Pricing What Cannot Be Measured: Building a Willingness to Pay

A methodology note from the Public Asset and PPP Lab (ISVD-LAB-005). On willingness to pay, the first gate in shaping a pay-for-success project, drawn from the Cabinet Office common guidelines and the accompanying Q&A.

What willingness to pay is

Willingness to pay (WTP) is the most that the body bearing the cost, usually a local government, judges it may pay to achieve an intended outcome. The Cabinet Office introduced the concept in the February 2024 revision of its common guidelines, where it works as the ceiling of the project budget.

It is a ceiling, not the payment itself. The contract price sits between that ceiling and the floor at which an operator can accept the work.

The guidelines also note what happens if prices are set too low too often: no private operator will be left willing to work on that social issue. Setting a ceiling is also the work of not dropping below a floor.

Why it was introduced

The reason is stated in the guidelines, and it is the part most often skipped.

There were many cases where social benefit or efficiency gains could not be shown as a number, or where the number shown fell below the project cost, and the local government still wanted to proceed. In those cases, the guidelines say, a judgement was operating tacitly: valuing residents' needs including areas that had not been quantified, identifying a value, and deciding to spend against it. Having described that, the guidelines say it matters to make this tacit valuation visible, share it among the parties, and allow it to be checked where necessary, and that WTP was introduced as the measure for doing so.

WTP, in other words, was not created to measure value for the first time. It was placed there to write down a judgement that was already being made.

Treating WTP as a new measurement method would mean waiting for that method to be established. Treating it as a way to explain existing value judgements allows work to begin by stating the reasons for pursuing a project and the evidence supporting that decision.

How much rigour is required

The guidelines put the absence of a method and the level of rigour in the same sentence. The way of setting a figure and the thinking around it are not yet established, and on that basis they state that "uniform rigour is not required". They add that project shaping should in principle examine whether social benefit or improvement effects can be calculated quantitatively, and proceed on that quantitative analysis where they can.

The Q&A likewise says that "the method is not yet established at present", then adds that in principle one should consider whether social benefit or improvement effects can be calculated quantitatively, analyse on that quantitative evidence, and reflect residents' needs as far as possible.

The reading comes in two tiers. Where quantification is possible, analyse quantitatively. Where it is not, say so, and record what the judgement of value rested on. Both are permitted, and choosing the second is not itself a failure to meet the requirements.

Using the four considerations

The guidelines list four considerations for setting a WTP. They read better as a sequence than as a flat list.

The order of d is fixed. The guidelines note that it "comes after project shaping has progressed and the draft outcome specification has been produced". Market prices cannot be leaned on from the start.

Consideration b carries the most weight in practice. How to handle evidence that has not been converted into money is where the real work sits.

The procedure

Step 1 of the guidelines places clarification of the social issue before WTP. Skipping the order means coming back to it later.

1. Clarify the social issue and the social need. Existing comprehensive and sector plans, and the data gathered while drafting them, are the material. If existing plans and records do not establish the nature of the issue, collect data through additional research
2. Identify the people with that need. Set out who benefits directly and indirectly. If existing records do not establish their needs, consult those affected through interviews or surveys. Seek expert advice on matters that require specialist assessment
3. Consider how important that issue is, and set it as the WTP
4. Apply whichever of the four considerations are available
5. Record the basis of the decision and the course of the discussion

Record the basis of the decision and the course of the discussion so they can be reviewed later. The guidelines state that "deciding a WTP is a process of policy judgement", say that basing it on available evidence raises its scientific soundness and that residents' needs should be reflected as far as possible, and add that publishing the basis of the decision and the course of the discussion, to secure transparency and the possibility of later verification, is desirable.

Keeping both the WTP amount and the record of the discussion supporting it makes later verification possible.

Where it applies

Working out a WTP carries its own cost. The guidelines note that a WTP is often not easy to set, that expert appraisal and arranging dialogue with residents carry a certain cost, and that the form of the procedure should be judged against the importance and scale of the project.

A small project does not need repeated rounds of dialogue. Conversely, on a large project or in a field with no precedent, skipping the procedure leaves nothing to explain the decision with afterwards.

The action plan decided in March 2026 makes "estimation of benefits" one of the requirements for a flagship project. For Type-A projects, which run at 50 million yen or more, that estimate is required. The idea of matching the depth of procedure to scale appears here too.

Limits and complements

Three limits.

First, a WTP fixes only the ceiling. Where to put the contract price is a separate judgement. The guidelines say the commissioner needs a payment below the WTP while the contractor's margin is the gap between payment and actual spend, and that a price giving both sides an advantage is desirable. After the ceiling, information about the floor is needed. That is why market price research sits later in the sequence.

Second, consideration b has no settled form. With no standard for what counts as evidence, its depth varies by organisation. Expert advice and procedures for hearing those affected are what fill that gap.

Third, the method is still being worked out. The Q&A says the Cabinet Office intends to organise the thinking and the approach to WTP through its support for bodies selected for project-shaping assistance. Present practice is not following an established method but proceeding while keeping a record.

As complements, logic models and outcome indicator design form the pair. WTP decides how much may be paid; those two decide what counts as the result. The order runs as a loop: clarify the issue, provisionally set a WTP, build the logic model, set the indicators, revise the WTP.

Related research notes

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