So is privatisation, with the government promising it will ‘implement public service reforms which aim for more efficient administrative work and privatisation’. But how much can privatisation actually contribute to fiscal reform? The answer depends not only on the proceeds from public asset sales but what they are used for.
There are divergent estimates for expected proceeds from privatisation. At the low end, non-obligatory holdings of equities by the central government totalled 9.2 trillion yen (around US$86 billion). At the improbably high end, holdings of fixed assets by general government (including central government, local governments and the social security fund, on a consolidated basis) totalled 453 trillion yen (US$4.2 trillion); shares and other equities 120 trillion (US$1 trillion); fixed assets of public sector entities outside the general government 134 trillion yen (US$1.2 trillion); and shares and other equities of such entities 59 trillion yen (US$541 billion). The total is 766 trillion yen (US$7 trillion). In addition, there are other government entities that are treated as private sector firms in the national accounts.
The next question is how much of the potential proceeds, however estimated, will be made available. After all, there are some entities that no one would ever consider privatising: for example, the Bank of Japan. In addition, there is the question of whether the potential resources are large or small. Some comparisons make 10 trillion yen (US$93 billion) of proceeds seem large: this is equivalent to 10.3 years of government research and development spending, and to 2.2 years of defence spending. In contrast, other comparisons make 10 trillion seem small: the amount is the equivalent of only 21 per cent of current borrowing requirements, 20 per cent of central government tax revenue, 7 per cent of general government current receipts, and 0.9 per cent of general government gross debt.
Outright asset sales were the key component in the privatisation programs in the 1980s, such as those involving Nippon Telephone and Telegraph (NTT), Japan Tobacco and Japan Rail. From the latter half of the Koizumi Cabinet (2001–2006) to the first Abe Cabinet (2006–2007), privatisation was positioned as an important pillar of reform, with privatisation of the post office the central initiative. Between 2007 and 2011 the government also sold some of the oil companies that had been taken over from the former Japan National Oil Corporation and some of the stock held by the government in the Japan Alcohol Corporation.
The plans from those years to privatise many of the state corporations were eventually revised, however, as the role of government institutions was reconsidered after the global financial crisis and the Great East Japan Earthquake. One example is the Development Bank of Japan (DBJ): the DBJ law was revised in July 2009 under the LDP administration and this effectively postponed privatisation of the bank.
As a part of the reform of independent administrative agencies, the cabinet decided in January 2012 upon a proposal to reorganise 64 of 102 entities through their abolition, privatisation and integration by April 2014. However, in January 2013, after the LDP returned to power, this decision was suspended ‘for some time’.
The Abe administration has proceeded steadily with the sale of government-held stock in order to secure funds. In early 2013, based on the Reconstruction Funds Securement Law, the government sold Japan Tobacco stock. In addition, in March 2014, the government sold some of its holdings of NTT stock to raise funds for a 5.5 trillion yen economic stimulus plan.
Under the structural reform strategy of Abenomics’ ‘third arrow’, there is an emphasis on public–private partnerships (PPPs). The first type of PPP is a concession-type PPP and is envisioned for airport and water and sewerage businesses. Under the second type, the government is considering establishing ‘air rights’ for metropolitan expressways and selling them to the owners of land along the expressways. The third type of PPP is expected to make use of unused public real estate, such as the sites of closed school buildings and surplus land. The fourth type would be a traditional services-for-sale PPP in which the government would sell services produced by private companies; the consolidation of multiple facilities would result in economies of scale, and the private companies could boost their attractiveness.
Until now the operation of airports has been largely under state control, but airport concessions became possible with legislation passed in 2013. Three airports have so far been specifically targeted for privatisation: Sendai Airport, Kansai International Airport and Osaka-Itami International Airport. Benefits should be seen in two main areas. First, the concession system should enable efficient airport operation by granting the operating company the authority to decide what fees are charged. Second, the system should enable unified airport management. At state-run airports, different bodies manage the terminal buildings, the car parks and the airport apron, and conflicts can arise between these bodies. It should be possible to improve efficiency through unified management.
The most important point is how proceeds are used, and in particular whether they will help to accelerate productivity growth. Just how much productivity growth could the privatisation proceeds produce?
A hint of what is possible comes from the relationship between economy-wide research and development (R&D) spending and labour productivity growth. For mature OECD countries, each 1 percentage point of GDP devoted to R&D tends to add about 0.4 per cent to productivity growth over the medium run. If Abe’s goal of 2 per cent real GDP growth is to be met by raising productivity through research and development, then the ratio of R&D spending to GDP would have to rise from about 3.3 per cent now to about 6.5 per cent. This is the equivalent of about 16 trillion yen (US$147 billion) per year of extra R&D spending, for the public and private sectors combined.
How could privatisation contribute to a rise of the R&D share of GDP? The direct method would be to spend the proceeds of privatisation on R&D. This would require an ongoing and very aggressive program of privatisation. An indirect method would work through efficiency improvement: the shift to the private sector makes firms far more sensitive to efficient performance, including the adoption of new technology. The history of privatisation in Japan has shown some shift from direct to indirect privatisations.
An aggressive strategy of privatisation to fund productivity-boosting research could be just the tonic Japan needs.
Robert Alan Feldman is the Chief Economist, Takeshi Yamaguchi is a Senior Economist and Shoki Omori works in the Research Division of Morgan Stanley MUFG Securities, Tokyo.
This article is a digest of the authors’ publication Japan Privatisation—A Macro Perspective on Bang for the Buck for Morgan Stanley in August 2014.
This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘The state and economic enterprise’.