Boosting Japan’s Regions

A Market-Driven Model of Regional Revitalization

Politics Economy Society

How can Japan revive its struggling local economies in the face of depopulation and severed budget constraints? Speaking from long personal and professional experience, Kinoshita Hitoshi calls for a shift from subsidy-dependent community development to a sustainable model driven by private enterprise.

As Japan’s population continues its inexorable decline, the nation’s regional communities are facing tough economic challenges. Kinoshita Hitoshi has spent more than 16 years studying and spearheading the revitalization of declining shopping districts and regional communities in Japan. Over the past few years he has become a driving force for innovative redevelopment solutions as chief executive officer of the Area Innovation Alliance, which he established in 2009 to pool the resources and know-how of community development businesses nationwide. We asked Kinoshita to present some examples of best practices based on his own experience and share his views on the essential ingredients for sustained regional revitalization.

The key for local communities going forward will be how well they can leverage their existing assets and resources and design development projects that can generate profits and guarantee a return on investment. They need to establish a circle of growth and development by implementing projects that make money and reinvesting the profits in new projects. Distributing more big grants to local governments will accomplish nothing as long as administrators keep investing them in programs that lose money, because local communities cannot sustain those programs without more and more subsidies. This is the cycle of dependence that has dominated regional development in the past. We need to shift to a positive cycle of self-sustaining growth.

So, what are these self-sustaining programs that can recover their costs and translate into long-term gains for regional communities? Here I present some examples of four tried and true approaches to revitalization and rehabilitation of regional communities, particularly central commercial districts. These are (1) neighborhood renovation and marketplace development, (2) commercially oriented development of public spaces, (3) area-wide facility management, and (4) public-private partnerships using the principal-agent model.

Neighborhood Renovation and Marketplace Developmen

The first approach centers on the cooperative redevelopment of vacant or underutilized commercial properties by local merchants, property holders, and other community stakeholders.

Taneya, a shared commercial space occupying a renovated historic building in the Kachigawa district of Kasugai, Aichi Prefecture, houses Café Momotoki among other businesses.

One example is Taneya, a shared storefront in the Kachigawa district of Kasugai, Aichi Prefecture. Here five merchants, including a café, a yoga studio, and an IT business, are sharing a formerly vacant pre–World War II storefront. The investment plan called for limited renovation of the wood-frame building, with the goal of recovering the costs within two years through the rent paid by the tenants. The approach to renovation was meant both to hold down those costs and to preserve the historic ambience, which customers have found novel and refreshing. Big, shiny, new commercial developments are no longer a formula for success.

Mercato 3 in Kitakyūshū, Fukuoka Prefecture.

A similar project is Mercato 3, a redeveloped arcade near Kokura Station in Kitakyūshū, Fukuoka Prefecture. In this case, a 50-year-old building in a declining commercial district was renovated after lying vacant for about a decade, with a view to recovering the costs within four years. The space is now occupied by a diverse group of young, creative, and ambitious entrepreneurs, including restaurateurs and interior decorators, whose fresh ideas have boosted the volume of commercial traffic in the district by more than 50%.

When you look at failed commercial development projects, they almost always begin with the construction plan and then start soliciting tenants. Our basic approach is to begin by lining up a core of prospective merchants with good commercial potential, figure out what sort of customers they can attract and how much those customers will spend, and plan backwards from there, tailoring the construction budget and architectural concept to the projected revenues.

Once you gather a group of interesting merchants attracted by a certain concept, the value of the real estate will go up. That attracts more interest in the property, and the value continues to rise. In this way a piece of property that no one was using not only generates new economic activity but gains value itself as an asset, and ultimately enhances the value of the entire neighborhood.

Using existing resources is also a key to attracting private investors. Community revitalization need not be about massive construction projects involving huge infusions of taxpayer money. When you reuse existing structures, you can minimize costs and operate more efficiently. And if you keep designing and implementing projects with a high return on investment, you can attract private capital and avoid dependence on public investment. This is essential.

Commercially Oriented Development of Public Spaces

Publicly held assets are also a potential resource for business-based economic revitalization. Thanks to the relaxation of regulations regarding public land use, communities have begun opening up city streets and other public facilities to private vendors and event organizers. One example is Ōdori Suwarō Terrace in Sapporo, Hokkaidō. Sapporo Ōdori Machizuri Corp., a designated urban development corporation, has helped revitalize the city center by setting up open-air cafés. It has also made use of public thoroughfares for events featuring food vendors, art exhibits, and so forth. This is another way to take advantage of underutilized resources and break the cycle of dependence on public grants and subsidies.

The café at right is one of the businesses taking advantage of the commercial development of public land in Sapporo’s Ōdori district.

A second project in this category is Arts Chiyoda, a privately operated arts center set up in a vacant school building in Chiyoda City, one of Tokyo’s special wards. The center has found a way to pay for its activities by renting out shared offices as well as art space, exploding the myth that support of the arts depends on public investment. Instead of receiving money from Chiyoda City to establish and operate the center, the organization is actually paying the municipal government to rent the facility.

A once abandoned school building in Tokyo now houses Arts Chiyoda, a privately funded culture center that rents out shared offices.

Areawide Facility Management

When the population of a community declines, its commercial buildings inevitably lose income. This makes reduction of building maintenance costs an urgent priority. Kumamoto Prefecture has realized significant savings by contracting with a private company, Kumomoto Jōtō Management. Set up to serve as area-wide property management agent, the company negotiates and oversees maintenance contracts on behalf of small- and medium-sized merchants and buildings in the prefecture’s downtown districts. To save on costs, it partners with a wide range of organizations in the public, private, and nonprofit sector. As of the end of 2014, savings realized by the 168 participating establishments totaled more than ¥15 million, and the quality of property maintenance had improved as well. One-third of the profits go into a fund that helps finance urban revitalization projects.

A Principal-Agent Model for PPPs

Japan has been pursuing so-called private-public partnerships for some time, but almost always with government agencies retaining full control and responsibility. What we call a “principal-agent PPP” takes the partnership concept a step further, transferring leadership, responsibility, and risk to the private sector. Under this model, private entities are delegated as agents and entrusted with the management of public assets. In this capacity, they plan and implement programs designed to contribute to the sustained development of the local economy.

A successful example of such a PPP is the Ogal project in Shiwa, Iwate Prefecture, a town with a population of about 33,000. At the heart of the development is Ogal Plaza, a multi-purpose community center combining public and private facilities. With this center as a nucleus, the development has rapidly expanded into what is now known as the Ogal area, which includes a soccer training ground, a business hotel with volleyball practice courts, and other facilities. With some 800,000 people visiting the site annually, the Ogal project has drawn nationwide interest as a new and promising model for regional community development.

Outside Ogal Plaza in Shiwa, Iwate Prefecture, a model of successful local development based on public-private partnership.

An important aspect of the project is the fact that it was funded by private bank loans instead of taxpayer money appropriated at the national or local level. At the time of the project’s inception, the Shiwa municipal government was facing a fiscal crunch and lacked the resources to build the public library for which it had already purchased the land. The town eventually decided to build the library as part of a larger PPP development managed by a private entity. A special purpose vehicle, Ogal Plaza K.K., was established to develop the unutilized public land, with a municipal library as the anchor. With more than 100,000 visitors projected to visit the library annually, we were able to attract private-sector tenants and develop a plan for a combined public-private community center.

The plan made economic sense for everyone. The town wanted a public library, but libraries are not money makers. However, by leasing part of the center to private businesses, the town government would be able to support the library with the rent collected from the tenants. The presence of the public library would guarantee customer traffic for the businesses, and the businesses would generate profits, so that the center as a whole could operate in the black. On the basis of this integrated development plan, we were able to obtain financing from banks and private investors to complete the project.

To ensure a return on investment, we budgeted backwards from revenue estimates after first lining up our private-sector tenants, and we found ways to keep building costs low, below the norm for public construction projects. This approach to construction also translated into savings on building maintenance, which have benefited the library as well as the commercial facilities. Meanwhile, the property taxes and rents collected from the commercial tenants add significantly to the municipal government’s revenues. In this way, the project aptly illustrates the importance of designing regional revitalization projects—including those involving public facilities—as money-making ventures.

A New Standard for Public-Private Partnership

Of the four approaches examined here, the last one, exemplified by the Ogal project, has the greatest potential as a model for future public development projects in Japan. It is a shining example of a public-private partnership adapted to a new era, a project that has succeeded in developing new public assets using the logic of the market instead of relying on government grants.

The site of the project is a 10.7-hectare tract of land that the Shiwa municipal government originally purchased in 1997 at a cost of ¥2.85 billion in connection with a major community development plan. But local tax revenues plummeted after 1997, and the government found itself unable to fund construction of the development for which it had made the land purchase.

As the municipal plan floundered, the mayor came to the conclusion that the local government could no longer foot the bill for community development, and he instructed the town administrators to draft a basic public-private partnership plan. Ultimately, they transformed a public development project into a successful business venture in which a private entity assumed responsibility for everything from financing to design and construction.

This is not just a success story for the town of Shiwa. Local administrators throughout Japan are plagued by plummeting revenues, some to the point where they are unable to budget for essential capital improvements. These local governments have much to gain by studying and incorporating the new model of public-private cooperation embodied in the Ogal project.

Here is a public facility that generates new economic growth and development instead of just absorbing tax revenues. The Shiwa Public Library in Ogal Plaza has actually outstripped original projections, drawing more than 300,000 visitors annually. In ordinary situations, each of those visitors would simply return home after using the library. But we realized that many of those library users would be happy to patronize a café, a healthcare facility, or a farmers’ market while they were in the neighborhood. In this way we were able to draw a variety of energetic young businesspeople from the region, who in turn drew other budding entrepreneurs to the district. The project stands as living proof that public facilities, if properly planned, can be engines for sustained local economic growth and redevelopment instead of costly boondoggles.

Under the Ogal project, public facilities in the plaza are owned and managed by the municipal government, while the private businesses are owned and operated by their respective owners. However, the center as a whole is planned, developed, and operated by Ogal Plaza K.K., ensuring efficiency and cost effectiveness. As a result, the return on investment is very high. The key to high returns is no secret: it boils down to maintaining adequate revenues while keeping down costs. And this means building cheaply.

Money-making facilities like Ogal Plaza can generate new wealth, new jobs, and new sources of government revenue for regional communities. Businesses in Japan have come to take government assistance for granted, but the new model of regional business development reverses this relationship. To private business, we now say, Ask not what your community can do for you; ask what you can do for your community.

(Originally published in Japanese on April 1, 2015. Banner photo: Ogal Plaza in Shiwa, Iwate Prefecture, a hybrid public-private facility that offers a promising new model for regional revitalization. Photo courtesy of Kinoshita Hitoshi, Area Innovation Alliance.)

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