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1. Policy Cost Analysis
(1) History of policy cost analysis introduction
(2) Purpose of policy cost analysis
(Column A: Provision of subsidies, etc. for FILP projects)
(3) Assessments of policy cost analysis
(Column B: Meaning of “policy cost”)
2. Framework for Policy Cost Analysis
(1) Components of policy cost
(Column C: What is conversion into the discounted present value?)
(Column D: Why does the opportunity cost of capital investments, etc. become
a policy cost?)
(2) Projects subject to policy cost analysis
(3) Procedures for policy cost analysis
(4) Setting of assumptions
(a) Common assumptions (analysis period, assumed interest rate)
(b) Individual assumptions
(Column E: What is the implied forward rate?)
(5) Enhancement of analytical approaches
(a) Factor analysis
(b) Breakdown of policy cost by the time of the provision of funds
(c) Past year comparative analysis (Real fluctuation analysis)
(d) Sensitivity analysis
(e) Breakdown of policy cost by causative factor
3. Utilization of policy cost analysis
(Column F: Comparison with other information disclosures)
4. Estimation of social and economic benefits
5. Composition of published data
(1) History of policy cost analysis introduction
The policy cost analysis was recommended in a report on fundamental Fiscal Investment Loan
Program reform by the Fund Management Council in November 1997 to secure disclosure of
future burdens on citizens and fiscal soundness.
Specifics of the policy cost analysis were considered at a meeting of a cost analysis and
assessment advisory group sponsored by the chair of the Fund Management Council in February
1998 and other gatherings. Test policy cost analysis results were published for five agencies in
FY1999 and for 14 agencies in FY2000 before the policy cost analysis was fully introduced in
FY2001, when the FILP reform was implemented.
(2) Purposes of policy cost analysis
The Fiscal Investment and Loan Program provides investment and loans to FILP agencies that
implement services for which loans are appropriate, in order to realize national policy objectives.
These services include long-term, low-interest loans and large-scale, very-long-term projects
that would be difficult to undertake in the private sector.
Since eligible projects for FILP, though having some external economy effects, feature a clear
relationship between benefits and burdens, and it is appropriate to require beneficiaries (users)
to bear that burden, loans are essentially repaid by beneficiaries. In order to ease the burden on
beneficiaries, subsidies or investments are disbursed from the central government (e.g. General
Account) to FILP agencies which execute projects.
The policy cost analysis represents the estimation of subsidies for these projects and
advantages arising from past investments for the purpose of determining the adequateness of
these projects. The estimation results of the policy cost analysis are published to enhance the
disclosure of future burdens on citizens and the transparency of FILP.
(See 3. Utilization of policy cost analysis.)
【Column A: Provision of subsidies, etc. for FILP projects】
Let us consider a case in which it is made a fiscal policy to establish a financing program for small
and medium-sized enterprises for the policy objective of promoting specific business operations by
SMEs. This program will provide SMEs with low-interest loans with relaxed collateral requirements.
In principle, FILP Agency A will collect the principal and interest on loans to SMEs to repay the
principal and interest on its FILP loans (beneficiary contributions). However, lowered interest rates on
loans to SMEs can be expected to reduce FILP Agency A's profit spread. Relaxed collateral
requirements can be expected to expand loan loss costs. Because there is a possibility that FILP Agency
A will fall into the red on cash flow deterioration if this situation is left unchanged, the government
may provide FILP Agency A with subsidies, etc. to achieve its policy objectives and reduce beneficiary
contributions.
(3) Assessments of policy cost analysis
Since the policy cost is designed to ease the burden on FILP project beneficiaries, it is not
appropriate to evaluate the policy cost simply based on the overall amount. Comprehensive
evaluation should be made with consideration given to social and economic benefits brought
about by each policy as well as the policy cost.
The policy cost represents fiscal policy support for FILP projects to reduce beneficiaries’
interest and fee contributions for policy purposes and does not indicate any problem with the
financial soundness of FILP agencies.
(See 4. Estimation of social and economic benefits)
General
account, etc.
FILP
Beneficiaries
(Users)
【Column B: Meaning of “policy cost”】
Generally, the word “cost” is used to mean an expense, prime expense or a price. However, the
term “policy cost” represents the total amount of subsidies, etc. expected to be disbursed by the
government (from the general account, etc.) and the opportunity cost of past capital investments,
etc. for FILP projects, rather than expenses in the calculation of profit and losses at FILP agencies.
Policy cost analysis was introduced because participants in FILP reform discussions argued
that the government should ascertain future national contributions accompanying FILP projects.
In this, the word “cost” was chosen to mean national contributions. In order to specify this “cost”
as separate from expenses in the calculation of profit and losses, the term “policy cost” was
adopted.
(See Column F: Comparison with other information disclosures)
Borrowing
Repayment of principal and interest
Policy Cost
(1) Subsidies, etc.
(3) Opportunity costs attributable to investments, etc.
(2) Payment to the treasury, etc.
Beneficiary contributions
External econom
ic effects, etc.
Provision of cheap services using FILP
FILP agencies
FILP projects
Social and economic benefits
(1) Components of policy cost
The policy cost analysis projects future cash flow for FILP-using projects for each FILP agency on certain
preconditions (future interest rates, operating revenues, charge-offs, etc.) to estimate (1) subsidies, etc. expected
to be disbursed by the government in the future, (2) payments to the treasury / corporate tax, etc. to be paid to
the government in the future and (3) opportunity cost of past investments, etc. (interest payment alleviation
effect).
The calculated policy cost does not indicate the financial burden itself accompanying the
future transfer of funds generated by the implementation of the FILP target project (only item
(1) represents the financial burden accompanying the future transfer of funds).
In this way, the policy cost has the following three components -- [1], [2] and [3].
(See 2. (3) Procedures for policy cost analysis.)
○Image of “Policy Cost”
( [1] - [2] & Calculating the present values )
[1] Subsidies,etc (Funds Expected to be disbursed by the government in the future)
[3] Opportunity costs attributable to investments,etc (= interest payment alleviation effect)(conceptual cost not disbursed by the government)
[2] Payment to the treasury/corporate tax,etc (Funds Expected to be paid to the government in the future)
Policy cost = [1] Subsidies – [2] Payments to the treasury/corporate tax+ [3] Opportunity cost
Capital investment and interest-free loan
Opportunity costs of capital investments and interest-free loan(= substantial subsidies for interest payment)
Subsidies
Payment to the treasury/corporate tax
(1) Subsidies, etc.
Subsidies and other grants expected to be paid by the government to FILP agencies in
each fiscal year in the future cash flow estimation are discounted to present value and
combined into a component of the policy cost.
(2) Payments to the treasury/corporation tax, etc.
FILP agencies’ expected payments to the government, including those to the treasury,
corporation tax and dividends, in each fiscal year in the future cash flow estimation are
discounted to present value and combined into a negative component of the policy cost.
(3) Opportunity costs attributable to investments, etc. (=interest payments alleviation
effect)
If the government uses funds for investments in or non-interest-bearing loans to FILP
agencies, the action may be interpreted as losing profit that could be gained on investment
of the funds in government bonds. The opportunity cost of such investments (an interest
alleviation effect through government investments in FILP agencies) is handled as a
component of the policy cost (See Column D).
Specifically, the total value of investments at the beginning of a fiscal year for analysis are
compared with the total discounted present value of past investments to be recovered by the
end of the year. Their gap is treated as the opportunity cost.
・Surpluses, etc. at the beginning of the year are considered investments for the computation
of the opportunity cost.
・Loss at the beginning of the year is considered a decline in investments for the
computation of the opportunity cost. If there are losses at the beginning of the year, the
opportunity cost of investments may be lower than in the case of the absence of losses.
・Since surpluses at the end of the year for analysis are assumed as belonging to the
government for the estimation of future cash flow, funds to be transferred as surpluses to
internal reserves by the end of the year work to reduce “[3] the opportunity cost.”
(Note) The breakdown of policy cost by time of provision of funds specifies “a policy cost accompanying a change
in surplus funds” separately from the opportunity cost of capital investments, etc.
【Column C: What is discounting to present value?】
Is it possible to say that 10 billion yen today will have the same value even at the end of 10
years? If 10 billion yen is invested for 10 years at an interest rate of 1% (simple interest), a
combination of the principal and interest will come to 11 billion yen. Given this point, it is not
appropriate to treat 10 billion yen today as having the same cash flow value after the passage
of 10 years.
In order to appropriately ascertain the cash flow generated at different points in time, we
must discount the future value (principal + interest) by the equivalent of the interest to
determine the present value (= principal). This calculation is called “discounting to present
value.” The coefficient used for multiplying the nominal value for discounting the nominal
value to present value is called “discount factor.”
(The discount factor may also be called the “present value coefficient.” (For details, see 2.(4) Setting of
assumptions))
In policy cost analysis, expected subsidies, etc. from and money that is expected to be
transferred to the government (nominal amounts) for each future fiscal year are not simply
aggregated, but converted into their discounted present values before the aggregation. The
conversion allows us to ascertain policy cost projected through future cash flows at the time of
analysis (at present).
If 11 billion yen in subsidies, etc. are projected after the passage of 10 years in the above
case, the amount is converted into the discounted present value of 10 billion yen to be added as
a policy cost.
Total of subsidies, etc. discounted to present value
Project duration
subsidies, etc. for fiscal each year
Discounting to present value means converting future value into present value by eliminating interest
Policy cost
Pol
icy
cost
(bi
llio
n ye
n)
Present Future
Interest rate
【Column D: Why does the opportunity cost of capital investments, etc. become a policy cost?】
The opportunity cost is an economic term meaning “a gain forgone due to an economic action.”
To comprehend the meaning, let us consider a case in which FILP Agency A implements a project
with a capital investment of ¥10 billion from the government and will repay the entire amount to
the government in 10 years.
If the sum of 10 billion yen is invested in 10-year government bonds with a coupon rate of
1%, considered a risk-free asset, instead of being invested in FILP Agency A, the government
will surely receive 11 billion yen in 10 years. If the sum is invested in FILP Agency A, however,
the government will receive only 10 billion yen in 10 years and be considered to have lost a gain
corresponding to 1 billion yen in interest income. The sum of 1 billion yen is the opportunity
cost of 10 billion yen in capital investment, or a conceptual cost that is not actually disbursed.
If FILP Agency A fails to receive 10 billion yen in capital investment from the government, it
must raise (borrow) the sum on its own. If a simple interest rate of 1% is imposed on the
borrowing, FILP Agency A will have to repay a total of 11 billion yen, combining the 10 billion
yen in principal and 1 billion yen in interest, in 10 years. If FILP Agency A receives 10 billion
yen in capital investment from the government, however, FILP Agency A will not have to pay 1
billion yen in interest. This means that the agency will effectively receive 1 billion yen as an
interest subsidy.
In this way, the opportunity cost of capital investments, etc. is interpreted as a policy cost.
＋
10 billion yen 10 billion yen 1 billion yen
＋
10 billion yen 10 billion yen
(= Interest costs the FILP agency has avoided thanks to capital investmentby the government)
(= Gain forgone by the government due to the capital investment)
No interest
1% interest rate
[Opportunity cost] Incorporated into policy cost
●Case in which the government invests 10 billion yen in bonds andFILP agency A borrows 10 billion yen on its own
●Case in which the government invests 10 billion yen in FILP agency A (the entire amountwill be repaid by the FILP agency upon the completion of the relevant project)
(2) Projects subject to policy cost analysis
The policy cost analysis is performed only on FILP projects that are implemented in each
fiscal year. Even if an FILP agency implements a projects for which subsidies, etc. are provided
by the government, if it is not an FILP project, it will not be subject to the policy cost analysis.
When the policy cost analysis is used, therefore, it is necessary to take note of the analytical
approach and the scope of projects subject to the analysis.
(Projects subject to the policy cost analysis are specified at the outset of materials for each FILP agency)
(3) Procedures for policy cost analysis
Each FILP agency conducts the policy cost analysis according to the following procedures:
① Individual assumptions (operating revenues, charge-offs, etc.) required for
estimating future cash flow are set according to the characteristics of each project.
② The above individual assumptions and common assumptions, including an assumed
interest rate, are used for projecting future cash flow for FILP projects implemented
in analysis periods
③ Based on projected future cash flow, subsidies, etc. from the government and
payments to the government are estimated for each fiscal year.
④ Subsidies and payments to the government as estimated above for each fiscal year
are discounted to present value with the discount factor for each year for summing up.
The opportunity cost of capital investments, etc. are added to the aggregate value to
calculate the policy cost.
(Note) Payments to the treasury, corporation tax and other payments to the government represent
fund transfers to the government, so they are considered negative subsidies for computing policy
cost.
(4) Setting of assumptions
In the policy cost analysis process, future cash flow and other factors are estimated based on
certain assumptions. They include (a) common assumptions used for all FILP agencies and (b)
individual assumptions that are set by FILP agencies according to the characteristics of their
individual projects.
(a) Common assumptions
[Analysis period]
An analysis period for the policy cost analysis represents a period subject to cash flow
projection. The period for the analysis in FY2017 starts in FY2017 and will end in a fiscal
year for ending a FILP project. Specific periods or numbers of years thus differ from FILP
agency to FILP agency and from project to project. However, analysis periods are set under
the following principles:
[Financing Institutions (including policy financial institutions)]
Under the assumption that no new loan contracts would be concluded from
FY2018, a period during which a FILP agency will recover all loans is adopted as an
analysis period in principle.
[Project Institutions]
Under the assumption that only projects such as those that are ongoing or that are
scheduled to start under medium-term plans will be implemented, the analysis period
for each project is set to end when the FILP funds raised by the relevant FILP agency
are redeemed after the project’s completion.
［Assumed interest rates (discount factor and future interest rate)］
As the discount factor and future interest rate over an analysis period are required to
compute the policy cost, these rates are set as common assumptions according to
computation with a theoretical equation in the following way:
(a) Based on the market yield on government bonds (a final yield on interest-bearing
bonds) on the base day, the spot rate for a certain remaining period to maturity (a final
yield on discount bonds) is calculated (Figure 1).
As the policy cost analysis calculates the policy cost based on the budget for the fiscal
year subject to the analysis, the assumed interest rate is calculated based on the market
yield on government bonds (actual value) on the base day when the budget proposal
for the fiscal year is adopted.
A sensitivity analysis is conducted to ascertain the effect of an assumed interest rate
change on the policy cost. (See 2.(5)(d) Sensitivity analysis)
(b) Based on the spot rate calculated in Step (a), the discount factor is set to discount
nominal future cash flow data to present value.
When the spot rate is negative, the discount factor (up to 1) is set at zero.
○Relationship between the spot rate and discount factor
PV FV
1FV ＝ ＰＶ（１＋ｒ） → ＰＶ ＝ ＦＶ ×
(１＋ｒ)
Conversion into thediscounted present value
FV for future value, PV for present value, n for number of years, r for interest rate (spot rate for a certain number of years)
ｎ
ｎ
Discount factor(DF)
The discount factor is used to convert the future value into the present value (see Column C)
(c) Based on the spot rate calculated in Step (a), a certain method is employed to calculate
the implied forward rate (an interest rate based on the present rate) (Figure 2), which is
used for setting future FILP loan interest rates, etc. (See Column E)
○Figure 1 ○Figure 2
(Note) Figure 2 indicates that a FILP rate (a future interest rate) on a 10-year bullet loan to be borrowed 10 years
later is 1.2% in the FY2017 analysis (1.9% in the FY2016 analysis).
(b) Individual assumptions (other than those listed under common assumptions)
In addition to common assumptions (analysis periods and assumed interest rates), future
operating revenue and cost estimates and other assumptions are required to project future
cash flow. These assumptions are set according to the characteristics and latest performance
indicators for individual projects of FILP agencies, based on individual laws and medium-
term business plans of independent administrative agencies.
Major individual assumptions include charge-offs and future loan prepayments for
estimating loan clawbacks at financing institutions and operating revenues at project
0.3%
1.1%
1.4%1.5%
0.1%
0.6% 0.7% 0.8%
0.0%
1.0%
2.0%
3.0%
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40(Remaining period to maturity)
Spot rate curve (yield curve)
FY2016 analysis
FY2017 analysis
1.9%2.0% 1.9%
2.2%
1.2%1.0%
1.1%1.3%
0.0%
1.0%
2.0%
3.0%
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40(years after)
10-year loan rate (Implied forward rate)
FY2016 analysis
FY2017 analysis
institutions
〔Examples for financing institutions〕
They estimate future loan prepayments and charge-offs based on average
levels for the past five years.
They use past default and other data to estimate future charge-offs by category
of loans for asset assessment.
They use quantitative models to calculate the prepayment ratio based on the
number of years elapsed on loans.
〔Examples for project institutions〕
Highway traffic data over the recent years are used to forecast future traffic
demand and estimate future operating revenues.
Air traffic demand projections in an airport development plan and present unit
fares are also used to estimate future operating revenues.
【Column E: What is the implied forward rate?】
Let’s consider the concept of future interest rates in the policy cost analysis through an example.
When 10 million yen is invested for two years, for example, the following two methods are assumed:
【Method 1】Using a two-year interest rate for a compound interest investment
【Method 2】Using a one-year interest rate for the first year and a one-year rate one year later for the
second year
As the two methods are expected to result in the same principal and interest, the total of principal and
interest is calculated as follows, with the present two-year interest rate put at 0.5%, the present one-year
rate at 0.25% and the one-year rate one year later at a%:
【Method 1】10 million yen × (1 + 0.5%) × (1 + 0.5%) = 10.1 million yen
【Method 2】10 million yen × (1 + 0.25%) × (1 + α%) = 10.1 million yen
The above equations result in a one-year rate one year later at a% (=0.75%).
[Method 1]
2-year interest rate(compound): 0.5％Present Two years laterOne year later
1-year interest rate one year later(Implied forward rate)
α%=0.75%
Profit on Method1 is the same asthat on Method 2
1-year interest rate:0.25％
[Method 2]
The rate implied by the present market rate for a period between the two future time points is called
an implied forward rate. Their relationship is indicated by the following general expression:
(1 + 2-year rate)2
(1 + 1-year rate one year later (α%)) = (1 + 1-year rate)
What would happen if an investor predicts a one-year interest rate one year later at 1.25% instead of
0.75%? The investor may choose Method 2 as a more favorable investment method. Meanwhile, a party
raising a fund for the next two years cannot raise the fund unless the two-year interest rate is 0.5
percentage points higher. Therefore, the two-year interest rate rises to 0.75% to make the total of principal
and interest the same for the two methods.
【Method 1】10 million yen × (1 + 0.75%) × (1 + 0.75%) = 10.15 million yen
【Method 2】10 million yen × (1 + 0.25%) × (1 + 1.25%) = 10.15 million yen
Such market mechanism makes the total of principal and interest the same for the two investment
methods, allowing a future interest rate to be implied by the present level.
(5) Enhancement of analytical approaches
Various analytical approaches have been introduced for the policy cost analysis to improve
the transparency of FILP.
(a) Factor analysis
The factor analysis classifies the policy cost into components. This analysis reveals the
composition of the estimated policy cost.
(See 2. (1) Components of policy cost.)
If losses exist at the beginning and end of an analysis period, the discounted present value
of their increase or decrease during the period is indicated separately.
(b) Breakdown of policy cost by time of provision of funds
Policy cost includes the opportunity cost of past capital investments, etc. However, they
do not indicate the amount of fiscal burden that the government will bear as a result of the
transfer of funds in the future for the implementation of FILP projects.
The opportunity cost of capital investments, etc. can be classified into a portion accrued
from investments, etc. made by the beginning of the analysis period and that from new
investments, etc. made during the analysis period.
The breakdown of policy cost by time of provision of funds classifies policy cost into the
following components:
(1) Opportunity cost of (past) investments, etc. made by the beginning of the analysis
period
(2) Policy cost expected during the (future) analysis period
(a) Subsidies, etc. expected to be provided by the government during the analysis period
(b) Payments, etc. to the government expected to be made during the analysis period
(c) Policy cost accompanying the increase or decrease in surpluses expected to be
generated during the analysis period
(d) Opportunity cost of investments, etc. expected to be made during the analysis period
This analysis can determine additional fiscal burdens accompanied by future fund transfers
out of the calculated policy cost.
(c) Past year comparative analysis (Real fluctuation analysis)
The assumed interest rate for the policy cost analysis is calculated based on the market
yield on government bonds on the day for the annual budget proposal adoption and differs
from year to year. A change in the assumed interest rate affects future cash flow during the
analysis period and forces discounted present values and the opportunity cost of investments
to be revised through a change in the discount factor.
The initial year for the policy cost analysis moves every year. For example, the FY2016
analysis estimates the cost for the period from FY2016 and the FY2017 analysis estimates
the cost for a period from FY2017. Out of the policy cost covered by the analysis in the
previous year (FY2016 analysis), therefore, the portion accrued in the initial year (FY2016
cost) is not covered by the analysis in the current fiscal year (FY2017 analysis). In this way,
the policy cost level changes in line with the annual change in the initial year for the analysis
(in the analysis period).
Due to these factors, the policy cost for each fiscal year widely fluctuates even if details
of a project subject to the analysis remain the same. Therefore, it is not adequate to simply
compare the policy cost levels in the previous and current fiscal years for assessing and
considering projects subject to the analysis.
The past year comparative analysis (real fluctuation analysis) makes adjustments required
for comparing the policy cost levels in the previous and current analyses and indicates real
policy cost fluctuations and factors behind the fluctuations.
Specifically, real policy cost fluctuations are determined in the following way:
Among assumptions for the current annual analysis, the assumed interest rate level is
replaced by the level used in the previous analysis to recalculate the policy cost ((1)
assumed interest rate adjustment).
From the policy cost level indicated in the previous analysis, the cost accrued in the
initial year is excluded to unify coverages for comparison ((2) adjustment of the initial
year for analysis).
(See “Conceptual illustration of real fluctuations in policy cost” on p.33)
(Note) When the total policy cost levels for all FILP agencies in the current and previous years are compared,
not only the above factor but also changes in FILP agencies subject to the analysis must be taken into
account.
The factors behind changes in the real policy cost are analyzed to the greatest extent
possible, providing a breakdown of such changes.
The past year comparative analysis indicates how changes in project details and future
predictions influence the policy cost.
For financing institutions, for example, the FY2016 analysis projects future cash flow on
an assumption that no new loan contracts would be concluded in and after FY2017. Therefore,
loans for new contracts expected under the FY2017 budget are added to future cash flow in
the FY2017 analysis, reflecting policy cost changes involving new loans in the real
fluctuations.
For project institutions, however, future cash flow balance sheets for ongoing projects
fluctuate annually due to demand projection changes. Therefore, policy cost fluctuations
accompanying demand projection changes are reflected in real fluctuations.
【Conceptual illustration of real fluctuations in policy cost】
[Before adjustment]
[After adjustment]
<Reference> Image of real fluctuations
[Financing Institutions] [Project Institutions]
Previous year’s policy cost
Current year’s policy cost
・・・・・・
・・・・・・
X-1 X
(FY for analysis)
X+1
FY
X+2 X+10
Previous year’s policy cost
Current year’s policy cost (①after adjustment for assumed interest rate)
・・・・・・
・・・・・・
(X-1)
FY
Policy cost gap in the same analysis period = Real fluctuation
X X+1 X+2 X+10
(②Policy cost accrued in the 1st year of the analysis period)
20172016
Loa
n cl
awba
cks
New loans in FY2017⇒Influencing real fluctuations
Cash flow inFY2016 analysis
Cash flow in FY2017 analysis
(FY)20172016
Ope
ratin
gre
venu
es
Demand projection changes⇒Influencing real fluctuations
Cash flow inFY2016 analysis
Cash flow in FY2017 analysis
(FY)
(d) Sensitivity analysis
As the policy cost analysis estimates the policy cost based on some assumptions including
the assumed interest rate based on the market yield on government bonds on the day for the
annual budget proposal adoption, the policy cost level fluctuates in accordance with changes
in the assumptions.
The sensitivity analysis estimates policy cost rises or falls on changes in some assumed
conditions, including interest rates and operating revenues. Of the estimated policy cost
changes, opportunity cost fluctuations that are not accompanied by the transfer of funds are
specified.
The sensitivity analysis indicates how changes in specific assumed conditions affect policy
cost levels. The assumed conditions that will fluctuate are selected in accordance with each
FILP agency’s operations. The following are some examples of assumed conditions that are
set to fluctuate:
[Financing Institutions]
- A case in which the lending rate and the fundraising rate (assumed interest rates) are raised
by 1 %
- A case in which charge-off is increased by 10%
[Project Institutions]
- A case in which the fundraising rate is increased by 1 %
- A case in which operating revenues are reduced by 10%
- A case in which medical services revenues are reduced by 1%
- A case in which project expenses are raised by 10%
(e) Breakdown of policy cost by causative factor
The breakdown of policy cost by causative factor classifies the policy cost of financing
institutions into causative factors including prepayments and loan losses.
This breakdown indicates how factors particular to financing affect policy cost.
(Note) As causative factors for policy cost at project institutions differ from institution to institution and from
project to project, they do not estimate the breakdown of policy cost by causative factor.
[Effects of prepayments]
Policy cost arising from prepayments that FILP agencies are expected to receive from borrowers during analysis periods (Note) If prepayments expected during analysis periods are accompanied by borrowers’ payment of lost
profits to FILP agencies, the policy cost may remain unaffected.
[Effects of loan losses]
Policy cost that will be caused by expected charge-offs and the expected gap between
new loan loss provisions and their reversal during the analysis period.
(Note) If loan losses are expected during analysis periods, with loan loss reserves booked at the beginning
of the analysis period, the policy cost may remain unaffected.
[Others (spread, etc.)]
Other factors including administrative costs and profit spread.
The policy cost analysis is designed to enhance the disclosure of FILP information and
improve the transparency of FILP by estimating the subsidies, etc. that are expected to be
disbursed by the government for projects using FILP, estimating the benefits of past capital
investments, etc. for these projects, and making these estimates public as policy cost. (See
Column F: Comparison with other information disclosures)
Since FY2001, incorporated administrative agencies subject to FILP have implemented the
policy cost analysis and published analysis results. They have tried to expand published data to
include data for the assessment of projects as well as policy cost levels.
Specifically, they have enhanced analysis methods to carry out (1) the factor analysis, (2) the
breakdown of policy cost by timing of the funding, (3) the past year comparative analysis, (4)
the sensitivity analysis and (5) the breakdown of policy cost by causative factor and to indicate
social and economic benefits accompanying the implementation of projects as quantitatively as
possible. In addition, these FILP agencies have disclosed their assumptions and reasons for the
annual analysis and relevant government budget decisions in detail. These published data are
expected to be useful for the ex-post assessment of FILP projects. (See 5. Composition of published
data)
Estimates made about future cash flow for FILP projects in the policy cost analysis process
are important for judging future courses of the projects, effects on their finance and the certainty
of redemption of relevant fiscal loans or investments. In the analysis, assumptions that greatly
influence policy cost are considered among relevant government organizations and FILP
agencies to estimate long-term cash flow and reaffirm whether relevant fiscal loans or
investments may be redeemed. This process is significant for creditors from the viewpoint of
governance. By providing such project assessment methods, the policy cost analysis is expected
to lead FILP project implementers to review FILP projects.
Furthermore, each FILP agency also uses the disclosure by noting the policy cost analysis in
explanations of their bond prospectuses (documents prepared for investors in compliance with
the prospectuses required under the Financial Instruments and Exchange Act) when issuing FILP
agency bonds.
We continue to steadily implement the policy cost analysis and enhance the published contents
as well as further utilizing it.
<Reference> Examples for utilization of policy cost analysis for drafting FILP
○Scrutinizing business outlooks and other assumptions used for estimating future cash
flows
・For example, financing institutions confirm how charge-offs (charge-off rate),
prepayments (prepayment rate), etc. were in the past settlement of accounts and
whether their future projections are adequately made based on the latest conditions.
・For example, project institutions confirm how the latest operating revenues, etc. were
and whether their future projections are adequately made.
○Scrutinizing and confirming assumptions, including projected loan clawbacks such as
loan losses, and projected operating revenues to reaffirm expected loan repayments and
the certainty of fiscal loan or investment redemption
・For example, the extent to which borrowings, etc. would be renewed or whether
borrowings, etc. would be repaid without renewal is confirmed.
・For example, financing institutions reflect borrowers’ credit risks in interest rates on
loans to them and confirm that any cost exceeding the risk portion would be covered
by returns on investment.
○Considering whether projects are suitable for FILP and whether project details, loan
terms, etc. are adequate, while taking their policy-related necessity and complements to
the private sector into account, after scrutinizing assumptions and confirming the
certainty of fiscal loan or investment redemption
・For example, future cash flow and other estimates are utilized for considering
government-guaranteed bond issues by maturity to improve projected balance sheets
for FILP agencies.
【Column F: Comparison with other information disclosures】
The government publishes statements of administrative costs, cost statements for public services
and policy cost information, in addition to policy cost analysis, in order to disclose policy and project
information.
Policy cost analysis compares with other types of information disclosure as follows:
Name Policy cost analysis
Creator FILP agencies (Agencies subject to the Fiscal Investment & Loan Program)
Analysis target FILP projects
Description In accordance with accounting standards for incorporated administrative agencies, policy cost analysis sets certain assumptions, estimates future cash flows under these assumptions and projects future national contributions based on planned long-term financial statements.
Objectives To increase the transparency of FILP by estimating and publishing subsidies, etc. to be disbursed for projects of FILP agencies and benefits of past capital investment for them
Fiscal year for introduction
FY2001 (estimation started in FY1999)
Name Statement of administrative
costs Cost statement of public services
Policy cost information
Creator
Corporations that have received capital investment/subsidies, etc. from the government (special corporations, government-authorized corporations)
Incorporated administrative agencies
Government ministries and agencies
Information disclosed
Costs for each fiscal year Costs for each fiscal year Costs for policies designated for assessment by government ministries and agencies
Description
The statement is compiled and published in addition to statutory financial documents for special and other public corporations. It includes costs to be covered by national contributions and financial documents based on business accounting principles.
The statement consists of financial documents particular to incorporated administrative agencies, based on their accounting principles. They are positioned as one type of their financial statements.
The information breaks down costs booked in a cost statement of government ministries and agencies by policy subject to assessment. It is positioned as segment data in a cost statement.
Objectives To specify special and other public corporations’ business costs to be finally covered by national contributions, in order to secure these corporations’ accountability and transparency.
To specify costs to be covered by national contributions in regard to incorporated administrative agencies’ business operations in each fiscal year, in order to contribute to citizens’ assessment and rating on administrative services.
To disclose the entire picture of costs for each policy area in order to promote administration officials’ cost-consciousness and citizens’ understanding about administrative operations.
Fiscal year for introduction FY 2000 FY2001 FY2009
It is important to comprehensively assess policy cost along with social and economic benefits
accompanying specific projects. However, it is difficult to uniformly and quantitatively
ascertain the social and economic benefits of different projects. In addition to policy cost,
therefore, the policy cost analysis also aims to show the results of relevant projects, explain
them on a qualitative basis, and show the quantitative social and economic benefits estimated
by each FILP agency as best as possible.
Project institutions can quantitatively estimate the social and economic benefits of their
projects under almost unified standards, by taking advantage of the Cost-Benefit Analysis
Manual and other guidelines prepared by the relevant government agencies for public works.
Therefore, they estimate social and economic benefits based on the following assumed
conditions.
● Assumptions for estimation
［Projects subject to estimation］
Benefits are estimated for ongoing projects and new ones planned to start under medium-
term programs. (Benefits are not estimated for projects that have been completed.)
［Method of measuring the benefits］
Benefits are estimated through the measurement methods specified in the Cost-Benefit
Analysis Manual and other guidelines.
As for expressway projects, for example, benefits from driving time savings, driving cost
savings and traffic accident drops are estimated in accordance with the manual created by
the Ministry of Land, Infrastructure, Transport and Tourism.
［Discount factors］
The Cost-Benefit Analysis Manual and other guidelines fix the social discount factor to discount
social benefits to present value. Based on the past average yield on long-term government bonds, or
the average fundraising cost for social infrastructure development, the factor is set at 4% for the
immediate future.
Here, the social discount factor (4%) and the same discount factor as used for the policy
cost analysis are used for estimating social and economic benefits. If the assumed interest
rate for the policy cost analysis is lower than the social discount factor of 4%, social and
economic benefits estimated with the discount factor for the policy cost analysis are larger
than those estimated with the social discount factor.
(About the discount factor for policy cost analysis, see “2. (4) Setting of assumptions)
[Analysis period]
Benefits are estimated for the analysis period (service period) chosen in consideration of
the project implementation period specified in the Cost-Benefit Analysis Manual and other
guidelines in light of the project’s service life, and are also estimated for another period (the
redemption period) that is the same as the period for policy cost analysis.
[Initial period for estimation]
The initial period for estimating social and economic benefits is basically the same as for
the policy cost analysis. If there are inevitable problems including those regarding the
acquisition of basic data and renewal burdens, however, the past results of social and economic
benefit estimation are utilized to revise the initial period for estimation. Specifically, benefits
before the current fiscal year are excluded from benefits estimated earlier for an analysis
estimated to project social and economic benefits.
●Illustration of a revised initial period for estimation
Current fiscal year Current fiscal year
［Estimate of past social and economicbenefits］
［Estimates for the revised initialperiod for estimation］
For the period starting from the current fiscal year, benefits are converted into present value
Earlier estimated benefits
For some non-financial FILP agencies and projects, benefits cannot be quantitatively
estimated because benefit estimation manuals have not been developed, or because appropriate
basic data for estimating social and economic benefits cannot be obtained. While financing
institutions have not conducted any uniform estimation in the absence of any well-established
manual, some of them exclusively estimate social and economic benefits.
(For details, see data for each FILP agency.)
55.. CCoommppoossiittiioonn ooff ppuubblliisshheedd ddaattaa
1. Summary of operations implemented using FILP funds
2. Amount of lending under FY2017 FILP(Unit: billion yen)
3. Estimated policy (subsidy) cost analysis of the project
(1) Policy (subsidy) cost (Unit: billion yen) (3) Year-to-Year comparison analysis (Unit: billion yen)
(2) Breakdown of policy cost by the time of the provision of funds (Unit: billion yen) (4) Breakdown of policy cost by causative factor (Unit: billion yen)
(5) Sensitivity analysis (cases where assumptions change) (Unit: billion yen)
Fluctuation in opportunity cost
<Reference> Budgeted amounts of subsidies and capital investment in FY2017 Fluctuation in opportunity cost
Capital investment: 11.5 billion yen
Subsidies: 23.2 billion yen
4. Outline of estimation and project prospect employed in the analysis1) All loan projects are included in calculation.
2)
3)
4)
5)
The total loan loss provisions from FY2017 to FY2047 are ¥223.3 billion.
(Unit: %)
* Components in each column may not add up to the total because of rounding.
Estimated outstanding amount of FILP lending at the end of FY2016
6,045.0
13.700.71Loan loss provision ratio 1.07 1.03 0.89 0.83 0.6
Prepayment ratio 15.00 13.00 12.93
1.0813.40 13.7014.13 13.70
0.92
2) Policy cost expected to be newly accrued during the analysis period
-291.9 -149.1 +142.8
Changed assumption and extent of change Policy Cost (Fluctuation)
Policy cost accrued with achange in surplus funds
-358.1 -221.0 +137.1
2015 2017
Planned
2016
Opportunity cost of capitalinvestments, etc.
4.2 2.2 -2.1
Result Estimated
FY 2011 2012 2013 2014
10% rise in charge-off
63.8
＋23.1
Calculation is made assuming that loans will be provided under the FY2017 business plan (¥2,680.3 billion) in addition to the loans that have beenalready provided amounting to ¥7,298.7 billion (estimated at the end of FY2016.)
The prepayment ratio (prepayment value in the current fiscal year ÷ outstanding balance of lending at the previous fiscal year-end) from FY2016 isprojected at a weighted average (13.70%) from FY2011 through FY2015.
The loan loss provision ratio (loan loss provisions in the current fiscal year ÷ outstanding balance of lending at the previous fiscal year-end) from FY2018is projected at 0.92% representing the average of ratios for normal to risky borrowers in FY2013, 2014 and 2015.
Assumptions for calculation
2018-2047
Subsidies, etc. from theGovernment
62.0 69.8 +7.7
＋19.0
Interest rates on money loaned and fundsraised +1%
77.7（+13.8）
86.7（+22.9）
Money transferred to theGovernment
- - -
3) Others (including profit spread) -202.3
31 -Analysis period (years)
2) Loan losses 240.6
(A) Policy cost (previously cited) 72.1 63.8 -8.3 1) Prepayments 25.5
1) Opportunity cost of capital investments, etc. provided before the beginning of the analy sis period
364.0 212.9 -151.1
Category FY2016 FY2017 Fluctuation (A) Policy cost in FY2017 (previously cited)
-8.3
3. Opportunity cost of capital investments, etc. from the Government
Subtotal (1+2) 62.0 69.8 +7.7(B) Policy cost of (A') generated in FY2017 or later
65.1 85.5 +20.4
4. Fluctuation in retained losses -420.1 -255.4
Subtotal (1+2+3)
Policy cost in FY2017 is 63.8 billion yen. The analysis shows an increase of20.4 billion yen in real policy cost over FY2016 when the effect of change inthe assumed interest rate for FY2016 and FY2017 is eliminated and the policycost that accrues in FY2017 and thereafter are compared. This increase in realpolicy cost is considered to be attributable to the following factors:
• Decrease in cost through new loans provided in FY2017 (-112.2 billion yen)• Increase in cost due to the charge-off (+21.9 billion yen)• Other factors (including an increase in operating expenses related to newloans) (+110.8 billion yen)
+164.7
430.2 249.5 -180.7
492.2 319.2 -173.0
31
- - 72.1 85.5
+7.7
+13.4
1. Subsidies, etc. from the Government 62.0 69.8 (A) Policy cost (previously cited) 72.1 63.8
To smoothly provide necessary business loans to small enterprises that have difficulty receiving loans from private financial institutions.
The analysis period continues for a period of 31 years in which all loans provided under the FY2017 business plan will be recovered in full in addition tothe loans that have been already provided.
Fluctuation Category FY2016Category
Japan Finance Corporation (Account for Micro Business and Individual Operations)https://www.jfc.go.jp/
FY2017 FILP
1,938.0
FY2017 FluctuationFY2016 FY2017
-8.3
Total (1+2+3+4=policy cost(A)) 72.1 63.8
2. Money transferred to the Government - (A') Policy cost obtained by re-calculating (A)
using the same assumed interest rate as in theFY2016 analy sis
The table indicates the policy cost breakdown by timing of the funding (analysis approach (b)) subject to the policy cost analysis.
It shows (1) that the interest cost reduction effect (opportunity cost) of past capital investments, etc. resulted in 212.9 billion yen in policy costs before the beginning of the analysis period, and (2) that subsidies and capital investments, etc. expected to be provided during the analysis period will bring about 149.1 billion yen in negative policy cost.
The table indicates a breakdown of policy cost by causative factor (analysis approach (d)) at the financial FILP agency. “1) Prepayments” → Policy cost caused by prepayments that a FILP agency expects to receive during the analysis
period. “2) Loan losses” → Policy cost caused by charge-offs and the gap between provisions for new loan loss and their
reversal expected during the analysis period. “3) Others (including profit spread)” → Other factors including administrative cost and profit spread.
The table indicates the factor analysis (analysis approach (a)) of the policy cost analysis.
“1. Subsidies, etc. from the Government” → Policy cost for subsidies, grants-in-aid and grants from the government (e.g. general account)
“2. Money transferred to the Government” → Negative policy cost for payment, corporate tax and other monetary transfers to the government (general account, etc.)
“3. Opportunity cost of capital investments, etc. from the Government” → Policy cost for the interest cost reduction effect (opportunity cost) of capital investment and interest-free loans from the government (general account, etc.)
“4. Fluctuation in retained losses” → If retained losses exist during the analysis period, the amount of retained losses incurred by the end of the analysis period is booked as a policy cost.
Here, the FY2017 policy cost is estimated at 63.8 billion yen, down 8.3 billion yen from the previous year.
The table indicates the year-to-year comparison analysis of the policy cost analysis (analysis approach (c)). It shows that if the policy cost for the current fiscal year are compared with those in the previous year with the effects of changes in interest rate and other assumptions eliminated, the policy cost increase by 20.4 billion yen in real terms due primarily to factors given below the table.
“FY2017 FILP” indicates the current fiscal year’s FILP amount for the project subject to the analysis. The “Estimated outstanding amount of FILP lending at the end of FY2016” is the estimate made when the current fiscal year’s budget proposal was adopted.
The table indicates the sensitivity analysis (analysis approach (e)) of the policy cost analysis.
The analysis estimates how the policy cost increase or decrease on changes in interest rate, operating revenue and some other assumptions.
Here, a policy cost change on a hike of 1 percentage point in lending and fundraising rates is estimated. The policy cost after the hike is estimated at 77.7 billion yen, up 13.8 billion yen from 63.8 billion yen before the hike. Of the policy cost fluctuation, the portion that is not accompanied by a fund transfer is specified
The table specifies subsidies and capital investments, etc. that the government (general account, etc.) plans to provide to the project (FILP agency) subject to the policy cost analysis under the current fiscal year’s budget.
Describes the details of the estimation in the policy cost analysis.
The description here covers specific details and background views about specifics and the scopes of the projects subject to the analysis, the analysis period and individual assumptions (including future loan-loss ratios and operating costs) set by the FILP agency for the estimation.
Describes policy objectives for which FILP is used to finance projects subject to the policy cost analysis.
5. Reasons for granting of subsidies, mechanism and underlying laws(Reasons)
・
(Rules)
・
(Underlying laws and regulations)
・ Grants have no legal base (they are budgetary measures).
・ The Japan Finance Corporation Act (Act No. 57, May 25 2007) provides for capital investment (Article 4).
Article 4 of the Act:
The Government may, when it finds it to be necessary, make contributions to JFC within the amount appropriated in the budget.
・ The Japan Finance Corporation Act provides for payment to national treasury.
Article 47 of the Act:
6. Special remarks
2)
(Reference) Outcome and social and economic benefits of operations 1) Financing
Financing (FY2015) Total financing (aggregate amount from FY1949 to FY2015)
For business 0.25 mil. cases 2.0517 trillion yen For business30.08 mil. cases 113.8712 trillion yen
For environmental health business 0.01 mil. cases 0.0642 trillion yen For environmental health business2.33 mil. cases 7.4151 trillion yen
For education 0.15 mil. cases 0.1832 trillion yen For education12.80 mil. cases 9.1138 trillion yen
Total 0.41 mil. cases 2.2991 trillion yen Total45.22 mil. cases 130.4391 trillion yen
Outstanding balance of lending (end of FY2015) Lending plan (FY2017)
For business 1.05 mil. cases 5.8173 trillion yen For business 2.3730 trillion yen
For environmental health business 0.07 mil. cases 0.2898 trillion yen For environmental health business 0.1150 trillion yen
For education 0.97 mil. cases 0.8941 trillion yen For education 0.1923 trillion yen
Total 2.08 mil. cases 7.0012 trillion yen Total 2.6803 trillion yen
2)
3)
4)
5)
6)
Grants in the Managerial Improvement Loan Program for Small-Scale Enterprises, the New Startup Loan Program and various Special Loans arereceived from the general account and the Special Account for Energy Policy to secure these programs’ smooth operation.
Grants cover profit margin falls resulting from policy-oriented cuts in interest rates for the Managerial Improvement Loan Program for Small-Scale Enterprises, the New Startup Loan Program and various Special Loans, etc.
In the event that the amount of the surplus recorded in the settlement of accounts for each business year exceeds zero in each accountrelated to the operations listed in each Item of Article 41 hereof, JFC shall accumulate, as a reserve, the amount calculated in accordancewith the standards prescribed by a Cabinet Order, among such surplus, until it reaches the amount prescribed by the Cabinet Order, and ifthere is still a surplus, JFC shall pay the amount of such surplus into the National Treasury within three months after the end of suchbusiness year.
National Life Finance Corporation was dissolved on 1 October 2008 by Japan Finance Corporation Act and Japan Finance Corporation [MicroBusiness and Individual Operations] succeeded to all rights and obligations of NLFC except assets to be handed to the Government, etc. Withthis matter, the accounting rule has been changed to the business accounting principle.
The data shows the policy cost required for providing long-term, fixed-rate business loans to small enterprises that have difficulty receiving loansfrom private financial institutions.
1)
The total number of employees of borrower enterprises is approximately 10% of the total number of employed persons. By supporting the businessstability and growth of small enterprises, loans contribute to the stability of the livelihoods of the employees of these enterprises. (Total no. ofemployees of borrower enterprises (estimated to be 5.41 million) ÷ total number of employed persons (63.76 million) = 8.5%)
The estimates calculated under a certain condition represents about 4,200 companies that could not have been incorporated without financing of theFinance Corporation and about 12.3 billion yen worth of benefit by the employment opportunity created by the companies thus incorporated.
The estimate under a certain condition represents about 12,900 companies that could avoid winding up with financing of the Finance Corporation andabout 67.8 billion yen worth of benefits by preventing the employees of the companies from becoming unemployed.
Stably providing educational funds for higher education etc. contributes to the improvement of education levels. The improvement of education levelsin turn contributes to the improvement of labor productivity, technology advancement and the like. (Number of students who took advantage ofeducational loans: about 0.12 million students (including about 60 thousand university students))
Loans contribute to business stability and the growth of small enterprises mainly through small loans for small enterprises with 9 employees or less,which account for about 90% of the total number of loans. The average loan amount is rather small, at 6.89 million yen, and non-collateral loansaccount for 81% of the total number of loans. (Number of loans in FY2015: 262,609; of these, non-collateral loans: 213,575)
The description here covers the mechanism (including reasons and rules for provision) and underlying laws for two policy cost components – subsidies, etc. from and monetary transferred to the government expected for the analysis period.
The description here covers information that needs to be described in addition to the abovementioned information.
Specifies for reference the achievements of the FILP project subject to the policy cost analysis and their social and economic benefits in the past and future.
Not
es 1
. Pol
icy
cost
s fo
r ea
ch f
isca
l yea
r di
ffer
in a
ssum
ptio
ns in
clud
ing
inte
rest
rat
es a
pplie
d to
est
imat
es.
2
. Fig
ures
unt
il FY
2008
indi
cate
the
polic
y co
st o
f N
atio
nal L
ife F
inan
ce C
orpo
ratio
n.
(Ref
eren
ce)
Cha
nges
in P
olic
y C
osts
by
Com
pone
nt
212.
6
-1.2
74
.3
110.
3 10
0.8
87.0
30
.7
23.9
10
.1
-5.9
6.5
20.2
23.1
38.3
43
.8
45.6
55.1
57
.4
62.0
69
.8
-182
.4
-200
.0
-100
.00.0
100.
0
200.
0
300.
0
FY20
08FY
2009
FY20
10FY
2011
FY20
12FY
2013
FY20
14FY
2015
FY20
16FY
2017
(Uni
t: bi
llion
ye
n)
<Ja
pan
Fin
ance
Cor
pora
tion
(A
ccou
nt fo
r M
icro
Bus
ines
s an
d In
divi
dual
Ope
rati
ons)
>
(Poi
nts)
・
Fro
m F
Y20
10 to
FY
2011
, pol
icy
cost
s in
crea
sed,
ref
lect
ing
the
effe
cts
of r
ecei
ving
ca
pita
l in
vest
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t fr
om t
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over
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omic
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ter
the
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Sho
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espo
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to t
he G
reat
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t Ja
pan
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thqu
ake.
・
Fro
m F
Y20
12 o
nwar
d, p
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y co
st h
as b
een
decr
easi
ng
due
to a
dec
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e in
cre
dit-
rela
ted
cost
tha
nks
to im
prov
ed
busi
ness
con
ditio
ns
of b
orro
wer
s an
d a
decr
ease
in o
ppor
tuni
ty
cost
of
capi
tal
inve
stm
ents
, et
c. r
elat
ed t
o a
chan
ge i
n th
e as
sum
ed i
nter
est
rate
.
Pol
icy
cost
s(t
otal
am
ount
)O
fwhi
ch, s
ubsi
dies
, et
c. fr
om th
e go
vern
men
tO
f whi
ch, m
oney
tra
nsfe
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to th
e go
vern
men
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ch, o
ppor
tuni
ty c
ost o
f ca
pita
l inv
estm
ents
, et
c. f
rom
the
gove
rnm
ent
The graph of policy cost each FILP agency that classified in component of “Subsidies”, “Payments to the treasury/corporate tax”, and “Opportunity cost” about policy cost analysis results of the last 10 years (reflected as much as possible if the organization has changed). ”Points” field describes cause of fluctuation and main trends of policy cost. Note: For policy cost of each year, note that assumptions, such as interest rate to be applied to the estimate is different.
