This is the third installment in the structural analysis series from the Public Asset Utilization Research Lab (ISVD-LAB-005). It examines the structural factors behind the sub-10% adoption rate of Pay-for-Success (PFS) contracts among Japanese municipalities.
What Is Happening
Pay-for-Success (PFS) — a contracting method where government pays for outcomes rather than activities — has been promoted by the Cabinet Office as a key innovation in PPP/PFI.
Yet as of end-FY2024, only 154 municipalities (323 projects) have implemented PFS — approximately 9% of Japan's roughly 1,700 local governments.
The distribution is heavily skewed: nursing care accounts for approximately 39% (126 projects) and healthcare for 35% (114 projects). Expansion into urban development, education, and environmental fields has barely begun.
The Cabinet Office has published comprehensive guidelines (revised February 2024), established promotion grants (50% of outcome-linked costs, up to ¥40 million per project), and deployed expert dispatch programs. The institutional infrastructure is complete. Yet 91% of municipalities remain inactive. Why?
Background and Context
The WTP Wall — "How Much Can We Pay?" Remains Unanswerable
The first and largest barrier in PFS project formation is setting WTP (Willingness to Pay) — the maximum amount a municipality judges it can pay for achieving target outcomes, functioning as the budget ceiling.
Cabinet Office guidelines identify four factors: ①evidence on economically quantified outcomes, ②evidence on non-quantified outcomes, ③comparison with existing program costs, and ④market price surveys. However, the guidelines also state that "WTP calculation methods have not been established," and a dedicated FAQ document acknowledges the difficulty.
In practice, projects stall when "how much we can pay" cannot be calculated. Finance departments and municipal assemblies require quantitative justification — but the methodology to produce that justification does not yet exist.
The Logic Model Wall — The Gap Between "Measurable" and "Meaningful"
In PFS, where payment is tied to outcomes, defining "what constitutes success" — designing the logic model and selecting outcome indicators — determines whether a project lives or dies.
K three Inc. CEO Masaki Kochi has repeatedly warned at Cabinet Office seminars about the danger of selecting indicators "because they are measurable." Once outcome indicators are fixed, private operators optimize for "increasing the indicator number" — and stop performing activities outside the indicator scope that may actually be valuable to residents.
The correct sequence is "articulate final outcomes → narrow down important changes → examine indicators → determine measurement methods," requiring months of iterative dialogue between government and private sector with specialized facilitation.
The Internal Consensus Wall — The Loneliness of Asking "Why PFS?"
The most repeated emphasis at Cabinet Office seminars was that "whether there is a motivated staff member in the responsible department matters more than any other factor."
PFS review processes require coordination across multiple departments (program office, planning/finance, legal, assembly liaison). At each stage, staff face: "Why outcome-linked instead of conventional contracting?" "Who bears responsibility if it fails?" "What is the rational basis for adopting an unprecedented method?" Whether executives and senior management understand PFS directly determines the difficulty of the review process.
Without a motivated champion, reviews stall. Even with one, personnel transfers can eliminate institutional memory and kill projects. This "person-dependent structure" is PFS adoption's deepest barrier.
Reading the Structure
The essence of PFS's 9% adoption rate is not "institutions don't exist" but "institutions exist yet the people and systems to execute are insufficient" — an execution gap.
Three breakthrough patterns exist.
First, multi-municipality collaborative PFS. Hiroshima Prefecture partnered with six municipalities to implement Japan's first regional SIB. Fixed costs were shared among six cities while the prefecture bore outcome-linked costs — enabling small municipalities that individually lacked scale to participate. Colorectal cancer screening examinees increased by 1,515 across the six cities, with detailed examination rates rising 6.09 percentage points.
Second, PFS lifecycle support. PFS is not a permanent contracting mode but "a method for the evidence-accumulation phase." One mayor testified: "The evidence accumulated over 5 years of outcome-linked contracting is why we can now operate at less than 1/3 the cost." Designing the full lifecycle — PFS introduction → evidence accumulation → transition to fixed-fee contracting — enables long-term municipal partnerships.
Third, internal evangelist development. If the primary variable is "people," then the companion function needed is support for internal consensus-building itself: articulating why PFS, creating briefing materials for finance departments, and conducting executive briefings.
Remaining Questions
PFS appears low-risk for municipalities: "if outcomes aren't achieved, you don't pay." In reality, four walls — WTP calculation, logic model design, indicator selection, and internal consensus — prevent 91% of municipalities from reaching the system's benefits.
This structural gap, viewed from the other side, represents an enormous market opportunity. 1,546 municipalities have not yet touched PFS. The companion who supports that "first project" holds the key to bridging the gap between institution and execution.
Related Research Notes
- Structural Gap in Priority Review Regulations — The reality behind 82% adoption rates
- Abandoned School Small Concessions — The institutional–execution gap behind 1,951 unused schools
Related Columns
- Water Pipe Aging Rate at 20% — Data on Japan's invisible infrastructure crisis
References
PFS Common Guidelines (February 2024 revised edition) — Cabinet Office PFS Promotion Office. Cabinet Office
PFS/SIB: Past and Future Development — Japan Center for Economic Research. Cabinet Office PFS Promotion Office
Hiroshima Prefecture SIB Cancer Screening Final Report — Hiroshima Prefecture. METI
PFS Application Guide for Urban Development — MLIT. Cabinet Office PFS Promotion Office