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News Release

A New Prescription for the Strengthening of Local Government Finances
- Proposal for a Local Government Version of the CRE -
(following a survey on financial and asset management among local government)

July 26, 2007

In the wake of the sanmi-ittai reforms and with the government considering the introduction of bankruptcy legislation, among other developments, the conditions facing local government finances are growing ever more difficult. Local governments are under greater pressure than ever before to strengthen their financial bases, and conventional measures such as administrative reform are unlikely to remain adequate. New methods of fund procurement and asset management making effective use of private-sector markets are required, such as the issue of bonds in the public market or the liquidization of assets, but to date, as compared with private-sector assets, little use has been made of markets, and there are fears that local governments will be too slow in their response. The Institute conducted among local government of awareness of these new methods using private-sector markets and of intended responses, and has proposed directions for future action.

Outline of Survey Results

♦More than 90% of local government recognize that gaps in fiscal strength are set to widen in the future, but have been slow to respond in terms of fund procurement and effective utilization of assets.
♦Local government create balance sheets but do not use them for asset management purposes.
♦Only around 20% of local government exhibit any intention of pursuing strategic asset management.

Almost all local government recognize that gaps in fiscal strength are set to widen in the future and that "the adoption of new methods of fund procurement and the effective utilization of assets held" are "essential", but have been slow to take specific action, and almost 90% of local government have not adopted measures to ensure good "ratings" for municipal bonds. The survey also revealed that although all local government draw up balance sheets, these are almost never used in the making of decisions on "debt compression" and "disposal of idle assets".

On the asset management side, more than 60% of local government recognize "the disposal of abandoned facilities and land with a low utilization rate" as a matter of high priority, but local government which said they were "not considering any particular measures" within the next 5 years accounted for 20-30% of respondents, and very few were tackling the utilization of assets, including administrative assets from a long-term perspective and across their organization. Moreover, only around 20% showed any intention of taking a strategic approach to asset management with regard to "land (ordinary assets)".

Proposal (Outline)

♦To enhance their fiscal strength, local government should diversify their methods of fund procurement and should advertise their creditworthiness and growth potential for the future to private-sector markets.
♦Like private-sector enterprises, local government should compress their debts and take inefficient assets off their balance sheets.
♦In future, to strengthen their fiscal base, local government should adopt methods of asset management that make effective use of private-sector markets (a local government version of CRE).
♦Only around 20% of local government exhibit any intention of pursuing strategic asset management.

1. Proposal on Financial Strategy for Local Government

With regard to the introduction of new methods of fund procurement, local government are becoming polarized between those that have implemented or are considering concrete measures such as the issue of bonds in the public market, and those which are not considering any measures. With regard to future fund procurement, developing the ability to procure funds at advantageous rates without relying on credit supplementation from the central government, will be of strategic importance, and local government bodies should therefore diversify their fund procurement methods and advertise their creditworthiness and growth potential for the future to the private-sector markets.
The ongoing transfer of power from central to local government and the liberalization of bond issuance, among other factors, mean that balance sheets are increasingly likely to affect the ability of local government bodies to procure funds on the markets and, for this reason, local government should take steps to keep their balance sheets healthy. Like private-sector enterprises, they should strive to compress their debt and remove inefficient assets from balance sheets.

2. Proposal on Asset Management for Local Government Bodies

To improve their ability to explain their fiscal conditions, etc. to the markets, local government should have an overall picture of the assets they hold and should formulate medium-to-long term strategies for asset management. In this connection, the PPP (Public-Private Partnership) approach will play an essential role, and in considering due diligence (assessment of value, etc.) and methods of utilization of assets, local government will have to work with external specialist organizations and make use of private-sector know-how.
To make more effective use of their assets, they should also adopt a local government version of the CRE (Corporate Real Estate) strategy — a "PRE (Public Real Estate)" strategy. CRE is a strategy applied to all real estate that a corporation uses to carry on its business, whether owned, rented or leased. It involves reviewing the form in which real estate is held and the methods by which it is managed with a view to maximizing the company's asset turnover efficiency and efficiency of investment, and enhancing corporate value. For instance, real estate owned by a corporation is evaluated on the basis of its use, maintenance & management costs and future profitability, and a decision is made to let or sell the property, whichever will be more profitable to the company, thereby increasing asset turnover efficiency, etc.
Looking to the future, from an ROA (return on assets) perspective, local government should seek to maximize the return on assets to local residents and should take a flexible approach to the management of their assets, considering such methods as leasing and securitization.

For more information on the content of this report, please contact Tsuneko Kameyama , the Japan Research Institute, Limited.

Tel: 03-3288-4597

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