The Role of the Creditor in the Debtor’s Management: The
Case of the World Bank’s Loans to Japanese Private ElectricPower Companies (1953-1961)

Takashi Kitaura
Faculty of Economics, Meiji Gakuin University
Discussion Paper No.14-01
April, 20141

This paper demonstrates that the loans provided by the World Bank encouraged therecovery of Japanese electric power companies’ profitability. At the request of the World
Bank, the electricity rate grew, causing the companies to experience depreciation.
Further, the World Bank compelled electric companies to construct thermal power
stations, which are more efficient than hydroelectric stations. The loans provided by theWorld Bank generated improvements in the power companies’ profitabilities because
the increased depreciation incited by the rising rate benefitted the companies’ financial
conditions.
Keywords: World Bank; Japanese private electric power company; Electricity rate;
thermal power station; hydroelectric power station; Debt/equity ratio

1. Introduction
This paper shows that loans offered by the World Bank facilitated the recovery of
profitability among Japanese electric power companies. More specifically, to improvetheir waning profitability, the World Bank gave Japanese government suggestions toincrease the electricity rate1 and construct efficient thermal power stations in the 1960s.
Four Japanese electric power companies—Kansai, Chubu, Hokuriku, andKyushu—raised funds through the World Bank to finance the construction of new
power plants. By providing funds to these companies, the World Bank facilitatedimprovements in their profitabilities.
The current electric power system in Japan was established in May of 1951 andconsisted of nine private companies: 2 Hokkaido Electric Power Company, Tohoku
Electric Power Company, Tokyo Electric Power Company, Chubu Electric Power
Company, Hokuriku Electric Power Company, Kansai Electric Power Company,
Chugoku Electric Power Company, Shikoku Electric Power Company, and Kyushu
Electric Power Company.3 Following World War II, the Japanese economy underwent asignificant period of growth, particularly between 1955 and 1973. Rapid economic
1

Electricity rate means electricity charge or power rate.
One of the primary characteristics of the current Japanese electric system was that electricity wasprovided by private companies. Japanese government established the government-managed electric
power companies to prepare for war between 1939 and 1942. After World War II, General
Headquarters ordered the dissolution of the government-managed companies and the establishmentof nine private companies for Japanese economic democratization in 1951.
3
Bellow called Hokkaido, Tohoku, Tokyo, Chubu, Hokuriku, Kansai, Chugoku, Shikoku andKyushu.
22

development in this period increased demand for electric power within Japan. To
address this sudden increase in demand for electricity, Japanese electric powercompanies constructed more efficient power stations. The companies turned to theWorld Bank for loans to finance the construction of these stations. In this way, thefinancial loans provided by the World Bank did not only provide the companies withmore substantial monetary resources, but also encouraged the construction of more
efficient power stations, allowing the companies to improve profitability on their own.
At the World Bank’s request, the rate at which Japanese power companies soldelectricity increased after 1953, causing the companies to experience increased
depreciation. However, the Japanese government restrained the electricity rate, thereby
negatively affecting managerial objectives associated with increased electricity rates.
These restrictions on electricity rates caused the deterioration of the companies’
financial situations. Because of these restrictions (and the negative effects on
profitability they incited), the World Bank often required the Japanese government toincrease the rate at which the electric power companies sold electricity, when the WorldBank tendered money to the electric companies. The rise of the sale electricity ratemeans the improvement of the electric power companies’ financial situation because theJapanese electric power companies supply the electricity dominantly.
To prevent the deterioration of the financial conditions of the debtors to which
they loan money, creditors typically supervise the management practices of debtor
companies.4,5 Therefore, as a creditor, the World Bank sought to improve the financial
situations of those to whom they loaned funds. As such, the World Bank’s requirements
for the companies’ improvements were normal stipulations associated with the loans
they provided to the electric power companies.6 As a result of these requirements,
Japanese electric power companies increased their rate, thereby increasing depreciation.
This increased depreciation allowed the companies to tap the internal reserve fund toconstruct more efficient power stations.
Another of the World Bank’s stipulations dictated that the companies were to
maintain a debt-to-equity ratio below 2, as further borrowing may have proven todamage their ability to repay their debts.7 Because of the degree to which the World
4

Michael C. Jensen and William H. Meckling, “Theory of the Firm: Managerial Behavior, Agency
Costs and Ownership Structure,” Journal of Financial Economics 3 (1976): 305-360.
5Paul Milgrom and John Roberts, Economics, Organization and Management (Upper Saddle River,
New Jersey, 1992), 183-84.
6World Bank Tokyo Office, “Segin shakkan kaiso [The recollection of the World Bank’s Loans],”(Tokyo, Japan, 1991).
7
Milgrom and Roberts, 183-84.
3Bank affected the management practices of the electric companies that borrowed from it,
the electric companies’ accounting methods took a great role in both the rate at whichelectricity was sold and the stipulations of the loan agreements made with the WorldBank.
A number of researchers have argued that creditors often use the debtor’s
accounting to supervise the management of the debtor’s operations. 8 , 9 , 10 , 11 , 12
Specifically, these scholars have examined how creditors’ use of debtors’ accounting
affects the debtors’ behaviors (particularly accounting behaviors). Because (a) mostpublic utility commissions establish prices and calculate revenues according to the sum
amount of operating expenses, depreciation, taxes, and the fair return of assets, and (b)that rate system affects the company’s operational practices and accounting behavior,
debtor accounting methods are particularly important in the public utility
industry. 13 , 14 , 15 , 16 , 17 The Japanese electricity rate was decided by the Japanese
government and calculated by the fully distributed cost method. As a result, theJapanese electricity rate system affected the accounting behaviors of Japanese electric
power companies.
2. A synopsis of the World Bank loans to Japanese electric power companies
Table 1 provides a summary of the World Bank’s loans to Japanese private
electric power companies from 1953 to 1961. As shown by the figures in Table 1, fourJapanese electric power companies borrowed a total of USD $143 million from theWorld Bank for seven projects in 1953, 1958, and 1961. This amount represented
8

Chee W. Chow, “The Demand of External Auditing: Size, Debt and Ownership Influences,” The
Accounting Review 57 (1982): 272-91.
9
Ilia D. Dichey and Douglas J. Skinner, “Large-Sample Evidence on the Debt Covenant
Hypothesis,” Journal of Accounting Research 40 (2002): 1091-123.
10
Joanne C. Duke and Herbert G. Hunt III, “An Empirical Examination of Debt Covenant
Restriction and Accounting-Related Debt Proxies,” Journal of Accounting and Economics 12 (1990):
45-63.
11
Richard Leftwich, “Accounting Information in Private Markets: Evidence from Private Lending
Agreements,” The Accounting Review 58 (1983): 23-42.
12
Ross L. Watts and Jerold L. Zimmerman, Positive Accounting Theory (Englewood Cliffs, New
Jersey, 1986), 210-17.
13
Steven F. Cahan, “The Effect of Antitrust Investigations on Discretionary Accruals: A Refined
Test of the Political-cost Hypothesis,” The Accounting Review 67 (1992): 77-95.
14Jennifer J. Jones, “Earning Management during Import Relief Investigations,” Journal of
Accounting Research 29 (1991): 193-228.
15
Kimberly Gilligan Key, “Political Cost Incentive for Earnings Management in the Cable
Television Industry,” Journal of Accounting and Economics 35 (1997): 309-37.
16
Shyam Sunder, Theory of Accounting and Control (Nashville, Tenn, 1997).
17
Watts and Zimmerman, 231-33.
4

roughly 17% of the total value of all loans provided to Japan from the World Bank
between 1953 and 1966. In 1953 and 1961, the World Bank invested in Japanese
projects geared towards constructing thermal power stations. In contrast, the loan in1958 was intended to promote the construction of hydroelectric power stations. Theinterest on the loans ranged from 5% to 5.75%, and the redemption period ranged
between 20 and 25 years. Four companies did not borrow money directly from World
Bank. Instead, the World Bank loaned money to the Japanese Development Bank, which
in turn, loaned money to the four electric power companies.
Table 1. World Bank’s loan to Japanese private electric power companies
Loan
Date

SignedRedemption
Beneficiary

Project

AmountInterest(DD/MM/YY)

Period (Year)(1,000 US$)

15/10/1953

Kansai

Tanagawa thermal power station

21,5005%20

15/10/1953

KyushuKarita thermal power station

11,2005%20

15/10/1953

Chubu

Yokkaichi thermal power station

7,500

5%

20

13/6/1958

Kansai37,0005.625%

25

25,0005.625%

25

29,0005.75%

2512,0005.75%

20

Kurobe No.4 hydroelectric power
station27/6/1958

Hokuriku

10/9/1958

Chubu

Arimine hydroelectric power station
Hatanagi No.1 & .2 hydroelectric
power station

16/3/1961

KyushuShin-Kokura thermal power station

Source: World Bank Tokyo Office, Segin shakkan kaiso.

In 1953, Hokuriku, Kansai and Kyushu had dividends equal to 12% per year18.
Chubu, Kansai, and Kyushu had this same dividend rate in 195819. In 1961, however,Kyushu’s dividend rate dropped to 10% 20 . The interest rates associated with thecorporate bonds issued by the four companies in 1953, 1958, and 1961 ranged from7.408% to 8.934%.21 The redemption period for these corporate bonds was between
Hokuriku Electric Power Company, “Yukashoken Hokokusyo,” (Toyama, Japan, 1953), Kansai
Electric Power Company, “Yukashoken Hokokusyo,” (Osaka, Japan, 1953) and Kyushu ElectricPower Company, “Yukashoken Hokokusyo,” (Fukuoka, Japan, 1961).
19 Chubu Electric Power Company, “Yukashoken Hokokusyo,” (Nagoya, Japan, 1958), Kansai
Electric Power Company, “Yukashoken Hokokusyo,” (Osaka, Japan, 1958), Kyushu Electric Power
Company, “Yukashoken Hokokusyo,” (Fukuoka, Japan, 1958).
20 Kyushu Electric Power Company, “Yukashoken Hokokusyo,” (Fukuoka, Japan, 1961)
21
Industrial Bank of Japan, “Shasai Ichiran,” Complete List of Bonds, (Tokyo, Japan, 1970).
18

5

five and seven years. The terms of the World Bank’s loans provided a moreadvantageous method of funding the electric companies’ construction projects thanstock and corporate bonds in terms of both financial costs and redemption period.
Given the strengths of the terms of the World Bank’s loans to electric companies,
a question emerges. Although World Bank loans represented the most advantageous
funding method, why did only four (of nine) companies borrow funds from the World
Bank? The answer to this question may lie in the tendency for the World Bank tointervene in the management of the companies that have borrowed from it. World Bank
intervention into the companies’ affairs may dissuade some of the companies to seek
funding from it.
Historically, when the World Bank has loaned money to companies, it has
required the guarantee of the government. Case in point, when the World Bank provided
funds to the Japanese electric companies, the repayment of the loans was guaranteed by
the Japanese government. Furthermore, the World Bank has tended to carefully evaluate
a potential borrower’s financial capacities, the market in which it operates, and otherfactors that may affect its ability to repay the loans it borrows. In the case of theJapanese electric power companies, the World Bank evaluated Japanese electricity rates,
and required the Japanese government to raise those rates. 22 The Japanese government
was compelled to raise the electricity rates because only it (and not the individualcompanies) had the legislative power to set the rates at which electricity is sold. As aresult of the agreement between the Japanese government and the World Bank, theJapanese government was forced to establish appropriate rates with relative promptness
and maintain those rates for sufficient time that the companies would be able to financetheir construction projects.23
After borrowing funds from the World Bank, some companies may look toborrow more funds from other banks, causing their financial condition to deteriorate andaffecting their ability to repay their loans from the World Bank. To mitigate thelikelihood of this possibility, part of the agreement between the World Bank andJapanese electric power companies stipulated that the latter’s debt-to-equity ratio mustremain below 2.24 To determine this ratio, the electric power companies and their
22

Technical Operations Departments, “Technical Report on the Chubu, Kansai and Kyushu Thermal
Power Projects in Japan,” Technical Report, (Washington, DC, 1953): 14-15.
23
World Bank, “Guarantee Agreement (Kansai Power Project) between Japan and Internationalbank for Reconstruction and Development,” (Washington, DC, 1953).
24
World Bank, “Project Agreement (Kansai Power Project) between International Bank for
Reconstruction and Development and the Kansai Electric Power Company, Inc.,” (Washington, DC,
1953): 8.
6

subsidiaries included “bonds and debentures,” “long-term loans,” and “short-termloans” in their calculation of debt. Equity was comprised of “provision for drought,”“provision for retirement allowance,” “capital stock,” “surplus,” and “next term.”25
To illustrate, Hokuriku calculated its debt-to-equity ratio in March of 1970.
According to Hokuriku’s calculations, the company had roughly 100 billion yen in debt
and 56 billion yen in equity. Its subsidiaries had about 14 billion yen in debt and 4
billion yen in equity (Hokuriku Electric Power Company, 1970). 26,27 Its subsidiaries’
debt and equity consisted of 12.2% and 7.7% in consolidated debt and equity. As aresult, the ratios of the non-consolidated and consolidated balance sheet were 1.8 and1.9. Given the small difference between the debt-to-equity ratios reported on the
non-consolidated and consolidated balance sheets, and because Japanese companies
disclose only non-consolidated financial information, I calculate the debt-to-equity ratiousing the non-consolidated balance sheet in this paper. Using Hokuriku from March of1970 as an example, there would be little difference in the calculation using thenon-consolidated relative to the consolidated balance sheet.
In addition, because the World Bank, the Japanese electric companies, and theJapanese government were all parties to the agreements that facilitated the constructionof new power stations, negotiations between these entities were quite lengthy. Toughnegotiations such as these prevent the provision of loans to other companies. For
example, Tokyo planned to borrow money from the World Bank between 1959 and
1961, but was unable to for two reasons.28 First, despite planning the construction
multiple hydroelectric power station projects, the World Bank judged the construction
projects to be risky and inefficient. Ultimately, the World Bank determined that thermal
power stations provided a cheaper alternative to hydroelectric power stations.29 Second,around 1960, the World Bank began to limit loans to Japanese companies. At that point,
the World Bank determined that Japanese companies could be trusted and were more

25

“Revaluation reserve” was included in “surplus.” “Next term” represents retained earnings carriedforward.
26
Hokuriku Electric Power Company, “Segin Hiritsu Shisan, [Trial Calculation of World Bank’s
Ratio]” (Toyama, Japan, 1970).
27
Materials from the World Bank Archives and Hokuriku Electric Power Company (1970) werereceived from Professor Takeo Kikkawa, Hitotsubashi University. I would like to express my deepest
gratitude to Professor Kikkawa for these materials.
28“6.4okudoru no syakkan zosho buseginsousai to kosho [The Minister of Finance negotiated USD
640 million with Mr. Black, World Bank President],” Yomiuri Shinbun, Sept. 13, 1959.
29“Shorui shinsa toru kyuden shinkokura no segin shakkan [An applicant screening was pass in theWorld Bank’s loan to Shinkokura thermal power station of Kyushu],” Yomiuri Shinbun, June 17,1960.
7able to secure loans from foreign private financial institution.30
3. The 1953 loan
Chubu, Kansai, and Kyushu secured loans from World Bank on October 15, 1953
for the construction of a thermal power station (see Table 1). These loans represented
the first of the World Bank’s loans to all Japanese companies. These loans were
specifically meant to fund issues related to these construction products, and could be
used for foreign exchange settlement when the companies bought the thermal power
station facilities from GE or Westinghouse.
Initially, these companies planned to borrow from Export-Import Bank (EXIM).
However, after Japan became a member of the organization in 1952, the Japaneseelectric companies shifted their focus to the World Bank for its long-term financing
needs.31
Following the request for financing, World Bank staff members travelled to Japanto determine whether it would be useful for World Bank to lend. On October 28, 1952,
these staff members instructed the electric power companies to demonstrate whether
the current electricity rate could financially support the replacement of the old plants
with new ones.32 The companies responded to World Bank staff determinations byclaiming that depreciation to the plants was less than desirable for paying off their debt.
In a report based on their research on the Japanese power companies, the World Bank’sTechnical Operations Department33 argued that “the power rates charged will have to
be increased fairly substantially over the next few years if the companies are to cover
costs, attain financial stability and raise adequate equity capital, in appropriate ratio todebt financing, to meet new capital requirements.”34
In accordance with the judgments of the World Bank, the government was forced
to establish increased rates for the sale of electricity relatively quickly. However, theWorld Bank remained unconvinced that the rate problem resolved by the Japanese
government’s actions. Its report indicated that the companies’ methods for calculating
the electricity production rate were flawed. At that time, the electricity rate was30“Shinki shakkan ni nanshoku Rosen segin kyokuto bucho [Mr. Rosen, Director Department of
Operation Far East, is against the new loan],” Yomiuri Shinbun, Feb. 23, 1961.
31
World Bank Tokyo Office, 18-20.
32
Electric Utility Enterpriser’s Forum, “Sekai ginko chosadan to taisuru denkijigyosha no teishutu
shorui,” 1952, 1.
33
Technical Operations Departments, “Technical Report on the Chubu, Kansai and Kyshu Thermal
Power Projects in Japan,” (Washington, DC, 1953).
34
ibid., 14.
8

computed on the basis of overall cost, including all operating expenses, depreciation,
taxes, interest charges, and dividends on capital stock of 15%. 35 The Technical
Operation Department, 36 however, insisted that “this method didn’t consider therevaluation reserve as capital for rate making purposes, although its assets counterpart
is recognized for depreciation purposes.”
In any event, the Japanese government raised the electricity rate in October of1954. The new rates were 18.1% in Chubu, 3.9% in Kansai, and 12.4% in Kyushu.
These rate changes affected the depreciation behavior of the electric power companies.
Table 2 summarizes the depreciation behaviors adopted by the electric powercompanies. At that time, the depreciation of the electric power companies was between
the amount calculated by the straight-flat method and the fixed-rate method.
Specifically, Table 2 shows the ratios of actual depreciation to depreciation calculated
via the straight-flat method or the fixed-rate method. Chubu and Kansai’s ratio of
actual-to-calculated increased from 1953 to 1955. Kensai’s ratio of actual-to-calculated
depreciation grew 108% of using the fixed-rate method in 1955. Kyushu’s ratio fell
from 1953 to 1955.
Table 2. The depreciation behavior of electric power companies
Company Depreciation Method 1953
Chubu
KansaiKyushustraight-flat
fixed-ratestraight-flat
fixed-ratestraight-flat
fixed-rate

106%
58%
134%
76%
150%
83%

1954

1955

120%
64%
144%
80%
133%
78%

156%
84%
194%
108%
128%
67%

Source: The Public Utilities Bureau of MITI and the Federation of Electric Power Companies of Japan,
denki jigyo junen no tokei

As noted above, as a term of their loan agreement, the World Bank mandated
that Japanese electric power companies maintain debt-to-equity ratios lower than 2. As
demonstrated by the figures in Table 3, Chubu, Kansai, and Kyushu had debt-to-equity
ratios well below the threshold (0.27, 0.28, and 0.57, respectively). Why, then, did theWorld Bank add this stipulation to the loan agreements? The answer to this question
35
36

ibid., 14-15.
ibid., 14.
9rests on World Bank predictions of the firms’ debt-to-equity ratios. According to Table
3, the Technical Operations Department estimated that the debt-to-equity ratios for
Chubu, Kansai, and Kyushu would respectively increase to 1.52, 0.82, and 1.71 by
March of 1958. Technical Operations Departments predicted that the ratio of threecompanies would be deteriorated less than 2 even in March 1958, but especially theratio of Kyushu would be deteriorated rapidly. The World Bank determined that thefinancing for the construction caused this deterioration. In addition, the World Bank
estimated that Chubu, Kansai, and Kyushu would respectively raise the 63%, 63%, and
73% of money needed for their construction project from new loans between 1952 and1957 (see Table 3). Given this, the World Bank required an increase in the electricity
rate to increase company reserves and improve their respective debt-to-equity ratios. In
response to this request, Kansai issued new shares up to 50% of its present capital. As aresult of these steps, Chubu, Kansai, and Kyushu were able to maintain debt-to-equity
ratios in March of 1958 that were lower than those predicted by the Technical
Operation Department (1.30, 0.71, and 1.42, respectively; see Table 3).
Table 3. World Bank's estimation of the debt and equity of the Japanese electric powercompanies (Unit; Billion Yen)
Chubu

KansaiKyushuEquityDebt(aEquity(b)(a)/(b)Debt(a)(b)

March 1952

Debt

Equity(a)(b)(a)/(b)(a)/(b)

7.8

29.3

0.27

21.2

75.8

0.28

12.6

22.2

0.57

54.5

35.9

1.52

69.8

84.8

0.82

55.1

32.2

1.71

80.9

62.4

1.30

92.4

129.3

0.71

76.8

54.0

1.42

March 1958
(estimation)
March 1958
(actual)
Sources: Technical Operations Departments. “Kansai Hydroelectric Project Japan.” Technical Report,
Washington, DC: World Bank, 1958, Chubu Electric Power Company. “Yukashoken hokokusyo.”Semi-Annual Report, Nagoya, Japan, 1958, Kansai Electric Power Company. “Yukashoken hokokusyo.”Semi-Annual Report, Osaka, Japan, 1958 and Kyushu Electric Power Company. “Yukashoken
hokokusyo.” Semi-Annual Report, Fukuoka, Japan, 1958.

4. The 1958 and 1961 loans
4.1 The loans in 1958
In 1958, Kansai, Hokuriku and Chubu again secured loans from the World Bank10(see Table 1). Although the companies were borrowing funds from the same lendingorganization, there were two distinct differences between the loans from 1953 and 1958.
First, the terms of the loans were somewhat different. Whereas the 1953 loans wereintended to assist in the construction of thermal power stations, the 1958 loans wereintended to assist in the construction of hydroelectric power stations. Given the different
costs associated with these projects, the average loan amount was USD $13.4 million in
1953, and roughly USD $30 million in 1958.37 Moreover, the average interest rate forthe 1958 loans was about 5.7%. This was approximately 0.7% higher than the loans thecompanies received in 1953. The redemption period for the 1958 loans was also longer(25 years). Another difference between the loans is that in 1953, the loans were used forthe settlement only by the foreign currency. In 1958, however, the loans were used forsettlement not only by the foreign currency but also by the Japanese Yen.38
The latter of these differences was attributable to a change in the World Bank’sview. The electric power companies initially sought to borrow from EXIM because theconditions and procedures associated with EXIM loans were far more flexible thanthose offered by the World Bank. World Bank personnel understood this proclivity, andPresident Eugene Black came to Japan in May of 1957 for the first time to promote theWorld Bank’s loans to Japanese electric power companies.39 In discussions with Hayato
Ikeda, the Financial Minister of Japan, Black said that the loan amount to Japaneseelectric companies would increase USD $300 million from 1958 to 1960. Thisannouncement was of great interest to Kansai, as the company needed substantial
funding for the construction of the Kurobe No. 4 hydroelectric power station. Despite
the promise of the World Bank loans to Kansai, Hokuriku, and Chubu, they were noteasily implemented. This was largely attributable to differences of opinion about how
the electricity rate should be calculated according to the World Bank and the Japanese
government. Ultimately, the World Bank insisted that its calculation method be
implemented between 1957 and 1960.
4.2 New rate system
Discussions related to the calculation of the electricity rate began on July 14,
1957, when Tohoku and Hokuriku raised the rate at which they sold electricity. In
37

In particular, Kansai’s Kurobe No.4 hydroelectric power station project was one of the biggest
projects during the era of high growth. This project was the subject of a movie entitled “Kurobe no
Taiyo” (the sun of Kurobe).
38
World Bank Tokyo Office, 1991, 32.
39
ibid., 31-32.
11

December of that year, the Japanese government established “the Power Rate
Investigation Council” to discuss the new rate system. The World Bank paid close
attention to these discussions, as the new rate system would likely become a key
element of the negotiations for the World Bank’s loans.40
As a result of their compulsory discussions, the Council delivered a report on theelectricity rate in December of 1958 41. In the report, the Council argued that theelectricity rate should be increased to permit the companies to finance an increasing
proportion of the costs associated with future development.42 In addition, the report
explained that business rewards were calculated through the addition of dividends,
surpluses, and interest expenses according to the electric power company’s actual
capital structure prior to the revision. However, this calculation was modified to reflecta fair return basis. In a fair return basis, business rewards are calculated in accordancewith the value of business assets and the weighted average cost of capital (WACC) for
debt and net assets. The conventional method for calculating business rewards kept
down electricity rates and prevented exertion by the companies. However, the fair returnbasis incentivized companies keep their capital costs low. According to MITI, if theelectricity rate for the nine companies was recalculated in 1960, their collective costs
would increase by 19 billion yen, representing 4.7% of comprehensive costs forgenerating electricity.43,44
However, the World Bank did not think highly of the change in calculation
method or the report of the Power Rate Investigation Council. Sigesaburo Maeo, a MITI
minister, sent a letter to World Bank President Eugene Black in May of 1958, 45
indicating that the Council was expected to reveal its findings in a report to be released
later that year. Further, the letter indicated that government hoped to increase powercompanies’ revenues within the 1959 fiscal year. Therefore, the World Bank loaned to
Kansai in June of 1958, before the Power Rate Investigation Council released their

World Bank, “Office Memorandum 8th January 1958.” Washington, DC: World Bank.
41 The Public Utilities Bureau of the Ministry of International Trade and Industry. “Shin denki
ryokin seido no kaisetsu [The explanation about new electricity rate system].” (Tokyo, Japan, MITI,
1960): 7-8.
42World Bank, “Japan- Power Rates 10th April 1959,” (Washington, DC, 1959).
43
Shin denki ryokin seido no kaisetsu [The explanation about new electricity rate system].” (Tokyo,
Japan, MITI, 1960): 45-46.
44
The rise in each company’s electricity rate was not practiced simultaneously, but occurred as eachcompany applied to the government after 1960.
45
Ministry of International Trade and Industry, “A Letter from Shigesaburo Maeo Minister ofInternational Trade & Industry to Eugene R. Black, President International Bank for Reconstruction
and Development on 27th May 1958,” (Tokyo, Japan, 1958).
40

12

report.
After the findings in the report were formally announced, the World Bank
internally discussed the report from April to May of 1959, determining its findings to be
weak 46 and claiming that “the Council recommended little change in current
practices.”47 In the World Bank’s estimation the report ‘’emphasized the stabilization ofelectric rates rather than the necessity of a proper return to the industry.”48 These
comments reflected the World Bank’s continued concern about the deterioration in therespective financial positions of the power companies to which it loaned money. 49 Most
notably, the World Bank was concerned about financial deterioration resulting fromincreasing construction costs, greater expenses for developing a new area, and perhaps
the most importantly, an unrealistic depreciation policy that made it impossible forcompanies to generate sufficient reserves, forcing them to rely on debt financing.50
Given these concerns, in a letter to the MITI, the World Bank stressed that substantial
improvement in the financial positions of the companies would not be achieved without
fundamental changes in their power rate systems. Ultimately, in March of 1959, theWorld Bank already informed the Japanese government that it “would not feel justified
in concluding negotiations for any further power project in Japan until appropriate
action has been taken to ensure that the power companies will be able to finance theircontinued expansion while maintaining a sound financial position.” 51 The WorldBank’s position on this matter was reflected in its negotiations related to the loan to
Kyushu in 1961, which was the last loan provided to a company of the Japanese electric
power industry.
4.3 The Kyushu loan of 1961
To finance the construction of the Shin-Kokura thermal power station, Kyushu
borrowed funds from the World Bank on March 16, 1961 (see Table 1). The
negotiations were quite difficult. According to Japanese newspaper, Kyushu applied forthe loan in 1958, 52 and the president of Kyushu travelled to Washington D.C. to
World Bank. “13th April 1959 the letter from Martin M. Rosen to Tatsunosuke Takasaki.”(Washington, DC, 1959).
47
ibid.
48
ibid.
49
World Bank, “1st May 1995 Letter from Martin M. Rosen to Tatsunosuke Takasaki,” (Washington,
DC, 1959e).
50
World Bank, “13th April 1959 the letter from Martin M. Rosen to Tatsunosuke Takasaki.”(Washington, DC, 1959).
51
World Bank, “Re: Power Rate Policy March 1959.” Washington, DC: World Bank, 1959.
52“70okuen no shakkan Kyuden segin ni yosei [Kyushu asked World bank for a seven billion yen
46

13negotiate the terms of the loan on February 11, 1960.53 Kyushu initially planned tofinance the construction of a hydroelectric power station using a loan from the World
Bank, but the World Bank rejected that project because the construction of a thermal
power station was a cheaper alternative. To construct the hydroelectric station, Kyushu
planned to borrow USD22 million (8.1 billion yen), which would have covered 40% of
the total cost. 54 However, the thermal power station project would have required
Kyushu to borrow only 5.1 billion yen from the World Bank. Moreover, because the
Kyushu region produced substantial amounts of coal, the World Bank determined that athermal power station would prove a more suitable project to finance.55 For thesereasons, Kyushu was forced to change its project; rather than construct a hydroelectric
power station, it built a thermal power station instead.56
Although Kyushu fundamentally changed its project focus in May 1960, it had tononetheless wait until March 1961 for World Bank’s decision to provide the loan. The
delay was primarily attributable to World Bank’s request that the electricity rate beraised in the Kyushu area.57 As a result of this request, the electricity rate in Kyushu
increased 10.5% in March of 1961. This was the first raise that was calculated using the
new rate-base system adopted in 1960.
Between 1958 and 1973, the electricity rate was increased only seven times (seeTable 4).58 The reason for the relatively low number of rate increases was the relatively
stable profitability enjoyed by the electric power companies over a long period of time.
Still, the World Bank’s request related to the construction of thermal power stations
encouraged companies to build these stations, thereby increasing their profitabilities
further.

loan],” Yomiuri Shinbun, August 1, 1958.
53“Seginshakkan kosho ni konya shuppatsu sato kyuden shacho [Mr. Sato, Kyushu President, willtravel tonight to negotiate the World Bank’s loan].” Asahi Shinbun, February 11, 1960.
54“Kyuden no seginshakkan huridashi ni modoru [The World Bank’s loan to Kyushu is going backto square one],” Asahi Shinbun, March 5, 1960.
55
ibid.
56
“Shinkokura karyoku de segin gawa to sessho Kyuden shacho [Kyushu President will Negotiate
the Loan to Shinkokura Thermal Power Station to World Bank,” Asahi Shinbun, March 11, 1960.
57“Kyuden shakkan niha neage ga joken [The terms of a loan to Kyushu is to rise the rate].” Asahi
Shinbun, February 22, 1961.
58
Chubu, Kansai, Hokuriku, and Kyushu, each of which borrowed from World Bank, raised theirelectricity rate one time between 1958 and 1973. In contrast, Chugoku cut its rate in 1966 (see Table
4).
14

Table 4. The revised situation of electricity rates from 1955 to 197359
Date (DD/MM/YYYY) Company The raised percent
14/7/1957
14/7/1957
21/3/1961
5/8/1961
1/12/1962

TohokuHokuriku
KyushuTokyo
Tohoku17.80%
18.14%
10.50%
13.70%
12.60%

1/4/1965
9/8/1966
15/10/1966
29/9/1973
29/9/1973

Chubu
Hokuriku
ChugokuKansai
Shikoku

7.89%
6.38%
-3.91%
22.23%
17.75%

Source: Federation of Electric Power Companies of Japan, Denki jigyo binran heisei 24nen ban [Ahandbook of electric power industry in 2012 version] (Tokyo, Japan, 2012), 134-136

4.4 The financial covenant in the loan in 1958 and 1961
As noted above, one of the stipulations of the loan agreements between theJapanese electric power companies and the World Bank in 1958 and 1961 was thecompany’s maintenance of a debt-to-equity ratio lower than 2. The debt-to-equity ratiosof Kansai, Hokuriku, and Chubu in September 1958 were 0.75, 1.67, and 1.28,
respectively.60,61,62 In March of 1961, Kyushu’s debt-to-equity ratio was 1.95.63 Overtime, the companies’ debt-to-equity ratio gradually increased. Most notably, Kyushu’s
debt-to-equity ratio grew until it nearly reached the threshold set by the World Bank. In
response, World Bank requested that Kyushu’s electricity rate increase to reduce theratio. World Bank predicted that Kansai, Hokuriku and Chubu would havedebt-to-equity ratios equal to 1.70, 2.33 and 1.78 by 1964 and that Kyushu would have adebt-to-equity ratio of 1.38 by 1966.64,65,66,67 The actual ratios for Chubu, Hokuriku,
59

Federation of Electric Power Companies of Japan. Denki jigyo binran heisei 24 nen ban. [Ahandbook of electric power industry in 2012 version] , (Tokyo, Japan, 2012).
60

Chubu Electric Power Company, “Yukashoken Hokokusyo,” (Nagoya, Japan, 1958).
Hokuriku Electric Power Company, “Yukashoken Hokokusyo,” (Toyama, Japan, 1958).
62
Kansai Electric Power Company, “Yukashoken Hokokusyo,” (Osaka, Japan, 1958).
63
Kyushu Electric Power Company, “Yukashoken Hokokusyo,” (Fukuoka, Japan, 1961).
64
World Bank, “Kansai Hydroelectric Project Japan, 11th April 1958,” (Washington, DC, 1958).
65
World Bank, “Hokuriku Hydroelectric Project Japan, 9th June 1958,” (Washington, DC, 1958).
61

15

and Kansai were 1.97, 1.98, and 1.05, respectively, in March of 1965. In March of 1967,
Kyushu’s actual ratio was 1.34.68,69,70,71
Table 5. Ratio of the World Bank’s loan to the debt in Hokuriku and KansaiYear Hokuriku

Kansai

1961
1962
1963
1964

15.5%
14.6%
13.5%
12.3%

21.1%
19.4%
15.9%
14.7%

1965
1966
1967
1968
1969

12.2%
12.9%
12.5%
12.4%
12.1%

13.9%
12.6%

1970

12.0%

Sources: Hokuriku Electric Power Co. Inc., Yukashoken hokokusyo, and Kansai Electric Power Co. Inc.,
Yukashoken hokokusyo

The loan provided to Kyushu in 1961 was the last offered to Japanese private
electric power companies by the World Bank. The World Bank determined that theJapanese economy had developed well, leaving the Japanese electric power companies
the credit needed to borrow funds from foreign private banks. 72 Although the Japaneseelectric power companies did not borrow from World Bank after 1962, the balances
associated with outstanding loans remained.
5. The friction in 1969 and 1970
As time passed in the 1960s, the ratio of World Bank loans to total loans for fourelectric power companies decreased (see Table 5). 73 This reduction reflected a
66

World Bank, “Appraisal of the Hatanagi Hydroelectric Project Chubu Electric Power Co.-Japan,
31st July 1958,” (Washington, DC, 1958).
67
World Bank, “Appraisal of the Shinkokura Thermal Power Project,” (Washington, DC, 1961).
68
Kansai Electric Power Company, “Yukashoken Hokokusyo,” (Osaka, Japan, 1965).
69
Hokuriku Electric Power Company, “Yukashoken Hokokusyo,” (Toyama, Japan, 1965).
70
Chubu Electric Power Company, “Yukashoken Hokokusyo,” (Nagoya, Japan, 1965).
71
Kyushu Electric Power Company, “Yukashoken Hokokusyo,” (Fukuoka, Japan, 1967).
72“Segin 14 nichi ni shonin Kyushu denryoku no syakkan [World Bank will agree a loan to Kyushu
on 14th],” Asahi Shinbun, March 9, 1961.
73
The World Bank’s loan amount was written into the annual reports of Hokuriku from 1960 to1969 and the annual reports of Kansai from 1960 to 1965. However, it was not written into the16diminished importance of the World Bank’s loans for Japanese electric powercompanies.
Although the World Bank provided less funding than it had prior to the 1960s, theWorld Bank determined that Chubu violated the debt-to-equity ratio covenant in Marchof 1969.74 To improve the ratio, World Bank determined that Chubu should issue
stock.75 In accordance with this determination, Chubu issued its stock on 13 March
1970, receiving cash payments from shareholders worth 16.2 billion yen. Chubu alsotransferred 4.05 billion yen worth of Revaluation Reserves into Capital Stock.76 As aresult, Chubu’s debt-to-equity ratio fell below 2 by March of 1970.77
A similar situation occurred for Hokuriku in 1970. Specifically, World Bank sent
a letter to Hokuriku on July 28, 1970, indicating that as of March 31 of that year, thecompany’s debt-to-equity ratio was roughly 2.2:1. 78 Although this letter failed toindicate how the ratio was calculated, if the World Bank considered (a) equity to consistof capital stock, surplus, and next term, and (b) debt to consist of bonds and debentures,long-term loans, short-term loans, provision for drought, and provisions for retirement
allowance from Hokuriku’s material, the debt-to-equity ratio would have equaled 2.24:1.
This figure is consistent with the figure reported by the World Bank.
Despite the World Bank’s claims, Hokuriku insisted that its debt-to-equity ratio
was only 1.78:1, and therefore, did not violate the covenant.79 Hokuriku argued that theconfirmation signed between the Bank and Japanese Development Bank commented on
the scope of indebtedness, capital, and surplus as follows: Indebtedness will include
bonds and long- and short-term borrowings. Capital and surplus will include not only
capital, but also provision.
World Bank argued that provision was to be included in the calculation of debt;
Hokuriku claimed that it should be included in equity. The provisions of Hokuriku wereannual reports for Chubu (1960 to 1969), Kansai (1966 to 1969), or Kyusyu (1960 to 1969).
74
World Bank, “Japan- Loans 91-JA and 205-JA Chubu Electric Power Co. (Chubu) on 27th July
1969,” (Washington, DC, 1969).
75
World Bank, “Japan- Loan 91-JA and 205-JA Chubu Electric Power Co. (Chubu) Results of theFirst Half of Fiscal Year 1969/1970 (April 1-March 31) on 10th December 1969,” (Washington, DC,1969).
76
Chubu Electric Power Company, “A Letter from Chubu to World Bank on 14th March 1970,”(Nagoya, Japan, 1970).
77
World Bank, “Japan-Loan 91-JA and 205-JA Chubu Electric Power Co. (Chubu) Financial
Statement for Fiscal Year Ended March 31, 1970 on 13th August 1970,” (Washington, DC, 1970).
78
World Bank, “A Letter from World Bank to Hokuriku on 28th August 1970,” (Washington, DC,1970).
79
Hokuriku Electric Power Company. “A Letter from Hokuriku to World Bank on 4th November
1970.” (Toyama, Japan, 1970).
17

related to drought and retirement allowance. As of March of 1970, these provisions
equaled roughly eight million yen. This represented about 8% of the sum amount ofbonds and debentures, long-term loans, and short-term loans. In contrast, it represented
about 16% of the sum amount of capital stock, surplus, and next term. Given this, theinclusion of a provision in calculations for debt or equity was critical for determining
the ratio.
There had been an agreement between the World Bank and Japanese
Development Bank in 1959.80, 81 According to the Japanese Development Bank, thetreatment of provisions had been evaluated in Japan, but had not been conclusively
determined. However, in Japanese accounting practices, it was considered reasonable toregret provision as retained earnings since they served as an adjustment account at thesettlement of accounts. In particular, the provision for drought was quite similar to“reserve for price fluctuation” of ordinary manufacturing enterprises.82 World Bank
agreed with this determination on September 22, 1959.83
In reality, the provision for drought was used to adjust profits. More substantial
rainfall yields greater profit for electric power companies, as the operating cost ofhydroelectric power stations was cheaper than that of thermal power stations; thermal
power stations require more work if there is less rain. As such, electric powercompanies were supposed to save the provision for drought when there was more rain
and they earned more profit. Similarly, they were supposed to demolish the provision
for drought when there was less rain and they earned less profit. Although Hokuriku
demolished all provision for drought in 1954, its flow rate in 1954 was 102.7% of theaverage of the previous ten years.84 In other words, although there was plenty of waterin 1954, Hokuriku demolished all provisions. For this reason, Hokuriku’s actual
electricity sales were lower than anticipated.85 This demonstrated that the provision
served to effectively control profits.
The conflict between the World Bank and Hokuriku was eventually resolved
through the World Bank’s acceptance of Hokuriku’s insistence that Hokuriku did not80

Japan Development Bank, “Re: Basis of Calculating Financial Ratio (Indebtedness/Capital andSurplus Ratio) of Electric Power Companies,” (Tokyo, Japan, 1959).
81
World Bank, “Re: Basis of Calculating Financial Ratio (Indebtedness/Capital and Surplus Ratio)of Electric Power Companies,” (Washington, DC, 1959).
82
Japan Development Bank, “Re: Basis of Calculating Financial Ratio (Indebtedness/Capital andSurplus Ratio) of Electric Power Companies,” (Tokyo, Japan, 1959).
83
World Bank, “Re: Basis of Calculating Financial Ratio (Indebtedness/Capital and Surplus Ratio)of Electric Power Companies,” (Washington, DC, 1959).
84
Hokuriku Electric Power Company, “Yukashoken Hokokusyo,” (Toyama, Japan, 1954).
85
ibid.
18

violate the covenant.86 During the conflict between Hokuriku and the World Bank,
Hokuriku’s debt-to-equity ratio increased. In March of 1961, Hokuriku’s debt-to-equity
ratio was 1.62, but by September of 1965, it had grown to 2.02.87 At this same time,
Kyushu was characterized by a debt-to-market ratio of 1.94. By March of 1965, Chubu
had a debt-to market ratio 1.97. Taken together, these figures illustrate that all theJapanese electric power companies (except Kansai) narrowly averted violating thedebt-to-equity ratio covenant established by the World Bank.
Following years of being subjected to this covenant, in October of 1971, theJapan Development Bank required the World Bank to rescind this element of the loan
agreement for four of the borrowing companies: Chubu, Hokuriku, Kansai, andKyushu.88 Specifically, the Japan Development Bank argued that four of the electric
power companies financed expansion programs primarily with borrowed fund, making
it difficult for them to maintain a 2:1 debt-to-equity ratio.89 The Japan Development
Bank further explained that it would continue to supervise the power companies underother provisions of the loan agreements.
This covenant was abolished in October of 1971. Following the dissolution of the
2:1 debt-to-equity ratio stipulation, the World Bank entrusted the Japan Development
Bank with the supervision of the Japanese power companies. Following the stipulation’s
abolition, the debt-to-equity ratios of the four electric power companies grew rapidly.
Before the covenant was abolished, the respective ratios for Chubu, Hokuriku, Kansai,
and Kyushu were 1.89, 1.98, 1.54, and 1.73 in September of 1971. By March of 1974,
these ratios had respectively risen to 2.42, 2.20, 2.85, and 2.46 (see Figure 1).

86

World Bank, “A Letter from World Bank to Hokuriku on 24th December 1970,” (Washington, DC,1970).
87
The ratio was calculated from the non-consolidated annual report.
88
Japan Development Bank, “Re: Loans Nos. 196 JA, 200 JA, 205 JA, and 278 JA,” (Tokyo, Japan,
1971).
89
ibid.
19

3

Chubu
Hokuriku
KansaiKyushu2.5

Hokkaido
TohokuTokyo
Chugoku
Shikoku

2

1.5

1

0.5

0

Fig 1 The debt/ equity ratio of nine companies
Sources: Nine electric power companies, Yukashoken hokokusho.

6. Policy Implications
6.1. The capital structure and capital costThis section demonstrates the role the World Bank’s Loans played in the ways inwhich Japanese electric power companies were managed from 1953 to 1973. Figure 1
shows the debt-to-equity ratios of nine Japanese private electric power companies
between September of 1951 and March of 1974.90 The lists from 1960 and 1970 showthat the ratios associated with four companies that borrowed money from the WorldBank were not always lower than those of the other five companies. However, byanalyzing these data at the company-level, a key difference emerges. While thedebt-to-equity ratios for the four companies that borrowed from the World remained
below 2 until the financial covenant was abolished, the ratios of other companies (e.g.,
Tokyo, Tohoku) exceeded 2 for different periods of time prior to the covenant’s
dissolution. In addition, the debt-to-equity ratio grew more rapidly than that of the othercompanies after the financial covenant was abolished in October 1971.
Figure 2 also illustrates the average debt-to-equity ratios for all companies. These90

The ratio is calculated from the non-consolidated annual reports in Figure 1, and deviates fromthe consolidated based ratio. However, it is expected that the deviation is not substantial.
20

data demonstrate that the average ratio for the four companies that borrowed from theWorld Bank was lower than that of the other five companies from September of 1961 toSeptember of 1968. In contrast, the average ratio for the four borrowing companies washigher than the average ratio for the other five companies after October of 1971. After
October of 1971, the difference between the two groups of companies in terms of
average debt-to-equity ratio continued to increase. This suggests that the covenant
prevented the deterioration of four companies’ capital structures.
3

World Bank
non-World Bank

2.5

2

1.5

1

0.5

0

Fig 2 The ratio of the companies borrowed from World Bank
Sources: Nine electric power companies, Yukashoken hokokusho

In Hokuriku, the average debt-to-market ratio from March of 1964 to Septemberof 1965 was 1.99. However, after March of 1966, the ratio decreased as a result of thecompany’s issuance of common stock and its increase in capital stock from 26 billion
yen to 32 billion yen. 91 A similar phenomenon occurred in Chubu for the same
reasons.92 In contrast, in September of 1961, Tokyo’s debt-to-equity ratio was 2.11, but
continued to exceed 2 in subsequent years.
When their respective ratios approached 2, Chubu and Hokuriku issued stock to
reduce them at the behest of the World Bank. In response to World Bank concerns about
its high debt-to-equity ratio, Chubu issued 16.2 billion yen worth of stock and advised
World Bank in March of 1970.93
How, then, did the debt-to-equity covenant between the World Bank and electric
power companies affect the companies’ capital costs? This question can be addressed bya hypothesis. As discussed above, the World Bank’s loan was lower than other financial
91

Hokuriku Electric Power Company, “Yukashoken Hokokusyo,” (Toyama, Japan, 1966).
Chubu Electric Power Company, “Yukashoken Hokokusyo,” (Nagoya, Japan, 1966).
93
Chubu Electric Power Company, “A Letter from Chubu to World Bank on 14th March 1970,”(Nagoya, Japan, 1970).
92

21

methods in terms of its capital cost. However, the companies that borrowed from WorldBank were restricted by the financial covenant that limited the degree to which they
could engage in debt financing. The capital cost of debt was lower than that of stockfrom 1951 to 1973. As a result, the World Bank’s loans did not always reduce thecompanies’ capital costs. This was particularly true when a company’s debt-to-equity
ratio grew, causing the companies to issue stocks, thereby increasing capital costs.
Table 6 illustrates the capital costs for the nine Japanese electric power companies
in March of 1964, September of 1971, and March of 1974.94 According to Table 6, inMarch of 1964, the capital costs incurred by Chubu, Hokuriku, and Kyushu was higher
than average; Kansai’s capital costs were lower than average. By September of 1971,
the capital costs of Chubu and Kyushu remained higher than average and Kansai’s
remained lower than average. Finally, by March of 1974, the capital costs for Chubu
and Hokuriku were higher than average and the capital costs for Kansai and Kyushu
were lower than average. Given that the capital costs for the different companies
seemed to vary over time, securing loans from the World Bank was not always thecheapest financing method available to the companies.
Generally, for those companies that borrowed money from the World Bank, thecapital structure determined their capital costs. Kansai’s capital costs were lower thanthose of the other companies in March of 1964 and September of 1971. Further,
Kansai’s debt-to-equity ratios at those times (i.e., 1.13 and 1.54, respectively) were thelowest among the nine electric power companies (see Figure 1). Given the company’s
low debt-to-equity ratio, Kansai did not need to issue stocks. In contrast, Chubu,
Hokuriku, and Kyushu had debt-to-equity ratios that ranged from 1.7 to 2.0, causing
their capital costs to be equal to or higher than average. Loans from the World Bank
reduced the capital costs of companies who already had lower debt-to-equity ratios. In
contrast, World Bank loans increased the capital costs of those companies who alreadyhad high debt-to-equity ratios.

94

To calculate capital cost, I divided the sum amount of interest expense and dividends by the sum
amount of debt, provision, and capital.
22

Table 6. The capital costs of nine companies
Mar-64

Sep-71Mar-74

Hokkaido
TohokuTokyo
Chubu
Hokuriku
Kansai

6.5%
6.6%
7.1%
6.6%
6.6%
5.3%

6.6%
6.5%
7.3%
6.8%
6.7%
5.9%

6.0%
6.8%
6.2%
6.2%
6.2%
6.0%

Chugoku
Shikoku
Kyushuaverage

5.9%
5.9%
6.5%
6.4%

5.6%
6.7%
6.8%
6.7%

5.3%
5.8%
6.0%
6.1%

Sources: Nine electric power companies, Yukashoken hokokusho.

6.2. A role of World Bank’s Loan to Japanese electric power companies
Given the above, the question remains as to whether loans from the World Bank
affected the profitability of Japanese electric power companies. Ultimately, these loans
improved the companies’ practices in two ways.
First, by inciting a rise in the companies’ electricity rate, the World Bank
increased the companies’ rate of depreciation. As shown in Table 2, following a rise in
the electricity rate in October of 1954, Kansai’s depreciation exceeded the amountcalculated by the fixed-rate method by 1955. Kyushu experienced a similar
phenomenon. In 1960, Kyushu’s depreciation rate was 56%; that rate increased to 86%
by 1961.95 An increase in internal reserves through depreciation was good not only for
the World Bank, but also for the management of the Japanese electric power companies.
Second, the World Bank’s loan stipulations encouraged the construction ofthermal power stations. Because of the World Bank’s insistence that the Japaneseelectric power companies become more efficient, thermal power stations largely
replaced hydroelectric power stations during an era of rapid economic growth in Japan.
Ultimately, by insisting on the construction of thermal power stations, the World Bank
promoted increased efficiency in the production of Japanese electricity.

95

The Public Utilities Bureau of the Ministry of International Trade and Industry and the Federationof Electric Power Companies of Japan, “Denki jigyo junen no tokei [10 Years of Electric Industry],”(Tokyo, Japan, 1962).
23

7. Conclusion
Loans provided by the World Bank affected the management of Japanese electric
power companies. Many of these companies borrowed money from the World Bank toconstruct power plants between 1953 and 1961. As a stipulation of the loan, however,the World Bank requested that the companies increase their respective electricity rates
to increase depreciation and improve their profitabilities. This increase in internal
reserves caused by depreciation benefitted not only the World Bank, but also the
management of Japanese electric power companies. In addition, the World Bank
encouraged the Japanese electric power companies to construct thermal power stations,which are cheaper, more efficient alternatives to hydroelectric power stations.
Ultimately, the World Bank’s loans to Japanese private electric power companies
demonstrate that the World Bank, as a creditor, can improve companies’ managerial
practices. As discussed in the Introduction, creditors often supervise debtors’
management to prevent the debtor from defaulting on their loans. To this end, thedebtor’s accounting methods are critical, particularly in the public utility
industry.96,97,98,99,100,101,102,103,104 Although the World Bank’s requests for the electriccompanies to increase their electricity rates and construct thermal power stations wereprimarily motivated by its need to ensure the companies would not default on theirloans, these steps had the added effect of improving the management of debtors’
business operations.

96

Cahan, 1992.
Chow, 1982.
98
Duke and Hunt, 1990.
99
Dichey and Skinner, 2002.
100
Jones, 1991.
101
Key, 1997.
102
Leftwich, 1983.
103
Sunder, 1997.
104
Watts and Zimmerman, 210-17, 231-33.
97

24