[ Keidanren ] [ Policy ]

First Phase Proposal Regarding the Reform of
Special-Purpose Corporations and Other Such Entities

March 28, 2000

(Japan Federation of Economic Organizations)

  1. The Need for Reform
  2. The Basic Rationale for Reform
  3. Practical Reform Measures
    1. The Reorganization, Downsizing and Periodical Review of
      Special-Purpose Corporations and Other Such Entities
    2. Implementation of a Common System

  1. The Need for Reform
    1. Since the temporary council for research into the public administration system was established by Mr. Doko, it has been pointed out that special-purpose corporations need to be reformed from the viewpoint of streamlining administration and coordinating areas of business between the government and private sector. As a result of several cut backs, as well as the rationalization and improvement of organizational aspects, management and efficiency, the number of special-purpose corporations has been reduced from a peak of 113 to 78. However, as seen in the recent integration of special-purpose corporations, even though the number has been reduced, this was only a simple integration of organizations and there were many cases where it is difficult to say that functions were fundamentally reviewed. It seems that there are many cases where corporations have lost or maintain a less significant existence than was their initial aim, or where the system of enforcement needs to be reviewed, even though the purpose of the policy still remains valid one. Therefore, while considering the main aims of administrative reform, it is necessary to review further whether special-purpose corporations need to exist and to continue to consider whether we should shift to a more efficient and effective enforcement system.

    2. In the fiscal investment and loan program (FILP) for fiscal 2000, 33 special-purpose corporations and five licensed corporations are due to receive fiscal investment and loan funds. Looking at the balance of FILP so far, about ¥250 trillion in fiscal investment and loan funds has been invested in more than 40 special-purpose corporations and other such entities. If we neglect to make continuous efforts to reform these special-purpose corporations, there is concern that part of the funds will not be recovered in the future, and we will have to cover these losses with taxes. As part of the reform of government ministries and agencies, FILP will be reformed. However, finding solutions to most problems concerning the reform of special-purpose corporations and other such entities, which is the final part of the reform program, has been postponed while only indirect measures involving fund raising have been adopted. Thus, in order to enforce FILP reform, there are needs for another overall review and reform of special-purpose corporations and other such entities.

    3. In April 2001, as part of the reform of government ministries and agencies, an independent administrative corporation system was established as a new administrative service organization that is in the public interest, transparent and capable of acting autonomously. In order to improve efficiency and quality and maintain transparency, a performance appraisal system and, in principle, a business accounting principle were introduced at independent administrative corporations. The independent administrative corporation system is well designed so it will be possible to resolve most issues which have been pointed out as peculiar problems of special-purpose corporation and other such entities by thoroughly disclosing information regarding jobs and performance, for example. Moreover, it seems there are many types of operations currently being carried out by special-purpose corporations that should be or could be operated within the framework of independent administrative corporations, or a similar system.

    4. Although they were established in a different form, licensed corporations are carrying out operations that are very much of a public nature and in the public interest in the same way as special-purpose corporations. Therefore, in the report of the temporary council for research into the public administration system, special-purpose corporations and licensed corporations are categorized together as "special-purpose corporations and other such entities," which means licensed corporations are treated the same as special-purpose corporations in relation to administrative reform. Therefore, we believe similar measures will be required for this phase of reform. Since special-purpose corporations and licensed corporations were obliged to "scrap and build," many administrative agency-type public-service corporations, which acted like secret special-purpose or licensed corporations, were founded. Therefore, it is necessary to continue to consider reforming corporations that are regarded as an extension of public administration, even if they were founded as private corporations.

  2. The Basic Rationale for Reform
    1. Special purpose corporations were founded as organizations for the implementation of government policy during the period from postwar revival to the period of high economic growth in response to an increase in administrative demand. Supported by a special law, they were designed to supply social overhead capital, which had been lagging behind, as well as encourage regional development, foster industrial development, and promote small and midium-sized companies. Many licensed corporations, which are actually no different from special-purpose corporations, were also founded during the high economic growth period with approval given by the competent minister based on a special law. Based on subsequent changes in social and economic conditions and views on how the role of the government and the private sector should be shared, it is fundamental that special-purpose corporations and other such entities be reviewed in terms of the following criteria:

      1. whether the policy objective on which the corporation's foundation was based is still valid;
      2. even if the policy objective is still considered necessary, whether it is necessary to take the form of a special-purpose corporation and whether there are any other alternatives.
      It is also essential to carry out a review of special-purpose corporations and other such entities with a view to their abolition, integration, or operational downsizing; their privatization or autonomy as private corporations; turning them into non-public-servant type Independent administrative corporations; or shifting to alternative means, such as subsidized interest payments.

    2. Based on the results of these reviews, it will be necessary to attempt to activate and improve the management and organizational efficiency of special-purpose corporations in the case of business activities that need to be maintained in the form of special-purpose corporations for some reason or other. At the same time, we should ensure that these corporations are always kept under surveillance by the public and the Diet by maintaining the transparency of their business activities. For that purpose, it is necessary to implement a common system that conforms to the independent administrative system. This will involve introducing a system that guarantees continuous reviews based on an objective evaluation by third parties and thorough disclosure. In particular, it is important to make sure that FILP agencies disclose information relevant to the issuance of FILP agency bonds.

  3. Practical Reform Measures
  4. (1) The Reorganization, Downsizing and Periodical Review of Special-Purpose Corporations and Other Such Entities

    1. The reorganization and rationalization of special-purpose corporations is specified in Article 42 of the Basic Law on the Administrative Reform of the Central Government. In the "Policy concerning the Promotion of Reform of the Central Government" (decided on by the Headquarters for the Promotion of the Reform of the Central Government on April 27, 1999), it was decided that "based on a series of Cabinet Decisions, special-purpose corporations are to be thoroughly reviewed; privatization, reorganization, downsizing or the abolition of operations is to be implemented; and special-purpose corporations still needed are to be examined, including whether or not they can become Independent administrative corporations, so that they will have an appropriate organizational structure and suitable business activities." Regarding the reorganization and rationalization of special-purpose corporations, it has been specified that "third parties should make proposals" in the supplementary resolution passed by both Houses (June 9, 1999 in the House of Representatives and July 8 in the House of Councilors) upon the establishment of The Law concerning Reform of the Central Government. Against these backdrops, First of all, the government should set up an authoritative, third-party-like organization to reorganize and rationalize special-purpose corporations, including licensed corporations, which have been treated in the same manner as special-purpose corporations. This should be done based on the Basic Law on the Administrative Reform of the Central Government and simultaneously with the shift to the new system from January 2001. The government should make a political decision to set a deadline by thoroughly reviewing the business activities of special-purpose corporations and attempt to reorganize and downsize them. This should be done while taking into account proposals based on actual conditions, such as Cabinet Decisions, and reviews in accordance with the following criteria.

      1. If the corporations have almost achieved their business purposes or their business activities are not significant anymore, or if they have engaged in business activities that are similar to those in the private sector and have less need for government support, they are to be abolished or downsized. If other means of implementing policy, such as providing guidance to the private sector, are effective, alternative means will be adopted.
      2. If corporations are self-supportive and do not need to operate as government enterprises or if they can improve their efficiency through corporate management, they are to be privatized. If corporations are already being privatized, the process will be accelerated.
      3. If corporations can maintain the same business activities, for example by becoming corporations under civil law, they are to be privatized. Even if it is difficult to turn them into "completely private corporations," their independence will be promoted as much as possible so that they will not depend on funds or subsidies from the government or similar parties.
      4. If there are several corporations carrying out similar business activities and they are inefficient, they are to be integrated or rationalized.
      5. In a specific area, if there are corporations that are not fulfilling their initial purpose anymore, they are to be integrated into corporations with national operations or transferred to regional business entities.
      6. If some corporations need to be retained as independent corporations even after the review mentioned above, their business activities will be thoroughly reviewed relevant to the adjustment of business areas between the government and the private sector so that their business activities are suited to such corporations. If the organizational structure is suitable for the framework of Independent administrative corporations, they will be transferred to non-public-servant type Independent administrative corporations.

    2. In order to achieve public administration that takes into account changes in social and economic conditions, there is a need to introduce a system of comprehensive periodical reviews, ranging from the right and wrong of the actual policies carried out by special-purpose corporations to the systems that actually enforce them. New evaluation procedures, such as cost benefit analysis, are to be implemented and all issues including whether or not business activities and organizations will be revised or abolished are to be examined based on objective evaluations by third parties. As a result of these reviews, if business activities and corporations are to remain in existence, the reasons and grounds for these decisions will be disclosed in order to maintain transparency, thereby allowing the public and the Diet to make the appropriate choices.

    (2) Implementation of a Common System

    1. The Obligation to Set Medium-Term Goals and Medium-Term Plans and Establishing Objective Evaluation Organizations
    2. Independent administrative corporations are obliged to decide on medium-term goals and medium-term plans. An evaluation committee set up in the relevant government ministry or agency will evaluate business performance during each business year. In addition, when the medium-term goal period has expired, Operation Evaluation Committees and Evaluation Committee for Independent administrative corporations, which consists of experts and placed in the Ministry of General Affairs, can advise the competent minister regarding whether or not the applicable corporation's major administrative and business activities should be revised or discontinued.

      Even for corporations that continue to maintain a special-purpose corporation structure, the same system should be established. The evaluation results will be reported to the Diet before the compilation of the national budget every year. Reviews of such corporations should always be promoted including decisions on whether or not they should remain. At the same time, medium-term goals and medium-term plans concerning downsizing and improvements in the efficiency of organization and personnel, as well as reductions in administrative and operational costs should be decided on, and a system should be developed to autonomously accelerate the achievement of the plan concerned.

    3. Appropriate Accounting Procedures and Thorough Disclosure of Financial Information
      1. Accounting Standards
        In October 1987, the "Accounting Standards for Special-Purpose Corporations" (hereafter referred to as the "Standards") were decided on so that the competent minister could utilize them during decisions on the approval of financial statements of special-purpose corporations in which the government has invested capital or to which it has granted subsidies. According to the "Standards," accounting procedures should basically be standardized in accordance with corporate accounting principles. However, accounting procedures actually often differ from the related systems of private-sector corporations. For example, in the current "Standards," since corporations appropriate an "amount regarded as appropriate" for allowances, too small or too large an amount can be appropriated. Moreover, when depreciating fixed assets acquired with subsidies, an amount equivalent to the subsidy should be accounted for as a liability and an amount equivalent to the depreciation allowance should be expended each fiscal year and accounted for as income. This method is thought to have been adopted because there are some special-purpose corporations that acquire most of their fixed assets using financial resources such as subsidies. Therefore, when reduction entries are used, as in the case of corporate accounting, there is concern that the actual use of subsidies becomes rather unclear. However, in order to accelerate disclosure, an adequate scheme should be worked out. For example, the accounting procedures used should be specified in notes that accompany financial statements.

        Therefore, the accounting standards for special-purpose corporations need to be revised according to the standards for Independent administrative corporations. At the same time, consideration should also be given to how consolidated accounting should be conducted between special-purpose corporations and their subsidiaries, affiliated companies and affiliated public-service corporations.

      2. External Auditing
        Independent administrative corporations are governed by legislation on auditing by accounting auditors but there are hardly any cases where special-purpose companies are obliged to perform external auditing with the exception of special companies. Consideration is being given to the introduction of such legislation for some policy-based financial institution but they should be obliged to have external audits performed by certified public accountants, as in the case of private-sector companies, to ensure the impartiality of accounting procedures. In particular, such legislation should be rapidly introduced for FILP agencies from the viewpoint of establishing conditions for the issuance of FILP agency bonds as well.

      3. Disclosure of Financial Information, etc.
        As regards special-purpose corporations, "The Law concerning Preparation and Promotion of Disclosure of Financial Statements by Special-Purpose Corporations" (the Special-Purpose Corporation Disclosure Law) was enacted in 1997. This law (1) legislated the preparation of balance sheets, profit and loss statements, annexed specifications, business reports and statements of the opinions of auditors, as well as the provision of offices; and (2) legislated advertising concerning balance sheets and profit and loss statements and attempted to establish a unified system associated with the preparation of documents concerning financial information and its disclosure. However, in the case of licensed corporations, which have the same characteristics as special-purpose corporations, no legal measures have been introduced at all, and the actual preparation and public disclosure of financial statements has remained limited.

        Furthermore, in the case of special-purpose corporations, numerous subsidiaries and other such affiliated corporations exist, and it has been pointed out that there are various problems, such as high costs resulting from expensive order issuing and purchasing, as well as the problem of amakudari (outsiders taking senior posts as a form of favor). In the case of "Concerning Disclosure by Special-Purpose Corporations" (Cabinet Decision of December 19, 1995), it became compulsory to disclose a list of associated companies (subsidiaries and affiliated companies) which includes the name of the company and the value and ratio of share holdings.

        To ensure further transparency for special-purpose corporations and other such entities, it should become compulsory to disclose financial information, with the inclusion of licensed corporations, and in addition to the thorough implementation of the above, to prepare and publicly disclose financial statements for all subsidiaries, affiliated companies, and affiliated public-service corporations, as well as consolidated financial statements based on the establishment of an accounting system. In addition, cash flow statements, which are due to be introduced in corporate accounting from fiscal 2000 in line with international accounting standards, will have to be prepared by Independent administrative corporations as well, and special-purpose corporations should also be obliged to prepare and publicly disclose such statements. This information is also important in evaluating the actual business of special-purpose corporations and other such entities and needs to be disclosed in a unified and summarized way so that it can easily be understood by the public.

    4. Information Disclosure
    5. In the Law Concerning Access to Information Held by Administrative Organs, which was established last year, the government created legal measures for the disclosure of information by special-purpose corporations due to come into force two years after the promulgation of the law (which took place on May 14, 1999). At present, the Committee for the Investigation of Information Disclosure by Special-Purpose Corporations, which was established under the jurisdiction of the Headquarters for the Promotion of Administrative Reform, is earnestly investigating what kind of system should be established for the disclosure and provision of information, including licensed corporations.

      A legal system concerning information disclosure should be established as soon as possible for Independent administrative corporations, which have become independent from the central government and newly established as organizations for the implementation of administrative services. However, such a system should also be established for special-purpose corporations that are regarded as administrative agencies and an extension of public administration based on central government participation, such as capital contributions and subsidies, as well as their operational activities.

    6. Abolition of the Principle of amakudari, the Promotion of Internal Appointments, and the Use of Private-Sector Individuals
    7. There are many special-purpose corporations and other such entities where the custom is to appoint "old boy" bureaucrats as the organization's head and where designated posts are assigned on the basis of amakudari because of an insistence on the need for specialist knowledge. Thus, the principle of so-called watari, where executives are transferred among special-purpose corporations and other such entities (for the purpose of monopolizing political power within one's own clique) should be abolished while responsibility should be made transparent and standards of responsibility should be clarified. However, to activate organizations and ensure they engage in efficient business activities, it is also necessary to abolish the principle of accepting amakudari personnel and to attempt to appoint internal personnel who have the advanced knowledge and experience to carry out the corporation's activities. At the same time, moves should be made to utilize private-sector individuals who have excellent management skills and the ability to perform business activities suitably and efficiently. To this end, it is also necessary to reform the public servant system by reviewing performance appraisal systems and early retirement systems.

    8. Establishment of a Common Legal System
    9. In the case of special-purpose corporations and other such entities, there are various legal regulations because these organizations tend to have been established on the basis of individual laws as the need arises, and no general laws have been established as they have in the case of Independent administrative corporations. In order to establish social responsibility and rules for organizations that implement government policies, and to ensure greater efficiency, quality, and transparency as in the case of Independent administrative corporations, the development of a common legal system for special-purpose corporations and other such entities should be investigated. This should first define and prescribe the scope of such organizations, but also include evaluation, financial, and accounting systems described above, as well as a basic system that covers the transparency of methods of purchasing and subcontracting, the authority and responsibility of executives, government participation and regulations, and insolvency and ways to deal with it.

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