Joint public-private firms must expedite efforts to end indebtedness
Joint public-private companies, generally known as third-sector corporations, may not be able to avoid liquidation as long as liabilities exceed assets.
Local governments operating loss-making firms in partnership with private-sector entities must waste no time in addressing the task of liquidating them—ending a negative legacy dating back to the days of the bubble economy—even if doing so will cause fiscal pain.
Bond issuance to expedite the consolidation or abolition of poorly performing third-sector corporations and businesses run solely by local governments has risen sharply recently.
Local governments issued third-sector bonds in 64 cases, with a combined value of \374.3 billion, during the April-September period this year.
In the three-year period from fiscal 2009 to fiscal 2012, bonds were issued 104 times with a combined value of \471.4 billion, indicating how massive the issuance of bonds issued was in the first half of this fiscal year.
With the issuance of third-sector bonds permitted specially for a period of five years from fiscal 2009, many local governments appear intent on issuing bonds just before the expiration of the deadline at the end of fiscal 2013.
Third-sector bonds are issued by local governments on the basis of resolutions by local assemblies, along with approval by either the internal affairs and communications minister or heads of relevant prefectural governments.
Issuance of these bonds enables local entities to reschedule their debts in the form of bonds, which have interest rates lower that those on other forms of debt. In addition, the central government offers preferential treatment by covering half of the interest cost by means of local tax grants, or tax allocations to local governments.
It is an extremely serious situation that the number of juridical persons, such as companies, that are considered on the brink of bankruptcy stands at 639 out of 1,928 juridical persons comprising third-sector corporations and enterprises operated solely by municipalities.
Don’t put off problems
About 60 percent of bond issues were by land development public corporations for the acquisition of plots of land prior to public works projects. Many local government-run corporations in such fields as forestry, housing and tourism are also heavily in debt.
Some third-sector corporations have racked up debts surpassing their net worth after huge tracts of land they purchased during the bubble economy were left unused because planned public works projects were scaled down after the bubble burst and land prices declined.
The vast amount of debt incurred by third-sector corporations adversely affects the fiscal health of local governments.
Third-sector business operations were the major factor behind the fiscal problems of the Yubari municipal government in Hokkaido. Because of its fiscal woes, the municipal government was designated as a body legally requiring fiscal reconstruction.
Especially problematic is the fact that a little less than 40 percent of the 1,928 quasi-public corporations, or 716, have yet to thrash out reform programs.
Liquidation of third-sector corporations makes it inevitable for local governments to take over the debts of the corporations. Fearing criticism for shouldering the debts, many local government heads tend to put off resolving the problem while they are in office.
Postponing the problems, however, will certainly result in increasing burdens on the local governments and residents due to increasing interest payments and drops in land prices.
Every local entity with third-sector debt problems must take up the challenge of drastically reforming the corporations by making use of the specially authorized bond issuance by the deadline at the end of March. This is prerequisite to ensuring an environment conducive to reinvigorating local economies.
Obviously, liquidation must be avoided as much as possible for third-sector corporations in charge of operations directly linked with residents’ lives such as hospitals and transportation.
Any further delay in heightening their business efficiency, however, will raise their indebtedness to be eventually passed on to residents.
Local governments should consult with all parties concerned about what should be done. They should provide straightforward explanations to assemblies and residents, instead of covering up the debts of their third-sector bodies.
The Internal Affairs and Communications Ministry will, in principle, refuse local governments’ requests to extend the bond issuance deadline for third-sector corporations. However, it may conditionally allow a bond issuance if the corporations and local governments concerned are considered to be making serious rehabilitation efforts. This stance is reasonable.
(From The Yomiuri Shimbun, Oct. 28, 2013)