Explanation of Policy Cost Analysis

Explanation of Policy Cost Analysis １． Description and Purpose of Policy Cost Analysis ２． Policy Cost Analysis Framework (1) (2) (3) (4) Elements of policy cost Programs subject to policy cost analysis Setting of assumptions (Common and individual) Procedures for policy cost analysis implementation ３． Significance of Policy Cost Analysis ４． Composition of Publicly Released Documents ５． Year-to-Year Comparison Analysis 9 1. Definition of Policy Cost Analysis Of the financing activities of the Government, FILP supplies long-term fixed interest financing based on Diet resolutions that cannot be supplied satisfactorily by the private sector to operations implemented with interest-bearing funds only and combine non interest-bearing funds (subsidies or capital investments) for the aim of realizing certain policy objectives. (Note) For example, it is possible to cover the large construction costs of toll roadway operations by interest bearing loans and repay the interest bearing loans through future user fees (tolls) and it can be said that these are operations that are suitable for the use of the financing method of providing loans. In order to ease the burden on the user in view of policy objectives that becomes necessary if the intention is to implement operations covering funding needs solely by FILP, it is also necessary to use non interest-bearing funds. In such cases, the operations are implemented through a combination of FILP and non-interest-bearing funds. (Note) For example, in the case of toll roadway operations, the level of user fees required if all construction funding is covered by interest bearing funds may be reduced further by providing non-interest bearing funds for the purpose of fulfilling policy objectives for a portion of construction funding. There are some operations among those eligible for FILP that are provided with non-interest bearing funds for the purpose of fulfilling policy objectives; however, in judging the suitability of such operations, it would be meaningful to estimate the level of non-interest bearing funds that would be provided to them into the future (it could perhaps, in short, be seen as the level of future burden on the citizens) and then disclose the results. Policy cost analysis consists from this perspective of setting various assumptions for interest rate, project scale, outlook for usage of operations that use FILP funding, estimating cash flows and, based on that, quantitatively ascertaining the amount of subsidies and usage cost of capital investment (opportunity cost) expected to be provided by the Government (General Account and/or Special Accounts) until that time in the future when the operations are completed as the “policy cost” (i.e., the future burden on the citizens). [Column – Relation ship between a deficit balance and policy cost in operations eligible for FILP] Let us consider for a moment the policy of promoting the activities of specific operations utilizing FILP. When setting up a program for providing financing to a certain Agency A at low interest and with partly eased collateral requirements, it is anticipated that lowering the interest rates will reduce Agency A’s spread and that bad debts will increase by easing collateral requirements. It would not be possible to implement this operation due to the risk of a deficit balance if things are left as they are. Consequently, in order to achieve such policy objectives, it is necessary for the government to provide Agency A with subsidies in order to assure a balanced account. In other words, though such operations are suitable for the provision of FILP financing, at the same time they originally would not be achievable without subsidies from the government and it is generally thought that policy costs are generated in such cases. 10 2. Policy Cost Analysis Framework (1) Elements of policy cost In the analysis of policy cost, the policy cost of each FILP agency is the figure derived by deducting (3) funding paid by the agency to the government in the form of payments, dividends and corporate tax from the aggregate total of (1) subsidies granted to the agency by the Government (General Account and/or Special Accounts) and (2) opportunity costs of capital investments and interest-free loans granted to the agency by the Government. 1) Subsidies from the Government ・ The total amount of subsidies estimated for each fiscal year with each converted to discounted present value is treated as the policy cost. 2) Opportunity costs of capital investments and interest-free loans from the Government ・ It is assumed that the total amount of capital investments will be repaid to the government by the final year of the analysis term and the opportunity cost during that time (an amount corresponding to profit expected to be obtained if the funding equivalent to the capital investment is invested elsewhere) converted to discounted present value is treated as policy cost. ・ If earned surplus reserves are expected to be generated during the analysis term, it is assumed that capital investment will increase by that amount. In addition, operating losses are deemed to be negative earned surplus reserves and any decrease in operating losses during the analysis term would be treated in the same manner as increased earned surplus reserves (i.e., increased capital investment). 3) Payments, dividends and corporate tax to the Government ・ The amount of payments dividends and corporate tax to the Government expected to be generated in each fiscal year with each converted to discounted present value is treated as negative policy cost. Image of policy cost analysis [Subsidies] Subsidies Example: Revenues and expenditures of projects are estimated during the analysis period (30 years). Then, subsidies and other costs required in the 30 years are estimated, based on estimated cash flows. Policy cost is obtained by adding the present values of subsidies and other costs of each year in the analysis period. [Opportunity costs of capital investment and interest-free loan] Capital investment and interest-free loan Opportunity costs of capital investment and interest-free loan. Policy cost = (Effective interest subsidies) Amount equivalent to annual interest [Payments, dividends and corporate tax to the Government] Sum of the present value of subsidies and other costs Project period The present value is derived by converting future value into present value by deducting interest. [Payments, dividends and corporate tax to the Government] Interest Project period Present value Future value 11 [Column: Why are the opportunity cost of capital investments and interest-free loans considered to be policy cost?] Opportunity cost is an economic term that means the “forfeiture of revenues because of the implementation of certain economic behavior.” To comprehend the meaning, let us say that a certain agency implements operations with a capital investment of \10 billion from the Government and then repays the entire amount to the government ten years later. If the agency were not able to obtain the capital investment from the Government, it would be faced with the need to borrow \10 billion on its own instead. In such case, the amount that it would have to repay ten years later would be \11 billion due to the addition of interest (\1 billion with an interest rate of 1%) on the original principal. Meanwhile, from the viewpoint of the Government, if the \10 billion were invested in 10-year 1% government bonds, the Government would have \11 billion ten years later but would only be repaid \10 billion if funding had been provided to the agency. In other words, it is possible to consider the \1 billion equivalent to interest to be lost revenues. That is referred to as opportunity cost. It was decided to include opportunity cost in policy cost since, from the perspective of the agency, the receipt of the \10 billion disbursement from the Government actually has the same effect as an interest subsidy amounting to the \1 billion equivalent to opportunity cost. Note 1: The opportunity cost of funding is not the same as subsidies and is not converted to cash and invested directly to the agency by the government; if the funding had not been provided (or if the funding were repaid), however, the government disbursement would be reduced by that amount and the amount of Japanese Government Bonds (JGBs) issued would also be reduced (or due to the redemption of JGBs), it would be possible to ease future interest payments. In that sense, it can be said that the funding places a burden on the citizens in the form of interest payment costs of JGBs and this then is included in policy cost. Note 2: In the above example, if the amount of \10.2 billion were to be repaid to the Government due to an additional \200 million surplus generated by operation profits ten years later, policy cost would be estimated with that opportunity cost of capital investment (\10 billion) surplus (\200 million) treated as a negative element in policy cost. When lending Interest rate 1.0% \10 billion When disbursing No interest rate \10 billion \1 billion \10 billion \10 billion Policy cost Opportunity cost (actually has the same effect as the receipt of a \1 billion interest subsidy) 12 (2) Programs subject to policy cost analysis In the policy cost analysis of FY2003, policy cost is calculated for operations eligible for FILP in FY2003. Note: If certain agencies implemented operations that received subsidiaries other than operations eligible for FILP in FY2003, that portion is not included in the analysis. In addition, as individual operation projects, policy cost is calculated for those implemented or continued in FY2003 and new operations scheduled to commence in FY2004 or later. Note: For example, if it is an operation–related agency and if there is a new operation scheduled to commence in a 5-year plan policy cost is calculated with implementation in FY2004 or later. later. On the other hand, if it is a financial-related agency, policy cost is calculated with new financing in principle not provided in FY2004 or (3) Setting of assumptions Policy cost analysis is estimated based on given assumptions for anticipating future project income. Those assumptions include common assumptions that are applied in common to all agencies and individual assumptions that are set and applied to individual agencies. 1) Common assumptions Discount rates are set for the purpose of converting to future FILP loan rate and discounted present value. In the analysis for FY2003, the yield to matulity on JGBs as of the time when the FY2003 budget draft was decided (December 24, 2002) is calculated by computer using a theoretical equation. The specific procedures are given below. First of all, the spot rate (the interest rate on a zero-coupon rate) is calculated using the yield to matulity of government bonds in the market (refer to Fig. 1). The discount rate (coefficient used when converting future nominal cash flow to present value) is calculated based on the spot rate determined in . The forward rate (interest rates corresponding to a specific period in the future assuming market interest rates at the present time; e.g., 10-year interest rate after 5 years) is calculated using a financial method and that is set as FILP rate in the future (refer to Fig. 2). Note: As indicated in the diagrams below, with the common assumptions of the analysis in FY2003, a given increase in the discount rates at some point in the future (e.g., an increase in ten-year interest rate to 2.4% ten years from now in FY2013) is assumed. [Fig. 1] Yield curve (spot rate) 3.0% 2.5% 2.0% 1.5% 1.0% 0.9% 0.5% 0.0% 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 14 analysis 15 analysis [Fig. 2] Future outlook for 10-year forward rate 5.1% 5.0% 2.1% 4.0% 4.0% 2.9% 2.4% 2.4% 2.8% 6.0% 2.7% 1.3% 1.9% 1.7% 3.0% 2.0% 1.0% 0.0% 14 analysis 15 analysis 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 13 2) Individual assumptions The individual assumptions that apply to individual agencies are, for example, set as indicated below depending on the characteristics of the operations implemented by individual agencies, circumstances of the agency and other factors. It is necessary to apply certain assumptions for the occurrence of prepayments of financial-related agencies and there are some cases in which the actual past record is used and other cases in which a quantitative model (calculating prepayments using elapsed years of loans and the interest differential of private sector loans subject to refinancing) is used. It is necessary to apply certain assumptions on the outlook for future revenues of operation-related agencies and there are some cases in which this is estimated based on forecasts of future transportation demand reflecting actual records of usage of expressways already in service and other cases in which it is estimated based on demand forecasts of airport development projects while referring to established fee levels. Note: Even if they are items that should be set as assumptions on an individual basis, efforts are being made to promote consistency with agencies with a high level of commonality, for example, promoting consistency in the outlook for the default rate of FILP agencies which ran the finance business with the Statement of Administrative Cost Calculations. (4) Procedures for policy cost analysis implementation Specific calculations of policy cost analysis are generally conducted according to the procedures given below for each agency. The future operation outlook is prepared based on the above common assumptions and individual assumptions. Cash flows consisting of all of the fund receipts and payments of the agency during the analysis term is estimated based on the prepared operation outlook based on the assumption of the FY2003 budget figures. The amount of subsidies from the Government anticipated for investment in relevant operations in each fiscal year is calculated assuming the present system (projects and framework of subsidies and other investments) based on the cash flows. The amount of subsidies and the other costs estimated for each fiscal year is converted to discounted present value for each fiscal year and the “policy cost” is calculated as the aggregate total of these. 14 3. Significance of Policy Cost Analysis Policy cost analysis clarifies “policy cost,” the so-called future burden on the citizens, for operations that utilize FILP funds and is used to confirm the certainty of payment by clarifying the future prospects for repayments of financing provided by Fiscal Loan Funds by estimating cash flows of operations that utilize FILP funds under given assumptions. Policy cost analysis is expected to contribute to the enhancement of disclosures of information regarding the future burden on the citizens, thereby heightening the transparency of FILP funds. In addition, policy cost analysis not only indicates the results of the analysis (level of policy cost) but also quantitatively indicates the social and economic benefits resulting from operation implementation as much as possible in order to provide tools for conducting assessments of that operation while policy cost (known as sensitivity analyses) is also estimated when the analysis assumptions are changed (increase in the interest rate, decline in usage outlook, etc.). Analysis assumptions (interest rate, operation scale, usage outlook, etc.) and their grounds are furthermore indicated in detail, which is also thought to be useful as tools for the evaluation of the operation. It is possible furthermore for the entity implementing the operation itself to more clearly grasp the future outlook of the operation as well as the effects on financing through the policy cost analysis process while it is also possible to comprehend various risks in the implementation of the operation and the impact on financing when those risks are detected by utilizing this method of analysis. Various effects are moreover anticipated, including the operational and financial improvement of the relevant entity, review of the nature of the operation. < Column: The concept of “cost” > “Cost” in Japanese is generally used in the sense of price, expense or initial cost and “policy cost” in policy cost analysis means the amount of subsidies and the other costs invested in FILP agencies by the Government into the future rather than expenses on the income statements of the relevant agency that are generated as the result of operations. Though the term “cost” is used in the sense of future burden on the citizens, it is a concept different from expenses on income statements and, therefore, in order be able to differentiate between them, the expression “policy cost” is used since it is considered necessary within the discussion of FILP reform to comprehend future burden on the citizens resulting from FILP operations. In addition, Statements of Administrative Cost Calculations are also prepared with the aim, as in policy cost analysis, of clarifying future burden on the citizens and the differences between these two analysis methods are summarized below. Policy cost analysis Analysis target Analysis year Calculation method Analysis dharacter Limited to FILP operations (FY2003: 28 institutions) Multiple fiscal years (until total completion of project period) Future cash flow analysis To estimate of future citizen burden based on long-term financial statements prepared based on given assumptions in accordance with GAAP for public corporations Statements of Administrative Cost Calcutations All public corporations (FY2003: 78 institutions incl. 34 FILP agencies) Single-year Accrual basis accounting in compliance with Japanese GAAP A sort of financial statements consisting of balance sheets, income statements and cash flows statements in accordance with Japanese GAAP 15 National Life Finance Corporation 4. Compositiona 1. Summary of operations implemented using FILP funds To provide business loans to small enterprises that have difficulty receiving loans from private financial institutions. of Publicly Released Documents ・ Policy objectives to be achieved through the implementation of operations considered to be subject to analysis with the use of FILP are recorded. ・ The amount of FILP Plan in FY2003 for operations considered to be subject to analysis is recorded in the FY2003 FILP and the outlook for the balance as of the end of FY2002 FLIP as of the time when the FY2003 budget draft was decided is recorded in the Estimated outstanding amount of FILP lending at end of FY2002. 2. Amount of lending under FY 2003 FILP （Unit：billion yen） FY 2003 FILP 3,050.0 Estimated outstanding amount of FILP lending at end of FY 2002 10,206.6 5. The number of new establishment loans indicated above in 5) is the total for the number of loans made to entrepreneurs within one year prior to and follow-ing the opening of their enterprises for business. 6. The actual figures for safety net loans indicated above in 6) include environ-mental health business stability loans. 3. Outcome and social and economic benefits of operations Financing Total lending For business 0.41 mil. loans ¥2.9232 trillion For environmental health business 0.03 mil. loans ¥168.1 billion For education 0.30 mil. loans ¥351.1 billion Total 0.74 mil. loans ¥3.4425 trillion Total financing (aggregate amount from FY 1949 to FY 2001) For business 25.88 mil. loans ¥81.7574 trillion For environmental health business 2.12 mil. loans ¥6.3819 trillion For education 10.16 mil. loans ¥6.0719 trillion Total 38.16 mil. loans ¥94.2113 trillion Outstanding balance of lending For business 1.67 mil. loans ¥8.5375 trillion For environmental health business 0.22 mil. loans ¥1.0484 trillion For education 1.31 mil. loans ¥1.1195 billion Total 3.20 mil. loans ¥10.7054 trillion 2) Contributes to business stability and growth of medium and small enterprise through small loans The average loan amount is rather small at ¥7.01 million. Small enterprises with fewer than 20 employees accounts for 95% of the total number of loans, 89% of non-collateral loans, and 80% of the total amount of loans. 3) Utilized by about 30% of medium and small enterprises No. of enterprises No. of medium and using business funds small enterprises 1.52 million enterprises ÷ 4.84 million enterprises = 31.5% 4) Total number of employees of borrower enterprises is approximately 15% of the total number of employed persons By supporting the business stability and growth of medium and small enterprises, NLFC loans contribute to the stability of the livelihoods of the employees of these enterprises Total no. of employees of Total no. of borrower enterprises employed persons 9.76 million employees ÷ 63.89 million employed persons= 15.3% 5) Employment for approximately 120,000 people a year is created through loans for newly established enterprises No. of new Average no. of employees establishment loans per new establishment 28,958 loans × 4.2 employees = 120,000 employees 6) Contributes to preventing the loss of employment for approximately 390,000 people a year through safety net loans No. of safety Average no. net loans (FY 2002) of employees 58,826 loans × 6.6 employees = 390,000 employees • Even when newly established enterprises are excluded, jobs have increased at enterprises utilizing NLFC loans as a result of those loans having the effect of supporting business stability and growth. Average rate of increase of employees of enterprises utilizing NLFC loans: 2.3% 7) Contributes to the improvement of national life through the steady provi-sion of consumption funds that support the foundations of living (educational loans and loans secured by pensions) No. of new students utilizing educational loans: 150,000 students Notes: 1. The data indicated above in 1) include figures of the People's Finance Corporation and Environmental Sanitation Business Finance Corporation. In addition, financing for business includes special loans and smaller business loans. 2. If not noted otherwise, the data for the concerned NLFC are the figures as of the end of FY 2001. 3. The breakdown for non-collateral loans indicated above in 2) includes some cases in which a part of the loan has collateral. Non-collateral loans, excluding these cases, account for 76.4% of the total number of loans and 55.6% of the total amount of loans. 4. The figures indicated above in 4) to 6) are estimates. 1) ・ The outcome thus far of operations considered to be subject to analysis and the social and economic benefits generated thereby as well as the outcome anticipated in the future and the probable social and economic benefits generated as a result are recorded. 4. Estimated policy (subsidy) cost analysis of the project 1) 2) 3) 4) An estimate is made for all lending projects. An estimate is made for the outstanding balance of past loans (¥11.658 trillion at the end of FY 2002) and the loans under the FY 2003 plan (¥3.6805 trillion). An analysis is made for the 31-year period during which repayment of outstanding loans and the loans under the FY 2003 plan will be completed. Based on the above assumptions, financial assistance for the implementation of projects has been calculated. It is assumed that surplus will be generated and paid to the national treasury in and after FY 2006. （Unit：billion yen） ・ The specific content of operations considered to be subject to analysis is recorded. FY2003 until the conclusion of operations subject to this analysis. In addition, “analysis term” means the period from Policy (subsidy) cost Category 1. Subsidies from the Government 2. Opportunity cost of capital investment from the Government Subtotal (1+2) 3. Money transfer to the Government Total (1+2+3=policy cost) Analysis period ( years ) FY2002 46.9 195.6 242.5 –224.2 18.2 31 FY2003 Increase/Decrease 10.9 153.3 164.2 –157.6 6.6 31 –36.0 –42.3 –78.3 66.6 –11.6 – ・ This is a table that indicates the results of policy cost analysis. Here, policy cost for FY2003 is estimated to be 6.6 billion yen. ・ Policy cost relating to subsidies, grants-in-aid and grants from the Government (General Account and/or Special Accounts) is recorded in the space labeled “subsidies from the Government” ・ Policy cost relating to opportunity cost of capital investment, interest-free loans, etc., from the Government is recorded in the space labeled “opportunity cost of capital investment from the Government” ・ Negative policy cost relating to payments, dividends and corporate tax to the Government is recorded in the space labeled “money transfer to theGovernment” ・ (Though there is no notation here), the amount of any decrease in operating losses that existed at the beginning of the analysis term by the end of the term is extracted and indicated converted to an increase in earned surplus reserves in the space labeled "decreased cost of loss". This is a negative factor in policy cost. ・ This is a table that indicates the results of Year-to-Year comparison analysis. “Year-to-Year comparison analysis” is an analysis for calculating fluctuations in real policy cost compared to the previous year (for details, refer to section 5. Year-to-Year Comparison Analysis). ・ Here, an increase of ¥43.4 billion was calculated for real policy cost. ・ Factors involved in fluctuations in real policy cost are noted at the bottom of the analysis table. ・ This was implemented based on the analysis for this year. Year -to-Year comparison analysis （Unit：billion yen） Category 1. Policy cost (previously cited) 2. Policy cost when the discount rates are used in the policy cost analysis of FY2002 3. Policy cost of 2. generated in FY2003 or later FY2002 18.2 18.2 FY2003 Increase/Decrease 6.6 –11.6 16.0 –2.2 –27.4 16.0 43.4 Policy cost in FY2003 is \6.6 billion. The analysis shows that real policy cost increased from FY2002 by \43.4billion when compared to the policy cost generated in FY2003 and later with the effects of changes in the assumed discount rate in FY2002 and FY2003 eliminated. This increase in real cost is thought to be due to factors such as those indicated below. • Decrease in cost due to new financing in FY2003 (down about \18.0 billion) • Increase in cost due to revised bad debt write-off rate (0.30 →0.42) (up about \88.0 billion) • Decrease in cost due to other factors (revision of advanced redemption, etc.) (down about \27.0 billion) Breakdown of policy cost by causative factor （Unit：billion yen） Policy cost in FY2003 Prepayments Defaults Other (spread, etc.) 6.6 75.1 186.5 -255.0 ・ “Breakdown of policy cost by causative factor” is a calculation of policy cost by causative factor for policy cost in FY2003. ・ Policy cost considered to have been generated by prepayments are calculated and recorded in the space labeled “Ｐｒｅｐａｙments.” Basically, policy cost when it is conjectured that prepayments anticipated as an individual assumption in the analysis will not occur at all is calculated separately and the difference between the calculation results and the policy cost for FY2003 is recorded. ・ Policy cost considered to have been generated by defaults are calculated and recorded in the space labeled “Defaults” Basically, the aggregate total of bad debt write-off and the transfer or disposal of allowance for bad debt occurring during the analysis term is recorded. ・ The difference between policy cost in FY2003 and the aggregate total of the above figures (prepayments and defaults) is deemed to be policy cost generated by other factors and is recorded in the space labeled “Other (spread, etc.).” ・ The outcome of so-called “sensitivity analysis” is recorded. Specifically, from the perspective of indicating the extent of changes in the future burden on the citizens in the event of a change in any portion of the assumptions, policy cost if discount rates, operation revenues, etc., are changed and the amount of fluctuation are calculated. Note: A discontinuity exists with the analysis of FY2002 because the impact of changes in discount rates on the opportunity cost of capital investment and interest-free loan are taken into account in sensitivity analysis with discount rates as a variable beginning with the FY2003 analysis. ・ Only that portion of subsides and other costs from the Government that are invested in agencies for this analysis and posted in the FY2003 budget are recorded. operations considered to be subject to The case if assumption is changed （Unit：billion yen） Changed assumption and extent of change Interest rates on money loaned and funds raised +1% Increase / decrease in policy cost 121.6 (＋115.0) (Reference) Budgeted amount of subsidies and capital investment in FY 2003 Subsidies : ¥6.0 billion Capital investment: ─ 16 17 4. Compositiona 5. Projections in the analysis 1) 2) 3) Payment of the FY 2003 loan of \3.6805 trillion is to be completed in 31 years. The loan interest rate adopted in and after January 2003 is 2.3% The advanced redemption rate (advanced redemption during the FY in question/ balance of loans at the end of the previous FY) is assumed to be 11%, the average figure for the past five years (1997-2001). The loans charged off rate (redemption during the FY in question/ bal-ance of loans at the end of the previous FY) is assumed to be 0.42%, the average figure for the past three years (2001-2003). (Unit:%) Result FY Prepayment rate Bad loans write-off rate 1998 12 0.23 1999 11 0.36 2000 11 0.32 2001 11 0.37 Estimated of Publicly Released Documents ・ The content, background approach of individual assumptions (default rates, operating expenses, etc.) set for each agency are recorded. Planned 2003 10 0.44 2004 11 0.42 2005 11 0.42 Trial assumption 2006 11 0.42 … 11 0.42 … 11 0.42 2002 10 0.46 4) In the concerned policy cost analysis, the amount of loans charge off, estimated from the loans charged off rate based on results to date, is accounted as loss (total amount for loans charged off from FY 2002 to FY 2033 is \236.9 billion; loans charged off total/ debit balance = 2.2%). Meanwhile, based on the assumption that NLFC operated as private companies, the reserve for loan losses accounted as a formality in accordance with the “Loan Inspection Manual” is \392.7 billion (as of the end of FY 2001, loan loss reserve/ debit balance = 3.7%). However, since the claims of NLFC are small, the actual situation is such that even if loans should fall into arrears, a considerable percentage of payment is completed by rehabilitating businesses through a temporary extension of principal repayment or by obtaining the cooperation of the joint surety sought at the time the loan was made (for example, of the debtors in arrears for three months or longer, approximately 40% repaid their loans during the following fiscal year). In addition, in charging off claims, the condition of the borrower is amply ascertained and claims judged to be truly irrecoverable in the future are disposed of. Therefore, it can be said that the charge off rate based on the results indicated above is a realistic trial assumption. Furthermore, the balance for risk management claims disclosed in conformance with the standard (Bank Law) for private financial institutions is \994.3 billion (as of the end of FY 2001). 6. Reasons for granting of subsidies, mechanism and underlying laws Grants in the Management Improvement Loan Program and Life Hygiene Business Loan Program and special measure for third person guarantors were received from the general account and the so-called revenue difference grants were not received for in FY2003. (Underlying laws and regulations) a) b) Subsidies have no legal base (they are budgetary measures). The National Life Finance Corporation Law provides for capital investment. Clause 2, Article 5 of the Law: When the need is recognized, the government may provide additional capital investment to the Corporation within the scope of the amount stipulated in the budget. The National Life Finance Corporation Law provides for payment to national treasury. Clause 1, Article 22 of the Law: If profits occur in its statement of profits and losses in each operating year, the Corporation shall pay them to the national treasury by May 31 in the next fiscal year. ・ The mechanism and underlying laws and regulations of anticipated subsidies, and payments to the Government in the analysis are recorded. c) 7. Special remarks 1) 2) Shows the policy costs required in providing long-term, fixed rate and low interest business loans to small enterprises that have difficulty receiving loans from private financial institutions. Transitions in policy cost to date are as indicated below. FY1999 FY2000 FY2001 FY2002 \84.6 billion \127.7 billion \43.6 billion \18.2 billion FY2003 \6.6 billion ・ Items other than that above requiring special notation are recorded. ・ Transitions in policy cost of each agency are recorded from FY2003 analysis. 18 19 5. Year-to-Year Comparison Analysis This is a method that was introduced in this year’s analysis for the first time in order to calculate fluctuations in real policy cost after adjustments for the two problems, described below, that generally arise in a simple comparison of the level of policy cost in the previous and in the current year. < Example of notation in publicly released materials > National Life Finance Corporation (Unit: billion yen) Section ①Policy cost ②Policy cost when the discount rates is used in the policy cost analysis of FY2002 ③Policy cost of ② generated in FY2003 or later FY2002 18.2 FY2003 6.6 Fluctuation △ 11.6 The effects of changes in the discount rates are eliminated by replacing the assumed interest rate in the analysis for FY2003 with the discount rate used in the analysis of FY2002. 18.2 16.0 △ 2.2 Costs generated in FY2002 are eliminated by estimating the policy cost of FY2002 generated in FY2003 and later. △ 27.4 16.0 + 43.4 Fluctuations in the real policy cost Problem 1: The discount rates assumptions for each year’s policy cost analysis is not identical. ・ Due to the lengthy analysis term of the policy cost analysis, diffarence of the discount rates have a strong impact on the level of the policy cost. Remedies: Policy cost (i.e., with the same discount rates) is calculated and compared after replacing the discount rates in the FY2003 analysis with the discount rate used in the FY2002 analysis. ・ In terms of the example above, the calculation results are recorded in space ② of FY2003 (since the discount rates for FY2002 is applied, the figures recorded in spaces ① and ② of FY2002 are identical). ・ By comparing the figures recorded in space ② of both FY2002 and FY2003, it is evident that the effects of changes in the discount rates have been eliminated. In this example, it can be seen that the policy cost is reduced by \9.4 billion, the difference between \6.6 billion and \16.0 billion, as the result of fall in the discount rates. Problem 2: While the policy cost in FY2002 is the policy cost generated in FY2002 and later, the policy cost of FY2003 is the policy cost generated in FY2003 and later and, therefore, in a simple comparison, policy cost generated during FY2002 is not taken into account (refer to Column: Conceptualization of real fluctuations in policy cost, Fig. 3). Remedies: Policy cost generated in FY2003 is compared after adjustment of the discount rates after calculating the policy cost of FY2002 generated in FY2003 and later (i.e., with policy cost generated during FY2002 deducted)(refer to Column: Conceptualization of real fluctuations in policy cost, Fig. 4) ・ In terms of the example above, the calculation results are recorded in space ③ of FY2003 (since all costs of FY2003 are generated in FY2003 or later, the figures recorded in spaces ② and ③ of FY2003 are identical). ・ Comparing the figures recorded in space ③ of both FY2002 and FY2003, it is evident that the effects of policy cost generated in FY2002 have also been eliminated. In this example, it can be seen that the policy cost is increased by \43.4 billion, the difference between \16.0 billion and -\27.4 billion, as the result of the new operation (loan) and changes in the assumptions (increase in the default rate and other assumptions). 20 Adjusting these two remedies makes it possible to compare the policy cost in the previous and current fiscal year and calculate fluctuations in real policy cost. In addition, fluctuations in real policy cost from the perspective of this calculation process include “policy cost of new FILP operations implementation in the FY2003 analysis”, “changes in policy cost due to changes in operation revenues and other individual assumptions”. The amount of real fluctuation as well as factor analysis have been newly added to the analysis for FY2003. This method can be described as a flow-based approach utilizing the stock-based analysis currently employed. < Column: Concept of real fluctuations in policy cost > [Fig. 3] Policy cost in FY2002 Policy cost in FY2003 (after discount rates adjustment) Off the subject of the policy cost analysis in FY2003 Fiscal year [Fig. 4] Comparison of cost generated during FY2002 deducted from the policy cost of FY2002 and the policy cost of FY2003 (after discount rates adjustment) Policy cost in FY2002 Policy cost in FY2003 (after discount rates adjustment) Fiscal year [Real fluctuations in policy cost (flow-based approach) ] The amount of fluctuation corresponds to “policy cost of new FILP operations in the FY2003 analysis” and “changes in policy cost due to changes in operation revenues and other individual assumptions.” 21