
Launched in 2010, the "Everyone's Abandoned School Project" aggregates and disseminates information about abandoned schools seeking new uses and provides matching support. National treasury subsidies exist for converting abandoned school facilities, and when combined with ZEB retrofitting, Ministry of the Environment support can also be leveraged.
Financing Selection Framework
Optimal method mapping by project phase and scale
Optimal Methods by Project Phase
| Project Phase | Recommended Methods | Objective |
|---|---|---|
| Concept/Planning (0-1 yr) | Hometown tax GCF, corporate hometown tax, regional revitalization grants | Gather small contributions broadly, build sympathy and momentum |
| Design (1-2 yr) | MLIT leading support program, MIC/MEXT subsidies | Parallel expert support and feasibility studies |
| Construction/Renovation (2-5 yr) | Project finance (SPC), management promotion bonds, green bonds | Address long-term, large-scale funding needs |
| Operation (5+ yr) | Concession fees, SIB/PFS outcome payments, regional bank loans | Refinance after cash flow establishment |
Options by Project Scale
| Project Scale | Primary Financing Methods |
|---|---|
| Under ¥100M (small) | GCF, corporate hometown tax, investment CF, MEXT subsidies |
| ¥100M-¥1B (small concession range) | MLIT small concession support, regional bank loans, management promotion bonds |
| ¥1B-¥10B (standard PFI range) | Project finance, green bond allocation, mezzanine finance |
| Over ¥10B (large) | Municipal green bond issuance, JFM joint bonds, institutional investor bonds |
Relationship with Risk Allocation
Financing method selection is inseparable from risk allocation design. In concession models where the private sector bears demand risk, project finance is the primary vehicle. In service purchase models where the public sector bears demand risk, public financing sources such as management promotion bonds take center stage. SIBs represent a hybrid structure where private investors bear outcome risk and the public sector pays only upon achievement of outcomes.
Conclusion
Financing for public asset utilization cannot be completed with a single method. GCF at the concept stage builds public sympathy. Public subsidies support the planning stage. Project finance and green bonds combine at the construction stage. Concession fees and SIB outcome payments provide the revenue base at the operation stage. This approach of layering multiple methods across project phases — blended finance — is the key to realizing public asset revitalization under fiscal constraints.
Cumulative PFI contract value reached ¥9.2528 trillion by the end of FY2023, with the market steadily expanding. Now that financing options have broadened, both municipalities and private operators must develop the strategic capacity to design "which method, at which phase, in what combination."
Risk Allocation Design in PPP
Lessons from failures on 'who bears what risk'
Small Concession Financial Planning
Revenue models and financing for small-scale PPP
Public Facility Management Guide
What to do after the comprehensive management plan
Recommended Reading
Infrastructure Finance: Practice and Application of Project Finance (Ryuichi Kaga, Toyo Keizai)What to do next
In the order you can act on them, within the week you read this.
| # | What to do | Where | Rough effort |
|---|---|---|---|
| 1 | Establish the project cost. Above 1 billion yen including construction, or 100 million a year for operations alone, changes what priority review covers | Budget team | Half a day |
| 2 | Check whether your organisation has a priority review regulation. If not, follow the Cabinet Office guidelines | Planning team | One week |
| 3 | Sort facilities by whether user charges are levied, or could be. If they can be, operating rights come into view | Each department | One week |
| 4 | Use steps 1–3 to narrow the method: Park-PFI for urban parks, a small concession for other idle facilities | Departmental decision | — |
| 5 | Pick the first project and run market sounding. Do not advance every facility at once | Private operators | 2–3 months |
Step 1 takes half a day and decides whether review is mandatory at all.
References
PPP/PFI Promotion Action Plan (FY2023 Revision) — Cabinet Office Private Finance Initiative Promotion Office (2023)
Tokyo Green Bond Impact Report (October 2024) — Tokyo Metropolitan Government Bureau of Finance (2024)
Green Bond and Sustainability-Linked Bond Guidelines 2024 — Ministry of the Environment (2024)
Common Guidelines for Outcome-Based Commissioning (PFS) — Cabinet Office (2024)
Promoting Appropriate Management of Public Facilities — Ministry of Internal Affairs and Communications (2021)
