Prime Minister Junichiro Koizumi may be on the verge of opening a Pandora’s box in his drive to pursue government reforms.

Today he will launch a special panel in the Cabinet Office to single out government-affiliated corporations for intense scrutiny. If studies find them too unprofitable or simply unnecessary, the panel will determine whether to abolish them, privatize them or integrate them with other corporations.

These 163 state-linked corporations were either established or endorsed by special laws to operate public services, such as Japan Highway Public Corp., which operates the nation’s expressways. Many of them are unprofitable and laden with huge amounts of debt or nonperforming loans.

But the bigger problem appears to be that nobody knows how serious their troubles are or will be.

The accounting rules of these corporations differ greatly from those of private-sector firms and follow no standard guidelines.

An advisory panel to the Finance Ministry released a report Tuesday urging 78 of the corporations to compile, by the end of September, financial statements for their latest accounting year, based on the general accounting rules used by private corporations.

For fiscal 2001 alone, 7.58 trillion yen in tax revenues and 24.41 trillion yen from the “zaito” fiscal investment and loan program — much of which is funded by public pension assets and the postal savings system — have been set aside for injection into government-affiliated corporations.

In addition, the panel demanded that the corporations disclose the “hidden costs” of their operations, which is a reference to taxpayer costs in the form of capital injections, interest-free government loans, and free use of state assets.

At the top of the reform list is Japan Highway, a special government entity established in 1956. The company builds and operates expressway toll booths throughout the country.

After decades of pork-barrel politics practiced by lawmakers pushing for expressway construction in their constituencies, Japan Highway’s cumulative debt has reached 26 trillion yen, and the corporation estimates the figure will peak at 34 trillion yen in 2021.

Japan Highway now plans to repay the debts over a period of up to 50 years — way too far in the future for any realistic economic projection — on the assumption that Japan’s gross domestic product will reach annual growth of 1.9 percent over the first 10 years and stay at 1.4 percent in the next decade.

Many observers point out that Japan Highway’s finances could eventually spin out of control, given construction plans already in the works for obviously unprofitable routes in rural areas.

“Local governments do not need to pay any money to build expressways. They naturally want any expressway they can get because it’s free,” said a senior official of the Land, Infrastructure and Transport Ministry.

Japan Highway procures its funds for expressway construction with government loans, state-guaranteed corporate bonds and government subsidies.

The corporation has already built an expressway network that stretches over 6,453 km, but in 1999, the government authorized a program to extend the network to 9,342 km by between 2020 and 2025, mostly in rural areas with declining populations.

A 1987 revision to a road construction law calls for extending the expressway network to 11,520 km by the early part of this century.

“Under the current scheme, the highway corporation can never repay the debts if you are to build (expressways of up to) 11,520 km,” another land ministry official scoffed.

Japan Highway’s unique — if not opaque — accounting rules only complicate the problem.

Unlike private-sector companies, Japan Highway does not depreciate its fixed assets, nor does it remove fixed assets that have been already lost or transferred to local governments from its balance sheet.

Japan Highway claims it does not depreciate fixed assets because the value of roads, bridges, tunnels and other road-related assets are maintained with daily repairs.

The corporation sets aside part of its annual profits as reserves to prepare for future debt payments. It claims the reserve fund now covers 31 percent of the total debt from its expressways, compared with 19 percent in 1990.

But critics say Japan Highway’s accounting practices are meant to pad its profits.

According to estimates by a project team headed by Toshio Nagahisa, general manager at private think tank PHP Research Institute Inc., Japan Highway’s reserve-to-debt ratio is only 7 percent if its earnings are calculated under private-sector accounting rules, which count depreciation costs and losses of fixed assets.

Nagahisa also pointed out that Japan Highway has not disclosed details of its debt-repayment plan on a route-by-route basis.

Instead, Japan Highway uses a “pool system” to estimate its profits and debt repayments by summing up the revenues and debts of all routes throughout the country into a single account.

This allows the corporation to continue building unprofitable toll roads in rural areas by using profits collected from urban roads with heavy traffic.

In spite of its opaque operations, however, Nagahisa grudgingly gives the toll operator credit because most other special government corporations have disclosed much less financial information than Japan Highway.

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