September 26, 2002
At the Promotion Committee for the Privatization of the Four Highway-related Public Corporations, the debate has been based on the premise that Japan's four highway entities shall be privatized and go public, that the privatized highway entities shall receive no additional public funds, and that the entities shall permanently collect tolls towards maintaining the current level of toll rates. There has been, however, scant analysis on how to correct the current high-cost structure that brings about extremely high logistics costs in Japan, thus accelerating the hollowing out of Japanese industry.
Today's financial deterioration of toll highway management is primarily attributable to under capitalization (i.e., insufficient injection of equity money). International comparisons show that the Japanese toll highways are less capitalized than other countries. China, which made the same mistake in operating state-owned enterprises (SOEs), has learned its lesson and shifted to a policy to address its "over-debt" problem of SOEs by way of debt-for-equity swaps and strengthening capital bases for future projects.
Toll highway users are being forced to pay more than the benefits they receive, effectively compensating for insufficient infusion of state funds. Introducing a permanent toll collection system without any reform on the toll rates is unfair and may accelerate the hollowing out of Japanese industry. Japan should resolve this pressing issue in a straightforward manner, providing necessary funds to strengthen the capital base of highway entities.
While price destruction proceeds in the liberalized sectors of the Japanese economy, price adjustment has hardly taken place in the other areas, that is, industries under strong government influence. To revive the nation's economy, it is vital to correct this dual structure. By rectifying the high-cost structure in a way that better reflects users' interests, the ongoing reform on highway management can lead to the reform of the high-cost structure of other logistics and distribution sectors.
The launch of the Promotion Committee for the Privatization of the Four Highway-related Public Corporations, a government advisory panel to the Prime Minister, has activated debates on the reform of Japan's highway management both within and outside the committee. The mass media are generally supportive of pro-reform committee members who are fighting against the resistance forces, namely, pro-road construction lawmakers who are firmly against ongoing reform initiatives. The big mystery is that the ongoing debates at the committee completely lack an examination of what to do with the current costly highway tolls.
The problem of under capitalization and excessive debts, which is heavily weighing on the management of public and semi-public corporations, and the problem of soured FILP funds are related. Among failing infrastructure projects are the Honshu-Shikoku Bridge, the Tokyo Bay Aqualine bridge-and-road system, and the Kansai International Airport to name just few. Bureaucratic insufficiency was certainly one factor and thus, it is necessary to privatize insufficient public and semi-public corporations. Japanese people are fed up with the opaque and unfair toll pooling system, public and semi-public entities having too many employees, and the vicious tenacity of their numerous family subsidiaries in attempting to protect their vested interests. In this regard, expectation is high on the Promotion committee to change this situation.
If their doomed-to-fail undercapitalized situation remains unchanged, however, the privatization of those public and semi-public corporations would not be able to bring its intended results. Trying to make both ends meet without addressing the root problem is tantamount to overlooking the forest for the trees and this may result in absurd decisions to freeze construction with no room for argument and/or to maintain toll collection system permanently which would lead to hideous consequences.
The government should create an expense item within its budget, a fund for maintaining the industrial base and rectifying the high-cost structure for roads and other infrastructure, and seriously consider ways to revamp the capital base of each project. Airport construction and management, laden with the problem of the Kansai International Airport, should be dealt with in the same manner.
Compensating failed public and semi-public projects is too much to ask of taxpayers. A more positive goal, such as investment for maintaining industrial base and rectifying the high-cost structure, should be set out. And the government should utilize debt-for-equity swaps, such as a scheme to revamp the financial structure of those corporations before they actually fail.
This scheme would surely increase the government's debt burdens. But financial market players have long been aware of the problem of NPLs held by special public corporations (soured or souring FILP funds) and they are already discounting them as the government's hidden debts. From their point of view, any additional fiscal burdens stemming from the implementation of a straightforward solution to this problem is nothing but the surfacing of off balance debts. Taking up fiscal burdens under the clear objective of correcting the high-cost structure, the government can send a positive signal that Japan is finally ready to address its problems and that is can avoid losing its best companies.
Author, Toshiya Tsugami
Senior Fellow
Research Institute of Economy, Trade and Industry (RIETI)
Editor-in-Chief, Ichiro Araki
Director of Research
Research Institute of Economy, Trade and Industry (RIETI)
e-mail: araki-ichiro@rieti.go.jp
tel: 03-3501-8248 fax: 03-3501-8416
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[http://www.rieti.go.jp/en/index.html].
The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).
