EXECUTIVE SUMMARY: LOCAL GOVERNMENT REFORM IN JAPAN


October 2002



French prefectural administration with centrally appointed governors and Prussian bureaucrat procedures with single entry cash budgets were introduced in the 1870s and municipalities were created in the late-1880s. Then, apart from cheap FILP loan capital becoming available in 1951, local government entered a virtual 100 year time warp so becoming a heavily "fatigued"system.

Consolidated debt was an estimated JPY235.0tr at March 2001: funded FILP etc two thirds and private institutions one third. MoF's ambitious FILP Reform programme 2001/08 refinances, rationalises and consolidates the FILP Fund even privatising many agencies. A good dose of reform is the panacea for all system fatigue and MoF is treating its in-house FILP fatigue firmly.

FILP Reform has been on the Kasumigaseki radar screen since 1996. Yet, like its charge, MoPM had also entered a time warp: it has no structured response to FILP Reform just a jumbled wish list. Fatigue means abuses, vested interests and loss of focus: construction shenanigans, LDP machinations, lack of fiscal equalisation transparency, governance failure, excessive debt etc.

MoF refuses to co-operate on fiscal resources transfer until MoPM launches modernisation of accounting, governance, disclosure and administration. MoPM takes no action repeating its list: "toy" accounts, Joint Public Offer, fiscal resources transfer, local authority amalgamation etc. Local government funding post-March 2008 is the hostage. Who blinks first MoF or MoPM?

LGB investors naturally support MoF, but also require an explicit government guarantee or a default insurance/reserve fund. For market liquidity a large lot mechanism is required: German Pfandbrief, French DEXIA, or Japanese SPC securitisation. A clear decision and action must be taken. Well established reform procedure lead times make March 2008 a very tight deadline.

Single entry cash basis accounts block comprehension of municipal finances. MoPM's pro forma toy balance sheets are just smokescreens. Clearly the major municipal enterprises (drinking water, industrial water, sewerage, underground railways, hospitals) are a heavy burden. Failed public corporations and Third Sector Projects involve estimated liquidation costs of JPY9.8tr.

Drinking and industrial water and sewerage are fragmented and require consolidation in line with watershed boundaries. Water catchment area sewage contamination argues for integration. There is popular resistance to outright privatisation, but fiscal pressures create flexibility and public private partnership is occurring. Underground railways and hospitals are special cases.

Statutory municipal enterprise restated results for year to March 2001 were, worst three listings, losses: sewerage JPY638.3bn, hospitals JPY537.6bn and underground railways JPY212.7bn and capex subsidies: drinking water JPY439.8bn, underground railways JPY339.3 bn and sewerage JPY336.0bn. Worst overall were the 130 sewerage enterprises with total subsidies JPY988.5bn.

In LGBs, the near-zero profile private placement enkosai have been an odd pre-Meiji, goyokin, anachronism, but are now experiencing modernisation as institutions other than regional banks participate. They are gradually becoming more like PO LGBs and a large unified market is in the making. MoPM's Joint and "mini kobo" PO LGB schemes are best considered distractions.

Reform lead times are typically interested party consultation 3 years, Diet legislation 2 years and transitional provisions 3 years. March 2008 is here and gone. Local government reform is challenging. Only MoF has the proven orchestration capability. When MoF eventually takes charge, meaningful business opportunities in LGBs and privatisation should become available.



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