Chapter 22: Special Status Corporations: No, No You Can’t Take That Away From Me!

Chapter 22 Special Status Corporations: No, No You Can’t Take That Away From Me!

The image of reform

When Prime Minister Junichiro Koizumi took office in April 2001 the sovereign debt was 130 percent of GDP. Koizumi, who was the Minister of Health and Welfare in Hashimoto’s cabinet, proposed reforms which encompassed three areas: (i) financial reforms; (ii) state-sector reforms; (iii) tackling NPL; (iv) reform of the social security system; (v) cutting government funding to Special Status Corporations by one-third or $1.3 billion. He planned to eliminate 50 percent of the number of Special Status Corporations which were heavily in debt to FILP. He also planned to privatize the state banks, including the Postal Savings Agency and downsize FILP by 17.7 percent ($218 billion), the two institutions that funded the corporations and whose accounting methods were said to be opaque.

By 1972, Japan had achieved a 10 percent of annual GDP growth to become the world’s third largest economy in the world and, realistically, many of the corporations were no longer needed to support economic development and should have been dismantled. However, the ministries had come to rely on their corporations, because not only did they provide temporary post-retirement positions for officials while they waited for  the obligatory two years before migrating to positions in the private sector (amakudari ) but, also, they served to extend ministerial powers and increase administrative jurisdiction (namely “territory”). The connections established between the ministries’ officials posted in Special Status Corporations, their subsidiaries and their branch offices throughout Japan effectively linked the ministries to the private sector.  Additionally, through their officials posted at branch offices of these corporations the national ministries can monitor local government policies and guide the planning of policies. A number of Special Status Corporations continued operations for many years despite bearing large debts, which would never be repaid to FILP.

As of October 1999 the number of corporations had been reduced through mergers of insolvent with solvent corporations. Nevertheless, in 2001 there were 163 corporations (not including their subsidiaries). Some Special Corporations began opening their books to reveal more information than had been available before 1999. However, many of the corporations, including their subsidiaries, did not provide financial statements but due to the government’s investigation of accounting practices, by 1999, the financial sheets of giant corporations, including the JH and the Japan National Oil Corporation (JNOC), revealed massive debt.

Koizumi requested that the ministries review how the corporations in debt were spending funds. His determination to cut funding by 50 percent was opposed not only by members of the LDP but by members of his own cabinet. Nobuteru Ishihara, the Cabinet State Minister of Administrative and Regulatory Reforms and whose father is Shintaru Ishihara, the former governor of Tokyo recommended that only one-third of the designated corporations should be considered for reform.

Koizumi’s administration devised a scheme that would convert fifty-nine Special Status Corporations into Independent Administrative Institutions (IAIs) with the expectation that eventually financing from FILP bonds and tax revenue would no longer be necessary and that there would be more transparency with regard to accounting methods. Many of the loans were not repaid and Seiji Ota, who was the director of the LDP office for the promotion of reforms, contended that one-third of the funds allotted to Special Status Corporations by FILP were wasted. Since MOF had been reticent to use the formal budget and tax revenue to finance the increasing number of loans throughout the 1990s, FILP was burdened with toxic debt.

Similar to the “law for the establishment of Special Status Corporations,” the “Incorporated Administration Law” for the establishment of Independently Administrative Institutions was implemented on December 13, 2002.

The Ministry of Public Management, Home Affairs and Telecommunications released an explanation in English that outlined the concept of the new IAI system:

The IAI system lies on the basic concept of public welfare, transparency, and autonomy of activities as Article 3 of the Law of the General Rules provides that (i) the IAIs must make efforts for just and effective operation under the consideration that the fulfilment of their undertaking is indispensable to people’s lives, society and the economy; (ii) the IAIs must make efforts to open to the public the status of their organizations and the operations by such means as the announcement of the content of their activities as provided by this law; (iii) the autonomy of each law must be respected in accordance with the application of the Law and the laws establishing the IAIs.


The Japan Highway Corporation (JH): a tug-of-war

Koizumi focused his initial efforts on the dissolution of the former MOC’s debt-ridden JH, which was referred to as “the world’s largest general contractor.” The expenditure in 1998 of Osaka Media Port in 1998 was $60 million, the highest of the JH’s subsidiaries.

Originally, Koizumi wanted to merge the JH with three other corporations – the Hanshin Expressway Corporation, the Metropolitan Expressway Corporation, and the Shikoku-Honshu Bridge Authority, which carried massive debts. In total, the accumulated debt was $488 billion. He then wanted to privatize the single entity by 2005 and have it repay the outstanding loans within forty-five years. He also wanted to cut government investment in future road construction by 40 percent because costs had ballooned to $2.46 billion annually.

The plans were admirable but the implementation of them was hindered by the vested interests of LDP law-makers, who relied heavily on contributions from their constituencies, who depended on public works projects for contracts and employment, and the bureaucrats who relied upon post-retirement positions in construction-related businesses. They demanded that the debts of the Shikoku-Honshu Bridge Authority, which could not repay the FILP loans, be separated from the other corporations, and that those prefectures where the bridges were located share the burden of the repayment with central government. Koizumi’s administration was pressured to produce a watered-down version of the original package that Koizumi had hoped to get through the National Diet. The cost was estimated to be $214 billion. The repayment of the debt was doubtful.

The process of the privatization of the JH was turbulent. The president was Haruhiko Fujii who had assumed the post in 2000 after retiring as vice-minister of the former MOC. During the period he was in both offices he was popular among LDP politicians because he expanded highway networks considerably and because of his close relationship with road construction firms. He was dismissed by Nobuteru Ishihara, the land minister at the time, after a much-publicized heated confrontation with Ishihara who accused him of being uncooperative during the process of privatization.

The four public corporations were privatized on October 1, 2005. But instead of Koizumi’s one entity, there are three, each with a new name. Regardless, the Ministry of Land, Infrastructure and Transportation (MLIT) which includes the former MOC, continues to manage the highway networks. FILP agency bonds fund the Japan Expressway Holding and the Debt Repayment Agency.


Special Status Corporations: the consequences of amakudari

The corporations in league with amakudari can be breeding grounds for bid-rigging which the JH exemplified. Since the JH distributed contracts to the construction companies, bid-rigging involving large construction companies was commonplace. On September 29, 2005, the Japan Fair Trade Commission (JFTC) ordered Japanese steel bridge-builders to stop bid-rigging for contracts from government and from the JH. The JFTC alleged that twenty former officials in the JH, including former Vice-President Michio Uchida and a former executive board member Tsuneo Kaneko, had received jobs in forty-five companies due to their involvement in bid-rigging. Among the forty-five firms named were Mitsubishi Heavy Industries Co., Ishikawa-Harima Heavy Industries and Kawasaki Heavy Industries Ltd. The JFTC announced that the contracts procured through illegal bid-rigging were worth approximately $2.35 billion. Former JH officials who were employed in the bridge construction companies had accessed unpublished information in the JH regarding toll road bridge construction projects. Uchida and Kaneko, along with officials from twenty-six corporations were indicted for bid-rigging.


The Government Housing and Loan Guarantee Corporation (GHLC)

Koizumi resolved to liquidate another MOC corporation (chapter 16) because it was heavily in debt. In 2002, 40 percent of all mortgage debt was from the GHLC and FILP reforms would make the provision of long-term, fixed-rate loans by the GHLC difficult. The corporation was converted to an Incorporated Administrative Agency on April 1, 2007 and renamed the Japan Housing Finance Agency (JHF) to assess mortgage debt to enable private financial institutions to create a steady supply of long-term, low-interest rate loans. It is one hundred percent government funded and managed by MLIT. So far, there has been no sign of success due to the soft real estate market.


The Urban Development Corporation (UDC)

Also targeted by Koizumi for reform was the UDC (Chapter 16). It was reorganized into an Incorporated Administrative Agency in July 2004 and renamed the Urban Renaissance Agency (AR). Funded one hundred percent by government, its work is no longer inclusive of urban projects and projects providing housing.


Japan National Oil Corporation: METI’s zombie treasure chest

Japan must import over 85 percent of its fossil fuel. METI oversees the energy-producing industries, among them oil. The ministry manages imports and refining through federations of oil importers. The former MITI established JNOC in 1967 to assist Japanese oil companies with the exploration and drilling for oil. The corporation received funding from FILP and had 142 subsidiaries and branch offices overseas. The federation connected MITI to the oil refineries which distributed to retailers. The domestic companies cooperated with foreign firms, usually holding the larger share of the investment.

Koizumi wanted to privatize the JNOC because in 1998 when the corporation was targeted for restructuring the president Kuni Komatsu, who was a former MITI Administrative Vice-Minister, divulged that the company carried an utstanding debt of $1.23 billion. However, Japan’s oil refiners were opposed to private companies taking over JNOC and wanted the government to continue JNOC’s operations because the corporations were financially too weak to take on the risks of oil exploration.

In August 2003, JNOC declared a net loss of $1.9 billion for fiscal 2002 and an accumulated debt of $6.17 billion due to the failure of its subsidiary, the Japan Oil Development Co. (JODCO). In 2004 METI began to dismantle JNOC, privatizing some of its subsidiaries such as the Japan Petroleum Exploration Co. and the Indonesian Petroleum Co. (INPEX Corp), a major upstream oil and gas company that was established in 1966 of which it owned a 53.96 percent share. INPEX had expanded operations internationally and was popular among foreign investors.

METI agreed to clear JODCO’s debts in order to convince INPEX to take over the money-losing JODCO. INPEX merged with Teikoku Oil in March 2006, receiving 81 percent of its shares. By 2008, JODCO was fully integrated into IMPEX Holdings.

One of the major complaints lodged against JNOC was poor management by officials who did not have the expertise to direct oil and production, pointing to MITI officials who took temporary positions for two years and forged relationships with domestic and foreign oil companies, which led to permanent post-retirement upper management positions in these companies. Traditionally, a retired administrative vice-minister from the ministry filled other top management positions such as vice-present or the director of finance. There were a number of migrations of officials from JNOC and from other MITI Special Status Corporations to such companies as Indonesian Oil, Japan Steel Pipe Co., Mobile Shell and Abu Dhabi Oil.  The trade- off for the privatization of JNOC was that amakudari was allowed to continue in JETRO.


Incorporated Administrative Agencies: what’s in a name?

IAIs are also regarded as Incorporated Administrative Agencies through the “Incorporated Administrative Agency Act” which is still another law which is neither civil nor corporate as stated on METI’s website:

An incorporated administrative agency is a judicial person that acts independently of the state and manages business operations such as research, inspection and trade insurance that were former performed by the state. A particular feature of such agencies is that they can independently consider how to perform their operations, and run these operations in a better, more efficient manner on their own responsibility. Specifically, each minister sets objectives to be attained by agencies under his or her jurisdiction, and each agency draws up a plan to achieve the objectives and carry out operations in line with the plan. The results obtained are evaluated by outside experts and the evaluation is reflected in management plans for subsequent years.

The explanation does not include that the government intends to review all of these agencies within a period of five to seven years in terms of efficiency of operations and management. If it is determined that the corporations are no longer viable, they may be terminated or downsized. The agencies are still in operation and it is difficult to envision that ministries such as METI, MOF or MLIT would willingly part with their respective agencies.

 METI retained JNOC’s oil and exploration units when it was merged with its Special Status Corporation, the Metal and Mining Agency, which in 2004 was christened the Japan Oil, Gas and Metals National Corporation (JOGMEC) as an Incorporated Administrative Agency.

In addition to JOGMEC, METI manages the following Incorporated Administrative Agencies which are energy specific and which employ retired METI officials in upper management positions or as directors on the boards.

  1. Japan External Trade Organization (JETRO).
  2. The New Energy and Industrial Technology Development Organization (NEDO) was established by the former MITI as a Special Corporation in 1980 for the promotion and funding of projects related to renewable energy and the development of industrial technologies. With a budget of $2.8 billion (FY 2009) NEDO employs 1,000 staff and engages in projects overseas with offices located in Silicon Valley, Washington, DC, Paris, Beijing, Bangkok and New Delhi.
  3. The Japan Nuclear Energy Safety Organization (JNES).
  4. The National Institute of Advanced Industrial Science and Technology (AIST) was established in 2001 as an amalgamation of fifteen research institutes that were managed by the former MITI. Its predecessor had been established in 1982. The new AIST is the largest government-supported research institute in Japan with forty autonomous research institutes employing 2,400 researchers and 700 administrative staff.

METI’s other Incorporated Administrative Agencies include:

  • Institute of Developing Economies, Japan External Trade Organization (IDE-JETRO).
  • Research Institute of Economy, Trade and Industry (REITI).
  • National Center for Industrial Property Information and Training (NPIT).
  • Nippon Export and Investment Insurance (NEXI).
  • National Institute of Technology and Evaluation (NITE).
  • Japan Water Agency (HWA).
  • Japan International Cooperation Agency (JICA).
  • Information-Technology Promotion Agency, Japan (IPA).
  • Japan Organization for Employment of the Elderly, Persons with Disability and Job Seekers (JEED).
  • Organization for Small & Medium Enterprise and Regional Innovation, Japan (SMRJ).

 

FILP: breaking up is hard to do

Koizumi’s reforms of Special Status Corporations included the privatization of state banks which, while supporting Japan’s rapid economic growth, were regarded as serving similar functions. The Japan Finance Corporation (JFC) was established on 1 October 2008 by MOF under the Japan Finance Corporation Act. JFC was the result of the integration of the National Life Finance Corporation (NLFC), the Agriculture, Forestry and Fisheries Finance Corporation (AFC), the Japan Finance Corporation for Small and Medium Enterprise (JASME) and the International Financial Operations (IFOs) of the Japan Bank for International Cooperation (JBIC). However, the Japan Bank for International Cooperation was separated from the JFC in April 2012.

The JFC is a FILP designated institution which entitles it to issue FILP Agency bonds which are guaranteed by government. Koichi Hosokawa, the current Governor and CEO was the deputy Vice Minister at MOF (2002-4). He describes the JFC: “JFC is a policy-based financial institution that aims to complement financial activities carried out by private financial institutions and contributes to the improvement in the living standards of Japanese people.” Hosokawa describes FILP:

FILP are long term low interest loans and investments by the government to achieve policies: financial support for small and medium enterprises, construction of hospitals and welfare facilities, scholarship loans, and securing of overseas resource rights.

Procuring the capital through issuing FILP bonds, (a kind of Japanese Government Bond), FILP enables the execution of providing long-term and low-interest funds and large-scale and long-term public projects, which have strong policy needs, profitability and expected returns but are difficult for the private sector to deal with. Considering the harsh fiscal conditions, FILP are becoming increasingly important as fiscal measures which do not rely on tax funding.

FILP, which is one mechanism of fiscal policy, has a function of adjusting resource allocation since goods and services are not sufficiently provided if the economy is completely entrusted to the market mechanism.

FILP supplies funds that are difficult to be procured in the private sector, to FILP agencies such as government affiliated financial institutions and incorporated administrative agencies, and such FILP agencies play a role in adjusting resource allocation by supplying various goods and services using these funds. For instance, although small and medium enterprises play an important role in the Japanese economy, they have weak credit and collateral compared to large enterprises, and they have a difficulty to obtain necessary funds from private financial institutions alone. To solve this problem, loans are provided by government affiliated financial institutions using FILP.

The 2012 FILP Plan issued by MOF called for continued loans to state banks such as the Japan Bank of International Cooperation (JBIC) which was the result of the merger of the former MITI’s EXIM and the Overseas Economic Cooperation Fund (OECF) in October 1999. In October 2008, JBIC became the international arm of the JFC to provide loans to small and medium size companies and to larger companies for the construction of infrastructure overseas and for such operations as oil mining. In the same year, JBIC was separated from the JFC. JBIC can issue JBIC bonds which are not guaranteed by government or FILP Agency Bonds which are guaranteed by government.

The Japan Development Bank (JDB) was established by MOF in 1952 to finance Japan’s industrial development by providing loans to heavy industries to support both domestic and overseas expansion. In October 1999 the JDB merged with the bankrupt Hokkaido-Tohoku Development Finance Corporation, a regional public corporation managed by MOF. The merger was celebrated with a new name, the Development Bank of Japan (DBJ). The bank’s former name in Japanese translates as “Japan Development Bank” (Nihon Kaihatsu Ginko). Although the new name in English appears to be almost identical, the English translation of the Japanese is  “ Investment Strategy Bank of Japan” (Nihon Seisaku Toshi Ginko). The DBJ is also a tokushugaisha.

When I met a DBJ officer who had been sent to the University of Edinburgh Business School for an MBA in 2004 he insisted that the bank would be privatized within three years. I argued that, due to Japan’s recessive economy, the DBJ would remain a state bank and continue to support struggling companies. The DBJ was one of the institutions that helped in January 2010 to rescue Japan Airlines which was on the verge of bankruptcy. The DBJ was set to be privatized in 2015, assuming a key role in supporting Japan’s domestic economy and industrial expansion abroad. However, the plans are still under discussion.

The two other state banks in the FSC, which provided loans to small businesses were the People’s Finance Corporation, established in 1959 by MOF, and the Corporation for Agriculture and Forestry and Fisheries also established in the 1950s by MAFA.

These state banks were revised as “special corporations” or tokushugaisha. The ostensible difference between Special Status Corporations (tokushuhoujin) and the “special corporations” is that Special Status Corporations are public corporations that were established by the ministries under a “special” law. The “special corporations” established in 2008 according to a separate “special” law are entirely government funded but the law specifies that these corporations will eventually be privatized. The banks still provide loans to SMEs engaged in agriculture and manufacturing.

Initially, the government, which owns 100 percent of the banks, had planned to sell all of the shares within a 5-7 year period.  However, privatization was postponed for three-and-a-half years because of the financial crisis in 2009. The privatization of the tokushugaisha was again postponed for three years to deal with the aftermath of the Great Northeast earthquake in March 2011 because the banks were needed to support the regions affected by the earthquake. Despite the government’s intention to reconsider the process of selling shares and the degree of influence it would reserve over banking operations, at end of FY 2015 the banks were still fully funded by government.

On the surface it appears that there has been a massive restructuring of Special Status Corporations (tokushuhoujin) with stricter guidelines regarding the use of public revenue and how the corporations justify their budgets. However, although FILP is said to be downsized, there is no doubt that in the case of many of these corporations, the pay-as-you-go government gravy train system is intact.

Despite Koizumi’s objectives to cut public spending through structural reforms, at the time he left office in 2006 the government debt was 150 percent of annual GDP.


Nothing Much Changes in this System

Spike_eat_too_much_berries

Merely changing the name of Special Status Corporations to Independent Administrative Institutions and merging some of the bankrupt corporations with solvent corporations did little to stop the wasteful spending of public revenue or the migration of bureaucrats to IAIs. In March 2007 a survey released by the Lower House reported the number of IAIs (including subsidiaries) maintained by the ministries and the number of “retired” bureaucrats, including officers on loan to these entities:

  1. The Ministry of Land, Infrastructure and Transport: 834 entities, 6,386 bureaucrats.
  2. Ministry of Health, Labor and Welfare: 709 entities, 4,007 former officials.
  3. Defense Ministry: 207 entities, 3,917 former officials.
  4. Ministry of Education, Culture, Sports, Science and Technology: 934 entities, 3,007 former ministry officials.

On 8 November the secretariat of the cabinet’s headquarters for Administrative Reform released documents to a government panel of experts on streamlining public corporations. Originally, fifty-seven corporations were set up to take over part of the operations of the ministries and agencies but this number had increased to 101, a similar pattern to that which evolved as the ministries were establishing their Special Status Corporations. The report showed that 40 out of 101 IAIs awarded contracts to their subsidiaries with more than 90 percent of the contracts completed without competitive bidding.

The documents also revealed that the 101 IAIs altogether had 260 affiliates. Companies where one-third or more of their posts were occupied by former directors and senior officials of the IAIs were among the affiliates. Also, 230 officials at the 101 corporations had assumed directors’ posts at affiliates in fiscal 2005 through amakudari.

The lucrative salaries that top management in the public entities receive make the positions enticing to retiring officials and to officials who had left their ministries to work in the private sector. As an example, on October 24, 2009, Kyodo News Service reported that ninety-eight public corporations hired officials who had retired from the ministries which managed their respective corporations. Eleven were operated by METI and seven of them, including JETRO, were headed by former METI bureaucrats. Of the seven, six were officials who had previously left the ministry to work as executives and advisers at major private companies. The average annual salary of twenty-nine chiefs for FY 2009 was $226,470.

In his book Minshu no Teki (Enemy of the People) published in 2009 former Prime Minister Yoshihiko Noda stated that he had anticipated that Koizumi’s administration would implement reforms and cut public debt but assessed the reforms as being no more than the image of reform of Special Status Corporations. He condemned Special Status Corporations (Noda refers to IAIs as Special Status Corporations) as a waste of tax revenue, as a haven for retired bureaucrats who landed comfortable jobs with high salaries and as impediments to the implementation of structural reforms. During Noda’s administration, a bill was passed to merge JETRO with a corporation managed by the Ministry of Foreign Affairs in 2014, which I also had recommended in Special Corporations and the Bureaucracy (2003). However, now that Abe and the LDP have returned, it is doubtful that the merger will ever materialize.

In the book I state: “Special Corporations are illustrative of the basic nature of Japan’s political economy. The ministries’ determination to maintain territory and thus protect vested interests can be seen in the continued operations of Special Status Corporations despite Koizumi’s plans to dissolve them.”


Fast Forward

Despite the struggle by successive administrations to end the amakudari system through a law prohibiting the ministries from arranging post-retirement positions in both public and private sector, the system continues. On January 19, 2017 the Japanese dailies reported that the former administrative vice minister of MEXT, after retiring from the ministry in August 2015 took a position a few months later as a professor at Waseda University, a private university. This type of post-retirement parachuting to universities has been a long-standing practice and in many cases, a positive use of bureaucrats in educational institutions if the officials’ lectures are based on their expertise.  However, this individual engaged in liaison and coordination of programs of MEXT, effectively connecting his former ministry to Waseda.

University graduates are increasingly unwilling to enter the civil service because of the ethos and the uncertainty of career paths within the ministries. In Japan’s Nuclear Crisis (2012) I suggested that Prime Minister Noda could beef-up the bureaucracy through the institutional restructuring of the ministries and to cultivate technocrats who were willing to collaborate with politicians in the planning of strategy and cohesive policies. Graduates would welcome the civil service if certain conditions existed that supported a more egalitarian environment such as the discontinuation of the seniority system and the installation of the “promotion by merit” system.

Additionally, wages should represent corporate pay-scales, retirement benefits should be increased and substantial bonuses awarded for good work. Adequate administrative staff should also be provided. I even went so far as recommending that a special corporate tax be levied on the larger exporters to finance the restructuring. The reorganization of the ministries would serve to assuage the hierarchical structure and discourage patronage and a “yes-man” society.

Ministry officials work long hours without receiving overtime pay and, therefore, Special Status Corporations offer an incentive to enter the civil service. Most officials are trained as generalists and do not have specific skills which are pertinent to the private sector. The ministries still rely on their corporations as a means of taking care of their officials after they retire. Since officials want to continue earning income for their families, the ministries’ corporations provide positions where they can conveniently rely on financial support.

Mr. Noda was correct in his assessment of Special Status Corporations but if he had worked as a ministry official, he may have concluded that there must be incentives in place to tempt university graduates to enter the ministries and something at the end of the line that would provide post-retirement salaries besides benefits. Despite the name – change to Independent Administrative Institutions or Incorporated Administrative Agencies or Special Corporations,  the Japanese still refer to the ministries’ corporations as Special Status Corporations.