Inefficient public works projects creaking under debt burden

KOBE — The Akashi Kaikyo Bridge, the world’s longest suspension bridge, looks superb as it spans the Akashi Strait, linking Kobe and Awaji Island in Hyogo Prefecture.

Traffic is scarce on the Akashi Kaikyo Bridge in this photo taken during a weekday last month.

Nearly three years after opening in April 1998, however, the future of the 3,911-meter bridge is hanging in the balance, with its operation creaking under the burden of snowballing debts.

The Honshu-Shikoku Bridge Authority — a special public entity that operates a set of roads and bridges connecting Honshu and Shikoku on three routes, including that over the Akashi Strait — is currently forced to spend 200 yen for every 100 yen it churns out in revenue.

With the volume of traffic passing over the bridge much lower than initial projections, the authority is earning far too little to repay its massive long-term debts.

Saddled with 4.37 trillion yen in debts and having only 3.53 trillion yen in assets as of the end of March 1999, the Honshu-Shikoku Authority is in an “extremely severe situation,” a government report warned in August.

The bridge-and-road system — one of the fruits of a 24-year project launched in 1975 — once symbolized Japan’s economic prosperity.

It is now viewed, however, as a symbol of inefficient public works initiatives carried out by the central and local governments and their affiliated public entities.

As of the end of March, outstanding long-term debts held by the central and local governments is expected to total 642 trillion yen. This figure will rise to 666 trillion yen — or 128.5 percent of Japan’s gross domestic product — at the end of March 2002, if the government goes ahead with its proposed budget for fiscal 2001.

And these dire figures do not include debts held by a number of government-affiliated special public corporations, such as the Honshu-Shikoku Authority.

Pundits say a steep rise in the tax burden on individuals along with a drastic curtailment in public works projects is becoming inevitable. Otherwise, they warn, the weight of public debt will become unbearably heavy on future generations, constraining the nation’s future economic growth and leading to a confidence crash in government bonds and the yen.

Between fiscal 1992 and 1999, the government spent more than 120 trillion yen on pump-priming measures, including 70 trillion yen on public works projects to construct roads, bridges, airports and other infrastructure.

The massive outlays, however, have failed to stimulate the desired economic growth.

What’s more, the end products have often resulted in the charging of exorbitant fees, contributing to the nation’s high-cost structure.

Public disenchantment with these projects is accordingly on the rise.

“We should not allow any more projects that are no longer wanted by the public but carried out to maintain (jobs and other vested) interests of those involved in public works projects,” said Yoshitaro Nomura, a Tokyo lawyer who heads a citizens’ group that monitors what he describes as the “abuse of citizens’ savings and pension funds by special public corporations.”

Public works are, by their very nature, not intended to be very profitable; instead, they’re supposed to fill in the gaps left by the private sector.

As many acknowledge, a number of infrastructure projects helped bring prosperity to Japan during the postwar reconstruction era and the ensuing high-growth period of the 1960s.

To some extent, therefore, public projects have had their place in society, propping up domestic demand during economic slumps. But that role is almost impossible to play these days as economists in Japan and overseas point to massive public debts as a major downside risk factor for the economy.

Author Naoki Inose, who provided a detailed analysis on the ever-expanding web of public entities in his 1997 book “Nipponkoku no Kenkyu” (“A Study of Japan”), says the country must now shelve its quest for development under its highly centralized administrative system.

That system, which emerged following the 1868 Meiji Restoration as a newly created government desperately tried to restore and protect Japan from powerful foreign forces, suited the postwar development stage, when the private sector was teetering, Inose said.

“But the problem is that the bureaucratic system has continued to propagate itself merely for its own interests, even after the private sector became capable of standing on its own feet,” he said.

Pork-barrel politicians have aggravated the situation, with this bureaucratic machine providing them with a convenient system in which to exercise their political influence on behalf of their faithful supporters. These include local construction firms and other interest groups willing to serve as vote-gathering machines.

“I will definitely increase budget allocations if you ask me to do so.”

That pledge came from Shizuka Kamei, policy affairs chief of the Liberal Democratic Party, in 1998 as he stumped for his elder brother, Ikuo, during the 1998 Upper House election campaign. He was speaking to construction workers.

“I don’t care if (the media) describes this as pork-barrel politics,” he continued. “That’s the job of politicians.”

The construction industry generates more than 20 percent of Japan’s gross domestic product, compared with 10.4 percent in the United States, 7.6 percent in Britain and 8.9 percent in Germany.

If figures are any indicator, Japan has far too many apparently inefficient construction firms — 586,000 with an average of 12 workers each.

They are among the most faithful supporters of ruling party politicians.

Numerous bribe scandals provide evidence of the cozy relations between politicians and construction firms over public works projects.

One recent high-profile case involved former Construction Minister Eiichi Nakao, who was arrested in June for allegedly accepting bribes in exchange for promising more public works contracts to a Tokyo-based contractor.

The government is now talking about cutting the umbilical cord.

In the face of mounting public criticism over needless public works projects in August, the LDP and its coalition allies — New Komeito and the New Conservative Party — made an unprecedented move, announcing plans to scrap 233 projects. The move is set to save taxpayers some 2.8 trillion yen.

The government has also embarked on efforts to improve the cost efficiency of public corporations and has pledged to reduce the number of these government-affiliated entities.

Whether all these efforts bring any tangible results, however, remains unclear.

Yoshitaro Nomura, a Tokyo lawyer who heads a citizens’ group that monitors special public corporations, stresses the need to cut into the so-called “zaito” fiscal investment and loan program, a key funding mechanism for public works projects.

Under the zaito program, which is often dubbed the nation’s “second budget” because of its magnitude, funds raised mostly in the form of postal savings and pension insurance premiums have been channeled to public entities and local governments in the form of low interest loans that finance public works projects.

“The government has long directed its attention solely to allocating ample zaito funds,” Nomura said, “giving little thought to how efficiently those funds are used.”

With little detailed disclosure, he said, the zaito mechanism is both unclear and inefficient, making it very difficult to scrap and build public entities in accordance with society’s needs.

Reform of the system, therefore, must start with new financial reports of special public corporations that are as clear as those of private companies and can provide the basis of management scrutiny, he added.

The Honshu-Shikoku Bridge Authority, for instance, received 135.4 billion yen in zaito funds in fiscal 1999 to help cover total expenditures of 463.92 billion yen, 87.5 percent of which was used for debt repayments.

Among other major recipients of zaito funds are Japan Highway Public Corp. and Water Resources Development Corp., whose operations also appear to be inefficient.

Of the 58 toll-charging expressways constructed and managed by JHPC, the traffic volume of 42 has been less than was projected, with 26 roads having posted losses in fiscal 1998, according to a government report.

Things are no better for WRDC, which currently operates 44 dams and is involved in the construction of, or feasibility studies on, 20 more.

Many previous dam projects were carried out in line with a 1978 water demand projection by the then National Land Agency, which has now been integrated into the Land, Infrastructure and Transport Ministry.

The agency projected that nationwide industrial and tap water demand in 1990 would reach 131 million cu. meters per day.

The actual demand, however, came to 78 million cu. meters per day, according to Teruyuki Shimazu, a researcher at the Tokyo Metropolitan Research Institute for Environmental Protection.

This huge gap means many of the dams built over the past few decades were unnecessary.

In response to increasing calls for improving the cost efficiency of public works, the government is trying to introduce steps to reform both special public corporations and the zaito program.

As a first step, a new zaito system will take effect in fiscal 2001, which begins in April. This will abolish the mandatory entrustment of funds from postal savings and public pension programs to the Finance Ministry’s Trust Fund Bureau, from which loans have been allocated to public corporations.

Accordingly, public corporations will, in principle, have to raise funds by issuing their own bonds without government guarantees. This is a move intended to introduce the market principle into the operation of these entities, thereby improving the efficiency and transparency of their management.

These changes are supposedly reflected in the proposed zaito budget for the next fiscal year, which was submitted to the Diet last week.

As seen in the budget proposals, however, the actual effects could be limited due to a huge loophole that allows the government to issue state bonds and extend loans to entities that cannot raise funds on their own.

Of the 33 public entities subject to the new zaito scheme, only 20 plan to issue bonds, which would raise 1.106 trillion yen. This accounts for just 3.4 percent of the entire program.

Nobuhiro Okuyama, a senior economist at Mitsubishi Research Institute, acknowledged these limitations and said zaito reform has a long way to go.

There are plenty of hurdles ahead.

Because special public corporations have yet to comply with accounting standards used by listed firms, there is a question of how investors will evaluate bonds issued by those public entities without the backing of government guarantees.

“As the zaito reform goes full-scale, however, there will gradually emerge a stark contrast in the financial health of special public corporations,” Okayama said. “Then, another big problem will arise, namely, how to deal with public firms saddled with mounting debts.”

Unlike the private sector, no legal framework exists to deal with the bankruptcy of public corporations. The Justice Ministry and the Finance Ministry have, however, been conducting a joint study toward establishing one.

Despite these obstacles, zaito reform is moving in the right direction, if not moving fast enough, according to Okuyama.

Regardless of the scale of the predicted turbulence, he said, Japan must further proceed with reform because only then can it regain its lost confidence.