JAPAN: Public taken for expensive ride
Attempts to stimulate the economy through so-called third sector projects - ventures such as theme parks funded by local government and private money - have been a disaster, writes Michiyo Nakamoto
From time to time the caretakers at Kure Portpia in Hiroshima run the empty ferris wheel, roller coaster and other rides that were the pride of the city but now stand idle on most days in the deserted theme park.
Kure Portpia has remained empty since it closed last year with liabilities of ¥11.4bn ($98m), but the rides are given an occasional run to keep them from rusting.
The park is one of a record number of local government-backed businesses in Japan that have closed with liabilities of more than ¥153.6bn ($1.32bn). These so-called third sector projects, funded by local governments and the private sector, include several theme parks like Kure, luxury hotels in the middle of nowhere, industrial parks developed at high cost that have failed to attract companies and countless other businesses that have steadily accumulated losses over the years.
The growing number of collapses of third sector projects highlights the failure of public policy in Japan to revitalise the country's depressed regional economies.
Third sector businesses were set up in the 1980s and early 1990s as a way to spur economic activity, particularly in depressed, remote communities such as mining towns on the northern island of Hokkaido. There are 349 profit-seeking third sector corporations in Hokkaido, one of Japan's most inaccessible and underdeveloped regions.
Spurred by legislation that offered tax breaks and subsidies, they were also able to borrow extensively from banks since "people believed that third sectors projects which had the backing of local governments would never fail", notes Hirotake Araya, deputy head of information at Tokyo Shoko Research, a private research organisation. Mr Araya has researched the problems of third sector projects extensively.
He maintains these public sector projects have failed in large part because they are run by people who have no real business experience. In many cases the projects have provided a second career for retired local government officials, or jobs for the friends of local politicians, Mr Araya charges.
Many of the troubled third sector theme parks, for example, were either too remote to attract a large enough attendance or too obscure. The Canadian World in Hokkaido featuring Anne of Green Gables and 19th century Canadian architecture, as well as the Sea Gaia in the southern city of Miyazaki, on the island of Kyushu, are far away and costly to visit. Many Japanese would prefer to go to Canada rather than Hokkaido to see a reproduction of old Canadian towns and might even find it cheaper.
What is more, the businesses which were ostensibly set up by the public sector to stimulate the local economy actually ended up competing with the private sector and putting pressure on their profits, he notes.
This year 24 third sector projects have been dissolved or liquidated, or about the same as the number of failures seen in the past seven years combined. In many cases the failures are forcing the local governments that backed them to shoulder the losses and repay the loans over decades. Owanimachi town, for example, is paying back the liabilities of a failed ski resort over a period of 60 years.
Furthermore, third sector corporations do not use regular accounting measures but are able to count the funds they receive from local governments as sales, Mr Araya points out. "If they used normal accounting rules, 70 to 80 per cent of third sector projects would be in the red."
Other problematic projects which have not yet closed are also on the brink, he notes. A project to develop the eastern region of Tomakomai in Hokkaido, for example, is already saddled with ¥180bn in liabilities, while a similarly troubled project in the town of Mutsu in the northern prefecture of Aomori has liabilities of ¥230bn.
The total liabilities of third sector projects facing near-term collapse comes to ¥447.5bn, according to information obtained by Tokyo Shoko Research. But this is only the tip of the iceberg, Mr Araya believes.
A lack of disclosure by local governments has meant that nobody knows exactly how much public money is being pumped into loss-making third sector projects or how high their liabilities are, he warns.
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