Intention to Use 3rd Sector Reform Promotion Bonds
Among Local Government Bodies

Survey on the Status of 3rd Sector Reform and Intention to
Use 3rd Sector Reform Promotion Bonds among Local Government Bodies

The Act to Amend the Local Allocation Tax Law, etc., which came into force on April 1, 2009, partially revised the Local Finance Law (Law No. 109 of 1948) to provide special rules allowing local government bodies to issue bonds to cover the costs that they incur in conjunction with the reorganization or regeneration of 3rd sector entities (commonly known as "3rd sector reform promotion bonds"; hereinafter "promotion bonds"), during the five-year period FY 2009-2013.

In view of the creation of a system for the issue of promotion bonds, this survey set out to ascertain the current status of reform of 3rd sector entities and intention to use promotion bonds among local government bodies, with a view to examining the value and purpose of promotion bonds in the reform of 3rd sector entities and making proposals on future directions for reform.

Outline of Survey Results

• 59 local government bodies (10.1% of respondents) said their intention of using promotion bonds was strong. Among prefectural and ordinance-designated city governments, deliberations on the use of promotion bonds are already advanced.
• 82 local government bodies said they "Plan to consider using promotion bonds in future" and that their intention to use promotion bonds might strengthen as the use of the new system spreads.
• The use of promotion bonds is focused on three major types of regional public corporation, but especially on land development corporations. This is partly due to the fact that Japan has 1,076 regional land development corporations, as compared with only 42 regional highway corporations, and that the disposal of land development corporations is regarded as a matter of urgency for local government bodies.
• Meanwhile, the proportion of joint stock corporations and foundations intending to use promotion bonds is low. This is probably due to the fact that around one in four joint stock corporations are making a loss while foundations are not generally subject to close scrutiny regarding their profitability, so that the need to reform these organizations is less obvious.

Outline of Proposals

• Especially among joint stock corporations and foundations, there is a need for measures to encourage the use of promotion bonds for "business regeneration" purposes.
• For some local government bodies, the use of promotion bonds would push the fiscal soundness indicator into the red zone, owing to the scale of the redemption burden. While taking care to adhere to the principle of restoring fiscal soundness, consideration could also be given to extending redemption deadlines and expanding local allocation tax measures with a view to helping reforms make progress.
• The "future burden ratio", which is an indicator of fiscal soundness, is not sufficient in itself to draw attention to the need for the reform of 3rd sector entities apparent. A new indicator that will give a measure of risk in concrete terms, e.g. the scale of the impact on local government body finances when a 3rd sector entity fails, is needed to foster the will to implement reforms.

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

Tel: 03-3288-5014
E-mail: wasada.sawako@jri.co.jp