The beginnings of public enterprises in Japan in the late nineteenth century may be attributed largely to the policies of the Meiji Government, which laid stress on the development of industry and on increased production for creating a wealthy and powerful nation. In pursuit of this policy, the government undertook to run its own industries, such as ship building and iron manufacturing. Most of the early undertakings were departmental enterprises. It was not until after World War II that statutory corporations were established. The success of the three government corporations (KOSHA) around 1950 - the Japanese National Railways, the Nippon Telegraph and Telephone Corporation, and the Japan Tobacco and Salt Corporation - provided the impetus for the establishment of other forms of corporations known as "Kodan" "Jigyodan" and "Koko".
The motivating force behind the growth and development of public enterprises in postwar Japan was the need for state intervention in rehabilitating war-affected industries and for providing public utilities and social welfare programmes. The activities of the new public enterprises ranged from road construction, housing, construction of harbours, regional development, transportation, telecommunications, electrification programmes and extended to financing, technical development, international co-operation and the growth of energy and other resources. Public enterprises, which in 1980 contributed about 10 per cent of the total GNP growth in Japan, were used effectively to stimulate the national economy. In times where the economy warranted tightening, public enterprises supported state policies in postponing investments and reducing expenditures.
Public enterprises in Japan may be broadly categorised as departmental undertakings, statutory corporations, government-controlled companies and autonomous bodies.
The 17 departmental enterprises are an integral part of government organisation and are managed and controlled by departments of the government. In the accounting sense, however, departmental enterprises do not form part of the general accounting system of the government but are controlled separately through special accounts. The National Forestry Service, Mint Bureau, Printing Bureau and Postal Services are examples of this departmental form of public enterprise.
Statutory corporations are created by specific laws. There are 81 such corporations which include the Japan Highway public corporation, Housing and Urban Development Corporation and Small Business Corporation.
The government-controlled companies are established under or governed by the provisions of the commercial law as are other private companies. There are 13 such companies which include Electric Power Development Company, Nippon Telegraph and Telephone Corporation and Japan Tobacco Inc.
The 96 autonomous bodies, such as the Research Centre for Oceanology, are different from the statutory corporations in that they are established by government resolution or order under particular laws
Public enterprises are intended to be self-supporting but few in fact are. Kodan public corporations manage large-scale public utility projects and invest heavily in essential public services. Jigyodan public corporations are less commercial in nature, with their activities more economic and social rather than investment-oriented. Generally statutory corporations are engaged in:
Many of these operations were considered high risk, unprofitable or unattractive to private participation but on the other hand were for the public good and required government support and control.
Local government authorities may also establish departmental enterprises and corporations under the Local Public Enterprises Law and the Local Housing Supply - Public Corporations Law for undertaking specific projects, activities and operations of a local nature such as water supplies, transportation, hospitals and housing.
Departmental enterprises are conducted in much the same way as their parent departments, with the head being appointed by the responsible Minister. Similarly public corporations, government-controlled companies and autonomous bodies come within the jurisdiction of their responsible ministers. Corporations and companies have a Board of Directors appointed either by the Minister or by the shareholders who may also remove them. Where the government is sole owner, the directors are appointed by the Minister. However the members of the Management Board of Japan Broadcasting Corporation and the Bank of Japan are appointed and removed by the government with the consent of both Houses of the Parliament (the Diet). The composition and size of the Board usually varies with the particular corporation involved, but generally there is a mix of experts in finance, commerce, agriculture and, perhaps, regional representation. Autonomous bodies, although much the same as corporations, are not managed by Boards, but come under the supervisory control of the responsible Minister. Ministers responsible for public corporations, government-controlled companies and autonomous bodies are empowered to issue directions to them and can further direct ministerial staff to carry out such examinations or investigations in these public enterprise as are deemed necessary.
Staff of departmental enterprises are selected and appointed by the National Personnel Authority. However the Postal Service, Printing Bureau, Mint Bureau and National Forestry Service are empowered to appoint their own non-clerical staff.
All other public enterprises recruit their own staff or in some cases may obtain seconded staff from the relevant ministries. Selection of staff is according to the skills required and all staff are given continuous professional education and on the job training. Public enterprises have a low rate of staff attrition on account of the "lifetime employment system" practised in Japan.
Revenues earned by public enterprises are to a large extent subject to national policies as product prices, rates and fees are determined by or with the consent of the government. Except for some public enterprises such as the Postal Services, Printing Bureau and Mint which generate sufficient income to meet their operating costs, most of public enterprises in Japan generally require government subsidy. The grants given to these enterprises are to meet development expenditure and loan repayments. There are no requirements for public enterprises to specify a rate of return on capital employed. Subsidies given are sometimes in the form of exemptions from corporate income tax.
Public enterprises may also borrow. Departmental enterprises may do so within the limits authorised in the budget. Some public corporations are authorised to borrow from both domestic and foreign sources; others, including the autonomous bodies, may do so with the sanction of the Minister responsible while still others are only restricted to local borrowings.
The government indemnifies loan repayments by departmental undertakings and may guarantee long-term loans of public corporations and some autonomous bodies within limits authorised by the Diet. There are also some sort of restrictions on borrowing by government companies and the government may provide guarantees for its loans.
Loans to public enterprises are usually given at preferential interest rates. Equity participation by the private sector in public enterprises (not including departmental undertakings) is for the purpose of attracting capital for public programmes and generally for injecting corporate experience into enterprise managements.
Surplus funds of public enterprises are dealt with as provided by the respective laws. Some are allowed to retain their funds as reserves while others are required to pay them to the Treasury. Those enterprises which are incorporated are required to remit dividends to the government. The Diet can order the closure of any public enterprise which is not performing and winding up procedures will be in accordance with prevailing legal requirements.
In Japan public enterprises in the form of departmental undertakings such as national forestry, mint, printing and postal service come under the control of their respective ministers. Departmental undertakings operate within the same administrative and financial framework as other departmental activities. However working conditions of the staff of these undertakings are subject to collective bargaining.
In the case of statutory corporations and autonomous bodies, the responsible Ministers are generally authorised to approve budgets, financial statements, business plans, funding plans, borrowing of funds, bond issues and accounting regulations. Moreover, the Ministers involved may appoint directors and intervene at their discretion in the management and supervision of these organisations. In the case of the sole companies, in which the government has a controlling interest, the responsible ministers exercise control only as a shareholder.
Ministers control the appointment of staff to departmental undertakings. With statutory corporations and autonomous bodies, the head of the particular organisation is responsible for staff appointments. Similarly with the government controlled companies, management controls staff appointments.
The responsible minister of a departmental undertaking exercises financial control over its budget. Ministers also exercise financial control over key aspects of the finances of statutory corporations and autonomous bodies, as mentioned above. However there is no provision for ministerial intervention in the financial policies and administration of the government controlled companies.
In those public enterprises where the responsible Minister has a financial role, this responsibility does not extend to the payment of funds to a destination nominated by him. Funds may only be expended for the purposes prescribed in the budget.
A central agency controls the appointment and dismissal of staff employed in departmental undertakings. Such staff are subject to the provisions of the Government Officials Act and the administrative requirements and directives of the National Personnel Authority. While, in principle, the conditions of service of staff employed by departmental undertakings are also subject to central agency control, these conditions may be changed in accordance with the terms of labour contracts negotiated through collective bargaining for individual departmental undertakings. However there is an upper limit to salary agreemerits, which may not exceed the amount prescribed in the budget. Where collective bargaining negotiation is complicated, assistance is available from the National Enterprises Labor Relations Commission established in the Ministry of Labour.
The heads of statutory corporations and autonomous bodies appoint and dismiss their own staff. Salary scales and retirement allowances are subject to the approval of the responsible Minister. In the case of the government controlled companies, there is no central agency control over the appointment and dismissal of staff and their conditions of service. These matters are the responsibility of the company's management.
Central agency controls over budgeting arrangements are also present in many of Japan's public enterprises. The budgets of individual departmental undertakings are compiled by the Ministry of Finance as an integral part of the national budget. The Ministry of Finance, which has a similar role for some statutory corporations and autonomous bodies, also controls the budget preparation for two special banks and nine finance corporations. The Department of Finance has no control over the budgeting arrangements for the Nippon Telegraph and Telephone Corporation, Japan Tobacco Inc. and other stock companies. The company's budgeting arrangements are the responsibility of its own management. With regard to other statutory corporations and autonomous bodies, the Ministry of Finance examines their budgets before approval is given by the responsible Minister.
In addition, other kinds of central agency controls are exercised by the government in regard to departmental undertakings and statutory corporations. The additional controlling agent here is the Management and Co ordination Agency (MCA), an internal inspection body of the government, which reviews the operation of public enterprises and, if necessary, makes recommendations for improvement. There are no additional central agency controls operative for autonomous bodies or for the government controlled companies.
Public enterprises are not required by the government to earn a specified rate of return on capital. All are expected to operate efficiently but no minimum profit is mandatory. Some operate at a loss in providing essential community services. Where profits are made, these are distributed as dividends, payments to the National Treasury, transfers to reserves or are applied in other ways in accordance with provisions of the relevant legislation.
Not all public enterprises are required to pay taxes applicable to the private sector. Public enterprises in the form of stock companies with share capital, such as the Nippon Telegraph and Telephone Corporation. (The Telephone Corporation has recently been partly privatized. Its form was changed from statutory corporation into stock company. Of the total shareholding 25% were sold in the stock market. But its title as a corporation is unchanged), and Japan Tobacco Inc. pay the same taxes as companies generally. Other forms of public enterprises are exempted from the payment of company taxes on income.
The government exercises selective controls which affect pricing policies through the responsible ministers of particular public enterprises. Thus the responsible Minister determines the standard price for which the Livestock Industry Promotion Corporation buys and sells milk and meat for the purpose of stabilising the market prices of these commodities. Charges for essential services provided by public enterprises such as rail fares, telephone charges and interest rates on loans from financial corporations are subject to the approval of the respective ministers.
In some cases the activities of public enterprises are subsidised from the central budget. Although subsidies are not paid to departmental undertakings, other forms of public enterprise may attract subsidies where the public interest is involved. For example, the government subsidises the difference between interest income and funding cost in the case of the Housing Loan Corporation established to provide housing loans to the public at low interest rates in accordance with the government's housing policy. Public enterprises do not provide free or discounted services to the government.
Departmental undertakings in Japan are controlled departmentally without recourse to a board or commission. Other forms of public enterprise, however, have a board or commission to control their operations, e.g. the Bank of Japan, Japan Broadcasting Corporation, Housing and Urban Development Corporation and Nippon Telegraph and Telephone Corporation. Some of the other statutory corporations and autonomous bodies do not have a board or commission, but the government controlled companies do.
The appointment procedure of members to boards or commissions, which operate effectively free from political interference, varies from one public enterprise to another. Members of the management commission of the Japan Broadcasting Corporation and members of the policy commission of the Bank of Japan are appointed by Cabinet with consent of both Houses of the Diet. Members of the Commission controlling the Housing and Urban Development Corporation are appointed by the responsible Minister. Directors of Nippon Telegraph and Telephone Corporation and Japan Tobacco Inc. are elected at respective shareholders' meetings, subject to approval by the responsible Minister. The directors of other government controlled companies are also appointed in the normal way at shareholders' meetings.
Generally boards or commissions are not empowered to fix the remuneration of their members. Two exceptions are the Bank of Japan and Japan Broadcasting Corporation. The remuneration of members of public enterprises in the form of stock companies is determined at shareholders' meetings.
Most public enterprises in Japan have computerised management information systems. Reports on the performance of individual enterprises are submitted to the responsible Minister once a year, but more frequently where required. In addition, public enterprises which are incorporated submit reports to the board of directors or commission at least quarterly.
Departmental undertakings are required to maintain accounts in accordance with the accounting standards prescribed in accounting legislation and other relevant laws and rules.
Statutory corporations have prescribed financial rules and accounting standards approved by the responsible Minister. The accounts conform to these rules and standards.
The accounts of government controlled companies are prepared as per accounting standards promulgated in commercial and taxation legislation.
The legislature exercises much the same control over departmental undertakings as over ministerial departments generally, but in particular:
Parallel controls are exercised by the Diet over two special banks and nine finance corporations. Other statutory corporations and autonomous bodies are subject to controls by the Diet through its committees. Although there is no similar control by the Diet over the government controlled companies, overall the legislature's control of public enterprises is effective.
The Diet reviews the budgetary bids of departmental undertakings and also of two special banks and nine finance corporations. However the Diet has no budgetary review function for the other public corporations and statutory bodies, nor for the government controlled companies.
Other means are open to the legislature to maintain accountability of public enterprises. The Diet may conduct extensive investigation of any government activities, including those of public enterprises. In the process it may require the attendance and evidence of witnesses, and submission of records where deemed necessary.
The borrowings of departmental undertakings are controlled by the legislature. Such borrowings are included in the national budget and authorised by the Diet. Similar provisions exist for the borrowings of two special banks and nine finance
corporations. Although the remaining public enterprises are not subject to control over their borrowings by the Diet, most public enterprises arrange borrowings from the Fund of Trust Fund Bureau or other public finance sources which are all under the control of the legislature. Also, limits on borrowing or bond issues are imposed by the law on some public enterprises. There is no control by the Diet over the borrowings of the government controlled companies.
The Board of Audit, as the SAI, is the external auditor of all departmental undertakings and statutory authorities. Although the Board can request that these public enterprises take corrective measures as a result of audit findings, officially it is neither a consultant nor an adviser to management. The SAI is not empowered to change the decisions made by the management of public enterprises but individual enterprises usually pay close attention to the audit findings and corrective measures requested by the SAI. Details of remedial action requested by the SAI and the steps taken in response by enterprises are included in the annual report of the SAI to the Diet.
The SAI is not appointed auditor of subsidiary companies owned or controlled by the government. However the SAI has discretionary powers to audit any of these companies. The accounts of subsidiary companies are not consolidated with those of the parent body. Further, the audited financial statements of subsidiaries are not submitted to the Diet.
Commercial auditors are appointed where subsidiary companies of public enterprises are joint stock companies. Although such appointments are made in accordance with normal company practice for the protection of shareholders, individual members of the Diet may require the responsible Minister of the public enterprise concerned to answer questions on any aspect of the management of the subsidiary company.
In the case of the government controlled companies, the external audit is similarly carried out by a private firm of certified public accountants appointed by general meeting of shareholders according to the Commercial Code and Securities Business Tax Law. The audit report of these commercial auditors is submitted to shareholders in general meeting. In addition, the accounts of the government controlled companies are subject to audit by the SAI whose audit report is submitted to the Diet through Cabinet.
The authority of the SAI over public enterprises is derived in the first instance from the Board of Audit Law enacted in 1947 and, secondly, from specific laws establishing each enterprise. Four types of audits are conducted:
The general purpose of the audit of public enterprises by the SAI is to ensure public accountability by monitoring the adequacy of, and rectifying the defects in, the accounting system. The type of audit used for particular enterprises is largely determined by individual objectives and nature of activities.
For those public enterprises established to provide services rather than make profits, the audit of the SAI is focused not only on the propriety of expenditures but also on administrative compliance and whether the prescribed community needs are being met. On the other hand, those public enterprises established primarily as commercial entities are subject to auditing criteria which encompass considerations of profitability and efficiency, in addition to the appropriateness of specific transactions.
There is a statutory requirement for public enterprises in Japan to have an internal audit function. This function tends to be less than effective because of the following weaknesses:
In the cases where it is apparent that internal auditing procedures are ineffective, the SAI is empowered to request the public enterprises concerned to effect the necessary improvements. The SAI also conducts training courses for internal audit staff in order to upgrade their abilities.
The establishment of audit committees is uncommon. Neither departmental undertakings nor statutory authorities have audit committees to advise on internal auditing procedures and generally oversee the auditing function. However there is one exception, viz Japanese National Railways which has an audit committee to carry out these responsibilities. Commercial auditors are not engaged to carry out the internal audit function.
The SAI does not have the power to engage commercial auditors on contract. Similarly, public corporations and autonomous bodies are not empowered to appoint commercial auditors as an alternative to audit by the SAI. Thus the SAI has the sole auditing mandate over these public enterprises. The joint stock companies in which the government has the majority equity are subject to audit not only by SAI but also by a commercial auditor.
The principal audit methodology employed by the SAI is transactions-based, where individual transactions are the main focus of auditing examination. However some attention has been given to systems based auditing and the importance of internal controls by management.
The audit techniques used by the SAI in the audit of public enterprises involve both compliance and efficiency considerations. Initially all relevant data are checked for accuracy, followed by the investigation of profit or loss, project results and systems operation.
In order to assist its overall auditing of public enterprises, the SAI collects official statistics and published figures from both public administrative institutions and private research and development bodies. This information is used by the SAI as a benchmark for the review of the role of social and economic factors in the management and operations of public enterprises.
The SAI adopts the same audit methods and techniques for those public enterprises with similar systems and activities. This uniform approach has been facilitated by the establishment in 1984 of a co-ordinating organisation which plans individual matters for audit attention and provides audit plans in cooperation with the audit divisions concerned.
Before 1978 most public enterprises were audited by one specialized bureau, which consisted of 7 divisions. Since then, however, audit divisions responsible for auditing particular ministries now include the public enterprises under the supervision of those ministries. Attention is paid to the overall compatibility of the activities of individual enterprises with the activities of the parent ministries.
No specific guidelines are issued for the audit of public enterprises. Each engagement is based on an annual plan which specifies the objectives, approach and methodology of the audit and details pertinent matters to be considered.
The staff engaged in the audit of public enterprises are specially trained through courses conducted by the SAI. The knowledge gained through these special in-house courses equips staff to undertake the auditing tasks involved. The staff of the SAI for the audit of public enterprises are recruited from a wide variety of disciplines, including such fields as law, accounting, engineering and architecture. It is considered that such multi-disciplinary recruitment is said to be a distinct advantage in understanding the auditing problems involved in organisations concerned with scientific and technological development.
Departmental undertakings, and those public enterprises in which the government has the majority equity, are subject to annual auditing and reporting requirements. The SAI may audit the financial statements of other public enterprises only when it deems necessary or at the request of Cabinet.
The above audits are conducted throughout the year, with individual enterprises submitting monthly financial statements and vouchers. The audited results of all departmental undertakings, two special banks and nine finance corporations are reported annually, while those of other enterprises are reported upon when deemed necessary by the SAI.
In addition to financial audits of public enterprises, the SAI conducts other types of audits, depending on the nature of individual enterprises. These types of audits cover a wide range of issues, including the effectiveness of capital investments, reasonableness of the costs of services, timeliness of projects, and efficiency of management.
The SAI reports annually on public enterprises to the Diet through Cabinet. However the SAI does not report to a Minister or Head of Government, as distinct from its reports to the legislature.
Under the Japanese Constitution the SAI is required to report to the Diet during the fiscal year immediately following the period covered. In practice the SAI submits its annual report at the beginning of the regular session of the Diet in the following fiscal year.
The audit reports of the SAI on individual enterprises are followed up by the SAI. In particular, enterprises in loss situations are required to advise the SAI of steps taken to recover recorded losses and avoid similar losses in the future.
In those cases where the SAI has sought remedial action and improvement in particular matters, relevant details are included in the annual report of the SAI to the Diet. The legislature, in turn, may request an explanation from the government regarding any matter queried by the SAI, and insist on rectification and improvement where necessary.
The form of the financial statements of public enterprises is not subject to the approval of the SAI. In the case of departmental undertakings, the responsible Minister determines the form. The Minister of Finance approves the form of the financial statements of two special banks and nine finance corporations. The form of the financial statements used by the companies in which the government has a controlling interest is prescribed by law. For other public enterprises, the responsible Minister approves the form.
The SAI does not participate in the preparation of the financial statements of public enterprises. The preparation of these statements is the responsibility of individual enterprises.