Expected reforms to the Fiscal Investment and Loan Programme (FILP) would likely mean a streamlining in institutions such as the Japan Highway Public Corp, they added.

The government is widely expected to submit a bill to parliament early next year that would transform the FILP into a market-oriented system as funds available to the FILP shrink.

The FILP provides loans to major institutions so they can achieve goals set by the government, but the firms are often blamed for inefficiency and a lack of transparency in their financial affairs.

The institutions total about 80 and are often seen as sources of well-paid jobs to bureaucrats after retirement, the analysts said.

Rationalising Japan highway

Japan Highway Public Corp, one of the biggestgovernment-backed institutions, has been making efforts to rationalise, but focusing only on profitability in its highway projects may not be possible, officials at the corporation said.

"We are not a private firm so it may be a bit misleading tocompare us with private companies," an official for Japan Highway told Reuters in a recent interview.

"Yes, private firms have to seek for profit and that is important for us too, but we also have an important role. That is to widen the highway network equally across the nation. This part is also equally important."

But institutions like Japan Highway may have little choicebut to transform into leaner operations that more closely resemble the private sector.

This is because under the FILP reforms, institutions likeJapan Highway may have to tap the market for funds, and their ability to raise money in the capital market will depend heavily on their credit risk profile.

Institutions to turn to markets

The institutions are likely to tap the Financialmarkets by issuing so-called FILP agency bonds or FILP bonds.

FILP bonds are similar to Japanese Government Bonds (JGBs),but the FILP bonds are only issued for the purpose of raising funds for a particular FILP agency, such as Japan Highway Corp.

The FILP agency bonds are bonds issued by the institutions themselves which contain no government guarantee. This means the market will be judging an institution as it would private debt-issuing firms -- according to risk.

Currently, the institutions have had no need to worry about the market. They receive funding direct from the FILP, which in turn has been funded from Japan's postal saving system.

But deposits to the postal system are dwindling, and this is forcing a reform to overall FILP system.

The government aims to abolish the current FILP system fromfiscal 2001/02, and plans to replace it with FILP agency bonds which would effectively slim down the FILP.

But analysts said that FILP agency bonds are likely to be limited to few institutions withgood financial conditions.

In late August, an advisory panel to the finance and postal ministers issued a report which provided an estimate that Japan Highway would require a total of about 3.4 trillion yen to complete its highway projects currently under construction.

The panel also calculated the estimates of other firms.

"Our project is based upon the government's plan, which is to construct highways that run 9,006 km (5,600 miles) in distance. The estimate of cost looks high, but in many cases the benefit of highways cannot be simply priced into figures," another Japan Highway official said.

"Of course we have to look into benefits for the public. The construction itself can draw demand and the completion of highways would bring in benefits like time efficiency, reduction of accidents and many others," the second official said.

Management & Coordination Agency calls for disclosure

A survey on public institutions compiled by the Management and Coordination Agency, a government ministry,said it was important to review the operations of the institutions to determine how they were performing.

It said that some should be merged and some others even scrapped after studying reviews made by Japan's ruling Liberal Democratic Party. It also highlighted a need for greater disclosure.

"At the time when calls for rationalising special government affiliated institutions are under debate, the disclosure of the firms, especially the issue of financial affairs, is strongly required," the agency said in a report.

"The disclosure of Financial affairs is indispensable to review the activity of each institutions. By doing so, we will be able the evaluation operations of the the firms, which use a big amount of public funds," the report said.

The agency has aleady issued reports of 13 major institutions so far after releasing a first set of reports in April. It plans to issue 16 more reports by the end of fiscal 2000/01, an agency official said.

Need to form guidelines to stimulatedisclosures

Analysts said that the streamlining can be only done when the country's private sectors are making an effort to restructure their operations after suffering a severe and lengthy recession.

"The FILP reform can only come effectively by streamlining the government affiliated firm...," Akihiko Noda, economist at research and analysis group Fuji Research Institution Corp.

"Their business activity is unclear. We have to find that outrather quickly. The first step is to seek for disclosure and then final decisions should be debated in the Diet (parliament)."

Hidehiko Fujii, senior economist at Japan Research InstituteLtd, suggested the government should come up with specific guidelines to stimulate disclosures by the firms.

"I feel it is pointless to make effort to single out some particular institutions. But its more important to establish a system to review the institutions as a whole," Fujii said.

"Such details like liabilities of a special government affiliated firm or potential costthat is required for the firm should be disclosed more clearly, and should be in front of the eyes of the public," Fujii said. "Otherwise there is no way for the public to distinguish between the necessary ones and not."

"A similar book entry system, just like private firms, is necessary to justify their performance easily," Fujii said. the country as a whole," the banker said.