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CFS Discussion Paper Series
Japanese National RailwaysPrivatization Study II:
Institutionalizing Major Policy Changeand Ex.amimng Economic Implications
Authors
Koichiro FukuiKiyoshi NakamuraTsutomu OzakiHiroshi SakamakiFumitoshi Mizutani
Cofinancing and Financial Advisory Services (CFS)Private Sector Development and Privatization Group (CFSPS>
The World BankDecember 1994
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CFS Discussion Paper Series, No. 107
Japanese National RailwaysPnvatization Study II:
Institutionalizing Major Policy Change
and Examining Economic Implications
Atwhors:Koichiro Fukui, Japan Development BankKiyoshi Nakamura, Professor, Waseda UniversityTsutomu Ozaki, Japan Development BankHiroshi Sakamaki, Japan Development BankFumitoshi Mizutani, Associate Professor, Kobe University
For additional copies of this publicathn please contact:Cofinancing and Financial Advkory Senvces. Room Q-5030. (202) 473-1228.
Foreword
Ihe hard work of rstructuring a statr-owned enterprise and preparing it for privaxiztion goes on wellafia the initi hecady reorganization-which marks the beginning of the process-has ended. Even afterfinl plans have been developed and agreed to, a nced persists for flexibility and fine uming in the tacil
planning process, which proceeds in paralle with the implementation of rcstructuring of a large stateenterprise. This volume allows us to look inside the process of enterprise resrructuring. With unique clarity
and insight it explains the responses and resourcfailness ofJapanese authorities in continuing to guide one
of te lagest smte-owned enterprises-Japanese National Railways-through the thickets and challngs
ofprirarzation. It allows us to measure theprogresswhhhas bcen made since ambitious prinati2aiion plans
were agreed to in 1986 and cxplains the ongoing need for fine tuning of restructuring efFirts in response to
unanticipated shifs in dte busines and competitive environments. The need to run a railroad on a day-to-day basis fiurther complicaues the process.
This paper is pamt of a seics published by CFS, and is a sequd to an calier volumc on the privatizationand zer staue reorgaization ofJapanese National Raihways. The series is intended to communicare theexperience and insighs of priatizntion practitioners to their colieagues around the world, and this mostrent volumne accomplished these objectives admirably. On behalfofCFS I would like to thank di authors
for their valuable contribution to the art and scienmc of priraciation.
Inder Sud,
Dircaor,
Cofinancing and Finandal Advisorv Services
Acknowledgements
Theauthorsexpressspecialthan to Mes TakayukiNayakadAkraSatoofdrejapan DevelopmentBank who fonned a teamwith authors and assisted in the completio:- ofthis study. The authorswould also
like tO hk two Proessors of Hamrard University, Dr. John R. Meyer and Dr. Jose A. G6merz-Ibafiez for
their constuctive advice. This paper was initited as a component of the World Bank Study entitled
"Compartive Analysis of Railrad Privaization.' managed by Mr. Ron Kopicic of Co-financing and
Fmancial Advisory Services, thc World Bank, but also has been completed as an independent study and
constiotes the sequel to the lready published Wodd Bank Discussion Paper, 'Japanese National Railways
Privadzation Study, Japanese Expeice and Lessons for Developing Counties (No.172, 1992). The
authors express their appreatn for the insihtfi sueion of Messrs. Louis Thompson, Kvin Young
and DhrmvaSahaiofthe World Bank, HiromichiToya and Kunio Kishimoo ofthe Ministry ofTransport
in Japan, Shuhitro Yamanouchi of JR East, an Yasushi Tanahashi ofJR Freghr.
The authors also xpress appreciation for the informational support of Messr Akio Koike of JR
Hokkaido, Knlo Aold and Toshini N*gswa of JR East, Ksumi Myawa, Masaya Sakta and
Mahiko Emuma of JR Cntl Makol Shibata, Masshi Nonaka and Koji Nakura of JR West, Hachiya
Hirono and Micdinobu Sogava ofJR Shikok, Masahir Iimamura and Kenji Mon ofJR Kyushu, Yasuo
K cluiandTahshiAbeofJR Frgh MinoruSuzuki Masaito MoriandYujiSegawaofJNRSetdementCorporation, YodLiali Komasu of the Kinid Nippon Railtay, Yasuhiro Kao of the Nagoya Railroad, and
Fumihiro yaA, Hiddei Napo and Shigeyoshi Fujiar of the Japan Devlopment Bank.
The authors finaly would like tO Cxpress their gratitude for the generous support of Miss Ayano Takeiand other stiff fiom the Intenational Coopertion Deparment of the Japan Development Bank.
Introductory Note
This report follows an carlicr report by the same authors investigating the results of the 'privatization'ofJapanesc National railways UNR). It takesalonger rangeviewoftheoutcome: what happened,why,whatsucceded and what did not? Observcrs ofthc railway restruacuringscene are fortunate to have thse reportsbecause they finally permit an answer to these questions. It is no longer necessary to sayr 'Results lookpromising, but it is premature to daim succes" Now, for some questions, there arc answers.
Byanyrcalistic measure the processwasasuccess. Traffichasgrownstronglyonallpartsofthenewsystembecause a profit orientation has made indiffcrcnce to customrs a luxury the new companics URs) cannotafford. With revenucs up, hugc deficits havc becn convcrted into solid profits through increased attentionto cost control. A bloated labor forcc has becn reduced and labor productivity has grown rapidly. One ofthe railways UR East) is wcll along toward tre privatization, and credible plans to scll shres in two more(JRWest andJRCentral) havebeenestablished. Mechanismshavc becnestablished topermitpublic-privatepartnerships to finance the heavy burden of new capacity expansion. If the Government had not chosen tointervene in the sale of railwayassets (because the real estate marketwas overheated) and if the stock ofthethree HonshuJR's had beensold beforethe "bubblec economyhad burst (ra thanwaitingfor thccurrentmarket which is too weak), all of the original JNR debt woult also have bcen repaid instead of falling moretan $ 100 billion short. All inall, it is doubtfiulifeven theoriginalproponentsofprivatiza0onactuaLlyhopedforrcsultsasfivorable asactuallyhappened. Certainlyther are fewgovenmmentsesewhcrein theworld thattook on such a largc problem and made so much progress.
The reasons for success, while always hard to implement, are simplc in concept. Definc objctivesdcarly and credibly, and build a consensus for reaching the.r Whcre an adequate market easts, adapt tkhsolution to the demands of that market ratder than remaining in a government nodc of operation: inparticular, mak maximum use of the pressures of compctition and the techniques of rhe private sector.Finally, identify winners and compensatc losers.
But the report also highlights a series of importnt issues that remain to be resolved. These are
* TvffRquLzion. When and how will thc Govemrnenc allow the JR's to have more rate flesibilityso ticy and the large private railways can expect tO earn adequate profits?
* The three Honshu Raihmay 'WiU privatization be completed? How (unlike the private raiwaswhich are predominantly urban passenger oriented) will the Honshu JR's continue to manage amixture of suburban and interciEy passenger seruvices which might be better handled by sepaateentities, or even transfered in part to the priva raiways or local govenments?
* Th thre d raikvys. The revenue stabilization fund mednism is unstable (becase offluc-tuations in inteest rates) and is a barrir to privatization: should it be replaced by a contract forpublic services which would be pxedictable and could easily bc tmnsferred to a private operator?Should the local govermeCnts of the three islands be asked to make a contribution to the contactpayments needed?
* The Fnght Railway. Is there a rational cost-sharing formula betwe freight and passenger whichwould not price freight off most main lines? Is dtere any hope that freight could affbrd to pay forcapacity expansion - and can the country affort to pay for more highway capacity expnsion? Isthere a better balance bewveen private and public roles in rail fieight sevices, and (give an agreedmethod for line operacing cost allocation) would it not be possible, even imperaive, to privaize JRFreighi through a limited auction or even a compettve, private placement?
There is much the Bank and its borrowers can learn from thejapanese experience and, given the issueswhich still remain, there will be good reason tO kp a close eye on developments.
Louis S. TIompsonRaia AdviserThe Wodd Bank
Executve Summary
The fis half of the present century was some- 1970s. In particular, the deficits gencrated byJNR,thing of a golden age for railways in many coun- the Foodstuff Control Speciad Account, and thetries. In Japan the first railway was built between National Health Insurance System posed a realTokyo and Yokohama in 1872 by the Govern- problemforlgovernmentfinance.Expendituresforment. New line construction folowed in various thesethree items aloncaccountedfornearly lOYoofareas and by the rurn of the centuzy the mileage of the tota budget. In March 1981, the Provisionalprivately-run railway lines exceeded that of Gov- Committee on Administrative Reform was ap-cmnmcnt owned lines. Immediatelyafter the Russo- pointed under theCabinet's jurisdiction andchargedJapanese War (1904-1905), the Japanese Military with divising drastic measures necessary to achievebecame convinced of the raihvay's strategic impor- fiscal reform without raising taxes. In 1982 thetance and lobbied for nationalization. The Rail- Provisional Committee proposed the privatizationways Nationalzation Lawwas enacted in 1906 xnd ofJapan's three largest public corporations-JNR,cxisting lines, both private and pub) ic, were inte- Japan Monopoly Corporation (tobbaco and salt),grated into a nationwide nctwork under Gove-n- andNipponTelcphoncandTctegraphPublicCor-ment controL Thereafter, massrvc construction of poration. The commitee also suggested that privatenew knes continued thughout the country. The initiative be employed in the construction of socialdecelopment of the railway network provided the inrucre, which in the past had been hievedbasis for a more mobile society and workforce. It primaily through public works.also facilitated the spread of a more homogeneous Of all the Provisional Committee's tasks, by farlifistyle, rapidly diminating traditional regional- the largest in scale and most crtical was the priva-ism. tizationofjNR.Japan'slargestpubliccorporation.
In the larter half of this cenruy, cspecally over In 1980, JNR cmployed ncarly 414,000 workers,the past two decades, the railway sector has experi- out ofwhich about onc halfwere considered to beenced cough competition from diffcrcnt, increas- redundant,andthecoporation'shugeannuallossesingly sophisticated modes of uansportation. and accumulated debts were increasing yearly. OnStat-operated railway systems almost universally the other hand, JNR maintained superb cnginecer-began to lose moncy and to require subsidies. The ing and opratirng ehniqucs ant the transitionsituation continued to deteriorate atan acclerated had to be handled in away that did not diminish itspace. Thus, restructuring of railway systems, in- tenial strength. Thc Provisional Committeeduding the abolition ofservircs, has become a high recommended the cscablishing of a Superisorypriority issue worldwidec The Japancse case pre- Committee forJNR Reconstruction, to formulatesents an interesting example of restructring rail- and implement concrete policies for theways, not only in its size and methodology but also corporation's reorganization. In 1987, in line withinitsphilosophythat dcrailwaysmustcontinueto the Supervisory Committee's proposal, JNR wasplay an important role in the future, that the broken up into SiX L .gionplly-based railw2ypassen-burden to dtc nation must be minimzed, and that gcr companies and a sventh company to handlethis type of retrucuring should not occur again. frcighttransporcmdionfortheentirecountry(TheseSeven years afier the successfil resuuriing, this concerns ar referred to as the JRs in this paper).paper examines the rnaining and newly arsing Abouttwo thirds ofJNR's debt,wiichhad reachedissues, and makes an economic analysis of raiLway $337 billion by the end of 1986, was reassigned to
privatization. the JNR Serdement Corporation along with anyBrkef DCSCT~puiOU eflapanese Nauonal ~ surplus real estate of JNR and the shares of the
newly cre ated JRs. Ile elimination of the redun-dant workcorc was carried out smoothly, aided in
Asinmanyaodercountrieswhichhaveachieved part by economic growth and by the vey lowor are considern privatization of the railway sec- unemploynt rate of the latter 1980s.tor, printization of Japanese National Railways The performance ofJRs since restructi has
MNR) was tniggered by the financial crisis of the beenremarkmble, especiallyuntil 1990. TheannualJapanese Goverment in the latter half of the incease in passengers and cargo has been 5% and
u lt Japanwe National RAilwsPrivstiAtion Stdy I
10% respectvely. The number of employees was As a result, the proceeds from the sale of assetsdrasdcilly reduced to 191,000 by 1990 and trans- have not covered intcrest payments, which totaledportaon efficiency has improved remarkably. In $56 bilionbetweenFYI987and 1992. In faa, the1991, cheJRsasawhole paid $4.0 billion in tax and liabilities of the JNR Setdtemcnt Corporation hadcontributions to the government, even though rail increased to $242 billion by the end of the FYI 992.fares had not been increased since 1987. JRs are In 1991 land prices peaked out and showed sharpmuling efiorts to respond better to local needs and decline subsequendy. According to the figurcs rc-their corporate image has improved dramatically. leased by the JNR Stdtement Corporation, theInSeptember 1993, 62.5% ofJR Ease'sshareswere valuc of this land bad on the posted price as ofoff bred to the public. The renaining shares of JR April 1993, was roughly $76 billion. In the light ofEast, aswell asshares inJR Central andJRWesc, are this, the Government has lifted the ban on com-scheduled to be sold during fiscal 1995 and later. pCitive bidding, but the oudook of land prices isThe restructuring and privatizaion ofJNR can be still bleak and sales of the Corporation's land arejudgedtohavebeensuccessfil,althoughthegrowh sti slow in spite of various measures to promoteof passengers and profitability began to stagnatc land sales. The repayment of debt, the major re-from 1992owingtotheprolongedeconomicreces- maining issuc to be rcsolved, must bc carried outsion, and thcre cxist remaining or newly arising rapidlythrough thesalcofsharesandland, orbytheissues. xmition of profits from the development of
Dehu dftJN Seaement Corporation ral este.
One unique chamactristic of thb JNR privatiza- Sa ofJRs Shartion is theway inwhichjNR's debts werc allocated It was planned that as soon as the JRs met theto various bodies JNR debts totaled $337 billion, listing rquirements oftheTokyo Stock Exchangc,induding fumtre liabilities. The JNR Scetlement theirsbareswouldbelisredandsoldandprivatiza-Corporadioninhiedatotalof$232billion,outof tionwouldbecompletedThrecoftheJRs (JREast,which $26 billion was scaured as a ftumr lease fee JR Central andJR West ) already met the require-in respect of Shinkansen (bullet trains). According mcnc by FY1991 and sales of their shares wereto the initial plan, the Corpoation was excxted to planncd to begin in FY1992. However, though therepay the remaining $206 bilion through the sales basic principle of theJNR Supervisory Committeeof surplus assets ($70 billion) and newly created that all the shares of JRs be listed and sold tO theJRs' shares ($11 billion) with the balanc of $125 public has not changed, the time schedule wasbilliion to bc bom by the GovnmmenL delayedbeaus ofanxietiesthatamassiverelcaseof
Soon after the formation ofthcJNRSettdement new stocks might fiher depress the alreadyweakCorporation in 1987, the price of land in Japan stck market.begn to soar and greatly apprecited during 1987 In September, 1993, 62.5% ofJR Eases Sharesand 1988. Had all the land been sold without were offered to the public, as noted above. Theconstrint by the peak of the emnomic boom in r.mi 1.5 miion unsoldJREastsharcs,aswell1990, the proceedswould bave met the the liabilities as those ofthe JR Central (2.24 million shares) andof the Corporation. Howcver, land sales have been theJRWest(4millionsharcs),wcrescheduledtobecared out at a much sowr pac than itRy soldfrom fiscal 1994 onwards. In December1993,phanned, owing to the Government's decision in the Vice Minister for Transportation announcedOctober, 1987 to prohibit compeitive bidding for that only one ofJR West andJR Gental would bedte read esate of the Coxporation. The Govem- soldoffinfiscalyear 1994, indicatingtheabandon-mentmadeitsdecisionarthecevnseofandagainst ment of the intention of the Ministry to list boththe objectves of the Corporation, because it was companies on the stock cxchange simultaneously.thought tat such bidding might push geneal land In Junc 1994 the Asset Disposal Council of theprices up further. Thrforc the saIc of real estate JNR Setdement Corporation conduded that onlyhas been limited. The sale of JR shares has becn JR West should be listed in Fiscal 1994. Thlisddayed also, owing to the depressed stock markeL decision was made in light of the postponement ofkwas only in Sptember, 1993 that 62.5% ofJR thesaleandlisdngofJapanTobacco Inc., (anodtrEast's shares were offered to the public for dth first Govemment-owned company) fiom fiscal 1993 toaime, fiscal 1994. In October 1994, one third ofJapan
Japmae Naional Raiwaysr Privasian Smd H w
Tobacco's shares were offerd to the bidders and enced excess capacity in the past few years (thoughpublic, but a substantial portion of tese shares demand was above the capacity of existing feetsremained unsold because the selling price was too during the period of the "bubbl" economy). Thehigh. On November 15, 1994 the Government situationworsnedin 1993 owingto theconfisiondecided the sales of JR West's shares should be of cargoes caused by unusually frequent typhoonspostponed until Fiscal 1995. The Goverfnment in the southern part of Japan and to the drstcconsidered that the absorption ability of the stock reduction of rice crop transportation caused by themarket for privatzed companies was not sufficient. abnornally cold summer.Owing to this decision, the completion of sale In line with operating volumes, the revenue ofprocedures for the shares of the three Honshu JRs the JRs also increased remarkably up to FY 1991has been delayed still furither. and then stagnated, because fiLrcs had nor been
As fras thesaleofstocksofthe three IslandJRs adjusted since 1987. On the othe hand, certinis concemed, in addition to the weakness of the cost components of the JRs continued to increase,companies' profit base owing to falling yields on resultningthedcdineofbothoperatingprofitandthe Management Stabilizing Fund, the argument retained eamings for the most of the compniesstill remains unresolved over whether or not the during the past two year In addition, in the case oflisting ofa company that is not deriving operatung the three HonshujRs, the purchase of Shinkansenpro fits from its main business is appropriate. Be- lines in 1991 has had a significant negative impactcause of these problems, the timing of the disposal on their profit. For the three isndjRs, recent lowofthe three IslandJRs' stock is not dear at present. intres r ates have decrcased the yield on the Man-As regards JR Fright, in addition to the need for agement Stabilizing Fund.
ntaining a cermin level of profits in order tO Thus, the environment affeaing each JR hasaieve lsting on the exchange, many ocher issues incrasinglydivergInFY1993thetheeHonshiremain unsotved, such as cost sharing with passen- JRs still adcieved adequate profits, though in theger JRs, the burden of new investments, competi- case of the three island JRs, their profit level hasuionwith ntrucks, rricuons on expnding:Yusiness declined almost to breakcven leveL JR Freightand othes This will make stock disposal dfficulct rcorded its first deficit in FY 1993. Ncvertehess,in the ncar f&turc. efforts to respond better to local meeds and an
b&'RecntPer Jimproved performance in gel have been ob--femaxe servedineachJR. This isdcearlythe positive sideof
In the first four years up to 1990, the respeaive privation.annualincrease in tpassengers and cUgD had been5% and 10% - madring a dcar contast wih the Is of Li Cdeclining trend up to 1986. In 1991 the growth of Railwy business, regardless of owneship, haspassengers still showed an increase of 4.9%. In somc public aspect by naturr. In the days ofJNR,1992, hower,thevrahemofpassengergrowthslowed tbis public aspect was emphasized. Since rhe re-down drastically with thEc end of 'bubbl" eco- stucuring in 1987, however, the pendulum hasnomic growdt in Japan. JR Central suffered most swung to the opposite cxtrme and priva;ized JRsamong the three Honshu passengerJRs, as it rdies are reluctant to undertake new linc construction.hcavily on business passengers using bullet trins. This is one imporant area where the conflict ofAs a result, the company registered its first negative public interests is grwing between those who beargrowth in passengers. In chat year the growth of the cost of, and thosewho receive benefit from, thepassenger traffic for the passsenger JRs as a whole new Shinklnsen lines, metropolitan commutingwas only 1.0%. The prolonged recession continued lines and intcercity lines.in 1993 and hree passenger JRs (JR Hokkaito, JR In the case of the Shinkansen network, a devel-CcntralandJR Kyushu) ceriencedslightdedines opment plan was formulated in 1973 to add to thein passenger growth. The passenger growth for existing four lins. This plan was tempoarily putpassengerJRs as a wholewas a mere 0.2%. onholdin 1982duringtheprocessofJNRrestruc-
The Japan Freight Railway Company, which muing. Since then, demands bave been raised re-registcred negative growth for three consecutive peatedlybylocalinterests andbyamajoriyofDietyears, was most severely hit, as it had to compete members for the rapid implementation ofthe panagainst commercial vehicles which have experi- In 1989 the Government prioritized eight projects
x Japanse NaiondAl hval Primdaion Std
and construction started. The priciple of burden necessary for any railway freight capacity increase.sharing for JRs is that; (a) the JR concerned bears Acordingly, the lcase rae was increased, whch had50% of the construction cost and (b) lease pay- amajornegativeimpactontheprofitofthecDmpany.mentsby the JR concened are commmsurate wih JR Freight also has to continuously renew rollingthe benefit which the new line concerned produces stock. At the same time, competition with tics hasFor other remaining projecs, which are estimated to been intensified in the past few yer owing to thecDst some $50 billion, neither constructoio period, prolongedrcesionandvab ityoftherailwayfreighrnor priority, nor the find source were deermninedL has been called into question ai
In the case of metropolitan cornmutir4 lines, In the face of external diseconomies and long-private railway companies in Japan tradidiocally term labor shoragcs affecting road fright, thedcvlopednewlinesandinternalizedextemalecono- Government has examined measures for a modalmies ofsurroundingrealestateapprciation. Nowa- shift of freight traffic from road to railway, ordays, extemal economies are divided among many maine, and for the acievmnt of multi-modalconcerns and it is impossible for railwaycompanies trasportation. In 1991, the Govrnment decidedto recover construction costs. In addition, negotia- to promote a modal shift to rail through interesctions to furthert evelop the nework havc become subsidies and tax reductions on certain types ofincreasingy complicated and involve many inter- investment byJR Frcight. Further steps, however,csts. For this reason, the concept of "Public-Private would raisequestions about thelong-term viabilityPartnership"has become common in constructing of rail firight in comparison with other trafficnew metmpolitan lines, where a newly established modes, especiallywith :rucks. The issue is compli-corporation Ioindy owned by local governments catedbyallegedcross subsidizationekoistingboth inand private concerns construs and operates the train and rudc transportaion. Furdte complica-constructedline. In manycases, railwaycompanies tions arise if exnalities such as congestion andwill not agreecven to bemme operators, suspecting pollution are taken into account.tha fiuure financial obligation migt fail on them. Using current maret prices and without con-Thus, actualprojects arc limited, although the need sidering externaliis, an indicative economiccom-exists, owing to the rapid spread of metropolitan parison is attempted in this study between railwayareas. As for intercity lines, largc needs therc scill androad feightinthccaseoflong-distanccfreigh,Cxist for the speeding up and capacity expansion of wher rlws may hvc relative advantges. Thelies. Here, "Public-Private Partnership" is also rcsult shows that the cost ofrailway is a litde lowersought,asJRsusuallyaskforfinancialsupportfrom than that ofroadfieight. In odhcrwords, rail freightand participation of local goveunments. can compec with trucks in the long distance mar-
krC on the basis of current costs. Thus, the recentmpredicamnt of JR Fright is seen to aris from a
The fieight sectorhad accounted forisubsrzntial lakofLmaketingabilityorbargainingpowerwithportion ofJNR's total operational deficit through- the final dients, because container freight by railout the 1970s and up to 1986. By the time of must use trucks anyway at both ends. JR Frcightrestructuring in 1987, railway freight was playing also has another constraint in that it cannot expandonly a marginal role and the perception grew that operationsofitsownwillwhenaconfliccariseswithit was difficult, if not impossible, for this sector to passenger twains for the usage of rail.be profiaolc. For this reason, in 1987, JR Freight C . o btwJRVAwdPriassumed responsibiltyonlyforroingstoc inorderto minimize pital costs. It was decded that Passen-gerJRs sbould own the infraucure and payments Few people disagree with the success of JNRby JR Freight for rai lcsc were deemed to be an restructuring, comparing the efficency ofJRs andaavoidable cost", which is basically the CoSt ofincre- JNRI Howevcr, the question remains as tO to whatmental ecrity and maintenance caused by fiight cxtent JRs are operating efficiendy in comparisontrafic. From about the same time when JR Freight with priva ailway companies (PRs). In Japan,began t opecza, traffic congestion on the road and thercisalarge number ofprivate raiWacompaniesthe shorage oftruk drivers becamc sious. This led in addition to JRs. PRs have historically rcordedtO a rapid increase in frcight railway traffic and in stable profit levds (despite inxibk firc regula-1992, JR Friot agreed to bear the capital cost tion), thians to complementary side busnesse
Jlapse Nadnl RaiJwys Privanution Study f xi
such as real estate development. Among them, the panie&AtthesametimethelocalorienrationofJRslargest fiflen private PRs (Large PRs) in the three has also introduced direct competition with PRs,mceropolima areas (Tokyo, Osaka and Nagoya) especially in paallel commnutin- lines in majorhaveplaymdanimporantmleinuansportingpeople cties where a JR and a PR provide competitiveto work and schooL (he achievmnt ofmanage- semes. On these lines, competition has contrib-menton aparwith that ofLarge PRs was one ofthe uted tO improved service quality in terms of trainguidelines for the JNR prnaization). freqncy and load factor,and has help-d to hold
A comparison of the thdre Honshu JRs and down the pressur for fare incrases. It is wvorthlarge PRs using simple average figures in 1991 examining to what cxtent this intramodal compe-shows that the former bad almost caught up in tition, or benchmark competition. has been inten-efficincy in certain key respects. In terms of car- sified, or has contributed to the growth of marketkan, the JRs were able to decrease their number of share fbr JRs.employes per unit to a level similar to that of the Regarding the frequency at peak hours on se-large PRs. In terms of passenger-km per employee, lected lines, the study shows that JRs more thanwhilestill below that ofthe Large PRs, thejRs were doubled the frequency between 1975 and 1992 onable to decrease the difference from 46% in 1987 to lines where competidon is strong, whereas the16% by 1991. In tcrms of cost per car-km, JRs' increasewas only 19% for lines where competitioncosts are stil higher than those of the Large PRs, isweak.Further,thestudyselectsdthcommunghowvcer. Regarding fares, the JRs have not raised areas where aJR and a PR are opating in parllelthem fiom 1987, while the Large PRs have maised in order to assess how benmnark competition hastheirs by roughly 20% firom 1987. As a remlt, thc influenced makt share, or psengers, of JRs. Indiffercnce in farelevels has been dedining. In some these lines JRs have kept fares rlatively low, haeareas, theJRs are carying passengers at lower fares improved congestion problcms by upgading cars,rhian the Large PRs. and havc increaed tnain frequency. Thc result
Labor productivity (passcger-km etc.) of all shows that JRs arc acquiring morc passngers thanassenger JRs was genrally cnhanced by a factr before, in some cases doubling their market sharc.
about thru timcs between 1981 and 1991. The Therelativeincreaseintrain fequcncyseemstobeimprovemnt by job type is also examined in this the key tO success, sLiCe tberc does nor exist anystudy. The analysis indicates that JRs improved price war between JRs and PRs. Thus, benchmarkproductivity in station and car maintenance activ- compettion has improved dte level of service qual-ties and less so in truc maintenance and adminis- ity in the commuter market and the benefits of thetrative activities. JRs' productivity was stil about improvement have been passed on to commutcrs.20% lower than Large PRs, but in the case of m ofjR Frightoperators and conductors it was about thersame.
Simple average comparisons such as thesc could In Japan, passngerJRs own railway infiastruc-bemislading,however,sincetheJRsand theLarg mre andJR Freight pays user lease fes based on thePRs have diflirent operating environments. For avoidable cost. In this siuation, one importantthis reason, the study also cmployed economic questionintheeconomicsenseiwhthruse-rlcaseanalysis using regrcssion techniques which rake fecs cover the relevant cost of tack use, or marginalinto account diflerences in nctworks and scrvics cost, from the stndpoint of efficiency. In thisThe results suggest that passenger JRs still retain study, the cost function of passenger and firightworkersperunikofoutput 20% wt30% inexcess of sevices is examined and the marginal cost of JRthose e mployed by Lauge PRs in most activities Freight is estimated, using an econometric model.except opertors and conductors. Howevcr, this The study shows that the margia cOst of JRdifference could be explained by morc usage of Freight is much higher than the user lease fce,contracting-out by Large PRs, or greater conges- indicating that JR Freight is cross-subsidized bytion in Large PRb' cars at the cost of passengers. passenger JRs. However, the extcnt of subsidiza-
Be.cknrk .wedon among rRs and vate tion that can be inferred from the rcsult must be.e...mark Cempedden among JAr and Privae treated as ndicaive only, since data used in the
Iwav time-scrics analysis represent the period of drastic
The regional break-up of passeger JRs has JNR restructuring and may nor reflect the actualintroduced indirect competition among the com- relation of freight volume and incrementa cost.
xii uapawe Nationd Aivdays Aris on Study H
T1he current aoidabl-costmethod is tied to the that the benefit of the improvement has beenparticular railway policy to maintain rail fieight. passed onto passengers. Freight rail transportationOn the other hand. uucks are also cross-subsidized is still cross-subsidized by passenger rail, but thisby passenger cars. Furthe, if extemal costs are issue must be considered in the contex; of moreassociated with road transportation, therearesound comprehensiveinter-modalcomprison, sincetruckseconomic reasons for railways to deviate fiom mar- are also cross-subsidized by passenger cars in termsginal-cost pricing, Indicativc economic comparison of low highway toils and fuel taxes.betweenrailandtruckfrcightin theprceding secion The restruturing of railway systems, indudingshows tdat rail feght can bc compedtvc cost-wise the abolition of services, is a phenomenon whichover long distances, indicauing the validity of the has occured in many parts of the world during thecurrent policy for rail freighL past twenty years. In Japan, this has been causedLa fJNR Priatio mainly by the rapid development of automobiles,
vwhchoverwhelmed railways in manyareas, and byThis study focuses primarily upon the various the massive migration of population to metropoli-
issuesarisingsevenyears after the initial restructur- tan areas (especially to 'rokyo), which has madeing of JNR in 1987 and upon economic implica- many local lines unprofitable. Similar phenomenations ofits privatization. For those countnieswhich have been observed worldwide.are consieng rsructrg now, the really im- In the long run, however, the viability of theporrant lessons derived from the initial restrucr- railway sector in comparison with automobilesing in Japan, which are eamined in detail in a must be analysed with care, when externalpreerdingsudyC"JapaneseNationalRailwaysPrna- diseconomies of automobiles, the toughest com-nation Study-The Experience ofjapan and LIs- peitor of railways, are taken into account such assons for Dcveloping Countries", World Bank congestion, pollution, destuction of nature andDiscission Papes 172 ), are still valid. These in- glo warming. At the same dime, over-ncentra-dlutc impartal planning, prioritization of issues, tion ofpopulation in Tokyo has caused intolerablecreation of incentives for effEcient management, problems for both metropolian and rural inhabir-and compensation for los However, even with ants and there exists increasingly a strong demandth inital restructuring succesfly compklted, for more balanced development of die Japanesemany counmes may eventally fiLace similar issues archipelago. Here= railways can play an importantto tose which are disimssed in this study. role, consisent with the commercial principles of
Our economic analysis shows tiat the produc- JRs.ThercstrucuringandprivatizarionofJNRhastvity of JRs has been gready improved by dte been based on the phiosophy that railways mustprivatzation, which has madc the nation the big- playan important long-term rolc. In each county,gest beneficiary. It also shows that rhe quality of decisions made today could have far-reaching ef-services has been improved by competition and fects upon later generations
Table of Conte
Chaliter ... ................................................. . .... Pago
Foreword ..............................................uuAdknowledgements ............................................ hInrducory Note ..........................................r... vExecutive Summary ........................................................ i
I. Privadzation ofJapanew Nationd Raways ................... .................. 1PHiatization inJa pS6Wand itsBe1k9g ad .........id................. ICH& withintJNRanditrCasa ........................................... 2PhrivizioniPerossofIf ............................................ 4Perr.rmnancef..wihngjNR R a¶uoxng ..................................... 5Remainiamg Isa ..... ................................................. 6
H.Rcent Deveopmens AfedangtheRemainingIsues .............. 8Lsauesofthejapiae so Naiw nap Se iwa Co seio... .. p....n. . 8
DeC.ofJNRSC. 8AefNofR...SC. 11Land salesofJNRsc . 13Poeles to Exse Reguleow Conxemixg the Dkp.s6LdfLond . 13Measresfor Land Diposa without DisdosixgLaxdPkes ... 14
JrssuCsCon..ingS.ks .f..' as.w. . 15Peficieso he S ,a *fs of Shar.15Iisial Sals of JR Easto Sha .s . 1677mr Sthedlefor Fse Sbwr Sak.. 18km Safor NoHmHs....oh... ... 18
I, JR:? Recent Performane and Newly Ariing I .s .......... ... 20JRlsRec xtPermaxce ...... 21
Recnt Deueupze off/s' featiox .21ProJfiabi&,vzdMAfajor Conce ofsj ......................................... 21ProibityorDivvi*dBusixs .................. 23capitdE.pexnditwsw andFdexdnaFmlin xgofjr ............... 24FinnzcidBurdn on Gonrnmexnt .................... 26
Eff&n*o ndidprobfi= ofBs .. ...................................... 26Thre Honshu ....................... 26Thee IsnvdjRs .................... 28
JR Fright .................... 32New Li Contrucion and Conflicts ofPbk Int t .................... 35
Growing Conflics oferst .................... 35Sinkanseni Networks ............................... 38Mebv&troitan Commuting Lies.................... 41Inercity Lins .................... 43
sssesofiWight Tramporttimn .................... 44Argument ofMoad Shift .................... 44Avoidabl Cost Method .................... 45Growing ConJtiofIntfrts ..................... 46Competition with Trucks and xndIe Ecnmic Comparisoxn. .47
Begantioxby Govrmnext .47
Contwd
IV. Market Strclture of Transportation and Comparison ofJRs and Private Ralways ......... 52AfarAet Stucture ofRailroad Sector in Japan ....................................... 52
Radrod System inJan .................Jap ,52Radroad Traffic Charatecs ................. 52Pazenger Traffic ................. 56rAhgbt Trafic ................. 56
Comparison ofPerfmuawe betweenJbs and Private Railways .......................... 8Lasge Private Railway .................... 60Comparison between Hoshbu IRs and Large P . ................................... 65
V.Economic Analysis of Productivityand Performance of Privatized Japanese Rlways ... 74Pr.dwviity Comparison betwen JI nd Privae ailways ............................ 74
Analytical Comparison between Ri and Private Railways .............................. 74LaborP roductity Growth.................................................... 74Labor Productivity by Acivity .................................................. 75Phdctivity Diqeoncs among JRs.............................................. 78EcononicAnaysisof Labor roductivity ................ .......................... 7p
enchmar Competition amongJRs and between JRs adPr;P i ...................... 81The Coxn eptaFramework ofBenchmark Competion .......... ..................... 81OverallAssessment ofBmnchmark Competiin ...................................... 82T fetofBh markCompition onJRSMarketShas ............................ 84
AppexdiA.A Sivmk IntegrutedAnalysis of Bewhark e ti ...... .............. 88Economic Anas ofJR Freight ................................................. 92
Changes in Cost and Service Output ofR F ................Frez.t.................... 92Estmation of Ct Funion ............................................. 4Estimatn of CooFwunaon ofJ&r .............................................. 95
L Privatization of Japanese NationalRailways
1.1 Asinmanyothercountrieswhichhadto readhed 39.6% of its tol budg This levd wasconsider, or are considering, privatization of the extremely high when compared with that ofotherrailway sector, privization of Japanese National leading Westen counuics, whose dependenc ra-Railways was triggred bythe financial crisis ofthe tios in 1979 ranged from 5.6% (United States) tOJapanese Government in the latter half of the 14.2% (West Gemiany).1970sL Snowbaling debts and deficits ofJNR and 13 Three factors contributed direcdy to thisthe resuking financial burden on Goverment had crisis: first, prices andwages injapan had increasedreached an enormous and unacceptabkl leve by dmntically in the wake of the oil crisis of 1973,1980.The rdativededineoftherailwaysecmorwas resuling in gradly inacased expediur for so-in a sense inevitable due to the devclopment of cial security, educaion, and other areas wheredieet, in,aeasinglysophisdcardmodesofians- Japan was just beenning to achie pairywith theportation. JNR could not cope propely with this advanced cDunties of the West, second, in 1974,change . which acclerated the deterioration of Japan experienced gatvc economic gowth forJNRs financial health Afier the failure of recon- the first time since WorldWar I. After 1976, in ansuuction plans byJNR managemen and frequent e&irt tO achicvc a more stable levd of groth, thestrikes by JNR labor unions in the 1970s, there governmentgrearyincreasedthenumberofpublicexisted a widesprcad perception by 1980 that the works projects undeaken, third, the slowdown inrestucturing was essential. On the other hand, economicgrowthled to areduction in =revernues,JNRmanained superb engineeringandoperating whicA in turn led to increased govemment expen-techniques, as was conspicuously shown in the dirures. In order to cover these expenditures, thebullet train nctwork especially. The transition had government had to issue more bonds. As a result,to be handled in away that did not diminish J's the govenment was confionted with an incrasedtechnical strNgdL burden in meeing principal and interest payments
Prwaiuation in Japan in the 1980s and its onthebonds.Backgrod .1.4 In addition to the economic and social
Background changeswhich occurred afitr 1973, another factor
1.2 Bythelatterhalfofthe 1970s, government contibuting to the fiscal crisis was the continua-finance in Japan had reached a crisis. In order to tion of spending pracces which had been greatlyrespond t this crisis, in 1975 the government ecpanded during the period of high economicbeganissuingspedalbonds(so-led deficitbonds) growt The country's financial structure was in-to hdp cover administative cxpenditrcs. These flexible and consequendy it was very difficult tobonds were in addition to the construction bonds reduce expenditurs. In paricular, thedeficits gen-the governmentwas already issuing to cover invest- emated by the Japanese National Railways (JNR),ment expenditures. By 1979, bonds had been is- the Foodscuff Control Special Account, and thesued fr a mtal ofUS $521 billion (C57.3 trillion)' I H US$ is abbrviatd as S. An ccange mm ofand the goverments dependence on them had 511110sse.
2 Japanese National Railways Prmiizution Study II
National Health Insurnce System posed a real administativc approval and government findingproblem for govermnent finances. Expenditurcs were reviewed, (b) the three public corporationsfor thcse threc items alone accounted for nearly mentioned above were privaEized, and (c) large10o of the total budget. projects, such as the Tokyo Trans-Bay Highway
1.5 In rcsponsc to thcsc problems, the Minis- and Kansai International Airport (in Osaka), werctry of Finance presented a fiscal reform plan to the implemented on the basis of private initiaive.Dict in 1979, the stated goal of which was to 1.9 Of all the Provisional Committee's tasks,'reduce the issuance of special government bonds by fiLr the largest in scale and most criticl was theto zero by 1984." In support ofthis plan, the Ohira privatization of JNR,Japan's lagest public corpo-Cabinet, composed of Liberal Democratic Party ration. In 1980, JNR employed nearly 414,000(LDP) members, tried to introduce a gencral con- workers and its huge annual losscs were increasingsumption tx. But public opinion was strongly yearly.The Provisional Committce conduded thatagainsrsucha tam Complaintswerevoiced tha tte rcstoring JNR's financial healh was impossibk asGovernment had not made sufficient efforts to long as it was operated as a centralized, nationwidestreamlinc its own operations, particularly when public corporation. The Po-isional Committeecompared to the cflbrt that the private sector had rcommendestablishmenrofaSupervisoryCoM-mnade in ovcrcoming the oil shock The public felt mitcee for JNR Reconstruction to formulate andthat there was considerable adntinisurative waste implent concrcte policies for the corporation'sandthat educinggovernmentexpendituresshould rcogaization. In 1987, JNR was broken up intobemadeapriority.As aresult, the LDPwas suffered six regionallybased railroad passenger companiesserious setbacks at the polls. and a seventh company to handle freight transpor-
1.6 Thus, public opinion madc it difficult to tation for the entire county (rkerred to as the JRsrebuild govmnment finances through large tax in- in this paper). The major portion of JNRs debtcrcases. In 1980, however, the LDPwon the gen- whichhadrachedS337biionbytheendofl986,ecalclecionbyalandslide,andtheSuzukiCabinec was reamigned to the Japan National Rawaysgained a stable majority in the DieL In March SetdementCorporationalongwithanysurplusral1981, the Provisional Committee on Administm- estate ofJNR and the shares in the nevwy creaedrive Rtefrm (the Provisional Commitece) was ap- JRs.poinedundertheCabinesjuidictionandcarged 1.10 In addition to these administradvewih devising the drastic measures necessary to forms, the tax sysn was also reformed in 1988,achieve fiscal reDm wihout raising taxes. The and thc national consumption tax dtat had beenCommitteewasheaded byMr. Toshio Doko, hon- proposed earlie was implemented. These actions,orry chairman of the Federation of Economic coupledwithEfrvorableeconomicconditions,madeOrganizations (Keidanren), who had an eellent it possible for the governmnt to achieve its goal ofrecordofsuccessfizlyrebuildingprivatecntepriscs. discontinuing the issuance of special bonds byThe Committee also induded xperts from various 1990, albeit six years later than originally planned.fields, including finance, government, and labor. The 1980s thus reprCsCnt a transition period be-
1.7 TheProvisionalCommittcediscussedhow tween the high-gowwh economy of the postwarto achieve an effective, flexible administrative sys- years and the present, stable-growth economy. Asmem thatwouldbeable toaccommodatechangesin such, itwasalsoaperiodofreevaluationandrefrmnsocial and economic conditions. In addition to ofthegovernmen's initive,financeandtaxrecommending radical reforrn of Japan's adminis- systms.trative system, the Committee also proposed the Ciis w JNR and its Causesprivatiztion ofJapan's three largest public corpo-rations-JNR, Japan Monopoly Corporaion (to- Development of Crisbacco and salt), and Nippon Telegraph andTelephone Public Corporation. They also sug- 1.11 Inl980,Japanhadapproximat*ly27,000gsted tat privatc initiative be used to construct ldlometcrs ofrail lineswhihwe-re operatedjointysocial infrastrucure, which in the past had bccn by JNR and more than a hundred private railwayahieved primarily thiugh public works. companies. With control of 80% ofthe totl num-
1.8 Based on these recommendations, the fol- ber ofrail lincs throughout Japan, JNR was by firlowing steps were taken; (a) all items that required the largst nationvide operator. Pnvate railway
Japanese National Railways Privatizaton Study II 3
networks operated throughout Japan, with the rsulting from cssive capitl investment andlargst ones concentmted in the three mtropolitan interest acruing on tic large volume of debt.areas of Tokyo, Osaka and Nagoya. JNR was in JNR's consistent policywas to continue to cover itsdimect competition for the commuter market with deficits by borrwing and, as a rcsult, itS mowl debtprivate concerns operating in these areas. continued to snowbalL
1.12 JNR had enjoyed vimtal monopolystatus 1.16 In spitce of its financially precarious sieua-unril the 1 950s. Gradually, however, competition tion, JNR continued to maintain excllent railwayfrom automobiles, aircaft and coastal shipping engineering and operating techniques, owing to itsinecnsificd and JNR lost its competitive edge in all history ofrecruiting officcrs and engineers of highgeographicregionsexceptbothinthemctropolitan caliber and moralc. JNR's managcmnt remainedareas and in the bullet train networks. But cven in confidentthat itwas theonlygroup capableboth ofchemetropolitanareas, repeatedfarehikesinJNRs running JNR and of reorganizing it. JNR wasfinal years as a public corporation rcsulted in fares opposed untilthclaswmomenttotheGovemmcensthat were higher than those charged by the private proposed break up and privatiaon of the corpo-rail lines. JNR's share in passenger transport vol- aion. The largest labor unionwithin JNR whichumedroppedsharplyfrom55% in 1955 to 23% in was socialist-led, also considered its role as part of1985.Theshareoffigihrtansporcvolumedropped a political struige and was actvely opposed to themore drasicaly from 52% to 5% over this same privatizationmovement. Butfiequentstrikes alongperiod. Meanwhile, JNR's investuents in infr- with scuhing attck from the press turne thestruucre only increased its debt burden. Road public against JNR by 1980, lcaving the generaltransport, onthe otherhand,beneficedfrom finan- impression that restucturing was essential Be-cal rsources obtained primaily from the gasoline cause of these circumstances, the implamcntationtax. of the prnvation process involved dt dismissal
1.13 JNR could not compete with the ocher ofmostoftheJNRmnagementandoftheincran-modes of transportauon which were being ino- sigent union's leaders (this union subsequendyduced during this period. Afiter 1964, the year collapsed). These were ather drstic masures forwhen JNR posted its first sine-year loss of $273 Japan. The other inority labor unions wihinmillion, reconstruction plans were formulated, JNR chose to cooperatc with the prvtizationabandoned and then replaced by new plans These process.attempts at reform byJNR management all cndedin failure due to mistaken assumptions, lack of Reasons for JNRs Manageria FailurTe beforesenitivity to the changing tranportation environ- Rewauring)foPr 1 uziauo
ment, and delays in approval by the Ditr. 1.17 JNR's manageral failures prior to privati-1.14 In the 1970s, JNR5s manag"'unt ~'mto- zation can bc attnbuted to a number of causes,
ducedalrge-scaleproducivityimprovementdtive classified into the three categories below.for the workforce, but the largest labor unionwithin JNR dlaimed the drive to be an unfair labor a. Problems inherent in the public corporationpractedesignedtoundemine theunion.Someof system such as.the daimswereupheldbyagovernmentarbitmtion i. Contol of the Goverment and ineven-agecy,andthemassmediasupporcedtheunionby tion of outsiders. In reurn forJNRs mo-cinazing the dnvec The productviy iLmprove- nopoly status as a public corporationment drive cnded in total defeat for magement, providing a key public service, it was sub-resuling ina negligible reduction in the work force ject to stict governmentl and congres-and an unprecedented deterioration of employee sional supervision and controL Fordiscipline. ezample, the approval of the Ministr of
1.15 Perfonnancecontinuedtodeclinethough- Transport was required in order to con-out the 1970s and early 1980s. In 1985, JNR's struct anynewline and theJNRbudgetannual loss before subsidies apprached $22 bil- had to be appwrvd by the Diet .As a re-lion. The causes of the deficitwere: (a) abnormally sudt, outsiders, induding politicians and thehigh personnel expenses (amounting to 78% of Government, ofien interfered in its man-cotal rvenues at their peak, comparedwith about agement and forced JNR to invest in un-40% for private railways), and (b) the burden pofitable routes.
4 Japanese National Ralays Privatizanon Study II
iL Lack of incentives for efficient manage- failed to improve the profitability of the cor-ment. JNR management made littl cffirt poration as a whole.to maximiz prfits by rducng costs andramising productivity. This behavior can beattributed to 1) a lack of managerial discre- . . . .muon, itsef the resllt of considerable outideinterfrrence, and 2) the absence of profit- 1.18 InJuly 1985, the Supervisory Committeemotivation under the public corporation submitted its written opinion concerning the r-system. scturing ofJNR to the Prime Minister. InApril
..i. Slow re.ction to intensified competition. 1987, as the first and most important part of theiiLSIow reaction tO intensified competiron. ... .. .Public corporations generally function n process, the corporatzion and divi-.ffic,vely in a monopolistic enviroanent. sion ofJNR were caLrried out vinually in line with
,, , ,. .................... the Su D asx Commttee's re rt. The mainHowever, as a resul ofa rapid incrcasc im th..Su.iso.Commitees.port. - -competitive modes of transportation such results of these steps w :as automobiles and aircrfis, the Japanese a. The passenger railway division was dividedrailway industry gradually lost its monopo- into six companies, threc on the main islandlistic position and market share. JNR man- of Honshu and one each on the three islandsagement could not cope with this situation of Hookkaido, Shikoku, and Kyushu. A sev-without having the power to take appropri- enth firm handled freight for the cntire coun-at m easures, sch.as the swift elimination tay. The profitability of each new companyof unprofitable lines. was carefully nasured and steps werc taken
iv. LIabor unions' lack of smns of crisis. Even so ensuae nagt thbse companics teineigaafter JNR began to run at a deficit. the solid mual bases. Ile thre biggrlaor uniots refusod apprciaa the scale Hoshu-based companies and the figi:of dne cdsis and continued to puwe politi- company........... assumed only S42 bilion of lNRsca issues. Thbey also r sed t cooperate ............ .ootal debt. The Shunanse (Bullet train)with. manateye's effrts tw rauonalize Holding Corporaton was established andaih rmauce mset's atfitud e rs $d in a sumed S52 billion ofJNR debt. It leasedae c d ismption of wok-placc displine and bullet train netwodrs to Honshu-based com-a diorarion io th e iuaIity of scrip an panics with the rcntal &fcs adjusted to correct
the profit disparity betwccn old and new bul-b. Size ofJNR and insensitive reacton t local let train networks The smaller passenger com-
needs. Ihe nationwide concern was simply panies in Hokkaido, Shikoku and Kyushu didtoo largc to be adequately managed by a single not assume any of the JNR debt. The Man-managrial entity. Those in the railway indus- agrnent Stabilizing Fund was created forry must be sensitive to local demands and these smaller passenger companies to oflfetprovide convenient services for dthir custom- the imbalance between rcvenues and expendi-ers. Under unified, nationwide management, tures. The Japan National Railways Secde-JNR was unable to provide locally-based ser- ment Corporation (JNRSC) provided thevice and consequendy lost its competitive capital for this Fund.position vis-a-vis the private railways b. The remaining S232 bllion liabiities were
c. Lack of profit from related businesses. Given asumed by the JNRSC, established as theits pubLic naure, the raiNway industy is regu- successor to the old JNR It also receivedlaced in dtermining itS fares. Even private shares of the JRs and the surplus real estate ofrailways do not genraUlly expec high profit JNR as well as the redundant workes Thclevels. Indeed, related businesses such as real redemption of debts assumed by the JNRSCestate development account for a substantial was tO be achieved as far as possible by theproportion of the total profit of most compa- r ent of dte Shinkansen Holding Corpo-nies. As a public corporation with specific ration, sales of the marketable pieces ofJNR-objectives, JNR was limited with respect to owned rcal estate, and sales of JR stocks. Thethe scope of its business. Thus it could not remaining debt is expected to be born by therly on rlated businesses for profits, and general budget account.
Japanese National Raihways Privatization Stdy II 5
c. JNR had about 200,000 redtundant workers in list these companics and to sr seling share1980. By 1985, the number oflNR employees beginning in FY 1992, completing the sale of alihad already boen reducd to 280,000 (through sodcs within four to five years. However, the swokprior rstuauring) compared with 414,000 in narkerwasdeeplydepressedthroughout 1992 and1980. However, there werc still an estimated concems were raised that the offering ofJRs'stocks93,000 redundant workers. Thc Govcrnment to the public in a massivc scalc would furtheracively promoted various measurcs to securc damage the condition ofthenmatker. For this reasonjob changes for these workcrs. The public the Govenmmt postponed the iitial sales ofscaor was asked to employ JNR workers, shares until September 1993 inspiteofthe desire ofwithout increasing total employees, and the these dhrce cDmpanies for an earlir offeing.private sector volunuuily accepted some JNR 1.21 In September 1993, 62.5% of JR East'swo . The eliminaon of the redundant shars were ofl red to the publicr The remainingwork force largely by job-tmnsition was car- shares ofJR East, as wll as shares ofJR Centraandriod out smoothly, aided in part by economic JRWest, arc scheduled tobe sold from Fiscal 1995growth and by the very low unemployment onwards. The remaining three island companiesrare of the Latc 1980s. As a result, the number have poorer operational bams and have been prof-ofJNNR employees ultimately transfrred to itable only duc to the added revenue from thethe JNRSC in April, 1987 was 23,660, imost ManaemenStabilizingFund,buttheyieldofthisof whom found jobs in other places by April, Fund has been lowcr during the past two years1990. A total of only 1,050 cmployces werc because of low intcrest rates. Among thcm, how-ulimately dismssed because dty refused to ever, JR ShiCOku has already met the requiredmove to newly allottd placments. profit smndad. JR Kyushu andJRHokkaido have
d. Chaimen of the new JRs wer chosen from nortyet met this standard. The current profit ofthcamong influential leaders in the local busincss freight company is still below the requied kveLcommunity. The first Preskients oftheJR These thre ilandcornpanies andthefreightcom-Eas and JR Wcst Company, the two largst panyarc also striving to achieve the ealiest possiblcof the JR companies, were former high-rank- listng, but the time schedulk is uncertain as ye.ing officals of the Ministy of Transport and P foiowig JNRhad been supportrs ofpmrnazarion. ThePresidet of the otherJRs were selected from 1.22 The performance of JRs since restructur-JNR management members who had not inghadbenremarkablekespeciallyinthepcriodupopposed privatzation. Otherlcadcrs within tO 1990, thanks party to the economic growthJNR who had promoted privatization (though which occurred in Japan during the period whenas a minoriy at the beginning) were appointcd restruturing was caried out. The annual inseto influential management posts at the newJRs. in passengers and cugo was 5% and 10%, respc-
tidvely between 1987 and 1990. Thc number ofSales of Shares employees was drastically rduced to 191,000 by
1.19 SinceApril1987,theJRshaveoperaredas 1990. As a result, transportation efficincyr hascomerdalized stock companies, but all of tie improvedremarkably.Theprofitabilityofthenewshares except 62.5% ofJR East's shares whicl were JRs has been improved due to the reduction of thesold to the public in September, 1993, wcre still wok-force and liabilities. Transporation volumeowned by the JNR Settlement Corporation. As has been increased by JRs' own efforts and bysoon as the JRs met the listing requirements of the favorable economic environmntL The amount ofTokyo Stock Exangc, teir shares were expected annual profit improvement for the new JRs as arobelisredandsoldtothepublic,andtherransition whole is cstimated to have reached $25 billion into private entcrprise would be completed. 1989 ( exduding the contribution of the favorable
1.20 On April lst, 1992, all of the JRs cel- economic environment). Of this improvement,ebrated dtir fifih anniver, one of the rcquire- $12.5 billion in profits arc estmated o be due tomeats for the lisdng. By chis datc, three of the JRs efftciency gains resulting from restructuring.2 La-(JR East,JR Cental, and JR West) had also met all 2 SeeKoicikoFukui.JapaeNar"?dAiIwayP?wiiff-ofthe other requirenents. The Govenment's and tm&v4 7. ew*fJ*=xdL"wj6r&diV-theJNR Sealanent Corporation's objectivewasto ig G ieWorld Bank Dicussion Paper 172.
6 Japanese National Raiways Privatizaton Study II
bormanar -ewm lonshavealsobeenimproved. Chaper III). The performance and oudook ofeachJRs are acively expanding heir businesses to areas JR affeces the rime schedule o fstock sales needed tooutside tasportton, as a result of dreguladon, finalize privatization.and their oDrporate iage has impwved dramat- Rem2nin Issuescaly.ReIs s
1.23 While the JRs have demonstmted better 1.26 With the creation of the JRs in 1987, theperformance,thebebeneficiaryofdis restruc- firstphasoftheJNR privatizationwascompleted.mring is the Government which benefits from the Ar that time, the following longero-tern issucs re-reduction ofits fiscal burden. Beforc reructring, mained to be resolved. (See Chapter II.).annual subsiies from the Government to JNR Debt oreached about $5.5 billion on averge. After re- flASCstructuring, the annual subsidy to jRs as been 1.27 A major portion ($232 billion) of JNR'sdrasticaily reduced. In 1991, for emmple, the sub- liabilitieswerereassignedto the JNRSC ;longwithsidies toJRswasonlyS 1.0billion, indudingthat to therealestaeandsharesoftheJRs.Teseliabilitiesthe JNRSC. This year. profitable JRs paid $4.0 are expeatd to be repaid by the sale of real estatebillion in tax and contributions to the Govemn- and shares. just after the fonation of the JNRSCment, rcsulting in an overal surplus paid to the in 1987, thepriceoflandinJapanbegan tosoarandGovcrnment of$ 3.0 bilLion (See Chapter M). gready appreated during 1987 and 1988. How-
1.24 Rail passnges have also benefited from ever, the land sales have been carried out at a muchan improvement in service quality (without fare slower pace than initially planned owing to theincreascs). On the other hand, cerain segments of Government's decision in October, 1987 to pro-the soacEy such as cquipment suppliers and other hibit competitive bidding for the rcal estate of theprvatc railway companies face more competiton JNRSC The Government made its decision at thefrom JRs' commerciation. Passenges in the cxpenseofandagainstheobjecvsofdheJNRSC,separted remote ines pay highr faEs in some because it wasu though tat such biddg mightcases. However. there have been no obvious lose push genal land prices up firthe. Therfrc, thcxceptforthefolrerJNRmanagemenrandradical sale of real este has been limited. The sale ofJR
union leaiers, as wedlas the 1,050 employees who shares has becn deayed longr than inially ex-wre dismnissd in April 199. The privatizaion pectd due to the depressed stock market.process ofJNR can be judged to have been success- 1.28 As a rcsult, the prceeds from the salc offul, even though the JNRSC still has outstanding assets have not covered interest payments, whichdebts otaled $56 billion between FY1987 and 1992. In
1.25 Since 1991, with the prolonged and in- fact, theliabiLities had inarasedto $242billionbycreasinglyscrious economic recession inJapan, the the end ofthe FYI 992. In 1991 land prices peakedparformance and oudook of each JR has begun to out and showed a sharp dclinc subsequenndy. Ac-differ. In 1991 JR passenger figures still showed a cording to figurcs relased byJNRSC. the value ofdemandincrease of4.9%,butJRFrcighe's emand its land (based on the posted price ofApril 1993)for cargo eveled off In 1992 the demand increase was roughly $76 billion. Therefore, the Govern-ofJR passenge as awhole slowed to 1.0% andJR ment has liftedthe ban on competitivebidding, butFright'sdmandshowedadedincofl.9%.Among the oudook for land prices is still bleakand sales ofJR pasnge this year, JR Central (which reles Corporaon's land are sll slow in spite of variousheavily on business passengers of Tokaido measures to promote land sale (See the next sec-Shinbasen) andJRShikolk (which faces tougber tion.).Therepaymentofdebt, tiemajor remainicompetition from newlyopened highways) epen- issue to be solved. must be caried out rapidlyenced dedine in pasengers for the first tme. JR through the sale of shares and land. or by theFreight faces increasing compeition from tuckm, maxiiaionofprofitthroughthedevrlopmentofand is also suffring from recession. The recession real estate holdings.continued in 1993 and thre passenger JRs (JR Ucmaixy cernwg Sala qfjRs'ShaHokkaido,JRCcntmlandJRKyushu) exienceda slight decline in pasenger gwwh. This year the 1.29 Assoonas theJRs meet delising require-growthoftalpassengerjRsasonly 0.1%,while ments of the Tokyo Stock Eang:I their sharesJRFrmightregisceedanotherdedineof4.5%. (See were exeted to be listed. Three of the JRs (JR
Japanese National Railways Privatization Study 11 7
East,JRCcntralandJR West)hadalrcadymet the public, but a substantial portion of chse sharesrequirements by FY1991 and the sales of their remained unsold because the selling price was tooshares was planned to begin in FYI 992. Th-e basic high. Subsequendy the Government decided theprinciple of the JNR Supervisory Committee that sales ofJR West's shares should be postponed untilall the shares ofJRs be listed and sold to the public Fiscal 1995. The Government considered that thehas not dcanged, but the time schedule has been absorbative ability of the stock market for priva-delayed for fear that the massive release of new tizedpublicompanicswasnotbigenough. Owingstocks might furither depress tealready weak stock to this decision, the completion ofthc sale of sharesmarkeL in the thrde Honshu JRs has been delayed still
1.30 InSeptemberl993,62.5%oftheJREast's further.Shares were offcred to the public for the first time. 1.31 Regarding the seling off of the stocks ofTheremaining 1.5 million unsoldJREastshares,as th threc Island JRs, in addition to the weakeningweilas those oftheJR Cental (2.24 million shares) of the companies' profit base (due to falling yieldsandtheJRWcst(4millionshares),werescheduled of the Managment Stabilizing Fund) the argu-to be sold from fiscal 1994 and later. In December menstillsrmainsunsolvedastowhetherthelisting1993, the Vice Ministcr for Transportation an- ofacompanythatisnorderivingoperatingprofitsnounced that only one ofJR West and JR Central from its main business is appropriate, or not. Thewouldbesoldoffinfiscalyear 1994, indicingthe timing ofthe disposal of the three IslandJRs' stockabandonment of the intention of thc Ministy to is thus uncear at presen.listbothcompanieson the stockexc;mage simulta- 1.32 ConcemingJR Freight, in addition to theneously. InJunc 1994 theAsset Disposal Council need for maintining a certain Ievd of profits inofJNRSC conduded tht only JR Wcst should be order tO achievc lisdng on the exchange, mostlistd in Fiscal 1994. This decision was made in analys agree th many questions remain un-light of the postponement of the selling off and solved, such as cost allocation with passenger JRs,listing of Japan Tobacco Inc (another Govern- the burden of new investmens, competition withment-owned company) from fiscal 1993 to fiscal trucks, resrictions on cpnding business, and1994. In October 1994, one third of Japan othe This renders stodc disposl difficult in theTobacco's shares were offered tO the bidders and near futurc.
IL Recent Developments Affecting theRemaining Issues
Issues of the Japanese National Railways sharcs ofthc Tcito Rapid TransitAuthority, whichSettlenent Corporation operates dhe majoricyparts ofthe subway in Tokyo.
2.1 OneuniquechacerisdcoftheJNRpriva- These various financial resources were allocated totr:auion is tie way JNR's debt was allocated to JNRSC to finance debt redemption.various bodies. The debt induded the liabilities 2.3 The JNR-rclated long-term debt requir-accruing in the future, such as the expectd fumre ingsealement totaled $337 billion (V37.1 trillion),deficits of the three sand companies and fu induding the liabilities acauing from such bodiespension payments, as wel as the enormous amount as JRCPC, the Honshtt-Shikoku Bridge Authorityofoutnding debt. All this reflects thc principles and fiture pensions, in addition to the direa $227of the Supevisory Committee for JNR Recon- billion of JNR's debt. Of dtis $337 bilion ofstuction, that the railmad sector must continue to liabiLities, JNRSC inherited a total of$ 232 billion,play an important role in the fiture and newJRs induding fture expenses of $52 billion such asmust have a soLd managnia basis, that the burden pension liabilities. But this figure did not indudeto the nation must be minimizeO!,and that thisype future interest payments on its liabilities, whihof restructring should not occur again. As an werc cakulad as $72 billion. Four JRs (East,important measure eo achieve these principles, the Central, West and Freight), the Shinkansen Hold-Japanese National Railways Setdement Corpom- ing Corporation (SHC) and JRCPC inherited thetion (NRSC) was crated and assumed themajor- remaining of $105 billion of liabilities.ityoftheJNR'sdebtaswelUasthesurplusassecsand 2.4 Of the $232 billion inherited by3NRSC,the sharesoftde newJRs. Sinceonemajorproblem. atotalof$26bilion wasscheduledtobepaidinrtheofJNRwas the existence ofthe accumulated debt, time period up to fiscal ycar 2016 by the threthe cvaluation ofJNRSC constitutes the important HonshuJRs (JR East, JR CentraL andJRWest) forfiactor of the JNR privatizaton itsclf. the rent of thc Shinkansen ficilities through SHC.
TDefNCorc, the amount of dcbt the JNRSC itselfDebts .fNR,SC had to redeem was $206 billion.
2.2 JNRSCwascratedprimarilytorepaythe 2.5 ITeFourJRsinherited$42bilionoftheirlong-term debt held by JNR through the sales of own debt and, in addition, had to pay $89 bilion,surplus asset and of newly createdJRs' shares. To orginally inherited by SHC, JNRSC andcJRCPC,this end, folowing theApril 1987 prnratization of making the total $131 billion.JNNR, it recived 8,180 hecres ofland from JNR, 2.6 Since their birth, these four JRs have re-equal to 13% ofth 65,380 hccrcs ofJNR's total paid some debt, but ar the same time undrtakenland, and 630 hectares from the Japan Railway new borrow:ng. So, it is not dear how much oftheConsauction Public Corporation (JRCPC), total- originally acquired $131 bilion liabilities still re-ing 8,810 hectarcs of land, as weli as the entire main. However, according to a report by the Min-shares of the new JR companies and about 54% isiyof TransportationinOctober 1992, theoriginal
10 Japanese Nationl Railways Privatization Study I1
mcntioned above, $26 billion, which will be paid sales.Althoughdebt redemptionby the endoffiscalby three Honshu JRs, was to be passed on to the 1992 amounted to $61 billion, new debt wasShinkansen Holding Corporation (reorganized in added. totaling $56 billion induding interest pay-October 1991 into theRailwayDevclopmentFund) mcnts, plus, pension and othier expeses, leaving ain the forrn of a loan fiom the JNRSC to that debt balance of $242 billion. Out of this amount,company,$70bilionwastobeeamedfromthesale $17 biDion will be collected from three debt JRsof land, and $11 billion from the sale of shares through the Railwvay Development Fund. So,(calculated at a fice value of$5 billion for thcJRs' JNRSCactuallyowed $225 billion at the cndofFYstocks and at revalued $6 billion fortheTeito Rapid 1992.Thisamounis$19 billionmorethanJNRSCTransit Authority) for an cnvisaged total redemp- inherited at its birth. However, this amount wouldtion of $107 billion. The remaining $125 billion be $167 billion without intcrest paymcnt- $39was to be financed by the General BudgetAccount. billion less than it inherited.This was supposed to be the final burden to the 2.10 By comparing the amount of subsidicsnation. However, the calculation did not indude received from the national govemment with thcfuEure interest on JNRSCs liabilities, amount of taxes and contributions paid by JNR
2.9 Following this setlement in 1987, the and succeding insitutions to the national govern-JNRSC has proceeded with debt redenption mentandtomunicipalbodics,onecmyobservcthcthrough the sales ofland, 54% ofthe equity in the burden borne by tax-payers before and after theTeito Rapid Transit Authority, and other asset privaization ofJNR.
Table l-1: Trends in he Long-Term Liabilft of JRs(USS billions)
Beg4ming;EndofFY of 1987 1987 1988 1989 1990 1991 1992
JNRSC 206 211 219 228 221 223 225JRs 131 128 122 117 '115 115 na
JRs temselves 42 40 35 34 32 31 n.a.owed to HC& JNRSC 78 78 76 74 74 74 na.owed coJRCPC 11 10 10 10 10 10 na.
Total 337 339 341 345 336 337 n.aS Shinkansn Holding Corpora ion was reorgaized as the Railway Devdopmenc fund in October 1991.
Note: In this able. final debors (payers) are shown. The daa derore diffrs fiom ta for inhried debtos
Table 11-2: Taxes, Contibutions and Sbsuidies(USS mjlions)
Fiscal Year Taxes and Contn$utions Subsidies Balance1982 320 6,631 -6,3111983 348 6,380 -6,0321984 421 5,885 -5,4651985 435 5,455 -5,0211986 455 3,433 -2,9771987 2,006 1,761 2451988 2,234 1,918 3151989 2,092 5,755 -3,6641990 2,722 1,428 1,2941991 4,039 984 3,055NotcForcxecontributionsandsubsidies folo6wingtheprivadntionofJNRfigspretanozlofdwsefromtheindiniduaIJRs. JNRSC. the Shinknsen Holding Corpomtion, and the Railwys Mainenance Fund.
Japanee National Railwys Privatization Studyl1 11
2.11 Thc Ministsy of Transportation rvcealed 1986, total losses amounted to about $73 billion,such figures in October, 1992. According to thcse, but in the fivc years following privatization fiombcefore priv.-tization, the amount of subsidies paid 1987 to 1991, despite the fact that the sal oflandto JNR far exceeded the amount of taes and and stocks has noc proceeded as smoothly as wascontributions received from JNR (as a public cor- foreseen, totll losses have filUcn sharply to $18poration, JNR was not required to pay frderal billion, including those of the JNRSC.taxes). It was estimated that the administation of Asst .f'AFSCJNR imposed a burden on tax-payers in the orderof $5.5 billion annually. 2.14 Outoftheassets that theJNRSCinherited
2.12 Following the privatization ofJNR, how- as financial resources for debt repayment, by theevcr, the individual JR companieswere required to end of fiscal 1992, it had sold fixed assets, such aspayfederal taxes such as the corporate tx and the 3,917 hecares of land, plus rail cars and otheramount of such taxes paid was quite considerable, assets, for a total of $29 billion. As a result, thereflecting the favorable. nagement conditions of amount of land held by the JNRSC fell to 5,314these companies. The amount of such taxes col- hcars On the other hand, 421 hecarcs of landlected came to exceed the amount of subsidis paid have been returned by the JRs because they do notto JNRSC etc, implying that the privatization of need them for their activitics. At the time theJNRhasbmughtconsiderablebenefits thejapa- original debt redemption plan was formulatd,ncsc tax-paying public in subsequent years. (In jNRSC had planned to repay $70 billion through1989 the amount of subsidies paid by the govern- the eanings from land sales (thc value of the landment exceeded the amount of taxes and contribu- that could be sold off from the towl 8,810 hectarestions received, due to special pension-related inherited).reasons6 which will not occur again.) In 1991, the 2.15 Immcdiattly afier the formation of thenet balance fiom JNR heritance to the govem- jNRSCin 1987, thepriceoflandinJapan began to
mint rached $3.0 billion. soarandgreadyappreciaedduring 1987 and 1988.2.13 Moreover,ifwelookattheoverlbalance By the beginning of 1990, the appraised value of
sheerofJNRveedbytheMinisryofTranspor- the land hed by the JNRSC had rise to aboutrtion, in the five yw period fiom fiscal 1982 to $136 biDlion. During these yas land sales have
Table l- Finncial Sta of JNR (FY 19812 - 1986) and JRS (1987-91) including JNRSC(LIS nillions)
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991OpraingRevenu- 26,812 26,915 28,206 30,095 31,062 32,117 34,554 35,907 38,588 40,140
% cbaagefiwmprnviamperiod (4.2) (0.4) (4.8) (6.7) (3.2) (3.4) (7.6) (3.9) (7.5) (4.0)
OpertniuExpense 35,249 36,701 36,330 38,420 34,298 29,784 30,710 32,195 33,077 35,418PmaxdEi,w (18,704) (19,219)(19,035) (20,931) (19.229) (16,220) (15,563) (16,811) (15,862) (16,470)
Openg Profit -8,436 -9,786 4,125 8,324 -3,237 2,334 3,844 3,712 5,511 4,722
Profit 7,243 7,909 7,349 6,980 6,467 3,411 4,635 9,083 17,645 9,640
GuuNSfiom SaltoJ'fivdA=& (643) (1,51C) (1,392) (1,404) 2.927) (1,207) (1,850) (2,265) (7,373) (7,065)
EordinyLoss 307 371 287 279 926 590 1,038 1,238 1,940 2,107
Sourc: Minims ofTanspot
12 Japanese National Railways Privatization Study I
beencarriedout at a much slowerpace than initially billion, outofwhich $5 billionwould represent theplanned, owing to the Government's decision in shames of the JRs, calculated at face value. Had theOctober, 1987 to prohibit competitive bidding for threeHonshuJlRsbeer listedonthestockexdangeEhe real cstatc of theJNR Serdernenr Corporation. at the peak ofthc so called Bubblc Economy, pricesThe Government madc its decision at the cxnse as high as Y1 million per sharc, twenty times asofand against objections from theJNR Setdement much as the face value, were suggested. At thisCorporation, because it was thought that such price, the totd 8.24 million hares of dhese threebiidding r.aieht push general land prices up fiurther. companies would have fctched $75 billion. How-Therefore, JNRSC missed thc opportunityofsell- ever, given the collapse of the Bubblc Economy,ing real cstates in an exemely fiavorable environ- wereallte sharcs to be sold in die prcsent siuationment. of weak share prices, (taking the Y380 thousand
2.16 In 1991 landpricespeakedoutandshowed seling price ofJR East shares as of August 1993),sharp decline subsequendy. According to the fig- the figure for the three JRs would. be only $29urcsreeasedbyJNRSC, tevalucofthislandbased billion. (Actual sale of JR East shaec: 2.5 milionon the posted price ofApril 1993, was roughly $76 forY1 trillion; JR East remaining sharcs: 1.5 mil-billion.Thcoutlookforlandpricesissdllblcakand lion, JR Central: 2.24 million shares, JR Wcsr. 2the sales of JNRSCs land is still slow in spite of million sharcs, total 5.74 million sharcs timesvarious measures topromoteland sales (See follow- Y380 thousand = $20 billion or V22 trillion)ing section.). 2.18 Thus, ifjNRSC werc to sell all of its land
2.17 Similarly, regarding the sales of stocks, the holdings at the posted price ofApril, 1993, as welloriginal plan assumed the sales revenue to be S11 as all th shares from thc dhrce HonshuJRs ar the
Table 114: Trends in Land Price (Cmrdnal Distict Peent Chag fmm Peceding Yer(Percent)
Area 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
Tokyo 5.5 7.2 12.5 48.2 61.1 3.0 4.8 4.1 -6.9 -19.0
(106) (113) (127) (189) (304) (313) (328) (341) (318) (257)
Osaka 3.9 5.0 7.0 13.2 37.2 35.6 46.3 8.1 -19.5 -24.2
(104) (109j (117) (132) (181) (246) (360) (389) (313) (237)
Nagoya 2.7 2.7 3.3 6.4 16.8 21.0 22.4 19.1 -7.6 -13.7
(103) (106) (109) (116) (135) (164) (201) (239) (221) (191)
Local 2.8 2.6 2.5 2.9 5.4 7.6 15.4 16.3 0.4 -5.6(103) (106) (108) (111) (117) (126) (146) (169) (170) (161)
Note The number in pamndxhsic de price in 1983- 100
TableM l. Trends in Share Pres(yen)
Ng" N;PPon Tdegapl Tokyo Electric SeibuStockr Avg. and Telephone Co. Power CO. Ra&IWay
Face Value (50.000) (50) (50)
April 1,1988 26,104 2,370,000 6,050 4,300
April 3, 1989 33,042 1,520,000 5,950 5I=0
April 2,1990 28,002 1,080,000 3,600 4,850
April 1, 1991 26,007 1,020,000 3,810 3,800Apil 1, 1992 18,581 615,000 2,800 2,200
April 1,1993 19,099 977,000 3,670 3,000
Japanese National Raihwys Privatization Study II 13
price given above for JR East shares (V380 thou- wasactivelycontinuing itseffortsr oseUthe remain-sand), it would be able to pay back some $105 dcr.billion (VI 1.6 trillion)-only about half of the 2.22 According to the regulations given in thelong-term liabilities outstanding as of the begin- JNRSC law, in order to ensure a fair and appropri-ning of fiscal 1993. This would still leave ro-ghy ate exeution of the land sales, such sales are to be$118 billion of unpaid long-term debt, the repay- carried out by competitive bidding. In the case ofmenc of which would have to be borne by the supplying land for public use, official use or publicGeneral Budget Account. utilities, the sale may be conducted according to
2.19 At the peak of the economic boom in frec contrax, as stipulated in JNRSC Law.1990, had all the land been sold offwithout being 2.23 However, at the time that theJNRSCwasconstrained by regulations at the current price formed, land prices werc already appreciating rap-given above, and had all the shares of the three idly, and, in rcsponse, the Emergency Land Coun-Honshu JRs been sold at VI million per share, termeasures Plan was enacted by the Governmentwhich was then suggested, a total of more than in October, 1987. Undcr this plan, in those areas$200 billion would have been made available for where the price of land was already apprcaatingdebt redempton. This would have met the liabili- beyond reasonable levels (apart fiom land beingties JNRSC had to pay, so that a much smaller supplied for public or official use) sales would bcamount than expected would be borne by the defrred, and, in addition, the system where landGcneal Budget Account. could b- disposed of without the disdosure of landLand Sales of.jRsC prices would be brought under review. Accord-
ingly, a study for land disposal measures without2.20 The rcsults of sales of land, train cac disdosng land pLice was cared out and recom-
and other assets since the inepuon ofJNRSC are mcnded several measurcs shown below.givn below. For a number of reasons, the sale of Pol t aseRegdxsom C4xcn=gdxDipesdland snce the inception of JNRSC has not pro-gressedsmoothly. F=stJNRSCneeds to takelmany fLsteps before it can complete sales of land, such as 2.24 According to the JNRSC Law, land dis-coordinationwith local govement and ncibor- posal duough fe contract wUS to be allowed onlyhood peoplc, paradarly in casc of large scal land in the following iune.in urban ars. Second, as part ofthe governments i In the case of the transfer of land t the statepolicy against the spiraling price ofland, the usual or corporations for public use, official use, orsystem of Open Competitivc Biddig was e&ec- public utlties.tvely frozen. Third, dcmand for land has fallen ii. In the case of the transfer of land to local gov-sharply because of the recent recession and the ernments for public use, official use, or publicdedining trend in land prices uilities.
2.21 As a result of land disposals up to fiscal iii In the casc of the twansfer ofland to public1992, the JNRSC was still in possesion of 5,314 enterprises for public usc, official use, or pub-hectres oflandat the benning offiscal 1993,and lic utilities.
Table 116: Residts of Sales of FLxed Assets by te JNASC(USSWlli)
land Method of SaleFY (hecares) Opeu Competitive Bidding Free Contract Other Assets Total1987 271 194 1,013 1 1,2081988 966 255 1,595 5 1,8551989 519 335 1,929 252 2,5161990 810 212 7,161 4 7,3751991 593 205 6,861 255 7,3201992 758 301 7,824 73 8,197Total 3,917 1,502 26,382 589 2S,473
14 japanese National Railways Privatization Study II
iv. In Ehe case of the transfer of land for use by of immediate construaion oncorporations in arcas of business that had that and.been recognized by thc Compulsory Pur- September 1992 Easing of rcgulations concem-chase of Land Law, or in the case of arbitra- ing business and commercialtion based on the Civil Conciliation Law. uses of land.
v. In cases where there are no bidders during 2.28 Moreover, thc Government decided incompetitive bidding in either the first or March 1993 to remove the regulation defcrring thesecond round of bidding and also when a sale of land through open competitive bidding.contract is concluded at a higher price than However, owing to poor economic conditions thehad been originally envisaged. sale of land through resumed open bidding has not
vL In the case that the successfil bidder does worked well. In addition, local govcrnments ofnot conclude a contract and also when the manyctiesarcunwilingtopcrmitandsalethroughcontract price is higher than that offered by open bidding in their areas because they are stillthe successfil bidder. wary of a 9are-up in land pnces.
viL In the case of the sale of land where the pwiceenvisaged do-s not exceed $27 thousand (V3 MeaSU for Land Disposa withoxt Dissmingmillion). LJdPfic
viii In the case that competitivc bidding is un- 2.29 AtthetimeoftheBubbleEconomy,whichs5i::bic. caused a rapid appreciation in land prices, there
225 In response to the Emergencya ndcCoun- existed theanxietythatsalesprices ofJNRSC'slandtermcasures Plan in October, 1987 following r2pid would accelerateland price inlation in generaL Forinflation ofland price, theAsset Disposal Commit- this reason, various methods were sought not totee in May 1988 decided to establish the foilowing disclo the land price directy. An outline andmethods with the revision ofthe JNRSC law regu- evaluation ofthcse methods for land disposal with-lating lnd disposal through free contract i) the out discosing land price is given below.Sales of Developed Real Estate Method, ii) the S ofDevelopedRealEFstaSma-ot Sals of TrustBenefiary RightsM Meod, 2.30 This involves the sale ofland on which theiii) ther Loan Convetibl into Real Esbta Method. JNRSC has erected apartment bu:' ings or otherFurthermore, based on decisions made by the am constructions, where the land and building are soldCommittce in September 1991, in order to avoidt
overl infle. th pric of lad th copd,ogethecr as parEWa ownership rights. As the saleoverly inflating the p. ce of land, t ,e compeive involves not just the land itself but also construc-biddingsystemwithacappricevasintroduced. h the land is sold is notddition, in order to facictart the sale oflarge-scale dear. the fich al was thade in the suburbs of
real esratewith high asset value, theJNRSC lawwasrevised to include the Corporate Bonds Conver- TokyoinSep-mber 199l,andfirthersalsinvolv-ibleintoStocMethodPrepartionsto implment ing 54 8 properies had been made byJune, 1994.the newmechodsarecurrentlyinprogress. Further- ii TheSmailLotSalsefthe TrmstBenejiuayRtightsmore, a new scheme called the Joint Sales of Land 2.31 This method involves the entrusting ofand Housing with Private Company Method was land to trust banks in excange for mst beneficiaryapproved by the Committee in February, 1994. rights,whicharesubsequendysubdWvidedandsold
2.26 As a result ofthe introduction of these new off to gencral investors through the mediation ofmethods, land sales through frie contract have tLust banks The total sum of the sale of the trustincreased since FY 1990, especially in Tokyo met- beneficiary rights, whih is given by the presentropoliman area. value ofthe trust dividends received while the land
2.27 In addition to the establishment of these is in trust and the money received from the salc ofnewmethods, thefollowingpolicishzavebeenalso the land and the building consaucted by the rstadopted to case regulations and facilitate land sales. bank after the tmst has matured, does not give aOctober 1991 A widening of the definition clear figure for the price paid for the land itself
of public utlies. 2.32 Foilowing the first such sale in DecemberSeptember 1992 Permission for local govern 1989, a total of six sales has now taken place,
ments to aqtuire real estate concentrated mainly in areas along the railwaywithout the usual requirement tracks (In addition, one case was cancled owing to
Japanese National Railways Privatization Study II 15
thewithdrawal ofthe main tenant, andanotherwas company are then issued. The redemption of thcscnot completed due to the lack of subscribers). bonds is conducted by converting them into theHowever, in addition to the wakening of the real stockofthe said companyafter dte elapse ofa givenestatemacet, (owing to theamendmentoftax laws period of time.imposing a greater burden on investors than be- 2.37 As the first sale of land under the abovefore) the sale of the trust beneficiary rights for each ystem, thesaleofland at Shiodome, locatedwithinof the pieces of real estate has proved difficult, and the Tokyo area, has been planned, and Shiodomeland disposal through this method is nor planned to Development Inc., thc company that is to receiveextend it. the investment in kind and develop the .eal sate,
was created in October 1992. At present, the com-in Lo=w Cox vemn into Real EArt.te
2.33 In this method, f .ids equivalent to the pany is in the process of formulating concreteland development projects costs arc paid in the development pla.form ofa long-term, low-intcrest loan in retumrn for Issues Coneerning Sales of JR's Sharesthe future right to joint ownership of the piece of 2.38 Since April 1987, newly created JRs havereal estate in question. In return for supplying low operatedascommealized,commercialized-stockinterest funds, after a certain period of time bas copanies,butailofthesharesexcept62.5%ofJRelapsed, the investor is able to exrcise the conver- Em's shares have been owned by the JNR Setde-sion right, thus acquiring the right to joint owner- meat Corporation. The basic principle ofthe JNRship of the real estate. SupcvisoryCommittee that all the shars ofJRs be
2.34 Intheperiodfrom 1990toJune 1994, five listed and sold to the public has not changed, but,such loans have been received for prime rcal estate as noted above, the timeschedule has been delayed.in Tokyo and other areas from companies con- Inadditionsinctheco apVofthebubblecconomysructing offices and commercial facilities. In addi- and the advent ofa prolonged recession, the opera-non, from December 1992 a system has ben tionaloudookforsomeJRshasdeteriorated.WhenstablishedwherebytheJapan Development Bank, all the shares are sold to the public, the transition toa governcmt financial institution, supplies long- private enterprise will be completed. Until then,term, fied-interest rateloans to subscribers to the the sales of shares continues to be an imporantjoint ownership rights. elmet ofJNR privatization.
iv Joiat Sals of Land ad Honming witb Pice p.ies for the Sal ofJR's Shae
2.- 35 Underth"Sales oflDvlopedRealEstat 2.39 The JRs, which are six passenger railwaysMethd,' private companies are sdectd to con- an one t service, were bon from the pria-struct residential buildings on land hdd by the tiation and subdivision ofJNL Regarding theseJNRSC, and the individual residences and land companies, theGovemmentdecidedto"transformbelonging thereto are subsequently sold of indi- them into privately owned companies as early asvidua11y. Under this system, in the event that not all possible, following the fulfillment ofseeral condi-vidu . Uner hissste, intheeven tht no aU tions such as the stabilization of management." Its
of the individual lots are sold, the private developer intntions, as explained by the Minister ofTrans-will be required to purdhase the remainder. Tlisenables thcJNRSC to complete the disposal ofthe porationand otherMmistrymembers to the Diet,land in question, even in the eventality of unsold wer as follresidences. As of March 1994 tWo sites had bee a. Tkhe govenment would aim at the completeselected for this system, and the respective pivate privation of the JRs though the sdelig offcompanies were chosen by July, 1994. of all shares, wvi are presendy owned by the
JNR Settlcment Corporation (thc JNRSC).a. Corpoate Bond Gmorbl inxt Stock b. It would not be necesary for the Govenment
2.36 Thismethod,currenlyunderreview,con- to recain a controlling share of the JRs, whichcerns large tracs of land with high asset values. A are plannd to bc priazed.company is created through investment in kind in c. A basic principle of the privatization, in accor-thelandinquestion. Thesame companythenraises dance with Governmcnt policies, is that thefindsfortheconsructionofbuildingsandprojects. JRs be transformed into pure private compa-Bonds with the right to future stocks in the said nies in order o act freely.
16 Japanese National Railways Privatizadon Study II
d. The Government is currendy studying dt 1989. For thisreason, theGovernmentandjNRSCtiming and content of the amcndment or were forced co considcr limiting the volume ofabolition of the JR law, which will bc re- shares sold in consideration of the impact on thequired, if the JRs are to be privatized through market. Regarding the volume, the Governmentthe sale of thc shares and their listing on the decided to sell off a half of jR East's stock As theTokyo Stock Exchange. stock market continued to bc bearish throughout
2.40 Following the reorganization of the JNR August, 1992, the sale of the company's shares wasand subsequent establishment of the JNRSC, the cventually postponed to fiscal 1993 or later for thestocks issued by the seven JRs were transfcrred to fear of causing further disturbance to the stockthe JNRSC. The number of stocks issued and market.capital of the JRs are givcn below. 2.44 In 1993, the Gavernment and JNRSC
2.41 As thestocks oftheJRswere designatedas agatn decided to carry out the share sales operationimportant assets, serving as financial resources for for JR East, and the sale was implemented accord-the repayment of JNR liabilities by the JNRSC ing to the following schedulc:Law, the disposal of these stocks should require Agwtdiscussion and authorization by the Assct Disposal * Sales of 600 thousand shares by bidding.Council, a committer established within the * Pricing for open tender to general invesorsJNRSC. In accordance with this law, thc Council according to weAghted avmge of tender pricesbegan its deliberation in April, 1992 and prescnted ofabove-n tioned 600 thousand shares.its report in July of the same year, regarding the sell- Sepwber-off of the stocks of the three Honshu JRs, which * Applcation for the shares from general in-already met all the requirements for listing on the restorsTokyo StocK Exchange. The stock of these three OacobeJRswassubsequendyplanned to besoldoffaccord- * Allotting of Stocks applicants seected froming to the above rccommendations of the report. above by lottery.
2.42 The requirements for the listing ofeach of * Listing on the Tokyo Stock ExchngedheJRs onth cTokyo Stock Echangeare shown in 2.45 W the sharcs werc offered to genetalTableII-8.AlloftheHonshuJRshavealreadymet investors in Scptember, a total of 10.48 milL;ontesc requirements for the listing in fiscal 1993. bids were reccived for 1.4 mion shares to be
Initidl Sakgs ofIR Eas6 S es released. Thercfore, buyers were chosen by loteq.When the JR East shares were listed on the Tokyo
2.43 Based on the July 1992 report of the Socd Exchange, theywere populr beyond expec-Council, che seling off of the three Honshu JRs' tation, necesitating the relcase of an xtam 570stockswasexaminedconcretely. However, thestocc thousand shares that had been held in rve to actmarket at that time was in bad condition. The as abrake on the rising share price. The combinedNikkei Stodc Average of major 225 stocks had revenue ofthe inital bidding, the open tender andcome down to as low as 15,790 yen in August 1992, the selling on the stock market ofthe extra shares asless than half of the avcrage levcl of the peak year abrake rcached (fora total of2.5 millionsharcs) VI
Table 11L7: Summary of The JR Stocks
Par Value Stock Issue Capita(thousand yen) (thousand) (billion V)
JR Hokkaido 50 180 9JR East 50 4,000 200JR Cetral 50 2,240 112JRWcst 50 2,000 100JR Sbikoku 50 70 3.5JR Kyushu 50 320 16JR Freight 50 380 19Total 9,190 459.5
Table 11-8 Listing Requirements IY Billion) _ _
Hokkaido East Central West Shikoku Kyushu Freight 3Standards Required Net Assets as of the end o
of the preceding fiscal year 18 400 224 200 7 32 38
Stockholder's Net Assets as of the beginning of FY 1987 259 297 166 155 104 311 34Equity Net Assets as of the end of FY 1992 264 544 399 260 120 320 46(Net Assets) Requirements Qualification Yes Yes Yes Yes ; Yes Yes Yes 3Profits Standards Three Years Earlier 2.7 60 33.6 30.0 1.1 4.8 5.7(the less profit of Two Years Earlier 2.7 60 33.6 30.0 1.1 4.8 5.7current profits and Preceding Fiscal Year 3.6 80.0 44.8 40.0 1.4 6.4 7.6profits after tax) FY 1990 1.6 107.8 117.2 60.5 7.4 3.0 6.1
FY 1991 13 108.0 117.0 66.1 7.0 2.4 1.9FY 1992 6.0 100.9 67.6 55.7 3.5 3.5 0.2Requirements Qualification No Yes Yes Yes Yes No No
Dividend Standards Dividing at the Preceding Fiscal No Yes Yes Yes No No NoYear (Fiscal Year 1991)
Other Standards Operating More Than 5 Years Yes Yes Yes Yes Yes Yes YcsAfter Establishment
Requirements on the listing for Tokyo Stock Exchange No Yes Yes Yes j No No NoSource: Minitry of TransportNotes: Nct asscts of the Thrce Island JRs arc calculated aftcr deducting of the Managcemcnt Stabilizing Funds.
'-1
18 Japanese National Railways Privatization Study 11
trillion. This amount far exceeded the V150.4 and JR Shilcoku) we expected to make losses inbillion, the amount planned by the JNRSC as theirrailaybusinesss from theiniz p6n and,inrevenuc in its budget in the beginning of the fiscal order to covcr the deficit, the Management Stabi-year 1993. lizing Fund (Hokkaido Y682.2 billion, Shikoku
2.46 RegardingthesalcandthelistingofthcJR Y208.2 billion, Kyushu V387.7 billion) was allot-East stock, dissatisfaction was cxpressed over the ted to them. The return on the investment of thisfit that some major issues such as the fare regula- find is then used to cancel out the railway businesstory system, which will affect the stock price, re- losscs. Thus, management's rcsponsibility in thesemained unsolved. These are, in a sense, problems Island JRs' has been to restrict losses made fromcxisting in any business of a public naure, but in railway business to within the amount generatedthecaseofJRs the relationwiththeGovenment is from the investment fi. d. Until 1989 the Manage-the matter to be settled in the future. The issues ment Stabilizing Funi was 1ent to the JNRSC,are likely to affea the firture management of the guaranteeing a yield of 7.3%, according to thecompany. scheme created at the time of JRs' creation. After
1989, each of the JRs would receive the gradualTimecSchd/dcfi~rFuaure ShartS^e &ilrepayment from the JNRSC to invest by itslf.
2.47 The remaining 1.5 millionunsoldJREast Operting losses of Island JRs' in fiscal year 1993shares, as wel as those of the JR Centrd (2.24 decreased from those of 1987 because of the in-million sharcs) and thcJRWest (2 millin shares), crease of opertng revenues, despite a decrease inwere scheduled to be sold from fiscal 1994 and theprofitfromoftheFund. However, failingyieldslater. In December 1993, the Vice Minister for due to rece low interest rates, together with theTransportation announced that tre stodc of only limitation of incrcases in the operating revenue,one ofjR West or JR Cental would be sold off in will weaken lland JRs' profit base and become afiscalyear 1994,indicaingtheabandonmcnrofthe serious problem for these JRs'.intention ofthe Ministy to list both companies on 2.50 Regarding the selling off of the stocks ofthe stoCk Cihange suiultUaneusly. This decsion the three Iland JRs, in addition to mesur con-was made in light of the postponement of the ceming the weakening of the companies' profitslling off and listing of Japan Tobacco Inc-, an- base due to falling yields, the argument remainsothr Govenment-owned company from fiscl unresolved as to whethr the listing of a company1993 to Fiscal 1994. that is not deriving opeating profits fiom its main
2.48 In Junc 1994, based on the report of the business is appropriaoc For example, therc is aAsset Disposal Council, the Miisty of Trnspor- question as to whether thcir provision of railwaytation and JNRSC chose JR West to be the com- serves isobligatoryornot, that is,wheerornotpany lised in Fiscal 1994, while the schedule and rheycandecidetodiscontinuesomeoftheirmoney-numberofstodcssold-offweretobestillxammind. losing railway services.In Oaober 1994, one third of Japan Tobacco's 2.51 Anotherissuearoseconceningthenatureshars were offered to the bidders and public, but a of the Management Stabilizing Fund. The equitysubstandalportionofthesesharesremainedunsold capital of the three island companies is relativelybecause the seingpricewas too high. On Novem- small, which makes the taeover easier in theseber 15, 1994 the Govenmcnt dccided tde sales of cases,andtheamountoftheManagemcntStabiliz-JR West's shars should be postponea until Fiscal ing Fund is considerably larger. For this rcason,1995. The Govermnent considered that the fewrshve beenvoicedregardingtheacquisitionofabsorbative capacity of the stock maket for priva- the companies for the purpose of conrroll:ng thetized-public companies was not big enough. Ow- hugeamountoftheManagementStabilizingFund,ingtothisdecision,thecompletionofthesingoff in the case that the stocks are sold offwithout anyprocedures for the shares of the three Honshu JRs restiction on stick-holdes. Considering the is-has been delayed still furher. sues, the timing of the disposal of the three Isiand
Share S&Efir Nox-Himhu Rs JRs' stock is not dcear at present.2.52 ConceringJR Freight, in addicion to the
2.49 The question of what to do regprding the need for maintaining a cercain lvel of profits insaleofthe renainingJRs'stock isyet to be decided. order to achieve listing on the exchange, mostThe three Island JRs (JR Holdaido, JR Kyushu, analysts agree that many questions remain unre-
Japanese National Railways Privatization Study II 19
solved, such as cost allocation widt passenger JRs, ers. All this making stock disposal problematical inthe burden of new investnents, compeition with the near future.trudcs, restrictions in expanding business, and oth-
Table/9-9:MarketConditionbeforeandin 1992
TradingVolume TradingValue Nikkei Stock Avg. (225)Avrage (million stocks per day) (billion Y per day) (V)
1988 1,021 1,025 27,0391989 877 1,309 34,0591990 484 717 29,4371991 373 435 24,2951992 Jan.-June 261 250 19,416
July 228 189 16,278Aug. 311 251 15,790
Note: Trading Volume and Trading Value ae based on die Tokyo Swock Exchanges fi section.
Tablei10-: Trends in ProfitandLoss forthe ThreelslandJRs(bi/on yen)
Hokkaido Shikoku KyushuFY 1987 FY 1993 FY 1987 FY 1993 FY 1987 FY 1993
Opauing Revenue 92 106 35 50 130 173
Oprating Loss - 54 -47 - 15 - 11 - 29 -27
Revenue fiom MSF 50 44 15 14 28 25
Currnt Pxofit - 2 1 1 2 2 1
II. JRs' Recent Performance and NewlyArising Issues
3.1 TheperformanceofthenewlyacratedJRs ship. During the days of JNR, this public aspecthas been remarkblc, although the growth of pas- had been emphasized. Afier th resuctring insengersand theprofirabilitybegan to sagnatefrom 1987. as a reacion to the past ecperiences, the1992 owing to the prolonged rccession and other pendulum has swung to the opposite ereme andrasons. The environment surrounding each JR oeializedJRs are reiLcrant to underctk newdi&rs, but dre improved response to local necds lineconstruczion.Anotherissueisthepredicamentand the bettr performance, whih is commonly of JR Frcight in the last few years. When tieobserved in eachJRis delalythepositiveside ofthe recession set in and the rcdundant capacity ofprivatizaion. On the other hand, new issues are existing truck fleet emrged, JR Freih's lack ofarising. Among them, one major issue is the ques- markcng ability in th competition against truckstionofnewlineconsrmraion. Railroadbusinesshas became visible. Thc issuc is complicatd by thesomepublicaspcsbynaurc, regardlessofowner- alleged cross subsidizaion cxisting both in train
Tabl NI-: Opeang Results ofJAs during the FirstSn Ye=s of Opeaon(iNAO %Pa r%,IWDntoi%)
1987 1988 1989 1990 1991 1992 1993JR Hokkaido 3,920 4.457 4,373 4,631 4,800 4,9 4,800
- 13.7 -1.9 5.9 3.6 1.4 - 0.9JR Eas 104,491 109,796 113,185 117,643 125,974 128,486 128,900
- 5.1 3.1 3.9 7.1 2.0 0.3
JR Centrl 41,148 45,085 46,302 51,051 52,110 51,200 51,000- 9.6 2.7 10.3 2.0 -1.7 - 0.4
JR West 45,782 48,227 48,885 52,125 53,690 54,423 54,600- 5.3 1.4 6.6 3.0 1.4 0.4
JR Shikoku 1,674 2,119 2,034 2,074 2,123 2,070 2,100- 26.6 -4.0 2.0 2.4 -2.5 0.7
JR Kyushu 7,664 7,904 7,893 7,994 8,333 8,600 8,600- 3.1 -0.1 1.3 4.2 3.2 -0.2
JR Passengers 204,677 217,586 222,671 235,518 247,030 249,600 250,000Tota 3.2 6.3 2.3 5.8 4.9 1.0 0.2
JR Freight 20,113 23,131 24,769 26,819 26,791 26,300 25,100Tota 0.0 15.0 7.1 8.3 -0.1 -1.9 -45Note: Figures of de second linc show the percencage duange from the pievious year.Source: Minisy ofTransporc.JRs.
Japanese National Railways Privatization Study II 21
and trudc transportation. Further complication railroad frcight. In addition, containcrs ofarises if extrnalities such as pollution and conges- new type owned by shippers have also con-tion are taken into account. Regulation by the tributed to thc traffic increasc-, a 30 feetgovcrnmcnt of the privatized JRs is another issue. container, a cool container, a small 2 tonThis chapter deals with thesc issucs as well as JRs' container, a 'car pack" (for automobiles),recent perfornance. and a largc tank container.
pR's Recent Performance 3.5 Besides thesc efforts made by thcJRs, twooutside fiLaors contributed to the growth of rail-
Recent Developmex t ofJRs' 9peration road passengers. One is thc inauguration of the
3.2 The growth of JRs' passengers since the "Se Ohashi bridge between the main island ofprivatization is remarkable, although the rate of Honshu and Shikoku in 1988 and "Scikan" tunnelgrowthsloweddown in 1992andwasalmoststatic betwoen Honshu and Hokkaido in 1989, whichin 1993. Freight transportation also grew in the connected ticsc islands by railways for the firstperiod up to 1990, but has declined since 1991. time. The other is the fivorableeconomicenviron-
3.3 Since theprivatization oftheJNRinApril ment up to FY 1990. As a rcsult, the achicvement1987, the JRs have rnade enormous efforts to has been impressive compan-r to those in theyearsrationalize their operation and management. First, of the JNR and evcn to the PRs during the samethey dramcally reduced their employees at the perioa-time ofpuivatizationi (from 277,020 cmployces to 3.6 In 1992, however, the rate of passenger200,650) and then continuously made efforts to growth slowd down drastically with the burst ofcut their labor forces mainly in the railway opera- 'bubble" economic growdL The JR Central suf-dons (from 164,671 employees of the seven JRs in feed most among the threc HonshupassengerJRs,FY 1987 to 136,081 in FY 1992). as it relics heavily on the busness passengers ofthe
3.4 Secondly, JRs have reviewed their invest- builettrain,andregistered thefirstnegativegrowthment strategies, according to the maket charater- ofopration. In thisyearthegrowthofroralpassen-isoa in each region of opation. During dhe finat grJRswas 1.0%.Theprolongedtrcessioncontin-years of the JNR total invnent had been re- uedin 1993andthreepassengerJRs (JRHokkaido,duced to a minimal levl due tO the huge deficit in JR Central and JR Kyushu) experienced slightopeons.Further,investmentdecisionshadbee declines in passenger growdt The growth of totalmade at the headquarter in Tokyo. The result was pangarJRs fel to only 0.2%.datiwmienrdecisionsdidnotrrelectlocalneeds. 3.7 The Japan Freight Railway Company,Since the privatization. each JR has seen respon- which registered a negative growth in three con-sible for its own investment planning secutve years, was most severely a&aced, as it had
a. investment in traffic capacity and seice to competc against trudcs with excess capacity inimprovement (eg. fiequency, new type of dte last fewyears, although their demand had beencoaches) in such metropolitan areas as To- above the capacay of existing flets during thekyo (JR East), Nagoya UR Central), and period of the "bubble economic growth. TheOsaka (JR West) has seen a great success siuation worsened in 1993 owing to the cargocompared to that of the PRs (private rail- unceintiscausedbyunusuallyfrequenttyphoonsways). in the southern part of Japan and to the drastic
b. accelerated investment in trunk lines of the reduction of rice crop transportation caused by theJR Shikoku and the Tokaido Shinkansen abnormally cold summer.has improved the competitivenss of therailway against other modes of transport, Pi, wMor Caem gfp2ri.e. road and airway. 3.8 In line with opeating volumes, the rev-
c railway's direct access to an airport at enue of thejRs also increased remarkably up to FYChitose in Hokkaido has cncouraged the 1991 and then stgnated, because fares have nottotal traffic demand, as well as strengthened beenchangedsince 1987. Ontheotherhand,somethe rway's competitveness against road cost components of the JRs continued to increase,transport. resultingin the delineofboth operatingprofit and
d. investment in new type of rolling stocks for retained earnings for the most oftheJRs duing thefreight has encouraged a modal shift to past three yars.
22 Japanese National Railways Prrnaization Study II
3.9 Along with the stagnant transportation for the JR Shikoku, and 1387.7 billion for the JRdemand for the JRs, several factors are responsible Kyushu. The profit arising from the Fund will befor the decline of their profit and earnings. These used to supplement their revenues.fators are discussed hereafter by each group ofthe 3.11 The Law Concerning Passenger RailwayJRs. For the three Honshu JRs, the purchase ofthe Companies and the Japan Freight Railway Com-Shinknsen lines in FY 1991 has had a significant pany (the Law hereafter) provides the Fund in thenegative impaa on their profit (although operating form of debt owed to the three Ildand JRs by theprofits appeared to be increasing, current profits JNR Settlement Corporation for a redeemabledecreased), as is shown by the iiusttive fgrcs in period of 0 years(with a grace period of 2 yars)Table 1114. andasemiannualinstallmcntrepaymentplan(with
3.10 For the three island passgerJRs, delinc an interest rate of 7.3%). The rationale for provid-inreveucsfomthcManagementStabilizingFund ingacne-tmefundraherthanprovidingasubsidy(the Fund herefter) has been one of the most eachyearistogivetheJRs managementincentivesimportant factors behind their profit decine. The for efficincy, improvemen. = The fund sets a ceilingFund provid for each company amounts to: amount ofcompcnsation for the kss from thclines16812 billion for theJRHoldcaido, V208.2 billion which have to be in operation from the view point
TabI Ab Renu, Operatng Proftand Rened Earing of JRP(4Blon, %)FY 1987 1988 1989 1990 1991 1992 1993JRHokkaido Rrvenue 92 94 100 105 106 105 106
Profit -54 -53 -53 49 -48 -47 -45(Ratio) (-58.5) (-56.7) (-52.8) (46.7) (45.4) (-44.4) (42.8)Earnings 1 2 0 1 1 0 0
JR East Revcnue 1,566 1,664 1,736 1,852 1,950 1,981 1,974Profit 296 323 281 292 355* 439* 417(Ratio) (18.9) (19.4) (16.2) (15.8) (18.2) (22.2) (21.1)Eamings 27 41 57 58 57 57 57
JRCenutl Revenue 875 969 1,003 1,103 1,131 1,111 1,114Profit 72 102 114 133 288* 405* 391(Ratio) (8.2) (10.6) (113) (12.1) (25.4) (36.4) (35.1)Earnings 17 35 67 53 56 33 26
JRWest Revenue 763 807 834 892 917 923 938Profit 71 79 91 122 128* 144" 137(Ratio) (9.3) (9.8) (10.9) (13.7) (13.9) (15.6) (14.6)Eanings 2 5 26 30 36 32 30
JR Shikoku Revenue 35 44 44 48 51 51 50Profit -15 -11 -12 -9 -9 -11 -11(Ratio) (-42.4) (-24.7) (-26.4) (-18.1) (-17.8) (-21.5) (-22.6)Earings 0 2 4 4 4 2 1
JR Kyushu Revenue 130 140 144 151 160 167 173Profit -29 -29 -29 -29 -28 -27 -27(Ratio) (-22.2) (-20.4) (-20.0) (-19.0) (-17.5) (-16.4) (-15.5)Earings I 1 4 1 2 2 0
JR Freigb RFvenue 173 183 192 205 215 216 206Profit 11 11 10 11 7 6 2(Ratio) (6.5) (5.8) (5.1) (5.5) (3.1) (2.6) (0.9)arnings r 2 3 3 3 1 0 -3
Notes:Operang Revenue: Revenue from railvay business (Eue rwnue and othe re3ene and side-business. not induded subsidiesOperatig ExpendueG labor, energ, repair, mrisoelaneous expnses. t (not indcuded trporae ax) and depredation(Ratio): Raio of Operting Prfit to Oprtg Revenue* OpratingproficforjREa jRCentl andjRWescin 1991 and 1992 incrasedducto hc decras ofShinklnsenleasepaymenc
(as is discused bWow).
Japanese National Railways Privatization Study II 23
oftheserviceforthc"nationalminimum.kAndthis furtiher as the proportion of the Fund managed byceiling amount has been recognized as a kind of the three Island JRs increases. The -Case in Tablemanagemcnt target by both managenent and em- I1-4 illustrates how lag the impact of the interestployees. The Fund has worked very well as a man- rate for the profit of thesc three Wsand JRs will beagemcnt incentive for these durec companies until when al the Fund is managed by tic JRs withrecendy. market mates.
3.12 Ncvcrthless since FY 1989, when the . .redemption of the princpal began, dth three islandJRs have taken thc responsibility for the manage- 3.13 The othe uncertainty for the JRs' man-mcnt of the Fund, in order to maintain ie princi- agement is the profitability of thc diversified busi-pal and interest yield at a level somewhere around ness. Alrhough the diversified business hasthe annual rate of 7.3%. Thc general economic contributed to reducing the number of employessituation has since changed drastically in Japan, in the raihayoperationofthcJRs, dteprofitabilityand interest rates have declined significandyr the of the business has neither increased nor reducedaverage bank lending ratc has decied from 7.7% their total profit significandy. especially for thein FY 1990 to 7.3% in FY 1991, to 5.3% in FY three Island JRs as is shown inTable HI-5.1992, and firther to 4.1% in FY 1993. Thus the 3.14 Furthermore,itshouldbenotedthatmanyrevcnuefromtheFundfor thehrecompanieshas diversified businesses have already been scparateddeaceased and is expected to decline signi:andy from the JRs and nested in to affiliated or unaffili-
Table 111-: hcrementa Cost for the Shinkansen Purchsed(IV Billion)
JREast JR CentralOperating Expenditurs 84.5 134
Depreciation 78.8 101Fixd Property Tax, etc 5.7 33
Other Expenditures 198.4 314
Interst Pyment 198.4 314
Total Expendime (A) 282.9 448
Le= for Shinknsen (B) 210.3 416
Incamentad Cost (A - B) 72.6 32
Table W4: Opertng Loss and Fund Revenue( Bllion)
1987 1988 1989 1990 1991 1992 1993 Case*
JR Hokkaido Operatng Loss -53.8 -53.3 -52.7 -49.0 -48.3 -46.8 - 45.4 -45.4Revenue*" 49.8 49.8 49.6 49.0 49.0 46.9 44.4 28.0Dif=exnce -4.0 -3.5 -3.1 0.0 0.7 0.1 -1.0 - 17.4
JR Shikoku Operating Loss -14.9 -10.8 -11.6 -8.7 -9.0 -11.0 - 11.3 - 11.3Revenue** 15.2 15.2 15.2 15.0 14.2 14.1 13.5 8.5Differnc 0.3 4.4 3.6 6.3 5.2 3.1 2.2 -2.8
JR Kyushu Opeating Loss -28.8 -28.5 -28.7 -28.7 -28.1 -27.5 - 26.8 - 26.8Revenue** 283 283 28.3 28.2 27.9 27.5 25.2 15.9Differnc -0.5 -0.2 -0.4 -0.5 -0.2 0.0 - 1.6 - 10.9
Csasmesthesimation of FY 1993 if dhe inter of41% (actal einFY1993) isappliedforthemvenuefiom theFund. AD ofthe Fund will be rdmed to the duhe IsdandiRs in FY 1996.Revenue from dte Fund
24 Japanese National Railways Privatization Study II
atrdsubsidiarycompanies.Thusthefinancialstate- depreciation and retaincd carnings (see the Tablemnents of the JRs do not provide a performance of 111-7) in order to improvetheirfinancialcondition.their divcrsified businesses as a whole. The only xceptions arc the JR Central and the JR
Capttd E ztures and Exad F mg of Frcight, which have not owned a largc proportionath ERs of ther rail tack as assets and thus have nor
tAc JRs registered sufficiendy large amounts of deprecia-
3.15 As is shown in the tiable above, major tion.caelgories ofJRs' invcstments during the first three 3.17 The Law provides that an approval by thetofouryearsare"maintenanceand rollingstocks" Minister ofTransportation is required for (a) newin order to make up the shortfall of these invest- stock issucs, (b) bond issues, and (c) long-termmnets during the final ycars as thcJNR. Since then, borrowings with a maturity ofmore than one year,the JRs have rapidly increased thcir investments in for all reJRs. Nevereless the Law does not allow'improvement of infriastructure," for example the t three Island JRs to issue bonds, and insteadimprovement of celctric facilities, advanced ATS provides the Management Stabilizing Fund to(AutomaticTrain Stop),ATC (AutomaticTrain strengthen their financial basis.Control) and CTC (Ccntralized Traffic Con- 3.18 The Law provides some favors to thcJRs.trol), and railway technology developmcnt. This Until the Commercial Law was revised (effectvetrend clearly shows that the JRs have changed from 1993), a provision in the Law had allowed atheir emphasis in investment from currently higher ciling for the amount ofbond issues by theurgent projects to investments with a long-term three mainland passenger JRs and the JR Freight;perspective. dtese JRs can issue bonds up to ten times amount
3.16 Almost all the JRs have resutained their oftdenetcapital valueofthclastavailablebalanceinvestment amount to the amount of their depre- shect (in gcnral, the amount of bonds is restrictedciation, or to the internal sources of funds, ie., uptothenetcapitalvalue).ThcTawalsostipulates
Table 1-: Revenue and Profit of Wiversilled BusinessOiBillon, %)
1987 1988 1989 1990 1991 1992 1993
JR HokkaidoRevenue 19.4 12.9 18.9 193 16.9 14.9 15.7Profit -0.2 -1.8 -2.0 -0.7 -0.5 03 0.2Ratio -1.3 -13.9 -10.4 -3.4 -2.9 1.9 I1
JR East Revenue 30.6 50.9 62.7 69.7 74.1 79.7 81.1Profit 8.3 7.1 3.8 8.1 9.3 7.6 5.8Ratio 27.1 14.0 6.0 11.6 12.5 9.5 7.1
JR Cntral Revenue 63 2.8 3.7 4.0 4.3 5.2 8.7Profit 0.5 1.0 1.3 0.2 0.6 1.5 2.3Ratio 7.6 35.5 35.5 5.9 13.8 28.4 26.4
JR West Revenue 16.2 12.6 11.2 12.7 15.4 16.5 23.3Profit 0.7 0.8 2.3 4.0 6.5 7.2 8.1Ratio 4.4 6.1 20.4 31.6 42.0 43.7 34.7
JRShikoku Revenue 4.6 3.1 2.9 3.1 8.0 9.5 7.8Profit -0.9 -1.0 -1.6 -1.6 -4.1 -4.2 - 3.0Rato -19.5 -32.2 -55.7 -50.9 -50.8 -43.6 - 27.4
JR. Kyushu Revenue 3.2 3.7 14.2 19.3 23.9 23.3 28.3Profit -0.7 -0.8 -5.5 -7.8 -7.6 -6.7 - 5.4Ratio -23.0 -22.7 -38.9 40.5 -31.9 -28.5 - 18.9
Tota Revenue 80.3 85.9 113.5 128.3 142.7 149.1 164.9Profit 7.6 5.2 -1.7 2.3 4.2 5.7 8.0Ratio 9.4 6.1 -1.5 1.8 2.9 3.8 4.9
Note Profit is the nurgm only afier dirct mast. and indiudes sadi indre cms as intrest payment had reprseus profit or lossover revenuc.
Japanese National Raaways Pivatization Study II 25
Table 6: Capftal Expenditures by the JRs(fBIIIion)FY 1987 1988 1989 1990 1991 1992(Plan) 1993 (Plan)
Maintenance 74 86 103 107 150 178 157Improvement 22 41 93 133 153 211 211Capacir Expansion 34 48 49 63 103 123 92
Roling Stock 65 163 198 208 172 180 156
Others 15 14 16 18 20 22 24
Tota 208 353 459 528 598 714 640
* Ihis expendie does nor indude the pucdus of Shinkansn Unes.
Table E-7: Investment Compred to Oepreciaffon by the JRS (1987 - 1991)( B1710ion)
Interal FuncsInvestment Tota Depreciaion Retained Earnings
JR Hoklkaido 87 92 88 4
JR East 788 1,390 1.183 208
JR Central 702 598 405 193
JR West 309 558 476 82
JRShikoku 53 58 45 13
JR Kyushu 103 127 118 8
JR Freight 105 74 63 11
Total 2,147 2,898 2,378 520
Table l-8: LongTem Enl Fino cing by Some JRs(4 Bkon)
1987 1988 1989 1990 1991 1992 Total
JR East Bond" 106 97 96 94 62 120 575Loan 42 342 461 35 46 81 1,007
ToMa 148 439 557 129 108 201 1,582
JR Centra Bondc' 19 20 19 20 18 20 116
Loan 16 48 83 38 58 73 316
Tota 35 68 102 58 76 93 432
JRWest Bond** 39 35 36 39 15 16 180
Loan 18 50 62 20 46 49 245
TotM 56 85 98 59 61 65 424
JRFreight Bond*** 2 5 8 9 12 0 36
Loan I 1 4 3 19 16 44
Tota 3 6 12 11 31 16 79
"Bond isu incdude bonds guaateed and subscribed by due GovenmeBond issue in FY 1992 is a forign madke bond, and aD the odtes are domestic bonds guaraeed by the Goverment.AD the bonds ate guaantd by the Govrnment
26 Japanese National Railways Privatization Study II
that up to the fifih year of operation, the Govcrn- brought considerable benefits co the Japanese tax-ment can providc a guarantee for the JRs' bond paying public in subsequent years.issues up to the amount approved by the Diet. Efforts and Managerial Problems ofjRs
Financid Burden on GovernmentThbree Hombu IRsf
3.19 Thc financial burden on the governmentconcerning the JNR and the JRs has been drasti- JR cally reduced since the privatization of the JNR, 3.22 Badckd by the largcst marketo fthe Tokyoand the JRs have paid more taxes than subsidies metropolitanarea, theJR East has thelargestoper-received. Table III-9 shows the amountofsubsidies ating basis among the JRs. The revenuc from thereceived from the central goverment, and the Tokyo metropoliman area reaches about half of theamounrofcaxs and contibutions paidby cheJNR companyIs revenue from railway business. Of theand succeding institutions to the central and local remaning half, about half comes from the twogovenmuents. Shinasenline!, Thus the primary stratg of the
3.20 Bcefre privatzarion, the amount ofsubsi- company's inve cmcnt is the improvement oftrans-dies paid to the JNR exceeded the amount of taxes portation capacity and services in the Tokyo met-and conttibutions received from the JNR (as a ropolitan ara. For exuampl, the company haspublic corporation, the JNR was not required to introduced double-dckers and increased the nur'-payfdral maxes).Theamountofannual netfinan- bers of trains with air conditioning. ITe secondcal burden to the government rched almost priority of its invesment is the rational use of the!600 billion. eising trunk lines and Shikansens. A good ex-
3.21 Foilowing the privatizaion of the JNR, ample is the Yamapta Shinkansen which directlyhower, the JR companies were required to pay connects the existng trunk linc with a ShinkasIedel taxes such as the corporate tax, and the to accelerate the speed of the train. And the com-amount of such taxes paid was quite considerablc, pany has actively promoted the corporate imagc asreflccing the favorable management conditions of a prvate railway company. Bcsides these efforts bythe JRs. In addition, the amount of subsidies ha., the company, the strong economic growth duringdecreased. As a result, the amount of rae came tO tde initial fiveyears ofits operation has contriburedexceed that of subsidies paid to the JR companies, to the company's impressive perfirmancr. Thisimplying that the plivateation of JNR has de- allowed the company rto be succsfuly listed to thEccreasedthe financialbuxdento thegovemnmentand stock market in Scptember 1993.
Table M1-: Taxes and Subsidies(I' Bitlion)FiscalYear Taxes and Contributions Subsidies BalanceUnerJNR
1982 35.2 729.4 -694.21983 38.3 701.8 -663.51984 46.3 647.4 - 601.11985 47.8 600.1 - 552.31986 50.1 377.6 - 327.5
UndCjR1987 220.7 193.7 27.01988 245.7 211.0 34.71989 230.1 633.1 - 403.01990 299.4 157.1 142.31991 444.3 108.2 336.1
Not: This tble also appeas m Chapter IL For axs contlmbtions and subsidics following dhe privatiion of JNR. figuvrsreprcsem a total of those from the JRs,JNRSC. the Shinkanseni :1lding Cosponion, and the Railwa Diclopmaent Fund.
* Beuse tdeJNRSC caries liabilities in addition to dhse ofJNR. some subsidies to thcJNRSC did not exist in theJNRyerIn 1989 the amount of subsidies paid by the govenment inreased rapidly due m a special measure concening pensions.
Sourc= Ministay of Transport
Japanese National Railways Privatization Study II 27
3.23 Ncvertheless the financial burden taken 42.8 lan whkh is currendy under constructionover from the JNR and addictional burden charged between Otsuki and Kofu.from the purchase of the Shinkansens renains the 3.26 The other strategic investment which hascompanysmajorconcern.Tecompany'snerworth beenimplementedcduringthe initialseveralyersaofratio declined to 8.1 percent in March 1993 after it its operation, is improvement of the railway capac-had been improved to 12.8 percent in March 1990. ity and services in the Nagoya metropolitan area,And fixed liabilities amount to about three times its which is the only metropolitan within the operat-turnover. Thus the company has been limiting its ing area of the company. The company has intro-investmentamount to the intemalsources offiinds, duced new type of trains which accommodatein order to strengthen its financial condition.With commuting passengers and has improved railwaythe listing on the stock market, the company ex- infrastructure which provides frequent services.pects to expand its fund raising capability. Nvcrthdess,Nagoyacityhasbeenprinarilydomi-
3.24 Theotherconcernisregulation,especially nated by road transportation and also well deCVe-the tariffsystem. In order to secure asound operat- oped with the local railway network by the PRs.ing profit and to respond to a variety of denands, Thus the demand for the exsting JR lines seems toflexibility of tariff system is a crucial factor for the be saturaed, or to increase only in line with popu-companys management. Now that it has been lation growth along the lines, after arapid increaselisted to the stock narket, the company advocates since the privaizarion of the company.much morc flexible tariff regulation than befiore 3.27 As is the case with JR East, the low netLaudy, the diversified business is onc of the impor- worth ratio is another concern for the companytant factors to strcngthen the company's profit fromafinancial aspect, especiallyafter thepurchasebasis, although the current level of revenue is only of the Tokaido Shinkanse Fixed liabilkies have
marginal part of the total turnover of the com- icreased to five times the companys tumover inpany. March 1993. Neverdhelss the carrent profit ratio
'AR Cemral was as high as 10.4 percent in FY 1991 and stillrenmains 6.1 percent in FY 1992 which is quite high
3.25 The principal business of the company is comparedto those of the PRs. Based on this solidthe Tokaido Shinkansen whkih has the largest profitability, the company hopes to be listed to thesingle-line demand in Japan m terms of passenger- stock market as soon as possible.km. second only to the Tokaido line which runsparalletotheShinkansen.Therevnucshareofthe JR WeTokaidoShinkansenoutofthetotalturnowverofthe 3.28 Two major sources of revenue for the JRcompany is as high as 87 percent.Thus the crucial We-t is the Shinkansen and Osaka metropolitaniSsus for the company are (a) maintenance, im- area, whih is similar to the JR East. Nevertheless,provement, and capacity cxpansion of the existing the traffic density oftheJR in the Osaka metropoli-Tokaido Shinkansen and (b) investment for the tan is much less than that in the Tokyo metropoli-newm Chuo Shinkausen line which is expeacd to tanarca, mainlybecauseoftheless equippcdrailwayemploy "Linear Motor technology. This tcchnol- network in the region. Although the total routeogy, using a superconducting magnet, has been length of the JR West in the Osaka metropolitantested by the "Miyazaki Testing ULne of 7 km in arcais7OpcrcntofthatofthcJR EastintheTokyoKyushu, ahieving 517 km per hour, and will be metropolitan area, the track runs around in thefurther tested in the "Yananashi Testing Line" of region with a less dense traffic demand. As a result,
Table 111-10: Rout Length and Traffic of JR East (FY 1992)(kbn, million passenger-kn million)
Route Length (A) Passenger-kn (B) Density (B/A)Shinkansen 839 16,244 19.4Tokyo Met. Area 1,097 76,755 70.0Otier Lines 5,566 35,487 6.4Total 7,502 128,486 17.1Soure: JR Eas. Kabushiki T7dsk-de Toroek Mokemi Sho ()fV*e=ff). 1993
28 Japanese National Railways Privatization Study II
the demand (density) for theJR West in the Osaka istration which is similar to the railway administra-metropolitan area is only half of that for the PRs. tion office of theJR Hokkaido and theJR Kyushu.This is a good contrast to the JR East in the Tokyo The idea is not to increase profit ability, but tometropolitan arca which sharcs the dense railway reduce the loss, mainly through (a) laborsaving bymarket almost equally with the PRs. The other integratingthelaborfunctionsand(b) icductionofcharacteristics ofthe JR West is its large share ofthe maintenance cost by applying dciferent standardslocal lines, compared to the other Honshu JRs. In of maintenance amnong ines.addition, its trunk lines have a relatively small Three bld Rstraffic demand. In other words, the company is atypical orginization which stil has an internal JR Hokkaido
3cross subsidizaton.t 3.31 Located in the most sparsely populated3.29 Strategy on the positive side for the JR areaofnordhernislandinJapan,theJRHokkaido
West is thus foacsed mainly on the speed up of the has an inherently difficult management environ-Shinksen and the developmnent of the urban mcnt both for railway business and for railvaynetwork in th Osaka metropolitan area. In order rdated business and the viability of the railroadto compete against the airway, devldopment of a sector itsdfhas been repeatedly questioned. At thenew train for the Shinhan3en named huWIN350s timc ofprivatization some unprofitabl lines rwerewhich has acieved a 350 km per hour is crrently abolishcd, or separated from JR Hokkaido, but itbeing undertake As for the development of the also had to acquire many unprofitabic lines whichurban network in the Osakahmetropolitan area, the could not be abolished fiom the viewpoint ofcompany has been constmucting svcral lines and "social minimum". Thus it has the weakest finan-expanding the line capacity by double tracking and cial sructure among the sixpassengerJRs and relicselctrificaton. Residential development in the heavilyonsuchfctorsastheM nntStabiiz-Osaka metropolitan area has been spreading out to ing Fund and avorabl tax treatment.theregion where the PRs do not have an perating 3.32 Neverteless the company has achieed ainiruccure. Good examples are, (a) construc- etter operatingrcsult during thefirstsixyears thantion of a new line calld "Kaafutku line" which wvas ex opecte.Wth the suclcss of the newairportconnrmcsthe east gate ofthe Osaka city a machi access line which connected Chieose Airport andand Kyobashi) and te s the westlo the Osakpacty -Sapporo (the largestcity) andwhih ovaiwhded(Amagasald), and (b) the double tracking of part of the bus service, the company is now confident thatthe Fukucyama line wher the spreading out of the railroad sector continues to be viable in ainthe residential area is very actve. trunk lines originating from Sapporo. The airport
3.30 The other side of the strategy for the access line is one example of the successfil aspecscompanyisrationalizationofchelocallinemanage- ofprivatization. With the cxpansion of air passen-ment. The JRs acknowledgc their obligation to gers, the ter i:uinal of Chitose Airport was plannedprovide railway services on local lines that are not to move to an adjacent area. When the initial panprofitable. The tariffon these local lines is allowed of newairportwas disdosed in thcearly 1980s,to beonly 10percenthigher than the normaltarifE the rewacion ofwas disclosedm itheearl 198 ow.Thus there is no other choice for te JRs than to They argue,' that air passengers would use taxis zominme the operating loss fiom these local lines. and firom thd nearby train station because the newThus the company has established railway admin- terminalwa .oo fiLrto walk The new managemenr
Table IllI: Route Lngth and Traffic of JR West (FY 1992)(kn, millkn pssengerkm, million)
Route Length (A) Passenger-km (B) Density (B/A)Shinhansen 645 16,161 25.1Osaka Met Area 765 25,419 33.2OtherTrunkLincs 2,046 10,932 5.3LocalLines 1,603 1,910 1.2Total 5,059 54,422 10.8Source JR WcslJR Nisii hn Iha Yeram (Profik efIR Wat). 1993
Japanese National Railways Privatization Study II 29
ofJRHokcaido,whichwasnaturallykeenonlocal its investmcnt has been effectively allocated todemand, realized that all air passengers would use those lines with comparatively dense traffic de-bus scrvice both timewise and moncywise if the mand,namelythelineswhichconnectsAsahikawa,altcernativewasthecombinadonoftrainandtaxi.In Hakodate and Kushiro with Sapporo.the first years aftcr the privatization, the construc- 3.34 Theotheraspectismanagcemntcffciencytion oftheairport access lineand the investment in improvement in the other local lines, which con-new roilingstockforthislinebecamethefirstpriority tinue to lose money. In return for the existence ofofJR Hokkaido and the line turned out to be a grcat the Managemcnt Stabilization Fund, thc companysu osscncethenewairportwasopenedinJuly 1992. has the responsibility of passenger train operation
3.33 The company's business strategy has in and the idea is to rcspond to local nceds and toprincple two aspects. The frs onc is active invest- minimize the loss. One example is cstablishment ofment and competitiveness improvement for the a railway administration office for independentmajor lines (trunk lines and an airport accss line) local lines, as the JR Wcst and the JR Kyushu do,that originated from Sapporo. About ninety per- which can be described as 'Autonomous Marginalcent of the total passenger-km of the company is lineManagement.Theadvantagesofthisschemetransported by these major trunk lines. Since the are, (a) more flexible time scheduling reflecting theinvestment find resource ofthe company has becn local needs and (b) labor saving by integratingin principle limited to the internal sources offunds, various functions necessary for train operation.
Chart lif-I
Hokkaido Railway Company / .,..
, _ gb Ll I~~~ftb Lm
30 Japanese National Railways Privatization Study II
3.35 Current major concerns of the company and (c) improvement ofprofitabilitryofthedivezsi-are, (a) declining revenue fiom the Management fled businesses.Stabilizing Fund (mentioned in the preceding sec- 3.38 The company's efforts for the speed-up totion), (b) increase of tax burden at the time of competeagainsthighwaysareremarkableandmustexpiration of the special tax treatment in FY 1997, be noted as the visible positive sidc of the privatiza-and(c) heavyinvestsnent requirement forthe main- tion. The electrification of Yosan line, one of thetenanceofrail trdcin the'Seilan tunnel 10 to 15 trunk line which connects Takamatsu andyears from now.Thc financial impact ofthe second Matsuyama, has been completed in March 1993.factor is estimated to amount to Y7.4 billion, In October 1993, double-tracking has been com-whereas thLe companys net carnings in FY 1992 pletedberweenSakaideaxidMarugame,partoftheamountcdto YO.3 billion. Expected investment for Yosan line and the part where the traffic density isthe d!ird ctor exceeds 1100 billion, whereas total reativly high. The Dosan Line, the other trnkinvestment during the first five years amounts to line, which connects Takamatsu and Kouchi, runsY87 billion . through a mountainous area wih winding rail
JR Sbikku tuades. Here, fforts have ben concentrated on theintroduction of new tilting trains, which tilts at the
3.36 Atthetimwofprivadzaion, thiJRShikoku curve to make each car more resistant to the cen-bad the least developed railroad infrastructure in tiugal force, dius enabling the rmin to maintainterms of shares of electification and double track- the speed. The other efforts in this Dosan Line ising. In addition, hampered by the mountains, the the snrigning of one track in each station. Theroutes ofthe lines are forced to have alot ofcurves. Dosan Line is still single-tracked, but in eachSuinc then the company has promoted the tain station it becomes doublc-traed, naldng eachspeedbothbyecrifcationandbyrintroductionof tracdc auved to both sides of a platfomL Untilnewtrains thatcan tiltoncurveswhile maintaining recendy, when an express train passed each station,speed (tilting trains). The share of the electrified it had tO reduce the sped unnecessarily due to theroute length of the compay has been incrased curveofthetrackNowonectackhasbeenchangedfrom on6.4 percet inApril 1987 to 27.5 percent to be saightc at each station and an express can passinMarch 1993. In the matnie, the -Seo Ohashi" through with highe speed.btidgec,which connects theShilokuislandwiththe 3.39 Asaresultofthesecfiorts,passegersoftheHonshu (mainland) by rail and road, has becn company d not decrease in l993 and has showninaugurated in April 1988 ar.-l contributed to a aslightincreascofO.7%inspiteoftheinaugurationsignificant increase of passengers, 27 percent in- of two direcdy competing highways. The moralecrease of passenger-mn in FY 1988. As for dte behind these efforts has beem supported by theefficincy improvement of the local line manage- sense of crisis that the company can not rely on thement, operation without a conductor has been nation anymorc after privauzation. Both the man-enlcouraged and minor stations h;ve ben dosed on agement and the labor realized the local situationthe weekend. As a resu;k supported also by the and has made effors for the survival ofthe railroadrevenue from the Management Stabilizing Fund, the sector in ShikohLcompanybasregisteredaconstantprofitsince 1987. 3.40 The company on its own has the highest
3.37 Nevcrtecless the major challenge for the share of revenues from diversified business amongcompany is competition from road traffic since FY the pasenger JRs. Although thesc divcrsified busi-1992, owing to the inauguration of the two high- nesses have been making losses, the company hasways which covers major traffic market in the been able to realize wnergy effecs with the mainShikoku island, between Takamatsu and Kouchi, business of railway, for eammple residential devel-and between Takamatsu and Saijo, which run opment (as the PRs do). In addition, by operaingalmosr parllel to the company's two trunk lines highway buses in cerain selecced routes, the com-(See Chart I1I-2). As a result, and also owing to the panybassoughtways to compensate for the declinerecession, the passenger-km in FY 1992 has been oftherailhapassegsshiifingtotheroadtuaffic.decreased by 2.5 perent. Required strategies ofthecompany are; (a) furtier speed-up investment for JRI(ahthe trunk lines in competition with hiways, (b) 3.41 Among the three small lsland JRs, the JRfirther efficiency improvement for dte local lines, Kyushu has the best marker for the railway busi-
Japanese National Railways Puivaization Study U 31
ness. The island has two large cities with a popula- 10% and frequency ofutain by40% from 1987 totion of over one million, and also has several 1992 to serve beter the commuring demand. Al-medium size cities. EspeCally in Fuklcoka metro- most onc fifth of 1,500 rolling stock unit are newlypolitan area, the population has been grwing and built, andatmre improvedaccommodation.Thusthe residential areahas been sprcadingout. In order the compny has achieved a stable inces ofto utilize thesc advantage of the madret, the com- passenger demand. The number of passengers haspany has incrcased both the number ofstations by inceased at a greater rate than passenger-kin, be-
Chad 1-2
Shikoku RailBway Company Md
HIighway Network mi Sbikoku
sar
m) tH \t/ 1n - n~~~~0=== Ita"vg cr Cntmct6ng
32 Japanese National Railways Privatizaion Study II
cause short-distance travel passengcrs in mcropoli- the urban lines, the company will further improvetan arcas are growing. the railway servicc for commuting passengers, cap-
3.42 LikeotherJRs,JRKyushu'sbusincssstrat- turing the spreading out effect of the residendalegy has two aspects. One is thc concentration of areainvestment on stcategically important lines and on Flines wherc railroad can be viablc with cfforts.These currently consists of new Miyazaki Airport RecentPeiformace ofJRFreg:access line, speed up between Fukuoka and Oica 3.46 The JR Freight is the only railway frightwith new rolling stock in each case, and new cmpany with a nationwide network in Japan.Kyushu Shinkansen. For instance, it will cake 60 Contrary to the general pessimistic forecast forminutes from Nobeoka to Miyazaki airport with railway freight, the company has registered a trc-the inauguration of airport access linc and the mcndousgrowthduring the initial fouryearsofitscompletion of new rolling stock, 13 mninutes faster opton, and has almost always exceded thethan the prescnt journey time. In the case of the projected figures by the Govemment The reansairport access line, using funds from central and for the revvl of the railway freight can be attrib-local governmnents, the company has been able to uted to following fiacors;providc V1 billion of the tomal Y6 billion projcCt a) the strong fight traffic demand in general.cost. Thus in these lines the company is preparing due to the raid ecnomic growthto compee with roadDs. b) the modal shift from the road sector, be-
3.43 The other factor is the effidency improve- cause of the shorcagc of the truck driecrsment of money-losing local lines. In order to im- and road traffic congestionprove the local line management, the companyhas c) the completion of the Seto Ohashi" bridgeintroduced railway adminiscration as the JR and the "Seikan" tunnel which connect theHokkaido and thcJR Wcst do. labor functions are Honshu (mainland) and Shikoku andintegrated to reduce labor forces, and an operation Holdaido islands by railwithout a conductor has becn encouraged. Thus d) the restraint from the tariff increase, despitethe company has registered an almost conscant the truic tariff increaseprofit during the first six yeas of opcration, sUp- e) service improvement, for exampl incseported by the revenuc from thc Management Sta- of the number of despawches, introductionbilizing Fund. of various types of containers and wagons
3.44 Ncverthedess,rejgardingrheimportantlines, 3.47 Nevertheless,asthcjapancseeconomyhascompetition against bot highways and airways, fllen into recession, railway fight demand hascspecially highways is expected to bc formidable in again delined by 1.9% in FYI 992 and the profit ofthe Kyushu island. For example, currendy bwcen the companydecreased to barelyzero, even thoughFukuoka and Oita it takes 147 minutes by train, 30 the companyhas been subsidized by the 'avoidableminutes faster than by highway bus. However, cost"principle(describedinthesectionfiom3.104when the highway between Fulcuoka and Oita is on). The situation worsened in 1993 due to thecompleted in 1995, buses will connecttwo cities in decreasc of cargocs caused by unusually frequent140 minutes. In order to compete against high- typhoons in the summer and by the sharp drop ofways, the company is improving the speed oftrain, governmentally purdcased rice crps. resulting inand witi the compltion of new roiling stockS, it the loss of 3 billion yen in hkis year.will cake 133 minutes between two cities.
3.45 Thus the company has a plan to firther MarhcinranComonimprove the speed of trains on the intercity lines, 3.48 Themostimporcancissuesarcthemarlcet-includingthedevclopmentofthenewShinsn ing and the competition from the road traffic.The first stage of the newShinkansen is planned to Whilc the key strategy for the company is shiftingbe completed in 2001 in southern Kyushu. When the rail -ay freight business from bulk cargoes todhisShinkansenbetweenYatsushiroandKagoshima containers, the company does not have a directis inaugurated, it will deczease the time between contact with dicnts. Instead, it relies on a singleFukuoka and Kagoshima from 250 minutes to 150 frcight forwarder, ie., Nittsu (the biggest -4ightminutes. Thcn, JR Kyushu chinks char train will be transportation company), for pickup and deleymore advantageous than air travel. In addition, in services, and for marketing as welL Besides, Nitsu
Japanese National Railwvays Privzation Stu I 33
Chat 111-3
Kyushu Railway Company
-i
hkiy h aS~W--
LwJ
34 Japanese National Railways Privatization Study II
itsCtf is facing a severe competition from other lcased such facilitics as containers and forklifis.forwarders by road taffic. As a rcsult, fiom the Thus it isestimated thatthcrealinvestrcentduringbalanceofbargainingpower,thecompanyis forced the first five years should have been Y120 to 130to provide a large discount. Thus it is desirable for billion rather than the actual figure of V1 05 billionthe company to scrcngthen marketing and to select , if cthe leased facilities are taken into account.and cany out only profitablc business. Another 3.51 The company leases almost all of the railissue is to reduce the labor forces to an extent that track fiom the passenger JRs (the leased crackis compatibkc with profitable operations. readces 9,978 km, whereas the company's ownIn vestnme Requireat Rolling Stock track reached only 76 km at the end of March
1993). The company and the passenger JRs have3.49 Although the company's financial base is reached agreement that thc passenger JRs should
weak, it is rquired to invcst a largc amount for maketrackavailableforthecompany(acthcsecondrollingstockandinfirstrucure. DuringFY 1989 to priority together with supcr Cxprcss and Cexprcss
1992, the total inavcstmcnt by the company trains as thc samc order, only second to the bulletamounted tO Y123 bilion, whereas the intral trains and commuting tmins in the metropolitansourc of funds amounted to only 60 billion, of areas as thc first priority.) Ncvertheless, as thewhich 53 billion camc from depreciation. This demand for the passengcrJRs has incrcased signifi-shortfaU in thc internal fimd source resulted in an candy during the first several years after privauiza-increaseofthelong-tcrmdebtroutstandingamount tion, it has becomc difficult for the passengerJRs wof bonds and long-term loans has inceased from make a track, especially of the Tokaido linc, suffi-Y78 billion in March 1989 to Y93 bilion in March ciently available for the freight taffic.1993. On the other hand, since the JNR hardly 3.52 Thus the capacity increase of the Tokaidoinvested in the rolling stock during its last sevcral linc, which has the largCst demand (about thirty
ycars (and actually the investmcnt in the freight percent) for the raiway feight, has become anseEorwas allocated the least priority in the last ten importantste& forthcompany.Thccompanyyears ofJNR), investment in rolling stodc has been has a plan to invest Y30 billion for this project, ofand continues to bc an urgent priority for the whichIllbillionwillbeinvestedforthefirststagecompany. during FY1993 to 1996. Capaciryexpansion ofthe
3.50 Inorderto alleviateitsfinancialburden for powuer substaionscostsabouthalfofthe 11 billion,roling srodc investment, the company has pardy and the remaining amount will bc invested for
Table 11-12: Capital Expenditures by the JR Freight(I Billion)
FY 1987 1988 1989 1990 1991 1992 1993 (Plan)Maintenance 0.9 1.6 3.2 7.3 20.5 20.3 6.7Improvement 1.5 2.0 2.0 3.9 4.6 6.2 11.6RollingSwock 2.0 11.9 15.0 17.4 10.7 11.8 12.2Total 4.4 15.5 20.2 28.6 36.0 38.4 30.5Intcrnal Fund 12.1 16.7 15.5 16.1 13.9 14.1 n.a.Depreciation 10.3 13.6 12.6 13.3 133 13.9 n.2.Retained Earnings 1.8 3.1 2.9 2.8 0.6 0.2 n.a.
*'Maintenance figuras in FY 1991 and 1992 indudeinvesment fiorwarehouses which amounm to mowrhdun V1ObiOionannuaily.
Tabl W13 Container Investment Purchase and Lease(I Billion)
FY 1987 1988 1989 1990 1991 TotalPurchase 3.0 7.7 53 3.0 0 19.0Iease 0 0 5.0 9.2 7.0 21.2Totl 3.0 7.7 103 12.2 7.0 40.2
Japanese National Railways Privatization Study II 35
expansion of the freight terminal and of the side- in the following section 3.60) to operate the aban-track This project has been authorized by the donedpartoftheline,whichthecompanylkasesbyRailwayDevelopment Fundand thus the financing paying the current "avoidable cost."that the companyis responsible forwill coverabout New L'me Conswuction and Conflicts of Publictwo thirds of t total invement cost. The reain- Tder will be financed from the Fund, byan interest-frec loan, from the 'Fiscal Investment and Loan Grouing Corq%a efIntffatPrograms," and from bond issues by the JRCPC 3.56 Sincc it usually costs a huge amount of(japan RailwayConstuctionPublicCooperation). money to construct a new railway linc, it is impos-
3.53 The first stage of the investment wull in- sibletotransferthewhoecconstructioncostdirecdycrease the number of the 1.300 con fteight trs to the tariff of the new line. In addition, it is alsoBy the second stage investmcnt, the tain speedwill dfficult to get consensus to tansfer the construc-be improved furthcr. And la.ty, by the third stagc tion cost ofa specfic line to the general tariffof theinvestnent, a 1,600 ton freight trin will be intro- railway srvic. On the contray, the railway devel-duced. opment provides extcrnal economics for the real
3.54 Another potential projects for the capacity csmtebusimss around the railway, rcsideats aroundincrease is the 'Nanpo Kamotsu Sen (Southern the railway stations, and the local municipal gov-Freight Line)' in the Nagoya area. Its consrucon emment in the form of increase of tax revenucs.started in 1967 is yet to be finished with comple- Thus there ahvays exists a conflict ofnterestamongron ofabout 95 percent; Ohfi - Inaawa of2l kn. those who bear the cost and those who receiveThe rest of the most congesed area for Tokaido benefit. In other words, some schemes for sharingLine, ie., Tsurumi - Odawara (about 60 Ian) in the development profit, or arrngement for theTokyo area and Ibaragi - Nishiakashi (about 70 iteraliation of external coonomies should bekm) in Osaka area, has been equipped as quadruple mamisdtracling. Thus the Nagoya arca has become thebotdeneck for the capacity increase of the Tokaido baerndan ofFvernd Economieslie. But the additional invemnt cost is esd- 3.57 These schemes are dassified in principlenuted to V10-20 billion that the company cannot into three ypes. The first one is an inenalioncasily bcar. of exernal economies within a railway company
Re,ining the Natomiwide Freigh Raiwa Network vvhi develops a new linc together with land Thesecond one is a direct trnsfcr of the external
3.55 Anothe serious problem in th e future is economics from the beneficiary to the developer ofrlated to thc New Shinkansen Lince pmen a new line. And the las one is an indirect tcransfrPlan discussed below.Wh all the lan of t xteral conomies by imposing an extra taxShlinkcansen lines are built, part of the current local for the lbeneflt.trunklinesmaybeabandonedbythepasengrJRs. 5 th file be i .Thuse cmpany may hv to prase and mented in the U.S., aimirvg principaly to reduceoperate that specific pt of the abandoned trunk financial burden for the local govcrnments who arelines and to bear he whole cost of the capital, the important investors for urban railways, espe-maintenance, and opaation in order to maintain cially aftcr the 'Tax Reform Act of 1986"; (a)its unified nationwide track system. But it incurs a Increase of sale tx in the concernd region; (b)huge amount of cost for the company to own the Establishmncn of "Special Financing Districts"rail traclc only for the freight crafllc~ Thus it iS where a special tax is levied; (c) 'Exaction' offundscrtical for the company to avoid this additional orlandsfiomdevelopersandlorotherbeneficiaries.burden, while keeping the rail track available. One 3.59 Although these arrangements are not asexample is the Shinetsu line whih is important fr 11 lisie in J as in the U.S., somethe company to tansport oil fiom Nagoya to the schem ofinternaizaion have been implementedNagano prefecture. However, the JR East will and are munmi as follows:abandon a part of this line when the Hokriku a Buraen suharizng by dclaopers Tois scsemcShnkansen starts operation. The local govermnt is a kind of an "Exacdon," and has severalof Nagano has decided to rctain tis line and to vaation; burden sharing schemc by newestablish a Public-Private Partnership" (described twn developer which has been agreed by
36 Japanese National Railways Privatization Study II
the Minisuty of Transport, the Ministry of PPP is discussed in the following section (Metro-Construaion, and the Ministry of Finance, politan Commuting Lines).burden sharing by developers who invest in 3.62 In addition, these examples of public in-real estate developments along the railway, volvement have accorded wdl with the "verticalwhich is stipulated in the land development scparation" (separation of a ownership and anguideline; ad hoc agrcement between the operationofraiway) conceptandthe"BTO"(Build-railway company and developers Transfer-Opcate) convention. The followingsim-
b. Internalization within a railway companyr As plified scheme ofthe railwaydevelopment in Japanthey are engaged in the urban developmcnt illustrates this accord;business, majorJapanese private railways by a. the JRCPC constructs a new line, using boththemselves have a capability to internalize public and private funds (Build)the external economics indirecdy from devel- b. the JRCPC transfers the constructed line to aoping a new railway line. PPP who is invested both by public and
Goternent In volvment private sector and receives a financial supportfirom the public sector (Initial Transfer)
3.60 Neverdless, since thlse arragements in c. 1) the PPP operates the new line (Opecrate)Japan are rather ad hoc and are not suffidcient to 2) the PPP leases the line to odter railwayfinance such big projects as the new Shinkansen or operator (Secondary Transfer & Operate)urban line construction, thc ccntral Govrnmcnt 3.63 This arrangement has been made Possibleandlor local governments are exaected to parEc- by the Railway Busincss Law of 1986, which haspae in these infrastructure development projcts. effctvjy introduced the principle of -verticalPublic involvement can be classificd as follows: (a) separaion3 in the Japanese riwa business, byestablishment of a pubtic enterprise, (b) finaniQal providing three yps of rilway busincss linses.supports by govenmments to a project, and (c) As a summary,Table I11-14 illustrates the publicestablishment of a "Public-Private Parmership and privat involvemnt in a railway development(PPP)."3 These examples of public involvement i-ng Jpanaim to transfcragenral sourceoffundsoftaxes andso on to the newlineconstructorand operator.The Functmons of the Ralway Developntm Funddfs ofthesCtypes oftransfer are tat, (a) theral 3.64 The Shinkansen Holding Corporation,bccficiary is not spccified and thus the "bencfit which was established solely to hold and lease theseteory" is not appropriately materialized, and that lincs, was dissolved at thc cnd of September 1991.(b) therc also CXiSts an imbalance of the level of the Onthdebasisofthe funds raised from thesalesofthcpubihcsupportamonguiwdevelopmcntprojecs Shinkac ens, the Railwy Developmcnt Fund was
3.61 Among thesC transfer mcasures, as the cstablished t implement the comprehensive sup-JNR has been Prvatizd in JaPan, railwaY develop- port policy for the railway development. In addi-ment by a public entpr is not likely scenario. tion,theFundisinchargeofrepaymenttotheJNRHowever a municpality involvement is stl actve, Settlet Corporation, as in the casc ofthe exist-namely the public corporations of a municipal ing Shinkansen lines.for subway development, whih receive a hugc 3.65 The Railway Developmcat Fund has twoamount offinancial support, about seventypercent major supporing measures as follows, classifiedofthe construction cost. The second altecnative has principally according to the source of funds;been broadly implemcnted by the Railway Devel- a. The funds for the first category of support-opment Fund which has been established to pro- ing measurcs comc from the sales of existingvide various financial supports for general projectsofthcrailwaydevclopment.TheSlhinkansendevl- 3 Public-PrivateParnrship is named as-Sansdru' injapa-opment, which is supported both by the national anm, which liitenly means 'The ThirdSecwor.' HowmerGovernment and by local governments currendy die Sanseku or"Public-PrivtPmtuership"'hasadifier-by up to fifty percent as a whole, is the principal ent origin and dharacteiricss fiom 'The Third Sator" in
the Western countrieL In geneal. "The Third Sectorproject ofthis alternative. The third alternative, the represents a Non-Profit Organizion in die U.S. and thePPP, has been also imporcant in Japan and in fact Europr, which is independent bodh fiom the firstsecrrofmany PPPs have been established, especially for 'Publc"andfiomirsecondseaorofPrivate"Sane"
urban lincs. Argurnents about the is norganizrionjoindyfindedby'Pubhe and'Priva"and thus is profit conscious and public-interest oriented.
Japanese National Railways Privatization Study II 37
Shinkansens to the three Honshu JRs, which & D for the aLinear" technology, and (vii)amounted to Y9,200 billion . This category investment for railway security improve-of supportng measures consisrs of, (I) a ment.grant and subsidy for the Shinkansem Devel- 3.66 Its FY 1993 budget amounts to Y1,336opment and (ii) an interest free loan tO billion, of which project support budget amountsprojets authorized by the Railwy Dcvelop- to 1258 billion, and almost all the rest is for thement Fund Law. The projects for the second rcpayment to the JNR Settlement Corporation asmeasure indude, (I) capacity expansion of for the cxisting Shinkmasen lines. Projecs covcredthe Tokaido Shinkansen, (ii) improvenent and each budget size in FY 1993 are as follows:of the existing runk lincs, for example con- a. New Shinlcansen:lne construction (1100necting with the Shnk6ansen, (ii) capacity billion)expansion of the freight railway, (iv) new b. Other trunk line development (V28 billion),line construction in metropolitan area, and c. Development of urban lins, includuig sub-(iv) capacity expansion of the urban lines, for ways (1122 billion),cxample doublc taddng. d. Railway technology developmcnt (16 bil-
b. The finds for the second category of sup- lion),porting measurs come in principle fiom the c. Security improvement investment (14 bil-general national budget. Measure of this lion)category indude, (i) a subsidy using the gen-erl naional budga, andi (i) an intest free 3.67 The main custoers for these supportingloan using the special funds raised fiom the om arc japan RailwaP Constauction PublAcsaes of NTr (Nppon Telephone and Tde- orporation (JRCPCo),Teito Rapid Transit Au-graph Co.) stocks. Projects appropriate for thority, and railwaycomps, induding the JRsthese measures are, (i) projects of Shinkansen and die PRs.Deveopment Plan, (u) construction of locallines, (uu) resarch for development of Chuo TfanfrofShkaln Lineand Shikoku Shinlsens, (iv) improvement 3.68 TheShinkansenHoldingCorporationLzwof the existing trunk lines, (v) constucton provided t after the lease period of 30 years, alland improvement of urban railways, (vi) R the assets of the Shinknsen facilties should be
Tab -114: Public and Pfivate Invoemnt in RafwayDevelopnent
investmet Subiy CharCentl G. Local Gs. Privae Centaml G. Local Gs. Privae
JRs No No (Yes)* Yes Yes NoSubwasPublic No Yes No Yes Yes NoTranitAuthority No No (Yes)* No No No
New Town LinePublic No Yes No Ycs Yes YcsPPPs No Yes Yes Yes Ycs YesPRs No No Yes No No Yes
Other PRs No No Yes No No NoOther PPPs Yes Yes Yes No No No
JRCPCLocaLines Yes No No Yes No NoTrunkLines No No No Yes No NoPrivate Lines No No No Yes Yes NoShininsm No No No Ycs Ycs No
Source Japan So&cty ofC ilengineers (Dobolk Gakkai). Koux Seb Seido (Twspratwnx Drev tSySnJ). 1991.'(Yes) indicates thatheJRs and Tnsit Authorities amr not owned by dte govemmen. but by other public agencies# Subsidy for subways ofPPPs by central govenment and local governments is planning to establish in 1994.
38 Japanese National Railways Privadzation Study II
transferred to the three Honshu JRs. But the law Slbiikann Neworkshad some shortcomings as follows:
(a) Thc law did not provide the tota ransh Pcrvaluc of the Shinkansens, nor the allocation 3.71 On the basis of the National Shinkansenof the total value among cach line or Raihwy Development Act of 1970, two series ofamong each JR. Shinkansen Development Plans were drawn up in
(b) The Honshu JRs had to pay the mainte- 1971 and in 1973. From those projects in the 1971nance cOst for the lines, without registering Plan, theTohokuline betweenTokyo andMoriokathe depreciation for the wholc assets of the and the Joetsu linc between Tokyo and Niigatalinc. havecbeen alreadyconstructedandarc in operauion.
Financial Constraintsfor tJeJR Central However, the 1973 Plan was temporarily put on3.69 The second issueconcemningdepreciation hold in September 1984, mainly because of (a)
had a major impact on the JR Central's financial mounting fiscal budget deficits, (b) onstrucioncondition, because the company raises 84% of itS cost increa owing to the inflation, and (c) mana-total revenuc from a single linc of the Tokaido gerial problcms of the JNR. Then backed by theShinkansen. During the initial three years of ics requst fiom the local concens, the 1973 Plan wasoperation, the investmcnt by the company had reexamincd in January 1987. In August 1988,amounted to about 1330 billion (of which three prioriEy among the projects of the 1973 P1lan wasquarters are esimatd to rlate to the investment detmied joindy by the Govcrmnent and theqortheShinarnsens,w wilatheompanycouldhave then leading party (LDP), allowing for a reviewregistered only 1190 billion of dcpredation, and withinfiveycars, in thelightofeconomicandsocialconsequentdy the long-enr dcbt (outstanding conditions.amount ofbonds and loans) had increased by 136 DevelopmentSchemebillion. While the company had been registcring 3.72 Then in January 1989, the Governmentone ofthe highest profit-kvls among theJRs, ic., annouced ins decision on t developerm opertr,the company is the only paenger railwayJR that and fimd sources for thesc priority projects ashad becn spcnding more for the investment tlan folllthe internal source of fitnd , or the amount of thedepreciatonandretainedearnings,andthuswcak- a. JRCPC constructs and owns the newlineseningitsfinancialcondition.Inordertoresolvethis which theJRs leaseand operatefinancial deterioration, the company insisted on b. Averagc allocation of construction cost is aspurchasing the assets of thc Tokaido Shinkansen. follows
Val-de of the Existing Shinkansen Linestl oemet 5VWcofD5rEnng*Sibnksen ZiCentral Gvernet 35%3.70 After somc disputes abouE the total valuc Local Govemrnments 15%
and its allocation for each line, the four existing c. TheJRs bear the cost in the forn ofShinkansen lines, thcTokaido lIne, theSanyo line, i) the additional paymtent of Y1,083 billionthe Tohoku line, and the joetsu line, have been which has been already paid for the pur-transferred to the JRs, JR East, JR Centmal, andtJR chase of the existing Shinknsen linesWcst, from the Shinkansen Holding Corporation owing to the re-appreciation of theirin FY 1991. The total value of these four lines has value,beendeterminedasl9,177billion,which is Y1,083 ii)the lease payment for the new Shinknsenbillion above the then book valuc, considering the lines after starting operationappreciationofthevalueduring thefouryears since dt The rule for the amount of lease payment forrhcJNRwasprivarized or the book value was lasdy the new Shinkansen lines has been agroed ondetermined. Thc total amount, Y9,177 billion has in Dccember 1990 as follows: tic amount ofbeea divided in principle by the ratio of lease the lease payment will be set with the limita-payment for these asses among thrce HonshuJRs. tion of the net benefit amount that the op-Thc JR East owes 13,107 billion for the Tohoku erator, i.e, a JR., would receive by operatingandJoctsulines theJRCentralowesY5,096biOion the new Shinknsen line, and will never befor thc Tokaido line, and the JR Wcst owes Y974 an additional burden for the operator. Thebillion for the Sanyo line. net benefit is defined as,
Japanese National Railways Privatization Study H 39
i) a benefit fiom operation of the new Varasow ofSbinkamcsShinknsen line itself 3.73 Since then, construaon of al1 the priority
ii) a ncC benefit by separating the todir linc projects has been authorized anid started. In theabteast, if any, meantime, inApril 1991, the National Shinkansen
iii) a benefit from the side &fcr on the other RailwayDevlopmenrAcrofl970was amendedtolins connected to the new ShinkLnsen lincr apply the basic scheme of the Shinkansen develop-
Shinkansen Network
AsahikWhe
QIIM
S
]Ao O}hebi
Aoc UHarChiuo
_-- IJ_C
_~~~~~~~~~~ '. ...
40 Japanese National Railways Privatization Study 11
ment, includingsupporting mcasures, to variations cnd of 1990, to be constructed as a "Miniof Shinkcansens, namely "Mini Shinkasen' and Shinkansen' which was cstimated to cost about'Super Express." Standard Shinkansen or "Full V60 billion . Then the plan was eviewed, takingShinkansen" represents a linc with an infrastruc- into account of hosting the 1998 Wintcr Olympiccure of the opemacing Shinkansen standard (maxi- Gamc in Nagano, and has ben decidcd to be builtmumspecdof260kmperhour). "MiniShinka6nsen asa"FullShinkansen'which iscstimatcdto ostsixrepresents a line with a gauge of the operating times the previous estimation. Thus the construc-Shinkansen sizc, added adjacent to the existing tioncosthas been increased,whereas thcamountofcrack, but with a train of small size (maximum theleasepaymentforthenewShinkansenlinesbyspeed of 130 km per hour). "Mini Shinkansen thcejRshasbeensetunderaruleasabove,whichhasscheme has been developed to minimize the con- little rlevance to the construction cost.stuction cost by utiizing an existing infrastrucure e i The Skinkan Developmentof tnk limes. Super Express' represents a new pI= *f197.3line with a narrow gauge but with all the otherinfrastrucure of the "Full Shinikanen" standard 3.76 The Government decided in February(maximum spced of 160 to 200 km per hour), 1994 to postpone reviewing the development planconsidering a future project of a gauge expansion of the remaining projecas4 in the Shinkansen De-for the "Full Shinkansen" standard. "Super Ex- velopment Plan of 1973, which have been tempo-press' standard is used for developing alinewhich rarily put on hok; since 1982, until the currendyhas a direct service with ordinary trunk lines at undertaken Shinkasen projccts are 50% coDm-present, that have a chance to be converted into a pleted (in about threc to five ycars time). Before"Full Shinkansen" standard. then the policy committee of secretary-genrals of
e ofSkinkae under Consmuaion therulingpartes (ofthccoalition governmcnt) hadreexamined the reaining projects and recom-
3.74 Outline of the whole projects under con- mended at the cnd ofJanuaiy 1994 to construct allstruction, namely the Tohoku line, the Hokuriku the projects in the 1973 Plan by the "Fulllinc, and the Kyushu line, is shown in Tablc 111-15 Shinknsen" standard. In addition, the committccbelow. has recommended that the "Mini Shinkansen"
standard of the Tohoku Shinkansen curentdy un-
4 Teem nini projects in the 1973 planare the Hokkaido3.75 Estimated construction cost ofithcaurent linc betceen Aomori and Sapporo (about 300 kin). the
Shinkansen projects under construction, amounts Kyushu line bodt beten Fulkuok and Nagasaki (aboutto 1,795 bilion (see TabldII- 15). Among dse 120 km) and betwen Fukuoka andYamtshim (abour 130tooj bils lion(e -ablell- rou Am og the k'n), and the Hokuriku line boEh between Osaka andprojects, the Karuizawa - Nagano route ofthe mcKanumn (about 240 km) and between Nagano andHoluriku Shinkansen bad becn planmed, until the Nisbi-iugi (about 170 km).
Tabk MI-15: Shinkansens under ConsuctionMode* of
Line Route Shinkansen Opeator Estimated Cost (I Billion)Tohoku Morioka - Nunakunai Mini 38
Numaklunai - Hachinohe Full 237Hachinohe - Aomori Mini 112Total JR East 387
Hokuriku Takasaki - Karuizawa Full 201Karuizava - N2pr. Full 387Uozu - Ioigawa Super 188Nishi-isurugi - Kanazawa Super 174Total jR East and West 951
Kyushu Yatsushiro -Nishi-kagoshima Super JR Kyushu 457Total 1,795* finir iepresents a 'Mini 5hinn. -Full- reprsents a -uF hinkansen.- and Super epresnts a Super Eess.*JR Ea is in charge of the area ea ofJoecsu. and JR West is in charge of th ar wes of Joeu.
Japanese National Railways Privatization Study If 41
derconstruaion should be converted into the"Full certainamountofrevenuefor theexpansion invest-Shinkians standart. ment with a tax exemption.
3.77 Nevertheless,thecommitteehadspecified Nw Line Development and PPPsneither consrction period, nor priority amongthe projects, nor the fund sourcr. Construction 3.79 APPP has long been afamiliarscheme forcosthas been estimated bythecommiLte as V5,000 urban railway development inJapan, especially forbillion , which should result in an additional huge the development of monorails and commutingburden for the national budget, as the committee lines for new towns, whereas a public corporationhas recommended that the burden sharing by the has been popular both for development and forGovernment and local govcrnments should be operacion of subways in the metropolitan areas.augmented to alleviate the financial burden for the Owing to a remarkable increase in the constructionJRs, setas fifiy percent for the currendyundermaken cOsts in recent years, a privatce sector involvementprojects. Negotiation for the national budget as for has been encouraged from a fund raising point ofthese projects thereforc has been rough under the view. Besides, owing to the sprcading out of metro-currnct fiscal budget condition. politan rcsidents, metropolitan railway networks
havc become much more complicated and it isrequired to negotiate among many concerns to
Pnv Pe Rawys and Capacay Expanion fiuher dcvclop the network Thus it has becn3narea ofjapan, the PRs decided to accelerate the cstblishing of PPPs,
h3v a dominantshare ofmabout two irdsin tcrms which have bettr access to public support than thehf rout inngth, agair oahb JRs. Ncvcrtheirs sinsc PRs or theJRs. The following are several examplesthe construction cost of a new line has increased from curentor plannd projcts whichare under-dramaticaly, the PRs are barely able to construa a 3kcn bT PPPsonew full line by themselves. However, congstion maes the pubic support called P Line Mthodin trains has become severe in the metropolitan kstpbc poadPne tdarea, especialy in the morning and evening, reach- 5 'P Line Method which acoordswth aBTO sdheme bydieing as high as two hundred percent of the designed !RCPC, has been applied for a nEw line construction incapacity. Thus the law to promote railwaycapacity metropolian 2reas.Thissupportschemeindudes (a) allowcxpansion investmnt in mceropolitan areas was atRn&ireeoperatorro redeemtheonsructioncostto teexpansion metropolitan ~~~JRCPC in 25 years afte the operation sum, and (b)enacted in 1986. The lasw allows those PRs, that subsidize th cost for inettr payment which exceeds fvehave a plan to expand railway capacity to set aside percent. equally by the nation and the local governammt
Table 15-16: New Lne Devdopmnt
ConstuctionConstmction Cost Length Operating
Name of Line Peiod (Y Billion) (kn) Entity Local Govements
TokyoSubway#12 1989- 1996 683 28.8 Tokyo Tokyo
Rinkai Fukutoshinsen 1991 - 1995 128 4.9 PPP Tokyo
Joban Shinsen 1992 - 1999 800 58.3 PPP Tokyo, 3 others
Saikama Subway #7 1994 - 1999 259 14.5 PPP Saitama, 3 cities
MM21 Line 1992 - 1998 195 43 PPP Yokohama city
Chiba Express Completed in 2000 93 10.9 PPP Chiba, Matsudo city
Toyo Express 1984 - 1994 220 16.2 PPP Chiba, 2 cities
Kamiiida Line 1995 - 2000 70 3.1 Nagoya Aichi, Nagoya City
Tozai Linc 1989 - 1995 61 3.5 Kyoto Kyoo city
Kaafiuc Line 1988 - 1996 330 12.3 JPWest Osak2, Hyogo, 2 cities
Osaka Sotomnjo Line 1994 -2000 135 20.4 JR West Osaka, othersSourc Chiho Koci igyo no Shin Tenkai Nado ni Kanrsuu Kenkyuu Kai (Study Commince for the Local Public Entise
Devdopment), Tosh Tewn AS nw Sei&i no Arikaa i Twire (Su. on Urbax Raiuay Deveipmnen) December 1993
42 Japanese National Railways Privatization Study II
insufficient to make projects feasible. Average con- was established in March 1991, by the concernedstruction cost ofa new line (see Table 1II-16) in the four local governments and twelve municipalities.centerofmetropolitansexceeds V20 billionperkm. Capital fromtheconcernedpublicseccoramountedEven in the suburban area, it reaches about Y10 to '130 billion, whereas that from the privatebillion per Ikn. The Chart III-5 illustrates the scaor amounted to '30 billion. The PPP wasfeasibility of the typical projects currendy under- licensed inJanuary 1992 under the first category oftaken in metropolitan areas; the Joban Shinsen in railway bus.ness to aw horize a company to operatcTokyo and the Katafiku Line in Osaka. This a railway business wiLh its own trackanalysis indicates that further financial support 3.85 The current estimate of the railway con-from the nation or the local governmnents is re- struction cost amounts to 1800 billion. The PPP'squired to construct a new line in a metropolitan paid-in capital both from the public and privatearea, given the current tariff system. sectors amounts to 160 billion, and the PPP is
3.81 Inaddition,thcsecwoprojecctsoftheJoban currently raising funds for this project throughShinsen and the Katafuku Line show a good con- interest free loans both from the Railway Develop-trast in tcrms of theJR's attitude to and its involve- ment Fund and from the local governments. Nev-ment in the project; while the JR East has declined ertheless, since the cash flow required is inaeasing,to own the track or to operate the Joban Shinsen, the Ministry of Transport considers to providetheJR West has been eagcr to operate the Katafufl loans from the FILPs (Fiscal Investment and LoanLinie. The rest of this sction discusses this issue of Programs) from FY 1994, which in turn is expectedthe JRs' involvement. to atta investors from the private setor.
a. Joban Sinsen b. atuafiu Line
3.82 Mhis projecc was fist recommended in a 3.86 The project of a 12.3 km new line wasreportbythe"CouncilforTransportPolicynofthe authorized by the Ministry of Transport in AprilMinistry of Transport in July 1985. This new 1981. This line will connect direaly the east andurban commuting line with a 58.3 ian length will west part of the Osak mtropolitan area, via thecombine the Tsukuba city, one of the major re- central business district of the city through under-search cenrers in Japan, with the center of the ground. In other words, this project is the key forTokyo metpolitan (Akihabara), by 45 minutes. the urban railway network dcvelopment in theThe major purpose of this project, however, is to Osaka metropolitan area (see Chart IV-2 of thepromote residential development along the line, raihay network in Osaka area). JR West has beenconstructing about 170 thousand houses. kE is alvays enthusiastic about this project, althoughexpcaed to start operation in FY 2000. this is one of the most expensive lines currendy
3.83 The report also recommended an esab- undertken in Japan. In addition, new town devel-lishment ofa PPP for this huge project. Then a bill opment has been encouraged around the Osakaconcerning promotion ofJoban Shinsen has been area, specifically in Sanda city whih is located inpassed in June 1989. Neverthdess it took a long the cxtcnsion of this line, and thus made thistimc to formulate a PPP, because of a growin6, project further prospective.cautiousness ofJR East which was assumed to be a 3.87 Thcotherkeyissueofthisprojca is theusemajor participant. JR East evenmally dedined to of a PPP. A PPP called 'Kansai Kosoku Tesudoown the tcrack and even to operate the new line, (Kansai Rapid Railway)" has been established inbased on thefindings ofa feasibilitystudy, cxumin- May 1988 to construa this newline and to lease theing the profitability ofthe linewith a then assump- track to theJR WesL The principal investors arc thetion of the construction cost of Y700 billion (in Osaka local goverunent, the Osaka municipality,1987price).TheargumentsbythcJREastwasthat and the JR West who own 22.9 percent of thethe company cannot transfer the hugc develop- stodks respectively. As a whole, thc public sectormcnt cost to thc general customers of other lines and the privatesectorequallyshare the stocs Theandthat thosewhocangaintheextcrnaleconomies major private investors arc dic Kansai Electricfrom the railway development should bear he cos Power Co., the Osaka Cas Co., and other compa-and risk of the project. nies based in the area
3.84 Then at last, a PPP called Shutoken Shin 3.88 The principal incentive for using a PPP isToshi Tctsudo (Metropolitan Intcrcity Railway)" to realize beter access to the intercst free loan from
Japanese National Railways Privatization Study II 43
Chart 111-5: Feasibility of New Lne Construction In Meopolitn Area in Japn: IllustIe Analysis
7501 - u 2.5 0
3600 . >' 2 -
= " - , -- ^' ~~~~~~~~~~~~~~Capital Cost**
30D. -L._
15 1 0.5 J loban Shinsen'
5 10 15 1 b ' -'Construcion Cst (billion yea/km)
Sourc Produced based on nJa Ski sn xi TsakeKaagarm (EJ=widg theJohaaSbiMeaM)bYMaSarke Matrsuda. Unyu w Klzai(Transporation & Economy). Ocober 1989.
NotesOperating Cost is assumed as VW.41 billion per Iam. based on the averge figuc ofthe major PRs in the Tokyo arca in FY 1991.Capimal Cost is calclated assutming, inprnciplekP Line Mchodw that (a) 30 percentoftheconstructon cDst is coveed by paid-in capitalwhich requires 10 percent ROI (reurn on investment). (b) all the other finance issubsidized ifthe interest rareeeds4 percent. and (c) the asset is deprciated in dtirty yesTraffic Dsity for theJoban Shinsen assumes 189 thousand passenger-krn per rouwe km per day. based on dth for the othersuburban JRline in the Tokyo area. Traffic Density fr the Kaafizu Line assumes 300 thousand pasger-km per routc kmperday. basedonthatf(orthedensstsubwaylinint heOsaaandTokyo metpolitanateas 353 thousand fortheTozailincin Tokyo. 343 thousand for the Chiyoda line in Tokyo. and 334 thousand for the Midosuji line in OsakbRevenue assumes V9.2 per passenger-km. based on the avea figure ofthe major PRs in the Tokyo Metropolitan area in FY
1991.
the govemment's special fiund of the NTT stock 1ntrcy Linssale an the JR itsef does. Equally important, aPPP cm arrange smooth negotiation among van- 3.90 As the railway network in Japan has beenous concerns to promote the construction, since areacdywell established, there are only few projectsthose concerns are aually invohled in the projects to construct new intercity railway lines, except foras investors. In addidon, JR West has not had an the Shinkansens. Nevertheless there still existlargeexperience to construct a subway, fir which the needsfordhespeedingupaadcapacityecpansionofOsaka municipality has a good pienc the existing lines. The following projects show a
3.89 The construction had been temporarily basicschuemeforaiwaydevelopmentandmanage-haltedbyan accident, and its inauguration hasbeen menr fimd raising, subsidy from the Governmentpostponed from FY 1995 to FY 1997. And the (the Railway Dcvelopment Fund), establishmentconstruction cost has been augmted from the of a PPP (ocal goverment involvement), andoriginal Y288.5 billion to 330 billion. By the opcation arangement.original investrent plan, 61.4 percent of the total £t YalUa ShYcost is covered by theJRCPC, and only7.4 percentis covered by the loan from privae bank The =st 3.91 Although it is ernedas a Shinknsen, theis covered by the entity's own capital and other Yamagata Shinkansen is not a full standardpublic financal supports Shinkansen, nor is it included in the national
44 Japanese National Railways Privatization Study II
Shinkansen Development Plan. This projeac aims c. Se&irho Lineto achieve a speed up of the intercity transport 3.96 Thisproject wil upgadc one of the majorbetween Yamagata and Tokyo, through (i) upgrad- 3.96sthejRokkadontrofuchewing the existing trunk line between Fukushima and trunklcnesoftheJRHoa kaido and introduce a newYamagata (90 kmn) and (ii) connecting the trunk expresstralinwithanamaximwspeedofl301cmperline directly tO the Tohoku Shinkansen at t hour. Thus it will reduce the tir.e required fromFukushima station Sapporo to Kushiro by 40 minutes to 3 hours and3.92uThem ptaost 40 minutes. The route length upgraded by this
3.92 'Me project cost arnounted tO V5 1.3 bil- Ron, induding Y24.0 billion investment for the pro)ect reaches 304 km.ro,ing s,odis. In ordcr to construcE a tmck and m 3.97 The construction cost amounts to Y10.7rolling stocks. In order to construct a track and tO ilon e...d.n roln st..i.stn bor.bpurchase moling stodcks, a PPP called 'Yamagama JR bglilon, excluding moUing StOCK investmnent born byChokko Toklknu Hoyu (Yamagata JR Direca Ex- the JR Hokkaido. A PPP called "Dot Kosokupross Holding Co.)u was mstablished in May 1988 Tetsudo Kaihatsu (East Hoklcaido Express Railwayand was capislized equally sy the local gove1- Development)" was established inJanuaty 1994 tomends and theJR Easl group. the Railway Devel- construct and lease the track to the JR Holdaido.opment Fund provided a subsidy to the PPP with 'MeJR Hokkaido and a group ofthelocal govern-twenty percent of the construction cost approved nnts each provides V2 billion for the capitaL Andby the Railway Developmcnt Fund. the Railway Development Fund provides 12 bil-
3.93 Leasing the track and rolling stocks from lion as a subsidy.the PPP, theJR East began to operate ehe upgraded Issues of Freight Transportationline in July 1992, connecing with the Tohoku A m entofi'doISI*
_hinknsen. The time required fiom Yamaaa tOTokyo has been reduced by 42 minutes to 2 hours 3.98 It was a general perception at the time ofand 27 minutes Thus the railway has become theprivatizantion that the railwayfrwight servedoncompettive against the airjourney, wiich takes 55 anarginal rolc in theJapanese frcight traffic marketminutes for the same trip. The number of air and that the profitability of railway freight waspassngrsbetweenYamagandTokyodecased diffa tO justif. Howe such peoenonbyamundonequarterinthefirstninemonthssince cmerged just aficr the privatization as the rapidthe Yamagata Shinkansen staed operation. growth of the rilway freight demand, the traffic
Hokuetju N,rtb Line congestion in the road, and the labor shortage oftrudc drnvers, cncouraged the argument of modal
3.94 Theconstmucionofdtisnewlocallinewas shift Besides, railwayr fright is thought to have anresumed in 1985 to makeashortcutin theroutefiom advantage in terms of cnergy efficiency' of trans-Tokyo tO SUCh major ities in the north coast of the portation and of environmental cxtcal cost, al-Honshu (mainland) as Toyama and Kinazzwa. The though the advantge has not yet been whollyroute length will be shortened by about 55 km, cxamined in Japan as has been donc in the argu-dtough this new bypass rourc of 59 km, and the ment of "infrastucturc frie in the Nordic coun-time required will be reduced by 20 minute
3.95 APPPcalled"HokuctsuKyuko(Holkuesu 6 Advange incenegeElciencvyofraihafighaainstCo )"owas established inAugust 1984. The de road fieight has bee broadly advocatd in Jyan.
local govecrnrcnts ancd prvat companies hold 83 Neverthels some profound smdies on this issue do nocnelissary support thisgenerI percption. when the rail-percent and 17 percent of the stocik respectively way fieight is compured to the road freight of the longand the amount of the paid-in capital is expcd to distance, which is the ral competitor of the raily. Forbe increased to Y4 billion beforc the operation etample. Hidala condudes tat on ihe basis of line haulstarts. In addition, the R ailwayDevelopment Fund enerW. which indudes both mnning aerg and indirecr
enezgy, the propottion of ecrgyperwon-kni consumed byprovides a subsidyand theJR East provides VI5.8 t railwa m dr by the tuck is 100 w 70-80 and dthbillion as a burden charge to the PPP. The cost dwe is not so much differnce of enegy efficienq C"En-amounts to 24.0 billion for the new route con- ergyEconomicsdv&oL 19 No. 16byrhelnstittofEnerajsuuoon,andupgcdig costofthesciscingluu*Of Economii,Japan). Contary. the road feight ofthe shorttheJRE:ast amounts to 179.4 billion .AndthePPP thean i he inno rcigtyraffic, isthernjor probkm of
,,,~~~~~~~~~~~~~~~~d in temfieanq ofdh fixght r&<chener inenofdhcwil operate the newly constructed route by a direct cnrgy consumption, or in tens of dxe socal cSt ofsenice connected with tracks of the JR East. polurtion and congescion.
Japanese National Railways Privatization Study II 45
tries which takes into account external cost of measures to promote the modal shift by Ehe JRcongestion, accdents, noise and air pollution. Freight. One of the measures is a provision of
3.99 Neverthdeess the modal shift can be justi- interest frce loans from the Railway Devdlopmentfied only in a certain area of the freight traffic. Fund to improve the capacity for container trans-Specifically, in a short and medium term, the portation. Projects covaerd arc construction andGovernment expects the modal shift in principle expansion of sidetrack (by-pass lines) for fireightfrom the long distance truck transport to the ma- traffic, of electric substation, and so on. The loanrine and the railwayfreight. Inorder to achieve this coversup to tirtypercentoftheauthorizedproiectmodal shift, the Government recommends for the cost.freighr railway to develop, (a) a multi moda trans- 3.102 The other is a special taxation measureport, e.g., bypromotingvarietyoftypesofcontain- for, (a) a fixed asset tax ofcontainers owned byJRers, (b) a high speed freight railway, and (c) a freight Freight's customers, (b) an automobile acqu isitionrailway capacity and services. In a long term, the tax of piggyback trains, and (c) a special deprecia-Government expects to develop a 'techno-super- tion method forsuchrenergyefficientequipment asliner," a special system for freight transport, and a a Push PullForldift,ahighefficiencylocomotive,transportsystem throughaverydeep underground. and a rotation controller.In order to support these visions of the Govem- 3.103 Bcsides thcse direct measurcs for themcnt, especialy for the short and medium term modal shift, the Government has amended laws forvision, the Government has implemented severl the frcight forwarding business. Ncw legislationmeasures to preserve the railway freight. The first has been enforced in December 1990 as a "Freightone is the move to consolidate the financial struc- Forwarding Business Laew and a 'Truck Busincssturc of the JR Freight. The other is measures tO Law." This legislation aims to promote a safepromote the modal shift or inter modal sevices. freight transportation by both truck and multi-
Fawor Providedfor theJR Fct mode transport, by undying the control over thebusiness as a forwarder who makes use of various
3.100 Inordertostrengthenihefinancialstruc- modes of trnsport. Before then every mode ofture of railway freight business, serall favors are fitght transport business has been controUcd by aprovided for the newly established JR Freight. specific law ior each mode of transport. Thus aFirsdy, in order to minimize the capital cos for the fright forwardig business has been recognized ascompany, the trackinfrastructur has becn decided an official business criterion first time injapan, andto bc owned by tic passngcr railways and beleased is expected to promote a multi-mode freight trans-to the company, and the othcr assets owned by the port, and consequently railway freight traffic.company havc been reevaluated at the murunim u Mehodvalue. Secondly, the operation in stations, mainte-nance, and repair shops is consigned to the passen- 3.104 The concept of an "Avoidable cost",gcr railways. And the rail lease and opaaeing cost whiich pays attention only to the incremental costs,paid to the passenger railways have been decided to has been used for callating the rail track leasebe based on the "avoidable costs principle, which paymentbothbyAmtrakintheU.S. andbyVIAinrequires thecompanytobear onlythecostinhereat Canada. Major feature of the avoidable cost con-to freightoperation (issues rlated to the avoidable cept is an assumption of plural services carried outcost" will be discussed later). Lasdy, on top ofthese byonelineofarailtrackdAlthoughmanyEuropeancost aleviation measures, the rail track sharing railways also pay for a same kind of rail track lease(timeschedule) bectwapassengrtrainsandfreight payment, the 'avoidablecost" in theNorthAmedcatrains should be negotiated fairly among the pas- and Japan is different from the European type ofscnger railways and the company by the commit- lease payment becaus ofa diferenceofa rail tracktee." ownership between these countries. While the rail
GoverwnentPeliq fir Prwm ngMda1 Skht track in Europe is owned (in case of Sweden) orfinancially managed (in casc of many other coun-
3.101 In addition, the Government has cxam- tries)bytheGovernment,thatintheNorthAmerimined mcasures for the modal shift offreight traffic and in Japan is owned by privatec ailway(s). ITusfrom the road tffic to the rail and marine tffic. the "avoidable cost" inherendy requires a negotia-In 1991, the Government dciddd to provide some tion among the private companies (lessorand lessec
46 Japanese National Railways Privatizaion Study II
of the rail track) without involving a national d. Thee two items, (a)(i) and (c), are sharedsubsidy. among the passenger JRs and the JR Freight
3.105 InJapan the report, "Ararashii Kamotsu to calculate the 'avoidable cost," based onTctsudo no Arikata ni Tsuitc (report on the new their volume of traffic.mnanagement ofJR Freight)' announced by Minis- c. The track ke payment is determined as thistry of Transport in Dccenber 1985, provides an Uavoidable cost" plus one percent margin."avoidable cost" principle for the rail track lease E All the passeager 3Rs report the amount ofpayment by thcJR Freight, aiming tO reducefinan- leasc payment by their own calculation to thecial burden for the company. Only such variable Ministcr of Transport, and the Minister ex-coscsascnergy(clectriciy) andmaintenance forrail amines the validity of the calculation andtracks and electcicwirc are Classified as an avoidable provides an approvaL Then the JR Freightcost andsharedamongthe passcngerJRs and theJR pays the amount approved by the Minister.Freight basecd in principle on the sharc of their Gmwig Colict ofIn atsistraffic volume. In other words, the Japancse con-cept of the avoidable cost includes only short tem 3.107 In October 1992, the lasc rate was in-marginal costs. The rate of the lease payment creased, which had a major impact on the profit ofshould bc reviewed in cvery October. the company. The amount of the lease paid by the
3.106 ThebasicscheneoftheJapanese "avoid- companyhasinceasedfromY 15.6billion(7.2%ofable cost" is as follows: the total revcnue) in FY 1991 to Y19.1 billiona. In principle, only two items as follows arc (8.8%) in FY 1992 and expeted to exoed 122
included in the "avoidable ost billioninFY1993.Sincetheamountofleasepaymenti) Elecrcity tariffwhich is consumed for th is significant both for the JR Freigt and for the
ailway taffic, ecept for the basic , paseneJRs, espciallyfor the three slandJRs, thenainenance cost for the power subsra- nde or dte avoidable cost is an imporant issue.rions, and capital cost for the power sra- 3.108 Since it was difficult to anticipate suchtions owncd by the passenger JRs. rapidincreaseoffieightraivaytrfficatthe timeof
ii) Maintenance cost for rail tradks, trolley privatization in 1987, the original concept of thelines, signal rdays, and what is consumed avoidable cost does not expliddy set a rulc for aby the traffic. burdnsharingofadditional cinventsswwich
b. For the (ii), all the capital cost is born by the are required to incas the freiht rffic capacity.passenger JRs. Afier the discussion between the passmgerJRs and
c All the direct labor cost for (ii) is born by thc the JR Freght it is decided that the JR Freightpassenger JRs, and only the material cost and should bear the capital cost specific to the freightsubcontract cost is included in the base for the tffi capacity increas Thus the avoidable cost"avoidable coste has changed its feature from the short term one to
Tabk 1117: Stabs of Seprauions of the National Ral7ways byCowlly
Verical Sepation Line-of-Business Separation Regionl SepronJapan URs) (No)** Yes YesU.S.(Conrail) (No)** Yes NoCanada (CN) (No)** Yes NoSweden (SJ) Ycs No NoNorvay (NSB) Yes (by financial separation) No NoFinland (VR) Yes (by financial scpartion) No NoSwiss (SBB) Yes (by financial scparation) No NoAustria (OBB) Yes (by financial scpaation) No NoGemany (DBAG) (Yes)*** (Yes)** NoSon= Tenod* Je&rw'ii Thdu S furox'iay)R byMamichiHori.UnywKeizi (Transpormtion&Economy).
April M9. OthersNotes: Line-ofusiness Sepamtion ia separation by a railway and a friht ilay business
(No) indicates itac the ra trak are not evaial seprfrom a h raiy. but are sepaated from some rilwy.DB (Deusche Bundesbahn) and DR(Deuc ieicsan) in Germany had bem separed. butwas unified in jantury 1994.
Ra =rck holding, the freight busines and pasenger business are se nd nside DBAG (organizational separaon) and areexpected to be compketdy separaed and managed by individual companies in 1997.
Japanese National Railways Privatization Study 11 47
the long term one. In addition. the avoidable cost competition, we compare the operaing cost per ton-still has such a disputablc issue as exdusion of the lcn (see Table III-18). The cost of railway freight isdirect labor cost for maintenance cost (only the almost half that of road fieighc. It is estimated thatmaterial cost and subcontract cost are induded). curdy railway freight bas advantage on cost be-
.. mpeuision .ith T. .krandl,adicatiueEcenom, tween Tokyo and Osaka, and thc rason why freighteo~on tnrlu have eceeded railway freight is the inconve-
nience and the weak makeing ofJR FreighL3.109 Theargumientofthemodalshiftandthc 3.113 Second, we compare the operating cost
aaual environment surrounding JR Freight inevi- on equal footing, which cxclude cross subsidiza-tably arouses the discussion of the viability of tion, and which do not include construction costs.freight train transportaion in Japan in the long In the case of road freight traffic, dhe costs of roadntn. The central issue here is the competitive edge construction and maintenance are considered to beof train in comparison with other traffic modes, subsidizedtosomeextentbypassengercars.Therc-especially with tmcks. The issue is complicated by fore, 1) we exdude tax (induding oil tax) andthealleged crosssubsidizationeistingboth intrain highway fee expenses, by which tiuc share roadand truck transporation. The issue is fiurther com- construction and maintenance cost, fiom the oper-plicaed if extnalities such as pollution and con- ating cost. 2) we add estimated niintenance cost ofgeiion are ake into account. road,inwhichtheburdensharinofpassengcrcars
3.110 Inthelasccoupleofgenerations,theedge is eliminated (assuming only trucks pay it), be-of fret trudcs has =ded that offreight rilway, tween Tokyo and Osaka. In case ofrailay freightthough the ilway is considered to have advantages traffic, we assnumc that the real avoidable cost (lincover the trucforlongdistance frcigh Thc ason is lease payment ofJR Freight to passenger JRs) is 4notconsideredtobethacthecosofJRFihrishi times as much as the line las payment whih JRbut ratherthatthe madngofJRFrcighcisweak. as FrdghcurrendypaystopassengerJRs.Asaresulr, theis discussed in the elie section. To compar these oper cost on equal footig of railway fight iS
two ficght modes, the costs of dte road feit and lower than that of oad fieight. Although the esd-railway freight arc calculated in tbis parm matedoperadngcostonequalfoodngisverysensitive,
3.111 The costcomparison of roadfrightand it maybesafe tO saytatraiwyfit can competeilayfrightisdifficultforthcfollowingreasons, road freight on cost without cross subsidization7
on the one hand passenger railways have givenadvantages to JR Freight based on the avoidable Ralion ofthe Goment
cost principle. In addition, it is said that the real Priwazon and Rgulaionavoidable cost is greater than the line lease epee 3.114 Alhough regulations are imporant towhich JR Fr t acually pays to passenger JRs. On sre sound management ofand safe operation by
the odhr hand. it is said dat fight trucls do not pay 7 Estimated CsCompasonindungC onscruaion Cosb
the appropFriate osts for their oad constuction and When bualding and extnding freight tanspor network
disrAcion. For example, the oil ax is specificalyone muse compare cos including opeatng cosr andspent to the road consuction and maintr.iance consuctioncosr-Bothrodanddilway line ostruccion
However, tax for light oiL whih many trucks use as cost which exdude burden sharing kr passenger cars and
fiel in Japan, is cheaper than tbat for g ine, whrilways must be considered. Consruction cost perton-lnof road fieight is. 114 that o fralways. since rod usage is 5
many passenger cus Moreover, trucks are suid to t imes = dun that of raiway tracL Totl cost of road
distract roads in the order of tens of thousand omes f&ieX is 1/2-113 dut of yilv fieight. so nihay freight
more than passenger cars do. annorcompeewith mad freighton cost if freighr railway
3.112 Here we focus on one route, between alon raher than both freight and passengr railway isTokyo and Osaka (580 km) - because betwn the reson for construction of new lines. See Table 111-19Tokyo and,Osaka. 1), freight de, and is bl . 60followir. This estiaut is basd on specific conditions ofTokyo and Okah, 1) ficot demand IS biggcst in +figtransportation injapan. Firstthe trackusageofJR
Japan. and 2) alhough it is said that a mmuing point Freighis arcsti d by pasngeJRs buse of high train
of trucks and railway freit is 400-600 kin, the fiequencyonsheTokaidoline. Iftheae isno estricton.jRshare of railway (5%) is much lower than that of Frightcaninihassenumberoffreiihttmins. Second,wiclk (51%) - in order to estimate the cost consuction cost ofroad nd railway is exrmely expen-
sive in JapLn dueto the hihland priceand laborexpensscDmpeauon ofmad fit& and ihway eidghtwz& Therere the compettion in other countries may be
outsubsidy.Pirs,inordertocomparethecurrcosr diffeent from the one in Japan.
48 Japanese National Railways Privatization Stcy 11
Table 111I18: The estimatd cost comparison of the road freight (ToMel highway and Meishin highwy)and raflway freight (Tokaido line) between Tokyo and Osab(IVper ton-km)
Road RailwayOpeatingCost (A)8 14-16 8Tax and Highway Expenscs/Line Lease Payment (B) 4-3 0.8Estimated Maintenance Cost (C) 1.1 3.2
Opeating Cost on Equal Fooung(A)-(B)+(C) 8* 11-14 10.4
' Operating Cost* Operating cost for road, for the long-distnce uuck with 10-20c loading capacity. is based on dth data in 1983. We aumed
tharcost incased from 1983 to 1991 by 139. (Sources "Tokkdcu no Ogaah ni Kansuru Chosa Kenkyu HokokuzSho (SmdyReporton Larger-sizeTrudcs)." 1983. InstituteofTransportaion Econo mics, 'JidoshaUnsoligyo KeieiShihyo (Financl Dataof Auto Express i gent). by Minismy of Tansport) The operting cost esduds cosms for pickup and delivery of cro, andrenninal.
* Opating cost for ihway is the awrage opeatingcost ofJR FreighAverage opang cost is influenced bythe fright tafficdistance. However. averge freight traffic distance ofjR Freight is 470 km and dte distance baween Tokyo and Osaka is 580km. Therforethe avcrage operatingcou betwenTokyo and Osaka is considered to bealmost the sameas the aveage operxungcost ofovera1 JR Fright.
Operting Cost on Equal FooWtin Operating cost which exduded co= subsiditaion* Road. Cross-subsidition for the tudcs is considered to bemainlyroad mntenanc costad road consuction cost ofwhidc
pasnger cars shre large par. We subtract the tax (including oil tox) and highy fees 4 - 3). by whidc road are maintainedand construted. from operatingcst Then we add theesdmared maintnance cost(I1.I) ofhe road betweenTokyo and Oska.asing only trus pay it.
Tax and Highway Expenses V per ton-km 4 - 3Mainienauce Cost *1 (D) Y million per km 80Road UsaW **2 (E) million ton per km 73.5Estimated Maintnnce Cost (D)/(E)V per ton-km 1.1
.1 Maineena (x.t: The naintnance cost for Tomei hihway is not publicized. Her it is assumed to be as mudc as themaintenanc cost ot lnhway in metropolitan aras such as Tokyo and Osaka because the nufic dasit of Tomei hiwy ishigh though the Tomei i,thway is opemri by Japan Highway Public Corporation.Japan Highway PublicCorp. 147 miltion / kmMetropolitan Expressway Public Corp. V176 million I kmHanshin Expressway Public Corp. V165 million I kmMaintenancD cstis smallertun thecoabovevwhich indude improvementexpenseand restoration apense (SourceJapanHighway Public Corporation Annual Report)
`2 Road Usg Road Usage. at 73.5 million ton per km perycar, is calculatd by dte tI trudc operating length on the Tomeihigway (small fizight trucks 3,371 thousand kn per day. nxdium and large feight trucks 13.559 thousand km per day) andtheaverage loding ofeach tuck (small feigh trucks 0.6 ton. medium and lage freight trucks 5.0 ton). (Source ̀ Taskso$ he12th National Urban Expresswas for 1990 Fiscal Yeae by Fukluoka-l(iakyusht Expnssway Public Corporation fiom'Exprssways and Auromobiles" 5/92 and 6192, Expresway Resarch Foundation of Japan)
RailwayLine L se Payment "3 (F) V million per km 103TRck Usage 4 (G) million ton per km 13.7Line Lease Payment (F)I(G) V per ton-km 0.8Esdmated Real Avoidable Cost "5 Y per ton-lkm 3.2
3Line Lease Payment 320 billion (the acual line lease payment ofJR Freight) x 0.3 (assuming that tonnage ofTocaido line is30% of the tal tonnage ofJR Freight) / 580 km (route ength ofthe Tokaido line) - V110.3 million per km per year.
"4Railway Trdc Usge. at 13.7 million ton per km per year between Tokyo and Osak. is calculated asming tha the onnaeon the Tokaido line is 30% of the total tonnage of jl Freih
26.3 billion ton-kin x 0.3 / 580 km - 13.7 million ton per km.
"5We assume that real avoidable cost of JR Freight is 4 times as much as the line lase payment.
Japanese National Railways Privatization Study 11 49
railways, considering that the JRs are going to be for the JRs. The major points of the rdevantfitUlly privatized or sold to the public, it is also articesin the Business Laware, (a) theitriffshouldimportant to minimize the regulations or at least to compensate the adequate cost under the efficientdisclose procedures of these regulations. The pri- management, and (b) the tariff should cover themary legislature for the railway business is the appropriate profit margins. The first problem on"Railway Business Law" (the Business Law hereaf- this tariff issue is that these concepts of adequateter) which stipulates railway companies' develop- cost, efficient management, and appropriate profitmentplan,operation,generalmanagementofralvays, margins are not precisely defined and are vulner-technological standards, and so on. Nevertheless the able to the occasional government control, orPRs are also required to follow this law, and thus political considerations. Furthermore, since op-these regulations are not specific for the JRs. erational environment is so different among the
3.115 The Law Concerning Passenger Railway JRs, and between theJRs and the PRs, it is difficultCompanies and the Japan Freight Railway Com- to presume a benchmark for these managementpany stipulates regulations specific for the JRs. indicators.Clauses of the law require an approval by the 3.117 TheotherissueonrhetariffsystemistheMinistryofTmnsport, concerning external financ- timing of the tariff revision. The experience of aing, appointment of CEO and auditors, annual PRs' tariff revision shows that a tariff increase isbusiness plan, ransfer and mortgging of impor- permitted (ice., has to be accepted by the Minisuytant property, revision ofthe artides in the incorpo- of Transportation (MOT)), only if the railwayration, diposition of profit or loss, and merger and companies make loss or are expected to make lossdissolve of the company. All the clauses huted fromtheirrailwaybusiness Ncvcrheless,itshouldabove, however, are also important items for pri- be noted that the profitably diversified business ofvate companies who are rcsponsiblk for the share- PRsmakcstisurvisionrulepossiblecassuring theirholders, but not for the Governmnct. Thus the profit bases. On the contray, dcivesified businessbottom line for the regulation argunent is whether of the JRs is in its infancy and can not contributethe Government considers the importance of the sufficiendy to their tota profit. As for the electric-sound management of the JRs as much as the icy tariff in Japan, operating loss of public utilitygeneral public docs for private railway companies. companies is not a prerequisite for the tariff rvi-Among these items, the most straightforward of sion.regulations affecting the JRs' management are (a) 3.118 Tariff revision requires the approval of
ytriff scm, and (b) investment. MOT. However, currcndy Japanese goWrnmcntTariffSjvm is promoting deregulation of domestic industry.
Asparcofthis cffort, the Governmcnt is dcreasing3.116 As for the tariffsystem, the Business law the number of regulations that MOT controls,
provides a common principle both for the PRs and including railway, road, airway and ship, by 20%
Table 11-19: Cost Comparison induding Constuction Cost
Road RaiWConstruaion Cost (H)(Y million per lum) 962 770Road Usage {I)(million ton per kIm) 73.5 13.7Est. Construction Cost on Equal Footing(J) = (H)/I() (t per ton-km) 13.1 56.2Operatng Cost on Equal Footing(K) (V per ton-kIn) 11-14 10.4Total Cost (J)+(K) CYper ton-kin) 24-27 66.6NotsTeaveage costforroad (962millionpcrkrnperyear)andforriway77o millionperkmperyear) arecalkulared assumingdat: a) consmtuion cos entils 5% inso expense 2mnualiy; b) asse are depredated in 30 years; andc) unit construction coDs arethe following: VI 5 bilion peri kforroad (thesame unitcostastheTokaidohihway and Vl2bgionperin forraway (ieavaageunir cost of raiW constrction is sihdty less than the unit cost of road constmction.)Sourc Japan Highway Public Corporation Annual ReporL
50 Japame National Railways Privatization Study II
within 3 ycars from 1993. Regarding raihway tariff Rclations Arrangemcnt Law) was enacted to besystem, in 1994 MOT is expecting to amend the applied mo public corporations. Under this lanw,Business Low that railway companies can discount JNR employees were given the right of collectivetariff of faciliy services, such as first class seats and barg.ining, but were nor allowed to strike. Unionsleepingberth,without approvalofMOT.JRs and membership was on an open-shop basis and work-PRs can increase or decrcase tariffs on facilitY erscouldchoose not to join, but most didJoin.Thesevices at their own discretion. National RailwayWorkers' Union, orKoktro,was
Investment Decison the biggest and most powerfil, and represented alltypes of workers. Politically, it had dosc ties with
3.119 Theissue of investment reatues mainly to the Japan Socialist Party and frequently led illegalthe construction of new lincs, especially those for actions for the right to strikc in the 1970s, whichbullet trains or urban transpot In both cases, a turnedthepublicapinst]NR, Three other unionshuge amount of funds is required. Since a railway split from Kokuro and duly registerd in order tocompany inhcrcntly has two different negotiate with the management. Thc Nationalcharacteristics,that of a profit oriented business Motive Power Union. or Doro, represented solelycntity and that of a public service supplier, invest- motive drivers, but therc were also many motivcment decisions for railway companies must cake drivce who remained within Kokuro. The Japanacount of the public interest, and are likely to be Rilway Workers Union. or Temsuro, was politi-vulneablc to political pressure. cally milder and supported the Japan Dcmocratic
3.120 The history of the upgrding of the Socialist Party. The All National Railways' Pcmna-Hokuriku Shinkansen line shows that the operator nent`WyandConstructionLaborUnion,orZ7ensirf,(in this case JR East) was fidly involved in the polirt supporedanodtrcenrimparty,Kreito.decision making process for the new line constrc- 3.123 JNR manemen negotited with cachtion, which required a huge amount of finds. ofthescunionsissucssuchaspayandcbangcsinOtherwise profitability or effective opeational train schedule, though pay rises usually ended inmanagement would be asured. Another example the same incrase as was recommendcd cach yearof operator involvement in the investment decision fur public servants by Nationat Personnel Author-nakdng process is the Joban Shinsen, a 58.3 km ity.Thesalasystandardwas inprincipleuniversinlong new urban commuting line in the Tokyo all CaE with minor differentiation by type ofmetropoirn area. Afer examining the feasiility crafts. Rct- zment age was decided by agreementof the new line, JR East deided against being an between the management and each union and wasoperator or an invcstor. Thus the project has bcen basicllythesamcasthatforpublicservants. Politi-initated by a PPP. waly, the leaders of Kokuro and Doro were influ-
3.121 Since the JNR was privatzed, the JRs encedbyMarxism,butinmanycascsanewworkerhavehad to be responsible for theirproficabilityand tended to choose the union which was dominant infinancil managment. A the sam time, howver. the divsion or district he was first assigned to.railays represent an important public goods in the Kokuro opposed to the break-up and the privatiza-national coonomy and socicq. Such abig project as tion ofJNR until the last minute and subsequendythe Joban Shinsen is a good example ofimuproving collapsed. The other dutee unions chose to supportnationalwfire. Thus there always eists a conflia the break-up and privatization.of interest between dtat of commerial entity and 3.124 In the final days of JNR, three unionsthat of public servicc Carrier. But as is indicated in (except Kokuro) inaugurated theJapan Confedea-the above two cases, it is neesry for the JRs to tion of Raihvay Works' Union UR Sorcn). Afterreserve their own decision-making right on impor- restucturng in 1987, separate workers' unionstant investment projects or involvement in such wer organized in the newJRswith JRSorenas theprojects in order to avoid becoming, in effoct, suprem body. These unions andJRs signed jointanotherJNR. declarions and established scable labor-manage-
Uxion Problms and Eliminatie f Union meat rlationships. TIhy are legay constitutedunions, which are not subject to the special labor
Rqukdm lawfor publiccorporations, and arc given the right
3.122 AtdhetimeJNRwasestablishedin l949, to strikeaswellas the rightofollectivebaainina special labor law (Public Corporaton and Labor Each union negotiated withthe management sepa-
Japanese National Railways Privatization StuldyII 51
racely and consequendly the rate of pay rises began non (JR Rengo) in May 1992. In these unions, dtetO be differentiated from the first ycar of 1987. old etsurm group was dominant. Consequendy,
3.125 In 1990 confrontation over hegemony the old Doro group formed additional minoritywithinJRSorenbeween theold DoroandTctsuro unions inJRWcst,JRCntra andJRKyushu. Onunionscane to the surface. InJuly 1991 theunion the other hand, thosewho are against the currentofJR Westseceded fromJRSoren and the union of leadership oftheold Doro group in the union ofJRJRCentralfollowed suitinNovember.Theunions East formed a minority Union and joined JRofJR Shikolak and JR Kyushu also seceded around Rengo in January 1994. Thus, the rivalry betweenthe same time. They formed another supreme JR Soren and JR Rengo has been incrcasinglybody, theJapan RailwayTradeUnions Confedera- intensifiued
IV. Market Structure of Transportion andComparison of JRs and Private Railways
Market Structure of Railroad Sector in Japan areas, electrification in this region is not urgndy
Railbad System mjuapan requirecL Among the rest of the regions, the shareof electrification in he Shikoku island is far behind
Radoad Route Lexgth by R the average of the other regions. Since the privati-
4.1 TheiloadsysteminJapan hasfollowing zation of dhe JNR, the JR Sbikoku has constandycharacteristics Firsdy, passenger traffic, not the and cagedy undertaken cIectification projects tOfreight traffic, is the main busincss since long timc be coampetitive against road traffic.(in FY 1991 400 billion passenger-km versus 27 4.3 Double tracding is also an important fac-billion ton-kin). Secondly, in addition to the sub- tor for speed up and railroad capacity. The JRs inways, the private railways are concentratetd mosdy the Honshu (mainland),where the largevolume of(about fifiypercent of the total route lengt of the traffic is expected, have a rclatively high share ofprivate railways) in such metropolhtan areas as double trning in terms of route lengd. On theTokyo, Osaka, and Nagoya, and thus operate in contrary, since the railroad in the three small is-the most populated areas. On the contrary, the lands arelocated inthelessdenselypopulatedareas,JRshavetheirtrackinfrastructuresinborhpopu- the JRs in these regions have a low share of doublelated metropolitan area (only about eight per- tracking, as low as less than one quarter.cent of the total routc length of the JRs) and also Riwra, Traffc CAaraceriwicsintercity arcas (trunk lines). Thirdly, the rail-road in the three small islands is overwhelmingly Passenger Trfic y DiswAwe
dominated by the JRs (86% of the total routc 4.4 AccorDingEotheTabeIV-3fo)llowinutnv-length, whereas 71% in the Honshu), where few elers on the bullet tramin and the other trnk lineslarge cities are located and the population is less withouta commuterpasshavealong trip disranceondense. Among the three islands, railroad in awerg and thus can be groupedasa difkrnr type ofHoklkaido is located in the most sparse area in customers from the short distance traveles Theterms of squarc Iclometcr and of population. marketstructure of raoad injapanwill be reviwed
Elemficdaion and Double Tracking hereaferbytypeofthemarket, ice, thelongdistancepassenger market, the commuter passenger market
4.2 The gographyofJapan ischaraceised by in metropolitan areas, and thBe freight marketlarge mountainous area and scattered metropoli-tans on the coast. Thus electrification of the rail- LongD Paxenger Mirketroad, whih can provide a stronger traction or 4.5 Table IY4 following shows that the ma-acceaion power oftrains. is an important factr jority of long distance passengers by rairoad arfor speed up and consequendy for the compeitive- business traversm For te privmte puposes of trav,ness of the railroad. Since the Holdcaido island travrbycarismuchmorepopular.Thusthedemandoccupies less mountainous and frwer metropolitan for long distance travel by railroad should bc af-
Japanese National Railways Privatization Study II 53
Tabb IV-1: Rout Longth of Janem Railrod in March 1993(An, %, kwOO qnL, peaonk)
Density DestyiRs PR? Total (Amre)** (Pop)**
Three Islands 5,584.8 85.6 942.1 14.4 6,526.9 45.2 3,545Hokkaido Island 2,628.3 92.3 218.6 7.7 2,846.9 34.1 1,984Shikoku Iland 855.8 82.5 181.9 17.5 1,037.7 552 4,035Kyushu Island 2,100.7 79.5 541.6 20.5 2,642.3 62.7 5,034
Honshu (Mainland) 14,555.8 69.9 6,2812 30.1 20,837.0 90.2 4,784East 7,502.0 71.6 2,979.6 28.4 10,481.6 80.7 5,157Center 1,994.7 58.1 1,441.4 41.9 3,436.1 117.3 4,157West 5,059.1 73.1 1,60.2 26.9 6,919.3 96.4 4,529
Total 20,140.6 73.6 7,223.3 26.4 27,363.9 72.9 4,488Metro Area*" 1,631.0 30.9 3,639.2 69.1 ,,270.2 n.a na.Three Metros 1,587.4 37.3 2,664.4 62.7 4,251.8 272.0 11,722Source Insmute ofTcunsporamion Economics, TashiK*nx Npe (Menpeftan TdN/fAnZud. MinisnyofTanspon. Toimu
Yearm (RatbvaALma) and Tesmi Yae Teok Nnpe f(Ravoad Trak StauAnwa. Others.* PRs indude Eidan (Teiw RapidTrnsitAuthority) and other publidy owned nlways. and allocad in each rqpon by the arm
ofthe Tranportaon Administaion which is not whoiy conpaibewiih the anra oered by the consponding J- Arm Density ida ute length (Ian) per thousand squar meter.- Population Density idcates peson per rourc length (kin).-Meo Aea sents such major metropolitan areas as Tokyo, Osaka. Nagoya, and other aty areas with a population of over
milion (Data fram Teado Yus Toka Neio).Thre Me ar Tokyo, Osak and Nagoya meropolitan aras (Data in March 1990 fiom Todn Ki Neap).Note: The nexr right olumns ofJRs and PRs epreat the percent shares ofJRs and PRs in the totl roume length.
Am of thesurfc space and the population are nor wholly compatible with the area covered by each JR.Populadon figurc is an cstimat as of October 1991 based on the national cnsu
TRabW IV-2: EBetrIfctIon and Double TrMck kglorJRs(Percent)
Electrificaton Double TracingApril 1987 March 1993 April1987 Mawh 1993
Holdcaido 9.5 16.5 18.7 25.5Shikoku 6.4 27.5 3.9 6.1Kyushu 45.2 52.0 21.7 24.4East (65.4) 69.2 (703) 73.6 (47.7) 53.4 (49.4) 55.1Center (67.0) 76.1 (62.1) 72.6 (46.0) 60.9 (42.5) 58.4West (50.0) 52.5 (53.2) 59.1 (32.1) 40.3 (36.4) 44.5Tota (47.5) 52.5 (53.5) 58.2 (33.9) 40.1 (37.3) 43.6Source Ministy of TRISrport Temsudo Yorn (Railmad Almanac).Figre in () exclude Shinkansn ties. * Double Tracking indudes double nadcing and more than doublc trading.
Table IV-3 Aerage Trip Disance by Pail (FY 1992)(krntrp)
AverCa Pase Non-PasJRs TrUnk 56.2 23.8 101.1
Bule Train 264.2 87.6 278.5Others 32.1 22.9 48.4
Metopolitan 14.6 15.9 12.2Other Local 173 13.2 25.2
PRs M Opolitan 11.2 11.9 9.9Subway 6.7 7.5 5.5Other 13.7 14.2 12.8
Othr Local 9.0 8.5 9.5Sourw Minity ofTnspom Tesudo Yuso Tokei Ncnpo (Riw Traffic S Annual).Note OPass rprsents commuter pass pas_nrs Tunk reps al the tunkc lines outside h metropolitan area
54 Japanese National Railways Privatization Study II
fecced morc significandy by die level of business haveashareofasmuchasfortypercentintrennsofactivities rather than by that of household sector total tonnage.activities. 4.9 Since Japan is surrounded by ocean and
4.6 In this category of travl, air is the strong many industrial sites are located dose to a port orcompctitor for railroad. The competitive advan- coastal area, ocean shipping has also been fairlytagebetwcentheairandthemailroadcanbesumma- common modc for long distance freight and hasrized as follows; about forty fivc percent of the total freight traffic in
1. The railroad is competitive, if the diffirr- terms of ton-km. Most of the wrmaining five per-ence of the travel time required by railroad cent is transported by railroad, and air freight hasand by air is less than 150 minutes (eg, only a nominal share.three hours forty minutes by bullet train, 4.10 Among the railroad fieight traffic, freightand one hour and twenty minutes by air). tcafficbybulklcargoesandcontainecrshavediffercnc
2. The air is competitivc, if the difference of characteristics. Firsdy, the average distance oftraf-the travd time required by railroad and by fic for the bulk cargocs (207 km) is much shorterair is larger than 200 minutes dtan dtat for the containers (924 kin). Secondly,
PassengerMarket in MeurmpoEtan Aa lines of commodities trnsported arc differentAbout30% ofthetotal tonnagebythebulicargocs
4.7 Passengers in the metropolitan area are is for petroleum and peroleum products, aboutdoninated by passengers with commuting pur- 20%forcement,andabouil5%forlimestone,andposes, ie., business men and womcn and students. thus dhese three commodities ofbasicmacerials addThc share of commuter pass passcngers is about up to two thirds of the total tonnage. These com-two thirds both for the JRs and for the rmilroad as modines are transported by spcial cargoes mosdya whole Although the purpose of trsav by the owucd by shippers. On the other hand, commodi-pssengerswithacomm utingpassisnotnecesrily ties pored by the containers are much moreits genuine purpose, a Laure share of the passngrs varied and value added, in other words, procssedwith a commuting pass ensures that the railroad oodsorconsumergoods;,about20% for chemicaldemand in the metropolitan area can bc muck products. about 16% for food products, and aboutmorc stable than that for long distance travel by 12% formtileandag a ralproducts rpecte.rallroad. 4.11 Compedtionandsharesamongthe modes
Frer*htMarkt offiighttaffcinJapanaresummarizedasfolUows;
4.8 Road(truck) istheleadingnodeoffreight 1. Truck (frcight taffic by road) is the domi-trafic in Japan, which has a share of over fifiy nant (over 50%) mode of freight trffic withpercent in wmns ofton-km. Suice the freight u-dic a distance of less than 500 kin, but with aby mad is mosdy concenuratd in a short distance distance of over 1,000 km, the share oftrck istrffic,itsshareintemsoftonnagereachesasmuch decreased to only about 20 percent. In otherasnnetyonepaecetAthoughcommoditiesmans- words, 88 percent of the wotal tonnage by tucdkported byroadhave alargevaricty, gmtlandwaste is a trffic with a shorter distnce than 100 1km.
TabW IV-4 P'upow of Long Ditnc Tre hI One Autumn Day(Number of Travelst/erc
Share By Air ByRain By Car By OthersBusiness 28.3 10.4 36.8 50.6 2.2Sightsecing 42.7 n.a. 5.0 92.6 n.a.Other Private 13.6 na. 12.7 80A n.a.Others 2.8 8.1 37.6 48.1 6.2Not Spedfied 12.6 na. na. n.a. n.a.Sour: Moroboshi.anRsRyoKarsuidonoSogoHaadmniKansuruChosa(R hontheTmnkTrafficforNP2egeu).
Japan Port & Harbor Assodation. Kowan. Mard 1993Peiod of Rearh-: FY 1990 and 1991Cdlumn 'Shae indits the share of tavdels with ach purpose of ta in the wtol number of tmverColumn aByAire. yP. Rail and so on indicat h sharoftvers byeach taffic mode in thespcific puxposofveL'n.a. in the table indicats tht data is not available or that the figure is negligible.
Japanese National Railways Privatzation Study II 55
2. For a tafficwitha distance of over 500 Ian, Since Hokkaido is a nordhen island isolated bythe total traffic by railroad and marine ex- road network, the sbare of road is lss than nineceeds that by road in terms of tonnage. percent. Although Niigaa is located adjacent to aAmong railroad and marinc, traffic by ma- big markae of Kanwo area, dte distance betweenrine forms is always much larger than that by dthse two regions by ocean route is much longerrailroad, as much as ten times of that hy than that by railroad, and thus the marine trafficrailroad. Thus railroad for the long distance between these two regions has only a nominalfreight traffic, which is dominated by con- share. Those geographic conditions pardy deter-tainers, is no morc than a marginal carrier minc the advantage of the railtoad traffic.which has a competitiveness only for the 4.13 In the case of commodities transported ainland taffic long-distnce (except for occan shipping), raroad
4.12 By origin and destination of traffic, rail- container freight has a majority share only forroadhas a rcladvelyhighershare in the traffic to and textile products. AU the other commodity trans-from Hokkaido, Niigata, and Tohoku regions. ported isdominatedbyaroadrraflc.Especiallyfor
Tabl IV-5: She of Commuter Pas Paenr In MeofolIan Areas In FY 19(Perentage)
All RailwaYs JiRsTokyo Area 65.4 66.0NagoyaArca 56.6 43.6OsakcaArea 61.2 63.6Three Area Total 63.8 64.6Sourc: Instiute of Transpormion Economics, Toshi Kis Nenpo (Mtepowp T :ftAsiwQ.
TaWe IV.- Fre Trafc Shae by Mode and by Disan (FY 1991)(Thouatnd kmI)
JR FrightDstance (cm) Totl Con.ai Bulk Tndek Marine Totl
-100 15,421 10S 15,313 5,395,351 135,387 5,546,159101-200 11,986 273 11,713 336,933 75,987 424,906201 - 300 5,921 433 5,488 135,407 53,389 194,717301 - 400 2,978 1,439 1,539 78,658 53,424 135,00401 - 500 2,276 1,249 1,027 50,582 48,276 101,134501- 1,000 10,893 8,846 2,047 96,916 124,599 232,4081,001 - 8,826 8,213 613 19,718 68,965 97,509Total 58,301 20,561 37,740 6,113,565 560,27 6,731,893Ave. Dist. 465 924 2)7 45 434 81Source lnsumte o Transpornaion Econominc Unyu t Keuai Crnrsporction & Economy), September 1993. Koum Kyok
(ransport Asscion). Korsu Nenpo (raffic Annua).
Table IV.7: Long Ditnce Freight Traffic by Road and Rai and by Commodty (at In FY 19)(Thousand tn, %)
Total Tru C Shre of coninerMining Products 122 65 57 46.7Wood Products 197 160 37 18.8Agricultumral Products 1,027 780 247 24.1Chemical product 1,047 648 399 38.1Machinery Producs 1,292 1,159 133 103Food Products 904 576 328 363TextileProducts 299 80 219 73.2Other Products 1,909 1,783 126 6.6Others 2,598 2,123 475 183Totl 9,395 7.374 2,021 21.5Souro= M:nsyotTrnspo= Kamotu nik Kyudo Ci. 1yokyaku chuii Kyudo Ulzosa (me Arad 1
TrA Statsics. Dam (orTruck" is arbit.ray calcaud basd on tde I bet regions. Od oa=uri oand strd, paper and pulp, and so on.
56 Japanese National Railways Privatization Study II
machinery products and other products, the rail- in nominal term during this period, by abolishingroad has only a nominal share. Those may be the the Passenger's Tax of 10% (nct of about 6.5%potential categories of commodities for the modal decrease together with the introduction of theshift from the road traffic to the railroad traffic. ConsumptionTaxof3Yo) sinceApril 1989 and byNeverthelesssuchservicequalitiesas frequency and introducingvariousdiscount ticketssinceFY 1990,flexibility of traffic schedule arc important consid- resulting in the decrease of about 17% in real termerations for die choice of mode of traffic. compared to that in ten years ago. Therefore travel by
Pgsengfr Tr4;c air has also increased significandy by 9.5 percent peryear. Tavel byrailroad has also achieved a good result
Dmand ELarmiciv of Traffic of 4.9 percent gowth per year during this period.
4.14 Passenger traffic demand in Japan shows 4.17 Afier the strong economic growth period,several fiatures. Firsdy the demand during the the inaeaseoffrectimcand impetus forleisure hassecond halfof l980's grew much more rapidly than also becn saturated and thus the lo ng distance travlthe general economy, the demand elasticity to the has recendy stagnated.GNP reaches as high as twu, which is quite high Passenger Trafi- in Mer*p.iia Areacompared to those of the other perods. The odter 4.18 During the second halfof 1980's, passen-feanture is the stable elasticity ofdemand for the PRs gm Durin the merop t ha als, bemthroughout the period. Since most of the PRs gei traffic in the metropontan area has aLso beenoperate in the metropolitan areas, the demand for ncreasrng wint a fairly strong pace of 3.7 percentthe PRs is mosdy concentrated on die commuting per year, if not so strong as the long dtance traveLand daily traffic which may not fluctuate much Among the modes of traffic. travel by private carsthroughout the period. On the contrary, since dte haveincsedwithamarvelouspaceof7.0percentJRsrelymuchmoreonthelongdistancetravd, the per ycar, supported by the increase of the owner-demandfor theJRs is much more vulnerable to the ship of private cars and the decrease of gasolinechange of economy, busincss activities, and the prces. Except for the private cars, the JRs achievedpeople's taste for the leisure time. The demand for a beter performance than any othe competitors.the bullet trains seems to be a typical example for 4.19 Passenger-km data also support the goodthe long distance travd, vevn though itS opeatio-i results for theJREs during this period. Owing to thethsukl may bc ovtrvated bevent of its oDnstnr cfforts by -he JRs and thus the improvemcnt ofdevelopment throughout the period. Other JRs thr mpeivc among die 2ailzoad taffic,
tan the bullet trains have reoDvered only to the rhe JP?s have achieved srrong success during FYvedofthePRsevenduringthisprosperousperiod. 1987 to 1992 ir the metropolitan market, com-
pared bothto the PRs and to the subwap. Lhe
Long Disncer Paexnger Traffie success by the JRs is attributable both to the in-
4.15 During the second half of 1980's, thc crase ofnumberof travelers and to the average trpJapancse cconomy has grown rapidly. Both the distance by avelers. Duc to the spread of thebusiness sector and the household sector have ex- metropoltan ara and dus he cxpansion of com-panded their expenditure significandy. The real mutng distance, the averagc trip dist b) met-prvate final consumption expenditure Cm the Na- ropolitan rcsidents has been expanded during thistionalAccounts) has grownby44 percent peryear pcriod. In this regard, the JRs havc capmred thaison avragc. In addition, two days off a w has expansLion effect most successfully.becomemuchpopularbusinesscustomandcthefree Fr8igbt Traffictime has increased for many Japancse. Owing to 4.20 FreighttfficinJapanhasbeenchraczer-these income and time factors, the long distance ized by a huge share, about fifiy percnt, of taffictravel during the penod has incased rapidiy. by marinc forms dtroughout the period, owing to
4.16 Among three mnajor modes of traffic, air its geographic condition. WViin the rand road have hived a remarable growth The iialfofthc ramfic, sharchasshted fiom the ailroadsuccess of road taffic is attributed to 1) develop- to road traffic.ment of higways, 2) increase of the ownership ofprivate cas, and 3) decase of dte real gasoline Loxg Term Review on Ahe Frget Traflprices, on top ofthos: faictors mentioned abovc. As 4.21 Duringth period ofearl1980's,eventhefor air, the average air fire has been decreased even total ficight taffic declined and truck taffic in-
Japanese National Railways Privatization Study II 57
Table IV-8: Passenger Traffic Demand (Pasengerkin) Elasticity of Private Fnal ConsumptionExpendituresFY Total Railroad JRs- Bullet Othcr JRs' PRs'75 -'80 0.525 -0.169 -0.660 -1.587 -0.404 0.611'80-'85 0.669 0.323 0.150 1.221 -0.221 0.581'85 -'90 1.877 0.820 0.936 1.637 0.630 0.635Data Sourc E cono mic PlanningAgency, Annual Kepo rc on National Accouncs. MinisqyotTranspor .WhaitcPaper on Transporr.* Tomil indicats all modes of traffic.`JRs before 1987 is JNR.
Table IV-9: Traffic Distance of Passenger(Billion Passenger-kmn, cars per day)
1987 1988 1989 1990 1991 1992 1992/1987Rail 95.3 103.2 103.9 112.4 116.4 114.8 1.205Air 38.5 41.1 47.1 51.6 55.4 56.7 1.473Highway' n.a. 54.7 n.a. 91.7 n.a. n.a. n.a.Highw2y"- 3,525 3,894 4,220 4,550 4,701 4,917 1395Soure: Vata tor Kail arc 'TrunE Line outside ot metropoiman arca craffic dam exccpt for commuter pass passengers. Minisyot
Transport, Tcrsudo YusoTokei Ncnpo (RailwayTcafficStatisticsAnnual). Daa forAin Kowsu Kyokai (TransportAssociadon),KonsuNenkan (TrafficAnnual). Daa for Highway are in billion passenger-kmd induding riversoftrudcs Miyaokand Kato,Heisi 2 Nendo Doro Kotsu Sensasu ni Miru Kosoku Doro no Riyo Jitmai, Express Highway Racah Foundltion of Japan,Kosoku Doro to Jidosh (Expressways and Automobies), May 1990. Data for Wighway are in as per day in highwas andtoll roads. Japan Road Public Corportion.
Taeb IV-10: Metropolitan Traffic by Mode(Million Pasengers)
1985 1986 1987 1988 1989 1990 19011985Railroad 16,523 16,966 17,311 18,047 18,436 18,974 1.148JRs 5,556 5,730 5,907 6,213 6,307 6,608 1.189PRs 7,318 7,483 7,620 7,799 7,975 8,089 1.105Subways 3,649 3,753 3,784 4,035 4,154 4,277 1.172
TraM 113 112 108 110 109 110 0.973Bus 3,576 3,558 3,567 3,583 3,577 3,605 1.008Taxi 1,482 1,504 1,524 1,544 1,511 1,412 0.952Car 9,689 9,863 11,015 12,197 13,455 13,590 1.403Totd 31,384 32,002 33,525 35,481 37,089 37,691 1.201Source: Insanie of Transportation Economics. Tuhi Koau Nenpo (Menwpditsn TnfflcAwaO).Note Merropolian here indicaes Tokyo. Osa, and Nagoya metropoltan areas.
Tabe IV-1 1: Railrod Traffic in Metropolitan* Ares(Billion Passenger-kn, kM per Trip)
Traffic Tnp Distance1987 1992 1992/1987 1987 1992
JRs 70.8 88.5 1249 14.0 14.6PRs 108.3 116.9 1.079 13.8 13.7Subways 28.2 31.6 1.123 6.7 6.7Totl 207.3 237.0 1.143 12.1 123Source Ministzy otFTransport, Teasudo Yuso Tokei Ncnpo (Railay Trattic Sursuc Annual).Note *Merolipoac hendieatscsudch big ityareasasTokyo.Osa Nago2y. andodiercitieswidia population ofoveronemillion.
Table iV-12 Share of Freight Trffic by Mode(Million ton-km %)FY Total JR PRs Truck Maxinc Air1965 186,346 30.3 0.5 26.0 43.3 0.01970 350,656 17.8 0.3 38.8 43.1 0.01975 360,490 12.8 0.2 36.0 50.9 0.01980 438,792 8.4 0.2 40.8 50.6 0.11985 434,160 4.9 0.1 47.4 47.4 0.11990 546,785 4.9 0.1 50.2 44.7 0.1Source: Miniscy of Transport. Whim Paper on Transporm
58 Japanese National Railways Privatization Study II
creased less than the tota economic activities. The November 1986 and all the railroad freight servicereason for this weak demand can be attributed to, has boen converted into the direa services. And asI) outsourcing of bulky materials from abroad, 2) the railroad has concentrated its investmcnt strat-product shift to lighter, smaller one with a higher egyoncontainersand intermodal f2cilities, most ofvalucadded, 3) efficiency improvementofdistribu- the traffic inrease for the railroad freight has cometion and delivery system, and 4) increasing share of from the trffic by containers, not by bulk cargoes.service industry in the whole economic acrivities. 4.25 Nevertheless the competitiveness of raa-Although many of these factors seems to be effec- road frcighttraffichasimprovedbyuneven amountstive throughout the recent years, the elasticity fig- among regions.ure during the second half of 1980's does not 4.26 Intermsoforiginoffreighctraffic,railroadconfirm itand the freight traffic hasstarred to jump has achieved an imnpressive increase in ics competi-again in the second half of 1980's. tiveness from Shikoku, owing to the inauguration
4.22 Railroad ficight traffic in Japan has con- of the railtroad bridge between the Shikoku islandstandy reduced its volume of transport and also its and the Honshu (Seto Ohashi) in April 1988. Nextshar among modes of traffic up to the first half of largestsuccessforrailroadisthetrafficfiomNiigata,1980's.BesidesjNRmanagementproblems,changes for which the total traffic has decreased, whcreasin lines ofcoonmodities and ofdistribution sytem in the railroad traffic has kept increasing. The de-Japan caused the dedine of raiLrad fisight traffic crease offreighi raffic from Niigaa is attributableduring thisperiod. Plasticizauon and dWesification to the traffic shift from Niigata to Hoklriku whichof commotities provides advantage for the traffic is adjacnt to Niigata, owing to the start in fizllby road and by container. As for the distribution service of Hokariku Highway in July 1988 whichsystem, high quality of service has been required to connects the Hokuriku area with Chubu and Kinkiaccord with a"Just-on-Tine system ofproducer. areas. On the contrary, this results in the loss ofThese changes have promoted downsizing of or- railroad competitiveness in thc traffic fromders and prompmess and ceraintyofdelivery, and Hokuriku.consequendyincurredtheeclinceofrailmadfreight. 4.27 In wtrs of destination of affc, Shiloku
Areent Development of e Rroad Freght is also the big winner for railroad fieighr. Same aspment of the Railroad Freight the traffic by orign Niigata is the second success
-ompetitivmw for railroad. Contary to the traffic by origin,4.23 During the second half of 1980's, total railroadhasg ineditscompetitivenessinthefreight
fieight traffic increased faster than the economic raffic to Hokkaido, owning to the inaugurtion ofgrowth. Ralroad freight traffic, which had been the "Seilan Tunnel' in March 1988 which con-constanty declining, had started incrasing once nects the Hokkaido island with the Honshu.again by an almost paralle pace with the real GNPgrowdt during this period. On top ofthe favorable Comparison of Permance between JRs andeconomic situation, the shortagc of truck drivers Pn Raiwasand the congestion on road had encouraged somc 4.28 Few people dispute the success of JNR'sfreight traffic shifting from road to railroad. restructuring. Efficiency gains ofnew railway enti-
4.24 In addition, in order to accord with the tics compard with the old JNR are analysed inchanges in the business environment, mashaling detail in the World Bank publication "Japancseyards were abandoned and instead traffic centcrs National Railways Privatization Study." Howcvcr,were established in February 1984. Furthermore the question remains as for to what extent JRs arethe traffic centers have also been abandoned since operaing efficiently in comparison with private
Tabe IV-13 Freight Traffic Demnd (Tonrn) Elastidty of Real GNPTotal JRFreight Truk
70-'75 0.139 -1.766 -0.24375- '80 0.902 -1.323 1.390'80 - '85 -0.063 -4.192 0.771'85 - '90 1.019 0.985 1.232Sources: Economic Planning Agency. Amwa Repmoen NaziwAceun. Minisy of Transport. 174ike Paper on Transot
Table IV-14: Competitive Indicator of Railroad Freight by Area (1987 to 1991) 1
I ~~~~Desti ation of Traffc
Area Hokkaido Tohoku Kanto Niigata Hokuriku Chubu Kinki Chugoku Shikoku | Kyushu
Hokkaido -23 x:?el*iss<4' "8 -57
Tohoku > 1 -14 j -59 -29|v 4 <37I -54Origiii Kanto "';< s,g < >.?7
of ki .>- 1 1 Traffic Hokuriku 3 I
Chubu__ 3 Kinki __ :
Cugoku |? -29 1__I8
Shikoku _ mlom
. r~otal lil li N}-41 -81 I M flm mData Source: Ministry of Transport, Kamiotsui Cfiiiki Ryuido CElosa, RyoAaku Cliliki Ryudo C/losa (finterArea Freighlt
anid Pa.ssenger Traffic Statistics).
Notes: * Competitiveness indicator is the difference between the increase rares of freight traffic in tonnagc by railroadand that by the total modes of traffic. Years of data used are FY 1987 and 1991.* Traffic within these areas is neglected, because these distances are too short to use the railroad freight.* Competitive irndicator sugests
_: ~~more thar 50
" ^'t*th |betwveen O and 50:less than O
D
60 Japanese National Railways Privatization Study II
railway companics. In Japan, in addition to J Rs, many small lines were constructed in local areas.there isalarge numberof private railwaycompa- By 1905, the routc length of private railwaysnies.AAmongtheseprivatecompanies,thelargest reached 70% of total railway route length in15 companies (in terms of capital, route length Japan (private railways 5,231 km. public tail-
and passengcrs) are refcrred to as the Large ways 2,413 km).Private Railways (Large PRs). The achievement 4.32 During the recession of the early 1900sof management on a par with the Large PRs was following the Russo-Japanese War, these smallone of th: guidelines of the JNR privatization. private railways faced bankruptcy. At che sameIn this section, following a brief outline of the timethcJapanesemilitatybecameconvincedoftheLarge PRs, we consider the effccts ofJNR priva- railway's strategic importance and lobbied stronglytizadon by comparing the JRs to the Large PRs. for the nationalization. In 1906, a railway nation-The data in 1991, the year when detailed data is alization act was passed due to the financial prob-available, is used in this chaptcr unless otherwise lems of small private railways and militaryspecified. Later, in Chapter V, an attempt is considerations in spite of the opposition of manymade toestablish the methodology of economic private operators. Afer that, the main intercityapproach using regression analysis on this topic, railways were operated by state-owned railways,talding into account the network condition and managed by the Ministry of Railways, and privatcservice output. railways were limited to urban and local railway
Lae Privae Rawys transportation.4.29 I'henamesofdhel5LargePRsbyrcgionar,-- 4.33 During the Taisho era (from 1912 to
4.29 Thenamesofthe 1LanrgeiPRsbyT gionarc 1926), as thepopulationgrewrapidlyinthe centersT4,reSa (8 Railway Companes) Tobu Rail- and suburbs of largc metropolitan areas such as
Kway, Seibu Railway, Kcisei Electric Railway, Tokyo and Osaka, the demand of private railways
Raiway, Tokyu Corp., Kehin Elcctric Ex- increasedastheagentofinnercitycommutertrans-prcss Railway, TokyugCorp.i Keihwayn Elecportation. However, the recession in thebeginningpress Rai dwway Sa ompa Railia k ^ofthocShowaera (from 1926) and thespreadofbus
pon Ara (l Railway Companic): Kinki, Nip- transportation brought about a rcorganization ofpon Railway, Nank CorpE.lec Hanscin Ela - privatz railvays. Large private raihways took over
* Raihvwa - smallprivaterailways.The imainingrailwaycom-tl C) N panies found their way into such other businessesNagoya Area (IR as rcal estatc and tourism.
Railroad 4.34 Aftcr Wodd War II, transportation de-Fukka 1 Railway Companies): Nishi-Nippon and in large citis ineased sharply. Private
railways reorganized and 14 larg private railwayHistory ofthe PRs in Jap companies came into existence (the number of
4.30 The first private railway (Nihon Tetsudo) large PRs became 15 in 1990, when Sagami Rail-opened between Ueno and Kumagawa in 1883, 11 way, dassified as small private railways until then,years after the inauguraton ofthe first state-owned was added to the large private railways). With highrailway, Japanese National Railway. The Meiji cconomic growth in the 1950s and 1960s, popula-government, which wanted to 'catch up' with tion became concentrated in large mtropolitanindustrial countries in Europe and America, pro- areas. The increase in population in the suburbs ofmoted the construction oftransportation nerwork. large metropolitan areas made private railwaysSince the government lacked sufficient financial indispensable as high-speed mass transportationresources to establisha transportation network, and system. In addition, the population increase gavebecausc ofits policy avoiding dependence on finds private railwaycompanies opportunities to partici-from overseas, it encouraged the privatc sector to pate in side-businesses such as real estate devlop-invcst in railwys. Following the success of Nihon ment, because housing demand increased alongTetsudo, pnvate cntrepurs consuaced raidways private railway lincs and privatc railways sold offone afier another. It is noticeable that the private the land and residences which they developed.railways at that time constructed intercity lines. They also opened department stores and amuse-
4.31 After thl 1892recession, thcsecondboom mcntfci;ities inftontofthesations,whichboosredof private railway construction begn This time the advantages of private railway lines.
Chart IV-1 Railway Network in Tokyo Area
k I LI) Lime) i z
Ut
.s.: !=P. ]cu.PLI
Tbra.peu1aiIm Am.
JR.
- New Trampod System
ChartIV-2 - --- -
Railway Network In Osaka Area i
FukuchlyamLle -- -L ine ,
h li
hm I , I .h 1 1 1__ _ _ _ _ _ _ _ _
.0 ~ ~ ~ ~ ~ ~ ~ ~ ~~
hI7~~~~~~~~~~~~~~~~~I< k a rieshimelo z * * * | ~~~~~~~~- New Tlportatm Systea l
| _ _ & , _ | ( ~~~~~~~~~~~~~~~~~~~~~------k Katarlkl |i|e_
Japanese National Railways Priviadon Study II 63
4.35 Aftertheoil crisisofthemid 1970sandthe crate. The consolidated sale ofthe Large PRs is twocndof high economic grwth, thesituationchanged to three times as much as dtat of parent companiesPopulation growth in metropolitan areas slowed. basedontheconsolidatedfinancialsutements,andFurthermorc, with the end of the land develop- wouldbemore danthatifindudinggroupcompa-ment boom, private railways have not camed prof- nies not covered in consolidated financial state-its fiom real estat development as much as they menhs.once did. 4.39 Fares are regulated by the care regulatory
4.36 In 1987 Japanese National Railways was system, leading to rigidity of revenue flow in theprivatizedandonceagainthcprivatesectorcameto railway busincss. Its profitability is strongly af-operate most of the railways in Japan. fectedbythecimingandsizeoffareincreases. In the
GbtaofPPs context of such negative aspects of the railwaybusiness, the diversified business sector gives the
4.37 The Large PRs mainly transport people Large PRs stable arnings. For example, in the casecommuting to work and school in the thr main of development of such areas along the railwaymetropolitan areas (the Tokyo, Osaka and Nagoya tracks through the selling off of real estate, theareas) and Fukuoka, where the population density companies thmselves have been able to regulateis high. In the three main metropolitan areas, the the amount ofland and residences sold, and henceshare of passngers transported by the private rail- the flow of revenue and profit. Many of the Largeways is greater than that of the jRs. As the mnor PRs increase the selling off of land when railwaytransporter un th large cia, the Large PRs have business is poor, and restrict it when conditionsmintainerelarivelysteadyprofits TheLargePRs improve. Thus ticy hae been able to ensure areceive no subsidy for their railway opertion, steady flow of profit available for dividends over
4.38 The Large PRs have acively moved into each fiscal year. Howver, because the supplementsmany other areas of business besides raivays. The that can be obtained from the real estate businessamounc of rcvenue earned by such activities aver- ar limited, their profitability has begun to dedinegecs 50% of total revenuc. These divasifid busi- recently.
ness activities include bus opceraion, housing and 4.40 As a result ofthe lack of available land andeal estate devopment, the rental of office build- increasing constuction COStS in the large dcties theings, tourism and leisure, and other businesses. Large PRshavemadefwadditionsorexcensions toDivesifiedbusinessrdaredthoseliving dosetothe thir acr tain lines. Rather the Large PRsrilway is mutually cmplementary to their railway concentate on the investment forquadruplc tracc-business, shaping the growdt of the privat railwy ing and other capacity expansions to relief thecompanies. The Large PRs also create separate congestion in metropolitan lines.companies to implement their diversified policies, 4.41 The Lrg PRs arealllistedcompanies. Inand the group of thcsc companies forms conglom- addition, apart from the Large PRs, there are also
Table IV-15: Dhersified Business(y Billion)
Honshu JRs Large PRsFiscal Year 1987 1991 1987 1991Raiiway* Revenue 3,191 3,891 921 1,110
Profit 429 754 135 147Bus Revenue 29 - 241 259
Profit -7 - 0 -6Real Estate Revenuc - - 363 506
Profit - - 126 205Others Revenue 23 93 280 408
Profit 17 16 5 4Total Revenue 3,192 3,984 1,805 2,284
Profit 439 770 266 351Source Minsuy of Tspor= Teiudo Toki Nenpo nnual Raiwas Siscics). -Note:Pro&f as opeatng prok- RailwayOperaing Revenuc Fare rvenue and other rvenue. nor included subsidies Railway Opeing Expenditure Labor.
enelgy. epair. miselaneous pecnses. ox (not incuded corporact u and depreiation.
64 Japanese National Railways Prniatization Study II
sveml other privte railway companies listed on all Japanese industry (3.0%) and for all manufic-dh stock gehange. Thus the private railways in wuring industry (4.3%). For dhc railway business,Japanhavefirmbasis,asoneoftheleadingcompa- the ratio is roughly equivalent to the all industrynies, in their own business areas average at 3.2%. However, thc ratio for the othr
FiwuidPaffornww busincss areas is high (7.6%), boosting the LargePRs' overall profit ratio. Regarding these ina
4.42 In fiscal 1991, the operating revenue for data for operating revenue and cxpenditurc ofthe Large Private Railway Compans came to Y2.3 railroad sector are public Non-operating revenuetrillion. Operating profit was Y351 billion, and and xpenditureofrailroadsctcorarecakulated bycurrent profit was V125 billion. If we disaggregare multiplying total non-operating revenue and ex-the Y351 billion operating profit, we see that 1147 penditure, which are reeased publidy in financialbillion, 42% of tocal operating profit, is derived stareants,bytheratioofthcrailwayfixedasseutofrom therailvaybusincss,while V2O5bilion, 58%, total fixed assets.comes from the real estae business. Thus profit 4.43 Profit and loss in the railway business armfrom the real estate business dearly exceeds that of strongly rlated to changes in fare prices. In fiscalthe railway business. The ratio of curent profit to 1991, the operating profit ofthe railwayse':torwastotl saes is 5.5%, higher than both th average for Y147 billion. However, due to the fact that 13 of
Tabl IV-16: Pri and Loss of fth Lare Priae Raiway Comnies(V' Dl Wn, PercentFisclYear 1987 1988 1989 1990 1991 1992Operting Revenue 1,805 1,908 2,031 2,186 2,284 2,329Optting Ependiture 1,540 1,614 1,738 1,864 1,932 1,990Operating Profit/Loss 265 294 293 322 351 339(Ratio of Profit to Revenue) (14.7) (15.4) (14.4) (14.7) (15.4) (14.6)
Non-Operating Revenue 67 67 85 98 102 99Non-Oprating Expendimre 231 231 241 297 329 318Current ProfitLoss 101 130 136 123 125 119Extraordinary -3 -17 -20 -9 4 -2Revenuc/ExpenditureCorporate Taxes 51 57 57 51 64 55Net Profit/Loss 47 56 60 63 65 62sour= Ministy ofTransporcm Tersudo Tokei Nenpo (Annual Railways Sraidwcs).
Tle V17 Operating Proft of the Large PRs: Railroad Sector and OtrSecors
Fiscal Year 1988 1989 1990 1991 1992Railway 159 143 135 147 193Others 135 151 188 204 146Totl 294 293 322 351 339Sourcen Ministry of Tranorr. Tetsudo Tokci Nenpo (Annual Railways Saosdcs).1992: Pne Railway Companies
Tabe IY-18: Scale of Railway BusinessHonshuJRs L arePRs *
Route-anm (cu) 14,545 2,870Passenger (million persons) 8,199 8,009Passenger-km (billi. n personkmn) 231.8 112.7Traffic Share (pecent) 17.4 8.5Siiu Ministry ofTransport.. Tndo ThkNenp.(AwaLRAihuaSmtia), InstitnucofTrspomtionEconomincs5iSic
Mmw Tasud '93 PUt Fat Beek '93).Honshu JRs lbe toa of the three jR companies lcatd on Honshu (mainland Japan)Large PRs: Th totl ofthe fifieen 1 pra rih y companies
- Route-kn: One way. non-duplicatngtotl klometesNote: The figures are in 1991
Japanese National Raihways Privatization Study II 65
the 15 Large PRs raised their prices in 1991, the increas in fares, the extra proceeds romwhich arcoperating profit for fiscal 1992 jumped to '193 retained free ofcaxbythe company concrned andbillion. As cosrs tend to rise in the long term, the allocated to such projects. On completion of theLarge PR's incomc from their railway business project (completion must be within 10 years) thetends to rcalize continuously declining profits in fitndisdismantledoveraperiodoftenyears,andinthe periods following price adjustments. The rail- the end the moneygained from this retumed to theway business, strongly influenced by changs in users. While the funds allocated are restricted tofareprices, is compensated for by otherareas ofside 25* ofthe cost of the project and must cvenrt-allybusiness, especially real estate. Thefollowingshows be returned to the users, it makes possible rhethe trend of operating profit of the Large PRs. In raising of interest free funds. At present, of the1989 and 1991 when the operating profir of rail- LargePRs,5companies(Tobu,Scibu,Kcio,Odakyuroad sector declined, operating profits of non- and Tokynu) are using this systea In FY 1994 thcrailroad sectors, almost all of which is contributed amount of loans is expected to increase from 25%by real estatc, incrcased. Howevcr, in 1992 when oftheprojectcostto 50%,andthe targetofprojectsthe operating profit of railroad sector rose, operat- to include new line construction.ing profits of the non-railway scaors decreased.
4.44 As mentdoned above, in the long term, thestable railway business and the complementary 4.47 In this section performance is comparednaure ofthe other side businesses ofthe Large PRs between the three Honshu JRs (JR East Japan, JRhave meant they have bcen able tO rcalize stable Central Japan and JR West Japan) and the fiftedividends ofbeween 8-10% in each period. How- Large PRs in order to assess the effect of JNR!sever, their profitability has begun to dedine re- privatizaion. In the case ofJRs the three Honshucendybecausethesupplementsthatcanbeobtained JRsare sdectedfrom the6JRpassengercompanies,from the rcal estate business are limited. because their operating areas are mainly confined
I C to thethreemajormetropolianrarcas andccoincides-wi"th the Large PRs. The sum of the dthree Honshu
4.5 As discussed above, the Large PRs have a JRs' damaandthesumofthefifteenLargePRs' datalong history as an imporant tansportation sysm are compared here. One diffilaty in maling afor people living in the metropolitan cities, devel- comparison between the JRs and PRs is thar whileoping in linewith their need The scale and growth thcLarge PRs are beavilyconcent;raed in the majorof Japan's Large PRs is unique among the private metropolitan areas, the JRs operate many loaldrailways throughout the world's large cities. How- train lines. In this context, there is an obviousever, the Large PRs are presently faced with a differenc in the traffic density of the two groups,dificult situation: Over-congestion during peak making a close companison problematic. Becauseperiod is serious in mectropoPtan railways, espe- of tiis, we analyze the diffirent nature of theciaily in the Tokyo area. Many PRs in the Tokyo Honshu JRs and the Large PRs, while making aarea carry twice as many passengers as they are comparison of the performance of the two groupsdesigned for. This problem requires heavy invest- following JNR's privatization.ment in order to relief the congestion and to 4.48 To comparc the producivity of the twoquicker transportaion through such measures as groups, simple average comparison medtod byquadruple tracking. However, due to the residen- actual figures is used in this chapter. Later, intial crowding in Tokyo, the acquisition of land for ChaperV, economicapproachbyusing regressionsuchquadrupletrackinghasprovendifficult. More- analysis is sought, which considers the diflirence ofover, the rise in land prices in the inner aiy has network and service. As a rle, the period of com-mcant that immense sums of money to finance parison will cover the five years between JNR'ssuch construction are requird. privatization in 1987, and 1991 whn derailed
4.46 In order to promote quadrupl tracking figures(AnnualRailwaysStatistics)werepublished.and other such large-scale investment by private Baic Figursfor the HonshufRi ad the Larg PBsrailway companies within the metropolitan area, anew investment-promoting system was established 4.49 The total route-km of the Honshu JRsby the govemen in 1986. Under this yastem, comcs to 14,5451an,comparedto2,87Onmfortheconstction is pariLly financed in advance by an Large PRs The route-lm ofthe Iarg PRsissmall,
66 Japan: National Railways Privatization Study II
Tabb IV-19 Characbdtesic of TrafficHonshu JRs large PRs
FY 1987 FY 1991 FY1987 FY 1991Average Traveling Distance (kln) 27.5 283 14.1 14.1Trffic Densitry 35.4 43.5 100.2 1073(thousand persons per kmn)
Averagc Passenger per Car 51.9 53.5 66.3 63.4(persons per kIn)
Sourc Minisrry of Trnsport, Tersudo Tokei Nenpo (Annual Railways Statistic).Traffic Dnsity: Passenger-km per Route-kmn per Day
Tabl IV-20: JR East JWn (1991)Traffic Density Rail Revenue
(thousand persons/km) (V Billion)Shinkansen 52.4 428Conventional line 45.1 1,290
Mctropolitan 187.1 935Local 17.2 455
Total 45.9 1,718Sour IjR. East apan
Ta IV-21: Transpolt VolumeHonshu as PRs
FY 1987 FY 1991 FY 1987 FY 1991Passenger-km 191.4 231.8 104.4 112.7(bAiLion person-km)
Source Ministry of Transpor Tsudo Toki Nenpo (Anmual Rlways Statistics).
Table IV-22 Car FrequencyHonshu IMs ae PRs
FY 1987 FY 1991 FY 1987 FY 1991Car Frequency (thousand times) 249.7 297.6 553.2 619.9Avragc Car per Train (car) 8.1 7.8 5.5 5.9Soure Ministry ofTransport. Tctsudo Tokei Nenpo (Annual Raihlays Staisis).
Car Frequencyq Carkan per Route-kn per Yenr
Tasb IV-23: Employee per UnitHonshu JRs lare PRs
FY 1987 FY 1991 FY 1987 FY 1991
Rail Ernployeek 151 134 56 56(thousand persons)
Employee per Route-kmn 102 9.2 19.6 19.5(persons per kIn)
Emnployee per Car-km 40.9 31.0 35.5 31.4(persons per n) **(1.15) (0.99) (1.00) (1.00)
Employee per Passenger-km 0.79 0.58 0.54 0.50
(persons per million person-kin) *(1.46) (1.16) (1.00) (1.00)
Sourc Ministry ofTransporr. Tersudo Tokei Neupo (Annual Railways Staistics).Notes lathisCapter.vecomparehenumberofemployes pernitrinordertoanalyzelaborproducrviy.TyismerhodisgeneallY
used injapan. in Chaptr V. dt lbor producrivity of all JR compamis is compared to lre PRs. while in this dcptr ta ofthe dee Honshu JRs OR East. JR Cenra and JRWesc) is analyzed.
Rail Employee permanent employer- not induded pa-t-ime employeeTke figures in parenthesis is the raio to the figures for the large PRs
Japanese National Railways Privatizaton Sudy II 67
reaching only 20% ofthe HonshuJRs. The reason higher dtan tiat for the Honshu JRs (Honshu JRsthat the route-km of the Large PRs is short relative 54 persons per kIn, Large PRs: 63 persons per km).to the Honshu JRs is that while theprivate railways' (Comparison over dte period fiom 1987 to 19911
main train lines are within the larg cities, the JRs' Trort Vo&metrain lines are a combination of innercity routes,interciry trunk routes and local lin routes. 4.55 ThenumberofpassengerstheHonshujRs
4.50 Thenumberofpassengerscarriedperyear carried has grown from 191 billion person-km inbyboththeHonshuJRsandlargePRscomesto8 1987 to 232 billion person-km in 1991, at anbillion. However, in terms of passenger-kIm, the average rate of 4.9 % over the 5 ycar period. ThisLarge PRs carried 113 billion, not evcn half of growth rate is higher than that of the Large PRsHonshu JRs' figure (232 billion). Longer traveling (from 104 billion person-kmto 113 billionperson-disance per passenger for theJRs than th for the kIm, 1.9% increase per year).Large PRs contributed to this lifference. Improumuent in Sewce
4.51 As a sharc of total domestic transportservices (in te;ms of passnger-km), the railways a 4.56 hle Honshu JRs' t esquency of car opera-awholc hold 30.1%, 17.4% ofwhich is held by the ofon (car-km per route-n) is lowconmpared to thatHonshu JRs, and 8.5% by the Laurc PRs. In the of the Large PRs and the average nus ber of cGaSthree rnajor mctopolitan areas, the railways'share connected to form one train tends to be high. Inis considerably higher at 50.6%, rcflecting the response to dte increase in aansport volume overimportance of its finction as mcans of transporta- the 5 year period, however, whilc the Honshu JRstion for the residents ofthc largc cities. .lc ac have decreased the average number of cars per aminnumber of passengers transported per day by the (from 8.1 carsper rain in 1987 to 7.8 cars per tminprivate railvays (induding small private railways) in 1991), they have increased their car frequencytotals 22 million peoplc, 21.5% of all transporta- (car-km per route-kn) by 19% (from 250 thou-ion in thelagecities. In theselargecitics, theshare sand times in 1987to 298 thousandrimesin 1991).
Of passengers transported by private itys Ls In comparison, the response of the Iarge PRs wasgreater tan hat of the JRs (17.5%). to increase not only the car frequency (by 120h) but
4.52 The avragc trip distance of passenger is also the number ofcars per train (from 5.5 cars perlonger rEJRs (HonshuJRs: 28km,LargePRr 14 train in 1987 to 5.9 cars per train in 1991) duringIn). This reflects the sitation decribed above this period. The increase in car frequency can bewhere the lage PRs are concentratedwithin cities, seen as ain improvement in pasenger suvicc, fur-while the JRs serve those traveling between cities, ther incasing tEUnsport demand.making traveling distnce per passenger much Numbr .,pl,usper Unitlonger.
4.53 The traffic density (the passegcr-kin per 4.57 The Honshu JRs reduced the number ofroutc-km per day) of the Hoashu JRs is low, only cmployees in the raiload sector during this period,40% of the figure of the Large PRs, orwing to the resulting in a reduction of 17 thousand workers&ct that theJRs have many local tain lineswhile overtheSyeaw (from 151 thousandin 1987to 134the Large PRs serve mainly inner city commuters thousand in 1991). The number of employees at(Large PRs: 107 thousand persons per in, JRs: 44 the Large PRs was almost unchanged over the samethousand persons per km). If we divide JR East period.Japan's conventional lines into those witdin the 4.58 In terms of the number of employees perTokyo metropolitan area and local lines, the met- route-kmn, the figure for the Honshu JRs is belowropolitan lines have a trffic density of 187 thou- thatofthe Large PRs (HonshuJRs: 9.2, Large PRs:sandpersonsperkm,alevelsinilartothatofthe8 19.5). This reflecs the differeat nature of theirLarge PRs in the Tokyo area (153 thousand per- respective routes; while the Honshu JRs operatesons per km), while for the local lines the figure is innrcity lines, interciy lines and local lines, theverylowatl7thousandpersonsperkm.Becauseof Large PRs operate only innerciqy lines. For ex-the local lines, the traffic density ofJR East Japan ampie, JRs' distnces becween stations (averageis lower than tht of the Large PRs. distance between sations: Honshu JRs 4.3 kin,
4.54 Intermsoftheavergenumberofpassen- Large PRs 1.6 kIn) are longer than those of thegeus per car-Ian, the figurc for the Large PRs is also Large PRs.
68 Japanese National Railways Privatization Study II
4.59 Ifwelookatnumberofemployeespercar- is reflected in the figures. In particular, the JRskim, in 1987, immcdiately afir privatization, the operate many local lines, which, by nature, havefigure of the Honshu JRs was 15% higher than lowtrafficdensityandtherefore rlativelyhighunitthat of thc Large PRs. However, if wc compare costs. In this contaxt, a dosc comparison of coststhe two in 1991, the number had become roughly between theJRs and the Large PRs suffers from theequal (HonshuJRs: from 40.9 in 1987 to 31.0 in same difficulties of the productivity comparison.1991, Large PRs: from 35.5 to 31.4). The JRs'initial inferiority to the PRs in terms ofemploy-ecs per car-km was a result of their low car 4.63 Interrnsoftheavcragecostoftransportingfrequency, despite their low number ofemploy- one passenger over one kilometer, JRs' figure isecs per route-km. In the 5 years following JNR's higher. Comparing 1992 in order to avoid theprivatization, the JRs were able to increase their influence ofrthe Shinkansen's lease fec, the Honshucar frequency, while decreasing the number of JRs required V112.5 per passcnger-km compared tocmployees. Thus the JRs were able to raise their Y8.9 for the Large PRs. Breaking down costs, welabor productivity, operating their cars with a can see that JRs' unit costs for personnd expenses,similar number ofemployces to that of the Large repair expenses and depreciation costs werc higherPRs. (1991 figures). Therewaslitdedifferences inpower
4.60 Comparing the employees per passenger- expenses or the amount of ax paidLIam, the Large PRs, which operatewith high traffic Costper Car-kmdensity, high car frequency and high av4cagu passsengers per car, have a lower ratio. In this respect, 4.64 Intermsofcostpercar-kr,JRs'unitcostLheirproductvityisgreaterthan tharofthe Honshu is also higher than that of the Large PRs (HonshuJRs. However, over the 5 year period, the Honshu JRs: F725 thousand, Large PRs: Y541 thousand).JRs were able to increase their transport volume However, breaking down the aggregate costs, we(passenger-kin) by 21%, at the same timc reducing fmd tat JRs unit costs forpersonnel and power aretheirwork force by 1l%.Asaresult, the ratio ofLhe lower than those of the Large PRs. In the previousHonshuJRstotheLargePRs&Ilfroml.46in 1987 comparison made in terms of trnsportng oneto 1.16 in 1991. Thisdecline represensa shrinking person over one ian, the unit cosC for the JRs wasof the gap in labor pmrductivity between the JRs higher due to te' low number of avcrage passengersand the Large PRs. per car and low car frquency. However, compar-
4.61 In conclusion, analyzing number of em- ing costs per car-km, which serves to exdude theployees per unit by the simple averge comparison, diff&rence of avcrage passenger per car, there is athe productivity of the Honshu JRs improved reverse m sone of the items.gready in the five years foilowing JNR's privatiza- ponnel Cosa pffEmployeetion and reached on a parwith Large PRs in certainindicators. However, the gap between the JRs and 4.65 IntheperiodimmediatelyfollowingJNR'sthe Large PRs still exists in ernployee perpassenger- pnvatization,JRs' personnel costperemployeewasIan, although this does not necessarily mean rhat lower than that of the Large PRs. However, byJNRislessefficient.Thisindicator could reflect dhe 1991 the figure had risen to the almosc same levcltwo factors'; (a) JRs operate local lines, too, and (b) of the Large PRs. The average age of employces wasPRshavenotbeenaseagerasJNRfortheexpansion 3 years greater at the Honshu JRs (all scaorsof transporation capacity, resulting in more includingsidebusinesses)inl991. Whiletheaver-crowded cars at the expcnse of passengers. Later in agc age rose at thcJRs over the 5 year period due toChapterV, we compare producivity of the two by thc 5 yearextensionofretiringage, at the Large PRsregression analysis which takes into account of the it dedined. A number of JR's aged workers willdiflcrcnce of network and service, begin to retire 5years laterand restructuringva dl go
on the way.
4.62 Below, we compare the cost strucure of See 'Dai Toshi Ken Shitctsu no Sezubi Toshi ni Tsuitethe HonsujRs ant the lrge PRs In makng di(Invsmenmt of Private Railways in Metropolitan Areas).'theHonshuJRsandtheLargePRs. Inmaking this 1991. and 'Tesudo Unchin, Shushi to Setsubi Tos"i
comparison, itis imporant to bear in miid that the (Railroad Fams. Profiability and Capiml Invesument).'di&rence in operating conditions between the two 199Z, by Hideli Moriya, the Japan Development Bank
]a mm National Railways Prnatization Study U 69
rable I-24: Cost per Passenger-km
Honshu JRs Lae PRsFiscalYear 1987 1991 1992 1987 1991 1992Operating Expenditure 14.2 13.5 12.5 7.5 8.5 8.9
Personnel Expenss 4.2 4.3 4.5 3.6 3.8 4.0Repair Expenses 1.6 2.5 2.2 0.9 0.9 1.0Power Expenses 0.6 O.6 0.6 0.6 0.6 0.6Other Expenscs 5.5 3.7 2.2 0.9 1.2 1.2(Lease on Shinkansen)* (3.7) (1.6) (-) - - ()Taxes 0.3 0.4 0.5 0.4 0.4 0.5Depredation 1.9 2.1 2.5 1.3 1.6 1.7
Source: Ministry ofTmnsport. Tetsudo Tokci Nenpo (Annual Railways Statistics).* lease on Sh inknsen Expense is fiom de financial statemnts ofthe Shinkansen Holding Cooperation.
rabl IV-25: Cost per Car-km11'Thousand
Honshu Rs Large PRsFiscal Year 1987 1991 1987 1991Opeaing Expenditure 735 725 499 541Personnel Expenses 218 230 236 241Repair Expnses 82 131 57 59Power Expenses 33 32 38 36Other Expenses 287 199 59 74(LeIas on Shinkansen)* (193) (83) - -Taes 14 21 25 28Dcepration 101 111 83 103
Source MinisnyofTraspoff. Terudo Tokei Ncnpo (Annual Railways Smtistcs).-eI on Shnkansen Expense is fiom dte financidal saenents ofthe Shinkan Holding Coopernaon.
Table IV-26 Persomel Cost and Age(MlUon, Yea)
Honshu JRs ue PRsFiscalYar 1987 1991 1987 1991Average Personnel Cost 5.3 7.4 6.7 7.7AvemrAge' 37.8 41.2 40.0 38.3
Source Ministy ofTranspor. Tersudo Tokei Nenpo (Annual Railways Srasics).JRs and Privare Raihways.Average Personnel Cost - Personnel CostslNumberofEmployces of Railroad SectorAl S ecors induding railroad and odter side businesses
Table IV-27: Fare Rate
Honsu JRs Lae PRs1987 1991 1987 1991
Pa* 6.8 6.6 5.2 5.7(1.31) (1.16) (1.00) (1.00)
Non-Pass 21.1 22.0 14.7 16.3(1.44) (1.35) (1.00) (1.00)
Total 15.2 15.6 8.3 9.2(1.83) (1.70) (1.00) (1.00)
Sourie Mnisuy ofTmnsporr. Tetsudo Tokei Nenpo (Annual Raiways Statistcs).* Pass Commute pass passengerNotes Fare Rare - Passenger Revenue I Passenger-kn. The figures in parenthesis is the rtio to the figures for the Large PRs
70 Japanese National Raihlays Prvatization Study II
Fare Rae the same period, inreasing fare prices by roughly
4.66 In twrms of fare rate, given by passenger 20%. As a result, the differenc becween the fEs ofrevenuedividedbypassenger-kln, thefigureforthe the Honshu JRs and the Large PRs in urban areasHonshu JRs is higher at 1.7 times that of the Ire has been deacreasing.PRs(HonshuJRs:15.6, LagePRs V9.2). One of 4.68 AlongcertainlineswheretheJRscompete
th reasons .h JR.rlativcl hih fu direcdy wth the private ralways, they have intro.the reasons behind JRs relativelya hhigurs duceda special fare discount system. Following theprernurn paid on excpress travel and the Shnicase. tw *rc ie mlmne ytelrePsoeIn order to achieve a more suitble comparison, we the five year perod, wltheb these ccrtai lines thelook at the fare ratc of commuter pass passengess.He the figure isV6.6 the HonshuJRs and V5.7 JRs presendy offier cheaper travel in some cases.for the Large PRs, decreasing the difference given Fin anIPergmancc OperaingRewnieabove to less than 1.2 times. Moreover, if we 4.69 TheratinvcRucofthCHonshuJRscompare the figures for 1987 and 199 1, wec grew at an average rate of 5.5% annually over thethat the gap has been shrinking as a rcsult of the five year period. This was due to the strong growth
Larg .Rs fareapeotTasa increases.roggrarge PR fire o s p t.rivatiaon i o in the number ofpassengers (4.9% avrage annual4.67 Prior to prmvanzation, in order semprove growth in terms of -assenger-kn). For the Lrge
their revenue position, JNR implemented a series PRs, the average r;. e of growth over the sameofprice hikes As a result, their fares became cen- penod was 4.9% per year. This was due mainly tosive as compared to similar lines operated by the the efec of thc increasc in re (fis incrcased byprivaterilwayswithizthemetropolanareas. The
crease in fires caused passengers to slhifi a yearly averge of 3.4%).from JNR, necessitating futher fire increases and Operaing Coutsthus forming a vicious circde. Since privatzation 4.70 Thc sum of the Honshu JRs' operating(from 1987 to 1992), th JRs have not incrcased dnon-operatingcostsgwatanaageannualteir ofaes, apart from an incse for the iroduc- rate of 5% through the period. Ihc reasons behind
hand,ftheooanrsum i hw se198 On twice m i relatively modest growth were downsring in
Tabe IV-28: FaU Rat(49Between Ticket Type 1986 * 1987 199I 1992Ueno One Way JRs 280 280 290 290
PRs 230 250 260 280Ichikcwa Pas JRs 8,400 8,400 8,650 8,650
(one month) PRs 8,600 9,400 9,690 10,900Shibuya One Way JRs 180 200 210 210
PRs 140 140 170 190Kichijoji Pass JRs 5,400 6,000 6,180 6,180
(one month PRs 4,700 4,700 5,560 6,600Shibuya One Way JRs 310 360 270 270
PRs 160 160 250 270Yokohama Pass ]Rs 9,300 10,800 8,030 8,030
(one month) PRs 6,580 6,580 8,330 9,620Nagoya Onc Way JRs 440 440 450 450
PRs 430 480 490 540Yokkaichi Pass JRs 13200 13,200 13,600 13,600
(one month) PRs 11,500 13,270 13,570 15,800Osaka One Way JRs 440 440 450 450
PRs 410 480 460 480Nam Pass JRs 13,200 13,200 13,600 13,600
(one month) PRs 11,620 13,180 13,570 15,350Sourot Insiini of Twisponation Economics, Ssig DeMfm Te*udo (RaiFaoBok).a JRs fior 1986 areJNR
Japanese National Ralways Privatization Study II 71
order to curb the increase in personncd costs, a billion in fiscal 1987 to V 26 billion in fiscal 1991lighter debt burden due to progress in the repay- (although in fiscal 1992 it recovered to V 81 billionment of debt inherited from JNR, and falling as a result of the increase in fare prices).intcrest rates. Current profit grew from V170 bil-lion infiscal 1987 to V293billion infiscal 1991. On11tio of C et Poit to Rethe other hand, for the large PRs, the sum of 4.71 At 7.5%, JRs' ratio of current profit tooperating and non-operati ng costs grew at an aver- revenue in 1991 was high relative to the Large PRsage annual rate of 5.4% over the same period. The (2.8%) as well as to the average of all Japaneseincrease in depreciation costs and interest pay- industry (3.0%). Its ratio fell in fiscal 1991 due toments f611wingsuchlargescale investmentprojects lower profits caused by increased costs from theas quadruple tracking were the major faaors bc- purchase of the Shinkansen line, but if we look athind this growth rate. Current profit fell from V 42 the five year trend it is apparent that the ratio has
Table N-29; Ralway Profit and Loss of the Honshu JRB11Bii0on, Percent)
Fiscal Year 1987 1988 1989 1990 1991 1992Opeacting Rcvenu^ 3,139 3,361 3,483 3,746 3,891 3,899Operating Expen4iture 2,710 2,865 3,004 3,210 3,137 2,927Operating Profit/Loss 429 496 478 536 754 972(Ratio of Profit to Revenue) (13.7) (14.8) (13.7) (14.3) (19.4) (24.9)(Ratio of Profit beforeDepredation to Revenue) (25.5) (28.1) (24.6) (24.1) (31.8) (40.0)
Non-Operating Revenue/ -259 -259 -200 -155 -461 -705Expenditurc * -
Current ProfidLoss 170 237 278 380 293 267(Ratio of Profit to Revenue) (5.4) (7.1) (8.0) (10.2) (7.5) (6.8)
Table 30: Raily Profit and Loss of h Larpe PRs(VBDiln, Percent)Fiscal Year 1987 1988 1989 1990 1991 1992OpentingRevenuet 921 988 1,012 1,053 1,110 1,196Operating Expenditure 786 828 869 918 963 1,003Operating Profit/Loss 135 159 142 135 147 193(Ratio of Profit to Revenue) (14.7) (16.1) (14.1) (12.8) (13.6) (16.2)(Ratio of Profit beforeDeprciation to Revenue) (28.8) (30.4) (29.9) (28.9) (30.1) (32.1)
Non-Operating Revenue/ -94 -91 -84 -109 -116 -110Expenditure
Current Profit/Loss 42 69 59 26 32 83(Ratio of Profit to Revenue) (4.5) (6.9) (5.8) (2.5) (2.8) (6.9)Source Ministry of Transporc. Tersudo Tokei Nenpo (Annual Railways Statistics).* Operating Revenue: Fare revenuc and otber evenue, not included subsidies
Opting Expcnditurc Labor. energy, repair. miscellanus expenses. tax (not induded corporate tax) and depreciationNon-Operating RevenutE/xpenditurc is estimated by multiplying total Non-Operating Revenue/Expendikure by the mtio ofthe railway fiwd assets o totl fied aets.
Table V-31: Business Proit tD Totl Catal(Percent)Fiscal Year 1988 1989 1990 1991 1992
Honshu JRs 9.2 8.9 9.7 7.5 * 6.6 *Large PRs 5.1 4.8 5.0 5.0 4.4Sourcc: * Ministry of Transport, Tersudo Tokci Nenpo (Annual Rilways Statistics). 1992: JRs and Private RaisNooe= Fg aes total business mtsults iucludin& railway business and other side business. Total Capital = Current Assets +
Fuoed Assers + Deferred Assets + Notes Discounted and Endorsed. Total Capital the average of the beginning andthe end of fiscal year. Business Profit - Operating Profit + Inteest and Dividends Received
* Business ProfirtoTotal Capitl ofhe Honshu]Rsdedi-ned in 1991 and 1992 dueotw eincreaseofboth costand fiaxsed sby acquiring the Shinkans line.
72 Japanese National Railwys Privatization Study II
been improving. While the unit costs oftheJRs ame 4.75 In the same period, theJRs were also ablehigher than thosc of the Largc PRs, they have been to downsize their work force by 11% and greadyable to remain higher profitabiitywith theirhigher increase labor produaivity. Due to the differencefare race. inthenature oftherailways opycmedbytheJRsand
Reh*rx ox As.ret the Large PRs, it is not possible to nake a simnplecomparison of their performance. Howevcr, look-
4.72 In terms ofbusiness profit to total capital, ing at the average for the Large PRs and threewhich measures the return on assets, the Honshu Honshu JRs in 1991, in terms of car-km, the JRsJRs(1992:6.6%)outperformtheLargePRs(4A%). were able to decrase their number of employeesAlthough the 1992 ratio for the Honshu JRs is per unit to a level simnilr to that of the Large PRs.influenced to some cxtent by the purchase of the In terms of passenger-kmn, while still below &hat ofShinkansen line, which Eripled JRs' assets, this the Large PRs, the JRs were able to decrease theprowvd eo detract litde from its profitability. difrence in number of employees per unit fiom
FncdPosidan 46% in 1987 to 16% by the end of the period. (Inthis chapter, simple average method is us5U for the
4.73 Vhile the JRs have been ablc to achieve compaison of the two, and in Chapter V produc-rdatively stable profitability, their financial posi- evity is compared by rgression analysis whichton weak In 1991, when the assets and liabilities takcs int account the nctwork condition andofthe Shinkansen were added onJRs balance sheet service output.)folowingJRs'acquisitionoftheShinkansenlincin 4.76 In terns of unit cost, JRs' costs are stilldhat year, JRs ratio of net worth to total capital higher than thatoftheLargepRs. Bycompensbeame 7.3%. This isweil below hat ofthe private for their higr costs through setng higher fares,raiys (17.3%), though the ratio for these com- thcJRs have been able to mainain a higher profit-paniis is low relative to other industies. abilitthantheLargePRs.However,overthe5year
zssgcbB on period under consideration, while theJRs have notraise didr fares, the price offares for the Large PRs
4i.74 In the 5 yers fol ng priatization, the has risen byrougbly20%.As aresult, thedifferenceHonshu JRs have seen a 21% incrase in passenger in fiare priccs betwe the two groups has beendemand. While the strong economy during tbis deidiuug and, within some areas served by both,period is behind this increase, JRs' own eiiorts can thc JRs are now carrying passencrs at lower faresbeen seen to stimulate demand. For example, the tan th of the private railways.increase in car frequency achieved, while decreas- 4.77 In comparing the performance of post-ing the avrwage number of cars per train, shows an privatiation JRs and the large PRs, we can see that,improvement in service, contributing to the m- in termsofservice,producti and fires, theJRs arecreasc in demand. approaching the standard set by the Lagc PRs
Japanese National Railways Privatization Study 11 73
Table V32: Balance Sheet of the Honshu JRs(f Billion)FiscalYear 1987 1988 1989 1990 1991 1992Current Assets 629 543 557 675 676 669Fixed Assets 5,433 5,286 5,334 5,446 14,636 14,566
TotalAssets 6,062 5,830 5,891 6,121 15,312 15,235Current Liabilities 1,183 1,254 1,241 1,281 1,494 1,403Fixed Liabilitics 4,216 3,831 3,756 3,805 12,695 12,629
Total Liabilities 5,399 5,085 4,997 5,086 14,189 14,032Capital Stock 412 412 412 412 412 412Lcal Reserve 205 205 205 205 211 215Retained Eamings 46 127 277 418 499 576
Shareholder's Equity 663 744 894 1,035 1,123 1,203Ratio: Net Worth toTotal Capita] 10.9% 12.8% 15.2% 16.9% 7.3% 7.9%
Table IV-37: Balance Sheet of the Large PRs(I Billion)
Fiscal Year 1987 1988 1989 1990 1991 1992CurientAssets 1,848 2,057 2,016 2,180 2,225 2,209Fixed Asset 4,504 4,870 5,375 5,918 6,467 7,101DeferredAssets 2 2 1 0 0 0
TotlAssets 6,354 6,929 7,392 8,098 8,692 9,311Currcnt Liabilities 2,167 2,216 2,266 2,440 2,606 2,727Fixed Liabilities 3,287 3,458 3,694 4,132 4,517 4,963Rcserves 0 15 34 48 64 79
Total Liabilities 5,454 5,689 5,993 6,619 7,187 7,769Capital Stodc 478 640 710 742 745 753Legal Reseve 338 506 583 620 630 643Rtained Earnings 83 94 106 117 130 146
Sharcholder's Equity 899 1,240 1,399 1,479 1,505 1,541Ratio: Net Worth toTotal Capitl 14.2% 17.9% 18.9% 18.3% 17.3% 16.6%Source MinisnyofTramspDfrTetsudo Tokei Nenpo (Annu2l RilW2ya SSaitisrics).No=: Ratio of Net Worth to Toal Capital - Sharcholdes Equity I (Toal Liabilities + Share.olders Equity)
Tabk IV-34. Raio of Net Worh to Total Capital (1991)(Pernt)
HonshuJRs Large PRs All Industries All Manu&ctufi7.3 17.3 28.8 38.2Source: Ministyof Transport, Tesaudo TokeiNenpo (inm aiRailwystaeics). Handbook ofIndusvidFmnandaDara1993 by the Japan Development Bank
V. Economic Analysis of Productivityand Performance of PrivatizedJapanese Railways
ProductivityComparisonbetweenJRs and Private 5.3 Ther aretwoanaliamehodsforstudy-Railways ingproductivity in this research: (1) simpleavceageAnalytical Metha& ofd Awdviy Comparison oDmparison and (2) regression analysis. The simplebetmm . .P.........fdaxwaw averagc comparison is the most common way to
mcasure productiv, in whih passenger-lan per5.1 Onc of thc peculiar fiatrs of the Japa- employce and car-kan per enployec, and train-km
.Aese railways system is the coexstence ofprivarizd per emploe are often used. Since this methodrailwaysandpubLicralways.Thereareseveral typcs does not takc into account netwodr characteristics,of owncrship, from municipal-owned subways or itprovidesonlyageneralindicationofproducivitythe semi-public local railways to purdy privare growth. The advantage ofregression analysis is thatowned railways. Against this bacground, an im- productvity measureentn reflects explicidy thepormant question is whether or not the JRs have diflrnces in nectwork, frequency of service, loadbeen able to inprove their productivity following factor, and ownership.privatizonwhencomparcdwith privaterailways,since productvity of public raihvays is said to be X''P""u Growhlower that forprivat railways. There isa common 5.4 There is no doubt that, followingimpression thatproductivity inJRsinfacthasbecn privatisation of the Japan Raiway companies haveenhanced by a combination of privaization and been inceasing productivty remarkably. Hcre wederegulation. To hdp understand what facors willexaminehowproducaiviryofJRshasimprovedmight contribure to makeJapanese-style privatiza- and whether or not their productivity has reachedtion distinct from that of other reforms, it is essen- thc level of Japanese largc private railways, whichtial to analyzc how much JRs have been able to are considered the most effcient organizations inimprove productivity. The following sections ad- the railway industry.dress the question what changes in productivity of 5.5 TablcV-1 showsthatlaborproductivityofJRs have emerged following privatization ofJNR. JRs after privatization has increased drmadcally
5.2 Usually there are three difflreen inputs to undcr any kind of measurement: passener-km,assess producivity growth ofJRs, such as (1) labor, car-km, and train-km per cmployee. Generally(2) energy, (3) roiling stodc Since railways are speaking, JRs' producaivity has improved by acharacterized as a labor intensive industry, we will fictor of around chree times from 1981 to 1991.focus on labor produciviy, as measurcd by servicc For example, the producivity of the Japan Na-output per onc employee. Although changes in tonal Railways in 1981 was only 509 thousandlabor quality and capital as well as technology passenger-lkn per employce, which was less thanmight affact labor productivity, they are not one third that for largc private railways, but it hadtaken into account becausc data is not readily incasedwo 1558thousandpassenger-kmbyl991.availabe. Compared with the producmvity growth of largc
Japanese National Railways Privatization Study II 75
privatc railways from 1981 to 1991, which in- fore privatization, organizational reforms, espe-creased by less than 20%, productivity growth of cially labor rationalization, were implemented.JRs is surprisingly high. Certainly privatization Relatively speaking, JRs after privatization werecouldbeoneimportantdelmentinJRs' remarkable free to pursue their own development as the largcproductivity growth. private railways do and they are endeavoring to
5.6 The productivity growth of JRs was not increas produaivity .even and has varied from one period to another. 5.7 Although the productivity of JRs has in-Furthermore, produaivity of JRs started to im- creased sharply since the mid-80s, the productivityprove svceral years before privatization. In fact, the level is still lower than that of large private railways.productivity growth rate before privatization was In fiact, the productivity ofJRs is about 23% lowerlarger than that afterward. For example, the JRs' in passenger-km, 6% lower in car-km, and 22%growth rate of productivity during the frve years lower in train-kmn per employee less than thoscfrom 1985 to 1989, which indudes years before forlargeprivaterailways. However, data inTablcand after privatization, was 79.3% in passcnger- V-1 do not pay attention to any difference inkIn, 77.1% in car-kin, and 91.1% in train-lan per network conditions between JRs and large pri-cmployee. However, in the post-privatization pC- vate railways.riod(from 1987to 1991) thesefigureswere37.4%,34.5%,and37.9% respecively. Itprovedthathigh e mproductivity growth occurred several years before 5.8 To evaluate what types of activity are re-privatization. The reduction of employecs had al- sponsible for productvity increases, rail serviceready begun in the late 1970s and the number of aciavities are divided into fivc categories: 1) raileMployees was reduced at about 10% every year. opeation, 2) station, 3) track maintenance, 4) carThis high productivity gowth could be attnbuted m aintenandce and 5) administration and engineer-to theffect on employces iniNRofthe announce- ing at headquarters. The questons are; whethermuent thatJapan Natonal Railways wouldbepriva- privatization could irnprove productivity in eachtized sooner or later. The anti-privatization side aaivity equalb, and, if not, which of activity im-may have had provide an incentive to improve proved the most andwhi is the least, and also inproductivityin order to show dictprivaization was what activities JR's have caught up with largenot necearywhile for the pro-privatation side, it private raihways. Herewe define labor productivitymight have provided an opportunity t promote by actvity diffience as service output per em-the rationalization pln Duing the fw years be- pIOYeC in eCh activity.
Tab V-i: Labor Productvity Comparison btwn JR and Lwt Pra Labor Pruvty* by Actv;ty
Passenger-km per Car-km per Train-km peremployee (thousand) employee (thousand) employee (thousand)
Year JR Large Private JR La Private JR larwe Priate1981 509 (0.30) 1693 (1.00) 11.7 (0.45) 25.8 (1.00) 1.36 (0.27) 5.05 (1.00)1982 524 (0.31) 1710 (1.00) 12.0 (0.46) 26.1 (1.00) 1.41 (0.28) 5.07 (1.00)1983 573 (0.33) 1738 (1.00) 12.8 (0.48) 26.5 (1.00) 1.52 (0.30) 5.08 (1.00)1984 633 (0.36) 1751 (1.00) 13.6 (0.50) 27.2 (1.00) 1.68 (0.33) 5.13 (1.00)1985 758 (0.42) 1793 (1.00) 15.7 (0.57) 27.6 (1.00) 2.02 (0.39) 5.15 (1.00)1986 929 (0.51) 1837 (1.00) 19.4 (0.70) 28.1 (1.00) 2.56 (0.50) 5.15 (1.00)1987 1134 (0.61) 1863 (1.00) 22.3 (0.79) 28.2 (1.00) 3.06 (0.60) 5.12 (1.00)1988 1281 (0.67) 1922 (1.00) 25.0 (0.89) 29.3 (1.00) 3.55 (0.68) 5.25 (1.00)1989 1359 (0.70) 1939 (1.00) 27.8 (0.92) 302 (1.00) 3.86 (0.73) 5.30 (1.00)1990 1496 (0.75) 1985 (1.00) 29.6 (0.98) 31.1 (1.00) 4.11 (0.79) 5.19 (1.00)1991 1558 (0.77) 2019 (1.00) 30.0 (0.94) 31.9 (1.00) 4.22 (0.78) 5.41 (1.00)%change(1981-85) 48.9% 5.9% 34.2% 7.0% 48.5% 2.0%%change(1985-89) 79.3% 8.1% 77.1% 9.4% 91.1% 2.9%% dage(1987-91) 37.4% 8.4% 34.5% 13.1% 37.9% 5.7%
76 Japanese National Railways Privatization Study II
Tabl V-2:Proporlon of Employees by Activity DifferenceEMPo EMPt EMPr EMPh
(Opertor & EMPs (Track main- (Car main- (AdministrationConductor) (Station) tenance) maintenance) Engineern
Year JR Large Private JR Large Private JR Lrge Privatc JR Lage Private JR Large Private1981 72.6% 25.1% 41.9% 34.0% 14.6% 14.6% 18.4% 11.6% 12.5% 14.8%
(0.50) (1.00) (1.23) (1.00) (1.00) (1.00) (1.59) (1.00) (0.84) (1.00)1982 12-A% 25.9% 41.6% 33.5% 14.8% 14.5% 18.6% 11.3% 12.6% 14.8%
(0.48) (1.00) (1.24) (1.00) (1.02) (1.00) (1.65) (1.00) (0.85) (1.00)l9b3 12.9% 25.4% 41.1% 33.8% 15.0% 14.3% 18.1% 11.3% 12.8% 15.2%
(0.51) (1.00) (1.22) (1.00) (1.05) (1.00) (1.60) (1.00) (0.84) (1.00)1984 13.9% 25.7% 40.6% 33.4% 15.3% 14.4% 17.2% 11.2% 13.0% 15.3%
(0.54) (1.00) (1.22) (1.00) (1.06) (1.00) (1.54) (1.00) (0.85) (1.00)1985 -16.2% 25.6% 38.3% 33.6% 15.8% 14.5% 15.1% 11.2% 14.6% 15.3%
(0.63) (1.00) (1.14) (1.00) (1.09) (1.00) (1.35) (1.00) (0.95) (1.00)1986 182% 26.0% 36.9% 33.5% 18.2% 14.4% 11.8% 11.2% 14.9% 14.9%
(0.70) (1.00) (1.10) (1.00) (1.26) (1.00) (1.05) (1.00) (1.00) (1.00)1987 20.1% 25.9% 35.5% 33.6% 20.6°h 14.2% 8.6% 10.8% 15.2% 15.6%
(0.78) (1.00) (1.06) (1.00) (1.45) (1.00) (0.80) (1.00) (0.97) (1.00)1988 203% 26.2% 34.0% 33.7% 20.0% 14.2% 8.8% 10.5% 16.8% 15.4%
(0.77) (1.00) (1.01) (1.00) (1.41) (1.00) (0.84) (1.00) (1.09) (1.00)1989 20.7% 26.6% 33.3% 33.7% 19.5% 14.1% 8.8% 10.2% 17.8% 153%
(0.78) (1.00) (0.99) (1.00) (1.38) (1.00) (0.86) (1.00) (1.16) (1.00)1990 21.0% 26.5% 32.7% 34.0% 18.9% 13.8% 9.0% 10.3% 18.3% 15.4%
(0.79) (1.00) (0.96) (1.00) (1.37) (1.00) (0.87) (1.00) (1.19) (1.00)1991 21.3% 26.9% 32.8% 34.2% 17.9°h 13.7% 8.8% 10.1% 19.2% 15.1%
(0.79) (1.00) (0.96) (1.00) (1.31) (1.00) (0.87) (1.00) (1.24) (1.00)% chwr (81-85)
10.2% 2.0% -8.6% -1.2% 8.2% -0.7%A -17.9% -3A% 16.8% 3.4%% change (85-89)
27.8% 3.9% -13.1% 0.3% 23.4% -2.8% -41.7% -8.9% 21.9% 0.0%% change (87-91)
6.0% 3.9 % -7.6% 1.8% -13.1% -3.5% 2.3% -6.5% 8.3% -3.2 %
Rgw V-1: Comparison of Change In Acfvlty-bass Employees
private(1g991)
8 EMPh
JR (after) _ EMPr
* EMPt
JR (during) _0 EMPs
* EMPo
JR (befoe)
0 10 20 30 40 50 60 70 80 90 100
Norm: JR (before): beiore privarizauion (1981) JR (during): during pricatizaion procs (19S5)JR (afir). akrer privarzation (1991) Private (1991): privae railways (1991)EMPo: operator 8c conductor EMPs: statwn employeeEMPt: track ainenanceeployee EMPr:- carmaintenance employeeEMPht administrtion 8c engineering amployee
Japanese National Railways Privatization Study II 77
5.9 Bel;re analyzing productivity by activity, trast, the proportion of administration and engi-we will study changes in the proportion of employ- neering is dose to the level for large privateees by activity. Table V-2 shows change in the railways. These results may indicate that stationstructure ofeach activity's employees from 1981 to and car maintenance activities before privatiza-1991.Stationemployeesaccountedforabout42% tion were inefficient and that JNR used manyofto tal employment in 1981, butin 1991 this ratio more employees than the private railways. JRswas reduced to 33%. Car maintenance employees, after privatization stil have more employees ina category which accounted fbr 18% in 1981 also track maintenance and administration activitiesshranktoonehalfby 1991. These two aaivities in than do large private railways. This may suggestterms of employment decreased sharply in the that since JRs' network is far [onger than that ofperiods before and after privatization. However, the private railways, JRs need more track main-the other activities such as operator and conduc- tenance. And also due to increases in the numbertor, track maintenance, administration and en- of headquarters after regional break-up, JRsgineering increased their relative shares in might not be able to reduce employment inemployment during the eleven years from 1981 administrative sections as they have done in otherto 1991. When compared with large private activities. Figure V-I shows die changes in therailways in terms of proportion of operators and composition of employees in JRs befire privariza-conductors, that for JRs were about 80% of the tion, during privatzaton, and after privanzationlevel of large private railways in 1991. In con- compare with private railways.
Tabe V4- Labor ProducfWIy CmnWpson by Actii DfffewImhouwnds of paswsnge km par emply)
PRDo PRDt PRDr PRDh(Opeator & PRDs (Track main- (Car main- (Administrationconductor) (Station) tenance) tenance) & eng6werirq
Year JR Lre Privatc JR LupPnargePvat JR LIg Priate arge Prvate JR Large Prime1981 4043 6750 1214 4981 3486 11627 2761 14640 4079 11445
(0.60) (1.00) (024) (1.00) (030) (1.00) (0.19) (1.00) (036) (1.00)1982 4213 6603 1261 5104 3537 11813 2822 15132 4175 11548
(0.64) (1.00) (025) (1.00) (0.30) (1.00) (0.19) (1.00) (0.36) (1.00)1983 4434 6828 1392 5145 3819 12116 3163 15410 4461 11460
(0.65) (1.00) (027) (1.00) (032) (1.00) (0.21) (1.00) (0.39) (1.00)1984 4545 6806 1560 5243 4141 12152 3682 15679 4869 11446
(0.67) (1.00) (0.30) (1.00) (034) (1.00) (0.23) (1.00) (O.43) (1.00)1985 4689 7016 1979 5343 4800 12395 5016 16058 5203 11750
(0.67) (1.00) (037) (1.00) (039) (1.00) (031) (1.00) (0.44) (1.00)1986 5116 7063 2516 5478 5103 12738 7838 16453 6233 12356
(0.72) (1.00) (0.46) (1.00) (0.40) (1.00) (0.48) (1.00) (0.50) (1.00)1987 5302 7202 3008 5540 5182 13168 12442 17328 7014 11954
(0.74) (1.00) (0.54) (1.00) (039) (1.00) (0.72) (1.00) (0.59) (1.00)1988 5916 7335 3531 5703 6000 13527 13712 18389 7134 12471
(0.81) (1.00) (0.62) (1.00) (0.44) (1.00) (0.75) (1.00) (0.57) (1.00)1989 6179 7303 3837 5748 6537 13710 14522 18933 7178 12657
(0.85) (1.00) (0.67) (1.00) (0.48) (1.00) (0.77) (1.00) (0.57) (1.00)1990 6678 7481 4291 5832 7445 14415 15572 19336 7664 12918
(0.89) (1.00) (0.74) (1.00) (0.52) (1.00) (0.81) (1.00) (0.59) (1.00)1991 6864 7504 4465 5899 8153 14727 16644 20044 7622 13394
(0.91) (1.00) (0.76) (1.00) (0.55) (1.00) (0.83) (1.00) (0.57) (1.00)% clnge(81-85) 16.0% 3.9 % 63.0 % 73% 37.7% 6.6 % 81.7% 9.7% 27.6 % 2.7%%cdange(85-89) 31.8% 4.1% 93.9% 7.6% 362 % 10.6% 189.5% 17.9% 38.0% 7.7%%change(87-91) 29.5% 4.2% 48.4% 6.5% 5733% 11.8 % 33.8% 15.7% 8.7% 12.0%
78 Japanese National Railways Privatization Study 11
5.10 The analysis indicates that JRs improved than 60% of the level of large private railways inproductivity in station and car maintenance activi- 1991.Thisshowsasharpcontrastwith chepreviousties, but could not do so in track maintenance and study ofMizumani, in which there was not a signifi-administradon activities. Table V-3 supports this cant diffience between private and public rail-surmise. The inteesting point is that there was not ways. JRs' large scale network, the operation ofmuch difference in productivity per operator and Shinkmnsen,andregionaldivisionofmarketsmightconduaor becweenJRs and large private railways in require more administrative employees. Moreover,1991.This is t-ue of the periodswel before priva- the competition in technological developmenttization. For example, in 1981 the diffirence in among regional JRs might need to maintain moreoperator and conductor's productivitybecveenJRs engineers at headquarters than private railvays.and large private railways was small compared with However, a 43% difference in productivity is stilldifferences in other activities. This result is very large cnough to justify looking for other reasons.similar to the previous comparative study ofJapa-"nse urban private and public radlways by MPzurang
,-I 11. 5.13 Here we will analyze productivity difier-. .1 The productivity diffirence in mainte- ence among six JRs. To evaluatc the privatization
nance activities, especially track maintenancr, is effect onJRs' productivi, it iS intcrestng to studyscilhlargebecwecnJRsandprivaterailwvays.Produc- the difference betwecn the three largest JRs intivity per track maintenance employee in JRs in- Honsyu (henceforth referred to as 'Honsyu JRs")creased more than two times compared with the and the three-islandsJRs (hceforth referred to asLevcl beforc privatization in 1981. However, it is 3-islands JRs"). Iabor produccivity of larke pri-still only 5 5% that for largc privae railway The vate railways could bc used as a bendunark topossible reason why JRs' productivity in tack compareproductivityamongJRs. TableV-4showsmaintenance remains lower than for large private laborproducxivityamongJRintermrofpasseager-rilways might bc that JRs have lrger networks kam per employcc.(e.g longer line haul and more lina) dan large 5.14 As shown in Tablc V-4, there is a largeprivatc railways. Furthermor the contracting-out diffirenc in labor produaivity between Honsyuschene in maintenance actvities, whih large pri- JRs and 3-islands JRs. In 1991, labor productvityvate raihlays adopt, might be another reason for of HonsyuJRswasabout2.8 times hihrtan thatprivate raiwayis' hih productivity of 3-ilands JRs. Honsyu JRs' prductivity is ap-
5.12 JRs' productvity per admini and proaching that for large private railways.The aver-enginering employee at headquarters is also poor age productimty for Honsyu JRs in 1991, forcompared with private railways, which was less example, was about 86% that of largc private
TS*le V- LabWor Productity Compafson AmO JRs Aft Pvafon(Thousands of paspger-kmsper emnoyee)
Honshu 3 JRs 3-IslandsJRs Private RaiwayTR TR JR JR TR TR jaR Smal
Year East Central West Avg. HJcaido Shkkn Kyusyu Avg Privae P te1987 1293 2034 918 1268 324 444 562 449 1863 580
(0.69) (1.09) (0.49) (0.68) (0.17) (0.24) (0.30) (0.24) (1.00) (0.31)1988 1511 2245 1003 1442 375 595 584 499 1922 594
(0.79) (1.17) (0.52) (0.75) (0.20) (031) (0.30) (0.26) (1.00) (0.31)1989 1636 2329 1014 1518 377 600 683 539 1939 593
(0.84) (1.20) (0.52) (0.78) (0.19) (031) (0.35) (0.28) (1.00) (0.31)1990 1725 2608 1125 1647 428 653 740 592 1985 482
(0.87) (1.31) (0.57) (0.83) (0.22) (0.33) (0.37) (0.30) (1.00) (0.24)1991 1868 2545 1162 1728 442 679 796 624 2019 498
(0.93) (1.26) (0.58) (0.86) (0.22) (0.34) (0.39) (0.31) (1.00) (0.25)%change(87-91) 44.5% 25.1% 26.6% 36.3% 36.4% 52.9% 41.6% 39.0% 8.3% 14.1%
Japanese National Railways Privatization Study II 79
railways. On theotherhand, 3-islandsJRs' produc- than Honshu JRs in the five yars since privaiiza-tivity on average is close to that of less-effident tion in 1987. When compared vwth small privatesmall private raiways. This may reflect the differ- railways which have very similar demand condi-ence in size betwcen JRs and the private railways. tions, the growth rates and level of produaivity ofEven JR Shilokt, the smallest of the JRs, which 3-island JRs are extrememy high. Although there isemployed 46 thousand workers in 1991, is larger stil alarg difference inlaborproductiviy betweenthan Kintetsu, the largest private railway which Honshu and 3-islandjRs, privatization could spuremployed 11 thousand employees in 1991. Thus, productivity growth cven in 3-islands JRs, which3-islands JRs may still have surplus employees in face dficlties stemming from the smaull sizc ofrelation to their size of sevice output. markets and competition from the road secEor.
5.15 Privatization with regional division seemsto have a verypositive impact on the enancemenb tof the productivity of 3-islands JRs. As far as 5.16 To clarify what factors were responsibleprductivity growth is concened, the growth rate for the improvement in labor productivity in JRs,of 3-islands JRs has seen, on average, 3% higher regression analysis is appliedher Table V-5 shows
TbIS V.5: Labor Prodkctiviy Using ProduWvity ode (Thousnd PaRnger nEn #w)
Owner- PRDo(operator PRDs PRDt(uac PRDr(car PDh(admin. &Metod ship &conduor) (station) mainuance) min_tnance) engineering)Case-i: JR 6864 4465 8153 16644 7622
(0.91) (0.76) (0.55) (0.83) (0.57)Simple avage Private 7504 5899 14727 20044 13394
(1.00) (1.00) (1.00) (1.00) (1.00)Case-2: JR 7434 4740 8380 19513 7944
(1t38) (0.78) (0.84) (1.21) (038)Mizutani (1993) Private 5393 6105 9985 16173 20877
(1.00) (1.00) (1O00) (1.00) (1.00)Case-3: JR 6970 4249 7615 16138 8411
(1.20) (0.79) (0.65) (0.69) (0.86)This study, Private 5793 5353 11788 23316 9762
(1.00) (1.00) (1.00) (1.00) (1.00)[Note](1) (A) Case-I is rsults without controlling network conditions: Result are ave for JR(6 pasc3ger JR raways) and for
Prvae(15 a6rge prive railways) in 1991. These ar the same shown in Table V-3.(B) Cae-2 is resultswith controlling nctwodr conditions butusingaprivuticproductivitycomparon model: Results forJR are sample average and results fir private are obtained by substinstingJR's network vaiables in Mizurani model.(C) Cas-3 is the resus ofa private-JR pwductvity compaison modd when network condiions were conolled: Results ofJR and Privt are obtained by assigning the dummy vatable O) aone in the case ofJRs and zero ifJRs wee assumed to beopented by a pive compay.
(2) (A) Equations for productivity esimation in Case-2 ate as followMfr.uauuirshu' (1993) PrIsv&&-PuhL& Conzpwirx Me
(a) ln(PRDo) = 5.725 + 0.478*1n(Qpkm) - 0.3781n(N) - 0.284*1n(r) + 0.196In(SI) - 0.164'PUB(b) Wn(PRDs) - 5.704 + 0.576*1n(Qpkmn) - 0.658In(Ns) - 0.127ln(Rus) - 0.41rPUB(c) In(PRDt) - 5.089 + 0.433*1n(Qpkm) - 0.364,n 1nr) - 0.088*ln(Ru) + 0.864 1n(CNT1) - 0.1600PUB(d) In(PRDr) - 5.629 + 0.423'1n(Qpkn) - 0.5581n(NI) + 0.636Pln(CNT2) - 0.405*PUB(d) Iu(PRDh) - 5.686 + 0.5021n(Qpkm) - 0.028Wln(Nl + 0.272'ln(lr)
- 0307*ln'(Ns) - 0.104ln(Ru)- 0.1 18PUB(B) Equations forproductivityesimation in Case-3 areas foiows:
Thi s,: Prih*-JR Compi*ox Modd(a) ln(PRDo) - 5.194 + 0.512'1n(Qpkm) - 0.4411n(N) - 0.294"1n(1r) + 0205"n(SI) + 0.185'JR(b) ln(PRDs) - 7.719 + 0.443'In(Qpkm) - 0.463'In(Ns) -0.0171n(Rus) - 0.231'JR(c) ln(PRD) - 5.446 + 0.4#iln(Qpkm) - 0.361'ln(Lr) + 0.004¶Pn(Ru) + 0.743(CNTI) - 0.437JR(d) In(PRDr) - 5.238 + 0.418'1n(Qpkm) - 0.427'ln(NI) + 0.74Vln(CNT2) - 0O368R(d) In(PRDh) - 5.523 + 0.555'ln(Qpbm - 0.4861n(NI) - 0.496'ln(Or)
+ 0.16201e(Ns) - 0.034*ln(Ru)- 0.149'JRwhere Qpkm - passenger-km NI - number ofline Ir - route-kn per line Si - load ictor(%)
Ns - nunber of sation Rus - % ofunesround sation Ir oute-km R - % of undergroundCNTI - contacting-out fortadc inea CNT2 - contraaing-out for cr mantnacPUB - ownershipdummy (public-1) JR -JRdummy R-1)
80 Japanese National Railways Privatization Study II
the results of activity-based productivity compari- 5.18 The first row (R) of Case 3 shows laborson. As productivity measurements, labor produc- productivityofJRswhich is obtained by regressiontivity per operator and conductor, per station, per analysis using data fromsixjRs andprivare railwaystrack maintenance, per car maintenance, per ad- on the number of employees, passenger km, num-ministration and engineering were used. In this ber of lines, route km and others in 1991. Theanalysis differences in network characteristics and second row (Privatc) of Case 3 is also the estimatedownership are considered explicidty Passenger-km productivity ofJRs obtained from the simulation(Qpkm) as service output, load factor (SI) as service model based on the same idea as the second row ofquality, number of line (NI), route-km per line (Ir), Case 2. The results show the hypothetical produc-number ofstation (Ns), percentage share ofunder- tivity of JRs when it is assumed that JRs wereground station (Rus) as nenwork characteristics, operated by a private company while they main-contracting-out for track maintenance (CNTI), tainedthesamelevelofserviceoutputandnetwork.contracting-out for car maintenance (CNT2) as The esults indicate how productivity might becompany policy characteristics, and ownership affected by the difference in ownership. Mostdummy (PUB), and JR dummy JR) as ownership results suggest thatJRs'producivity is stil 20-30%difference are taken into account here. less tan tat ofprivate ilways, except productiv-
5.17 Table V-5 compares the results which are ity ofoperators and conductors. This suggests thatestmated by three different methods based on the JRs stil rin more workrs than private rmiwayscross-section data in 1991: The first and second in most activities, evcn hough network and otherrows (JRandPrivatc) ofCase I compare productiv- conditions arc explicidy controLld in the estima-ity by the simple avera which was obtained by tion. Specificaly, productivity of trak mainte-dividing total passenger-kmn by tocal employes on nance and car maintenance is respectively 35% andan activity-basis. The first row mR) of Case 2 is 31% lower than those for private vailwys. Inlabor productivity of JRs which was estimated conrast withsimpleaverageproductivityanalysis,usingMizutanisprivare-publiccomparisonmodel. productivity for administration and engineering isTh coeffidens in the model were obtained by the only 14% less than that of private railways, whencross-sction data of public and private railways. diflerences in netwodrk conditions are allowed for.To estimate labor productivity of JRs, the average Unfortunately the t-statics for each coefficient arepassenger-kin, average number of employees, and about one owing to the small sample and it isthe averge of network chaacristics among six diffialt to specifywhat elements contibute to theJRs were used. The second row (Private) of Case 2 low productivity of JRs. But it may be safe to sayshows the results of simulation when it is hypoth- that becausc of large-sale networks JRs have tOesized that JRs' productivity may be improved if retain a larger number of employees in mainte-JRs werc operated by a privatc company. They arc nance and stations actinities, which may lowerobtained when the dummy variable (PUB) is as- labor productivity of JRs compared with privatesigned zero in the simulation. In other words, the raiys.simulation indicates how ownership difference 5.19 Table V-6 is the results of simulationmight affict JRs' productivity ifJRs were to main- showingwhatextentHonshujRsand3-islandsJRstain the currnt service output and network and may have redundant employees. Thre diffi&rentoperate under a hypothetical private company scenarios are introduce& (1) pCrfct privatization,
Tabf V-6: Compadso of Emploes Among JRs: After Ptlutioncase Honshu JRs 3-islandsJRspolicy option before afier changc beore after chgeSenario 1 (perictprivasization) 45,188 38,603 -6,585(-14.6%) 7,784 6,738 -1,046(-13.4%)Sario 2 (decselines by 10%h) 45,188 44,566 - 622(-1.4%) 7,784 7,677 -107(- 1.4%)Sceario 3 (decseline h1u by, 10%) 45,188 44,252 -936(-2.1%) 7,784 7.599 -1 85 (-2.4%)Scenario 4 (inesecona out by 10%) 45,188 44,755 -433(-1.0%) 7,784 7,662 -122(-1.6%)
Japanese National Railways Privatization Study II 81
(2) abandonmcnt of lines, (3) reduction in line in major citics such as Tokyo, Osaka, and Nagoya,haul, and (4) extensive use of contracting out for JRs in Honshu retain natural monopolistic powermaintenance works. The estimated productivity in intercity passengcr transportation markets asunder perfect privatization scenario is obtained by well as in commuting markets in metropolitanassuming that JRs were operated as a private com- regions. However,JRs facefiercecompetition frompany when JRs maintained the current level of road ransportin cities and fromair transportin thescrvice output and network In this case. the dummy long distance transportation narkets. Their mo-variablc OR) of ownership is assigned to zero in nopolistic power has been waning rapidly in longPrivate-JR Comparison Model. According to Sce- distance markets.nario 1, Honshu JRs as well as 3-islands JRs could 5.21 Secondly, privatization has involvcd a re-reduce employees by about 15% of the present gional break-up into six passenger JRs and onenumbcr on averagc if they were operated by the nationwide freightJR. The regionaldivision ofJRshypothetical private company. As shown in Sce- has now been tumed to advantage, since it hasnario 2, even if JRs abandon somc lines, it would enhanced indirect competition among JRs andnor gready contribute to improving productivity. direct competition between JRs and private rail-The decline in employment is only 1.4% in both ways. Since there areanumber ofparalel commut-Honshu JRs and 3-island JRs, when we assumed ing lines in major dtieswhere both private railwaysthat J Rs would reduce 10% of the number of lines andJRs provide competitive services, 3Rs are ttyingas shown in Scenario 2. Even if JRs decrease thc to improve the quality of thcir services in order toaverage line haul, it may have a mninor effect on seare more patronage. It is worth examining toenployment.Theelasticiyofdecreasesinnetwork what cxtent this kind of intramodal competitionis about 0.2 for both Honshu and 3-island JRs as (which is called benchnark competition herefier)indicated in Scenario 3. IfJRs inaease contracting has been intensified since the privatization ofJNR.out for maintenance ofirfrastruure about 10% of 5.22 From the standpoint of the regulatorythe current levl, they could reduce their employees authority and shareholders of JRs, a comparisonby 1% in the case of Honshu JRs and 1.6% in the between the peformance of JRs and the average3-islands JRs. Although it is difficult to assess performance of the private raihlays can make it easydirecdy firm this simulation how network re- to monitor thc behavior of JRs. For exanple, totrenchmnet and contractng out scheme might permit a rise in fires, the regulator can use thehave positive effcts on productvity, the results average performance of the railways sector as amay indicate that their contribution to the im- 'yardstick' or a 'benchmark,' because it is outsideprovement of JRs' labor productivity could be the control of any single railway. Although thesmaller than we expect. This means that thcre is a decailed procedures fr approving fare rises is notneed to examinc how such factors as the automa- made public in Japan, it may besafe to assumc thattion of idcketng and ticket gate, mechanization of the Ministy of Transportation would take intotrack maintenance and other technologies may account the average perfomrnce of the railwayinfluence produaivity. sectors, since officials tend to place much impor-
BenchmarkCompetitionamongJRsand. . tance on equality of fires among the railways.]Rs, and Prime R Enhancing competition based on the industy av-
erage of performance is expecd to provide anThe Conceptrrat Framework of Bhmark incentive to cfficiency and to ensure that the result-
Gn tn al Framework of Benebmark ing benefits are largly passed on to customers.5.23 The original concept of yardstick compe-
5.20 The privatization of JNR differs in two tition as aregulatoryschemewas formalized first byunique rcspects from a other privatizations which Shleifer[1985].The"cost-of-servic" regulationonhave so fir been achieved or arc planned, in Euro- pricesofmonopoliescannotaddresstheproblemofpcan nations as wcll as in developing countries, lack ofincentives for efficiency, since it alows thatFirst, privatizedpassengerJRs in the main islan of 'prices track costs." There is a need tc cnsure thatJapan (Honshu) are stiU considered to bc regional the enrityisgiven on incentive to engage activelyinnatural monopolies. Thanks to high population cost reduction and innovation. Shleicr indicatesdensityin the coastl regions ofHonshu and xocs that comparing present or past performance ofsiveconcntrationofeconomicandsocialactivities similar regulated cntities could serve as a simple
82 Japanese National Railways Privatization Study Il
and usefulyardstidcor benchmarkto cvaluatewhat are operating parallel serviceswith private railways.the costs ought to be and to set the right prices." This also has positive impact on efforts to improve
5.24 The comparison of cost performance the ovcaall quality of service of JRs.,tmong similar entities is used in reimbursement 5.28 Although benchmark competition whichsystem that compensatcs hospitals using average hasbeenobserved amongJRsandberweenJRsandcosts in the USA. A similar system is used by private railways in commuter markets is differentJapanese insurance companies to reimburse the fromyardsticccompetition inaShleiferiansense,costs of medical treatmenc to hospitals. If price is this kind of intramodal competition has greadydetermined by the average cost of the comparable contributed to upgrading the quality of service andfirms, the firm has strong incentive to be efficient, tO holding down the pressure for increasing fares insince it can "pocket" the difference betwem costs Japan. For example, since on some local lines JRsand prices. Moreover, the regulator does not need are allowed to adopt special discount fares thatto haveexactinformationabourcostsanddemands make it difficult for private railways to raise theirin order to control prices. fares, a rival could use improvement in service
5.25 Yardstick regulation was proposed in the quality such as increased frequency, speed, andLittlechild Report [ 1986] for regulation of the UK others as a mnarketing strategy.water industry. As suggcsted in the Report, since 5.29 Interestingly, regional break-up has pro-the yardstick or benchmark is determined not by vided an incentive for eachJR to engage in quality-firm's own decisions but by the other firms' dcci- of-scrvice competition, because it iscasy forusers tosions there is no motive to take strateic behavior of compare the difference in scrvice. Also theJRwishthe regulated firn. In addition, the regulator may to belistedonthestocdkmarke assoonaspossiblcenot suffer fiom asymetric information about Introduction of new types of cars and through-costs provided by the regulated firms, because they train servic to meet local demand are examples.norifir the correct cOsts. It seems that revealing 'true The most important cff ct ofthc regional break-upcosts' does not affect the firm's profit-maximizing of JNR is that benchmark competition amongconduct Japancsc railways has improved the quality of scr-
OveraffAssewnent ofBenehcark Gompedtion viceinurbancommuermanad aswellasininteriymares, and the benefits of improvement in qual-
5.26 Accordingtotheorginal conceptoflbnch- ity of serce have been passed to commutrniarkcompecition, it might be expected thatwhen S-eies baic model is as follows Ther are n iden-aJRs and private aihways which are operating paral- ' irm perating in cain irnent. Eah firm n esId lines are competing with each other for large demand crveQ(P) mn its marker Whenafirm spendszonmarketshareandfiaresaredeweminedbytheindus- cosc-reducnginnovaonbitanachicveunkcasckvddz).try average cst, both of them would try to reduce wih c(O)-c. The lump sum mbsidyT is transferred to thecosts if they could take the diflirence between fires firm if ic engages in innovaton. Profit is determined byand costs as profit. However, both JRs and the IfP-lszdi Q(-Z.T
railwaysare notonly undr stron puiiicIf de sodial welfiare objeative is the maximization of twadprivate raways arc not only under strong publk suupluseshn theeoptimum undertheconstmintofnolosspressure to reduce fires but also arc not allowed to haspockt the diffen between fiures and costs as Pc(Z)profit. It is a genral undertnding that if they are c(z)Q(l.lalso to earn extra profit, this should be injected to and z-T.In sum, firsr, price is equal tO marginal cosr, eond, co-reduce fis. Under this kind ofenvironment, they meducing innovation occurs up tO the poimt matialtend to give priority on quality-of-service competi- cost(-I) equals margna benefit; and third. the cost oftion in order to gain more patronagr. innorion issubsidized by the lump-sum ransfer.
5.27 In fact, jRs as new privatized railways have To diminatthe dependenceofthe firm's price on its owncost lavk the regulatorcan use costlvcls of idenical firms
been attempting to set their level of scrvice dose to tw determine the pricr. Average cose levl c and averthat of private riways. As a result, the diflrence expenditure for cost-rduction innovuion z can be ob-betw=eJRsandpri- aterailwas in terms ofqualky mined by dividing total cuss and total xpenditres of nofservice are beosirang smaller inaccordance with fi h (n-1). The indutry averAge cost and industry
d,cincn avenchpendir canbeswredasbenchmadcin compe-rheznrensayofbencbmarkcomon.TmonTtebenci- tion. What the relator should do isto commit himselfnmrk competition has enhanced the quality of to the price and tasfer rule given by price -industyservice,parcularlyoncommudnglineswhe :eJRs serg cst and TsZ7 See Vcrs and Yarw [1988].
Japancse National Railways Privatization Study I1 83
5.30 To assess ihe general effect of benchmark twcenJRs and private railways are not taken intocompetition among JRs and benween JRs and pri- account explicidy, for the sake ofsimplicity of thevate railways, the question of how much scrvice analysis. Although it is desirablc to consider thequality has improved since privatization is exam- diffcrences in the track capacity for increasingined herc. Thc hypothesis is that if benchmark frequencyanddhenumberofcarsinatrain,we didcompecition in certain markets is strong, frequency not consider thern, owing t data problems.at peak timewill increase and the load fiLaor will be 5.31 ThefollowingTablkV-7shows thdchangesreduced in and to win more passengers. Two types in frequency at peak times in competitive and lessof raihvay lines are selcted and analyzed to obtain competitive markets from 1975 to 1992. Generallya general picture of benchmark compectition: the speaking, there has becn sharp increases in fre-first type is the lines which are located close to each quencyofJRs in competitive markets. On the otberother. The assumption is that the shortcr the gco- hand, in less competitive markets no remarkablegraphical distance between two railways the stron- changes were observed. In fact, the increasing rateget benchmark competition will be and as a result of frequency of JRs from 1975 to 1992 in lessgreater the improvement on the quality of service. competitive markets is only 19%. In contrast toWe havc examined Kansai-Line of JR Ccntral, this, the frequency of JRs in vely competitiveTokaido-Line of JR Central between Nagoya markesincreasedmorethantwiceduringthesameand Osaka, Tokaido-Line of JR West, and period. The fact that the increasing rates of fre-Hanwa-LineofJRWest. The second type islines quency in the private railways are almost zero maywhich seem to be less competitive owing to the reflect the situation that private railways have ut-lack of competitive railway lines nearby. Ex- lized capacities at maximum rate so that thercamples are Tokaido-Line of JR East, Ring-Line would be no room to further increase frequencies inin Tokyo (Yamatc-Line), Northeast Commur- those markets. In this sensc, the situation with theing Line (Joban Line) which connects between reprd to incrcase in frequency, for example, isTokyo and thesuburban cities,and Ring-Line in advantagcous to JRs, since the tracks which JRsOsaka (Kanjo-Line). In these cases a major com- have inherited from JNR could be used for heavyperitor to railways is automobiles. Such freight trains. This renders it easier for JRs tointermodal competition between railways and increase frequency and the number of trains thanautomobiles and also transfer of passengers be- those for private railways.
Talbk V-7: Changes in Servce Quaity (Frequency at Peak Hour)Degee of RatioCompetition Line 1975 1985 1992 (1975/1992)Weak Tokaido:JR East 12 17 19 1.58
Yamte JR Est 23 24 24 1.04Joban:JREast 18 22 22 1.22Kanjo:JR West 20 18 18 0.90Average 1.19
Strong Tokaido:JR Central 6 7 13 2.17(Meitsu) (25) (26) (26) (1.04)Kansai: JR Central 2 4 7 3.50(!teitetsu) (18) (18) (18) (1.00)Tokaido:JR West 19 24 28 1.47(Hankyu) (25) (26) (26) (1.04)(Hashin) (25) (26) (28) (1.12)Hanwa4JRWest 10 12 15 1.50(Nank) (22) (22) (21) (0.95)Average 2.16
(1.03)(Now);Thenumbersarthe numberof trinsagpeak tiu. Those in theparecahetsathe freque.yoftheprivate rilways whidh
awr competing vwith JRs in the markem
84 Japanese National Railways Privatization Study 11
5.32 As is shown in the following Table V-8, selected from central part of Japan. The lines arethe same approach was adopted to evaluate the typical commuter railways which connect the cen-effect of benchmark competition on the load fac- tralbusinessdistrictofalargecitywith neighboringtor. We could observe a similar improvement in cities as dormitory towns. JRs have been attempt-terms ofthc load factor in the competitive markets, ingto keep fares relatively low, to improve conges-although the diffcrenc bevween very competitive tion by upgrading cars, and to increase trainmarkets and less competitive markets is small com- frequency in order to win more passengers. Sincepared with those for frequency. The average load neither JRs nor private railways don't wish to losefactor in Japanese railways is more than 200% in market share by taking the initiative to raise fares,the less competitive markets and about 150%o even fares tend to be verycomparable and stable betweenin the compectitive markets, which is extraordinazy them. Since there has been no explicit price warshigh by Westem standards. Congestion in com- between them, benchmark competition in Japanmuter trains is the most serious social problem that has taken place mosdy in improvement of serviceJapami must tacle. Since the overconcentration of quality.population in major cities, especialy in Tokyo 5.34 Tostudytheeffectofbenchmarkcompe-Metropolitan areas, is the major cause for conges- tition on a particular JR!s market share, it is as-tion, the increase in capacity of commuter trains sumed that the number of JR's passengers may becannot be an answer to the problem. To solve the determined joindy by the relative level of its Eres,congcstion problem, there is a need to introduce loadfactor, and trainfrequencyincomparisonwithdamstic land-policy refonns to reduce the concentra- those for the private railways. JRs since privaiza-tion of population in Tokyo and to chan land use. tion appear to bave used the lcvel of service quality
Tbe Effca o Benchrby the private railways as a benchmark to establishUi Beca Cheir markeing suargics. Since passenger chooses
Marhe railwm wrich offers rlatively lower fares and5.33 Toassesshowbenchmarkcompetition h higher quality of services, there woult be a direct
influenced the marker share ofJRs in terms of the cause-effect relationship between the number ofnumber of passenger, threc commuter lines wbere passengerand therelativelvclsoffares,loadfactor,JR and private railays are operating in pallel are and train frequency. It is obvious that train fre-
Table V-. Changes in Sence Qualily aud Fator at Peak Hour)(Paed)Degree of RatioCompetition Case of Lines 1975 1985 1992 (1975/1992)Weak Tokaido: JR East 263 256 226 0.84
Yamate:JREast 246 263 272 1.11Joban: JR East 206 259 248 1.20
Kanio:JRWest 232 244 156 0.66
Average 0.95Strong Tokaido: JR Central 165 168 130 0.79
(Mei mn) (213) (184) (168) (0.79)Kansai: JR Central 0.83 143 143 1.63(KWimts) (200) (165) (165) (0.83)
Tokaido: JR West 199 184 122 0.64(Hankw) (209) (174) (159) (0.76)(Qansbin) (162) (162) (153) (0.74)Hanwa.JRWest 212 183 169 0.80(2V=kd) (182) (179) (172) (0.9:'Average 0.97(0.81)
(Note): Thenumnbess arethenumbrofT ns atpeakumcTose in theparenthesesaetic fzequecyofthe preaiways,whidcarc compcong with JRs in dhe marks
Japanese National Railways Privatization Study II 85
quencyisaveryimportantdemcntfortheselccrion comDared with that for the private railways. Theof the railway in the commuter mnarkets at peak rario one indicates the 50-50 skare between the JRtime, because Japanese commuters as wel as those and the private railways. Thc horizontal axis showsin other countries are likely to place priority on the JR's rclativc magnitude of the three strategicreaching their workplaces on timc. Although there dements such as fares, frequency, and the loadare otherimporamnt factors to influencing thechoice factor to those of the rival private railways. Againof commuters, only thrce elements are considered the ratio one means that thesc three dements arc inherc because other data are not available. balance among themL Increases in JR's competi-
5.35 Theconceptualframeworkofanalysisused tiveness require movements of the share-strategichere is as follows: IfaJRwishes to expand its market elements profile in the northeasterly direction. Theshare, it would ty to lower the relative fare, increase following are examples which show how bench-the rlative frequency, and reduce the load factor in mark competition is working. Since we selctedcomparison with those of rival private railways. In lines with the same dismnce, fares in the followingthe competitive linc, the railway with the better Tablesarconcswhicheachrailwaycompanydcargcs.qualityofservice as well .s lower farecs will be likely 5.36 XlineCase:As showninTableV-9,theJRto carry a larger-than-proporrionate share of the since privatzation has becn increasing frequenciestraffic. Becauseofferingbetterservices is believed to at peak time Although the private railway stillcnable railways to capture the relative larg propor- keeps its dominant market share in this line, thcJRtion ofavailable taffic, each railwaywould attempt has been successfiul for obtaining more patronageto gain an advantage by increasing frequency and than beforc and expanding significandy its rmiarketlowering load factor and being a follower not a sharefrom5.7% in 1987 to 11.31%in1991. Sincelcader in price wars. Graphically this relationship the difrence in fares between the JR and privatcforms as S-shared airvc as in Figure V-2. The railways has ben widrin thbis may have somevertical axis shows the relative share of the JR inftuencontheexpansionofpassgausingtJR.
Figure V-2 The Conceptual Chart of Relationship beten the Market Share and Strtegic Elemens
100% i_
Relative
Share
Retive Fares (or Frequencyar LoadFactor)
Not: The vertical axis = The relative share of JR to tat for the rival private railwaysThehorizonrmlaxis= Thcsrec elementsuchas the tioofR's Ers, fiequency. and the load facor tohoseofdle privareraihwaysIncrease in JR:s competitiveness require movements of the sc-straegic eiements profik in the northeastey diection.
Table V-9 Benchmark Competion in X Line1987 1988 1989 1990 1991
Number of passenger at JR 1,214 1,653 1,230 2,391 2,680pek- hour Private 20,050 19,510 19,890 20,430 20,450Fare JR 440 440 450 450 450(yen) Private 480 480 490 490 540Load fiiaor JR 139 140 118 131 143at peak(%) Privamte 162 158 161 165 165Frcquency at peak hour JR 4 5 7 7 7(no. of taains) Private 18 18 18 18 18
86 Japanese National Railways Privatization Study II
5.37 TheFigurcsV-3,4,5showthcrelationship increase in its relative share of passengers on thisbetween theJR'smarketshareandtherelativefares, line from 1987 to 1991.load factor, and train frequency of JR to those for 5.38 Y Line Case: In the case of Y line, the JRthe rival railway. Obviously the movements in the had rdatively a large share of the market beforenorthcasterly dircaion show improvement ofJR's privatization. The JR aftcr privatization made ef-competitiveness . Although no one single factor is forts to increase the frequencyof trainsat peakltimedecisive in improvements inJR'scompetitive edge, by 60% from 1987 to 1991. In contrast to this, theit seems that relatively lower fares and higher train private railway did not have room to increasefrequencr of JR have bEen contributing to an frequency, because of the limitced capacity ofinfra-
Figure V-3: The relatonship between therelatve level of JR's fares and JR's market share
FARE VSSHARE
0.140.12 .--.0. 1 |
0.08. -0.06- -0.040.02
1.05 1.1 1.15 1.2
Note: The vercal axis = the market share ofJR in che X line fiom 1987 to 1991.the horizontal axis = the relative advantage ofJR's fes against the rival in the X linc fiom 1987 to 1991.
Figure V4 The relationship betmeen the relaivelvel of JR's load fator and JRfs maket share
LOADFACORVSSR4IRE
0.14_0.12 1
0.1 + 0.06+\0.08- -0.04 -0.02.
0 0.s 1 1.5
Note: The verical axis = dte market share ofJR yaginsr the riv2l in dte X line fiom 1987 to 1991.The horizontal axis shows the relative advantge ofJR's load factor aginst the rival in dte X line from 1987 to 1991.
Figure V.5: The relationship between the relative klve of JR's train frequency and JR's narket share
FJNCYVSSHAE
0.140.12 *
0.10.08-
0.06 -0.040.02
0 0.1 0.2 0.3 0.4
Note: Theverical axis =the market share ofJR in theXline fmm 1987 to 1991.Thehorizonau axis = the relativeadvanrage of JRs train frequencqagainsr the rival in dieX line fiom 1987 to 1991.
Japanese National Railways Privatization Study II 87
structure. As a result, JR has succeeded in expand- have provided favorable conditions for the JR toing its market share from 19% to 28%. Because regain its narketshare. Note thatdueto changesinfires were in balance bewecn theJR and the privatc the location of taffic reseach from 1989, trainrailways, the competition took dhe form of increas- frequencies and load factors in 1987 and 1988 areing frequency and reducing the load factor. Table adjusted to maintain consistency of data.V-10 indicaes rhestraregicpolicies ofbothJR and 5.41 In Z line the rdative low fiLres of JR andthe private railway in competing lines increasc in train frequency may be rcsponsible for
5.39 The following figures indicate how ixn- the increases in JR's market share from 1987 toprovementsinJR's servicclevelsmayberesponsible 1991. The foiowing Figures V-9,1 0, and 11 showforthe increaseinpassengers fortheJR inYlinefrom the relationship between JR's market share and1987o 1991. BoththeJRandtheprivaterailwaydid three variables. In this line there is a clear-cutnot raise firs for six years, owing to bendmuark relationship between the market share and reativccompetition. However, the JR's market share has fires as well as relative frequency, but not betwenincreased dristcaly. The Figure V-6, 7 and 8 may the market share and relative load factor.indicate thar when fares are not diflint between 5.42 Therc is no single decisive fator for in-rivals, the relative leel of sevice qualiy becomes creases in the reladve share of JR's passenger inimporant t determine relative maret shares. In this dtese three lines, because various elements joindyline the relative increas- in train frequency seems be have contributed to improvements in JR's relativea kry for the increase , -R's market share. competitiveness. However, the load factor is obvi-
5.40 ZLine Case:As LabklV-1 I shows,JR.had ously not an important factor for measuring thea relative high share in this marker and expanded its relative increase in JR's market share, pardy be-marker shareafterprivatizationfiom 1987to 1988. cause the load fictor might be used as a means forHowever, the privat railway counterattacked JPs increasing tanisportation capacity for the shortexpansion policy by increasing its frequency from terms in order to cope with the shotage of the1989 to 1991. As a result, JRwas forced to reduce capacity, and pardy because the load facor itself isits marker share compared to the private railway estimated bydividing the number ofthe passengerfrom 1988 to 1989. JR has gradually rgained its bytrain fequencyatpeaktimc. Theecasestudiescompetitiveness fiom l990 onwardswhen the rival's indicate tbatbenchm arkcompetitianhas enhancedconcern raiscd its fuares. JRs lower load faacors may the level ofservicc quality in thcsc competitive lines
Tabk V-10 Benchmark Competton in YLUne1987 1988 1989 1990 1991
Peak no. JR 8,876 9,899 12,871 13,013 14,706passcngers Privatc 36,829 37.127 36.815 36.970 37,170Farc (n) JR 430 430 440 440 440
Private 430 430 440 440 440Peak load tcor JR 174 167 134 124 130(%) Private 181 178 171 169 168Peak fequency JR 8 10 10 11 13
(no. of trains) Privatc 26 26 26 26 26
Figure V-6: The relationship between the relative level of JR's aes and JR's market shareFAFEVSSHAE
0.4-U0.35 a
0.3. 0.25.
0.2 .0.15-.0.1
0.05
0 0.2 0.4 0.6 0.8 1
NotcThveti axis = the marketshofjR. Thc horzon axis = th elaiveadvantacofJKs fawsagainstherin he Ylinefrom 1987 to 1991.
88 Japanese National Railways Privatization Study II
and the benefits of improvemcnts have been passed gers may bc determined joindy by the relative levelon to commuters. of fares, relative level of load facor, and relative
Appendix A Simple Integrated Analysis of eveloffrequency.Notethat,economricaiyspeak-Benchmauk Competition ing, because the load factor is detcrmined by divid-
ing the number of passengers by train frequency,5.43 It is difficlt to analyze direcdy the overall there might bc a strong tendency to correlate traffic
effcct of benchmark competition on the modal with these two fictors. Although there is no way tochoice becuse data are limited to only five years avoid these statisical problems, since there hasafter privatzation. We could not apply any econo- been no attempt so far to investigate the effect ofmetric methods to study the e$ffcts of benchark benchmark competition on market share, we havecoMpetitionon marketshares. Thefolowinganaly- tried co adopt the following simple analysis. It issis is an attempt to assess howJR'sefiTrts mayaffcc assumed that there is a linear relationship betwecnits maket share through benchmak compeition. JRls relative level of fares, load factor, and fre-Thcbasicassumption is that the number ofpassen- quency and JR!s relative market share as follows:
F1i V.7: The rdeaonship betmn th rdeave eve of JR's oad actor and JR's mabtshae
LOADFWTRVS94VE
0.4 .0.35 _0.3-
0.25 -0.2
0.150.1
0.05
0 0.5 1 1.5
Note: 'e vertical axis - die m- share ofR The horizontl axis - the relative advantge of]Rs load fiaor against the rivalin the Yline fiom 1987 to 19,91.
Fiw V-8 The reltfomnip bt n the reat ev of JR's ftin fruncy and JR's nmaket sham
0.354.
0.3 -0.25U
0.20.150.1
0.05
0 I I I0 0.1 0.2 0.3 0.4 0.5
NotG lhevercal axis- he maeshareofJR Thehoizontal is - the datveadvantagerofJRs uain fiequency against therivl intheYlinefiom 1987 w 1991.
Tabl V-1l Benchmrk Competiton hi Z Une1987 1988 1989 1990 1991
Peak no. of JR 9,515 10,515 10,117 10,933 12,404pasengs Pivate 29,574 29,768 30,290 31,075 32,259Fare (V) JR 380 380 390 390 390
Private 390 390 400 460 460Load fiaor JR 176 169 126 122 130at peak(%) Private 173 171 166 162 159Peak fiequency JR 7 9 9 10 I 1(no. of trains) Private 27 27 28 30 32
Japanese National Railways Privatization Study II 89
PjdPpv=CI(Fpv/Fjr)m+(Lpv/Ljr)b+(Qpv/Qjr)cI The larger the value of C is, dhe steeper the slopewhere becomes. C may suggest how changes in JR's fares,PjdPpv = the ratio of JR's passenger to the load factor, and frequency could affict on the
private rihvay's passenger. modal choice of commutens who might select theFpv/Fjr = the ratio of fares of the private rail- railwaywhic offirs bcter quality of service, other
ways to JR's fares, things being equaL In that sense C could be a proxyLpv/Ljr = the ratio of load factor of the private to show the sensitivity of conunuter choice. C is
railways to JR's load factor, called choice index hereafier, and shows indirecdyQpv/Qjr = the ratio of train frequency of the the intensity ofbenchmark competition over tume.
private railways to JR!s train frequenqc. In reality, JR has been trying to keep fares un-5.44 TheequaEionindcatethatifthesituation changed, reduce tde load factor, and increase fri-
is favorable to JR in tems of the relative ratio of quency to win more passengers. Although thefares, load factor, and frequency, JR's relative mar- analysis cannot rake into considration how manyket share will increase over rime. C is a kind of passengers have shifredfromaprivae railwk roJRcoefficient to determine the slope of the equationL and vice versa or from passager casn to JR. it may
Rigure V-9: The readonsNp befte te relatie level ofJR's faes and JR's nakt she
FARE V3SSARE
0.4. -
0.3 -
0.2-
0.t. .04
1 1.05 1*.1 1.15 1.2Noe The verial axis -dte madkr sham ofJRin dhe Z fine from 1987 to 1991. Th horizontal ais - the reative advanag of
JRfas against die rival in de Z line fiom 1987 to 1991.
RFure V-10 The reons p betwen the reai lvl of JR's load tor and JR'S nt sharLOAD FACMVRVUSSHARE
0.3 1
0.2-
0.5 t 1.5Note The verticl axis = the nma sare ofJR in dte Z line fiom 1987 wo 1991. The horiwonml axis . de rdati advantage of
JR!s load fcaor againse die rival in he Z fine fiom 1987 to 1991.
Figure V-11 The relationship between the r i lvel of JR's tin rquency and JR's nwketFREQUENCYVS SHARE
0.4-
0.3 .
0.2.
0.1. .
0t
0.3 0.35 0.4
Noe The vetical axis = the market sha ofJR in de Z lne from 1987 to 1991. The horiontl adis the relative advanuge ofJR9s train frquency against die rival in die Z line from 1987 w 1991.
90 Japanese National Railways Privatization Study II
show the intecraaion between JR and a privace tive because ifJR's relative frequency is larger thanrailgay. that for the private railwaysjRs could increase their
5.45 Although the coefficients. a, b, and c are market share, which is shown as the inverse of theunknown, itisobviousthataandbare non negative relative frequency of JRs to the private railways.values (a, b > 0) and c is a negative value (c < 0). Although there is a need to estimate these coeffi-Since a and b are the coefficients to show the cients (elasticities), because of data availability werdative level of fares and load factor of JR to the did not estimare them. For the sake of simplicity,private railways, their positive values mean that if we define here a and b as being plus one (a,b = 1)JRs ofrer relatively lower fares and lower load and c is minus one (c = -1). If JR and dte privatefactors than their counterparts, JRs could increase railvay share the market equally, and if JR istheir market share The coefficient c must be nega- equivalent to the private railways in terms of fares,
Tabe V-12 Changes In Choice Index in the case of X-Line
1987 1988 1989 1990 1991
C Values 0.024 0.034 0.022 0.043 0.046
Figure V-12 Changes In JfRs Choice Index in the case of X-Line
0.3
0.2
0.1
N 0 co 0 _0 CD 0 a> a
Figure V-13 Changes in JA's relaffve competveness
C-Value
0.3t
02-
0.1
0 _2 2.5 3
Three Strategic Elements
Note The vertcal axis = C-values TWhe horizontl axis = Relative Fare + Relative Load Facor + Relative Frequency Movemcnrsto the northeast dircaion mean thatJR7s r5ativc advantage is i.ceasing over ite.
Japanese National R. ilways Privatization Study II 91
load faaor, and frequenr-, C will be 1/3 or 0.33, ence toJR due to bendumarkcompeticion in X-Linebecausethe numerator i).Ppvisequalco 1 andthe increases abouc twice fiom 1987 to 1991. FiguweV-denominator is the suni of Fpv/Fjr= 1, Lpv/Ljr=1, 13 shows the changes in the relatioi'ship betweenand Qpv/Qjr=l so that the sum of thcsc ratio JR'scompetitircness and threevariables over time.becomcs thrce. In other words, when the compcti- 5.47 In Y line, since the JR increased its frc-tiveness ofJR and the private railway is in cquiib- quency, it becamc morc attractivc than before. Asrium, CwouldbcO.33. The rclativc increase inJRs' shown in Tablc V-13 and Figurc V-14, the calcu-competitivencss owing to bendcnark competition lated C values in Y line are not only higher thancan be measured by the deviation of C from an those in X-Line but also increased by about 40%equilibrium value of 0.33 over tim.c from 1987 to 1991. The JR has succeeded in
5.46 Tables V-12 to 14 and Figures V-1 2 to 17 cxpanding ie markersharebyimproving thequal-show the changes in C values of three lines, which ity of servicc. Figurc V-15 shows changes in themay indicate the degree of the modal choice of relationship bercwenJRscompecitivenessandthreebenchmau competiton from 1987 to 1991. Prefer- variables over time.
Table V-13 Changes in Choice Index in Y-Line
1987 1988 1989 1990 1991
C Values 0 103 0.109 0.132 0.126 0.142
Rigure V-14 Changes in Choice Index in Y-Line
0.3-
0.2 -
0.1 - -
co co coo im -0 m CD 0 CD
Fgure V-15 Changes in JR's Re/adve Compees
CValue
02-
0.1 .
2 2.5 3
Three Strategic Elememts
92 Japanese National Railways Privatization Study II
5.48 The following Table V-14 and Figure V- competitive markct, if it was freed from the heavy16 show the changes in Choice Index in Z-Line burden of maintaining infrastructure. Foz the firstfrom 1987 to 1991. Since the private railway twoorthreeyearsafterseparationfromJRspassenger,continued to inciease its frequency from 1988 to dtanks to the emonomic boom in the late 1980% anid1989, JR's competirive edgewas reduced, but after the severe shortage of workers in the trding indus-owing to incrase in the relative fiequency ofJR, the uyJRFreightmadefairlygoodprogressinexpandingsituation forJRgradualy has been improving Figture its market share. However, af;er the burst of theV-17 shows the changes in the relationship bctrw:cn bubble eoonomyin spring 1991 demandsfor railwayJRls competitiveness and three variables over time. freighthavebeenfallenrapidly,sineeshippinggeneralEconomic Analysis ofJR Freight goods by railway is considered the last choice for
customers who place prioniy on delivery time. As aCbnge in Cost and :Serice Ogputpxt efiR Firit rcsult,JRfreight finds it difficut to maintain even the
5.49 The main purposes of the creation of a currcnt rmarket share, which is less than 5% of thenation-widc Japan Freight Railway Company JR total freight market on a ton-kn basis.Freight) werc to reduce rhe snowballing deficits of 5.50 Onc of the problems JR fitces is hcavythe frcight section ofJNR and provide an opportu- dependence ofJR Freight on forwarders to collectnity for rcstructring freight operations and re- freight. Traditionally JR Freight has not beendressingineffiiency. Itvasexpeced thatJRFrcight equipped with the necessary marketing functionscouldstandalone financialiyandsurvive in thevery and does not havc trained people to engage in sales
Table V-14 Changes h Choice Indexin Z-Line
1987 1988 1989 1990 1991CValues 0.142 0.149 0.125 0.124 0.140
Figure V-16 Changes in Choice Index in Z-Line
0.3-
0.2-
0.1 *Ew0-
co CD co o CD
A~ |
Figure V-17 Changes in JR's competitveness
C V_ue0.3
02
0.1
0
0 t 2 3
Three Strategic Elemets
Note: The vertical axis = C-values The horizontal acis = Reative Fare Relative Load Facor + Relative FeqtiencyMovements to die northeast direction mnean that JRs relative advantage i: increasing over time.
Japanese National Railways Privatization Study Il 93
aaivities. JR Frcight is in a very weak position to 5.51 JR Freight in cflcct borrows tracks byaccess directly its dients in the general goods mar- paying user fees to JR's passenger companies. Un-ket when compared with forwarders. The trucking der thissituation, the imporrantquesrion is whethercompanies are doser to final consumers than JR or not the user fees JR Frcight pays cover theFrcight and have better knowledge of what the relevant cost oftra cuse. According to the contratcustomers want. Trucking companies were able to berween JRs passenger and JR Freight, user fees arcmake use of the transportation capacity of JR supposed to be based on avoidable cost. To asscssFreight as a buffer to adjust supply and demand for whether JR Freight financially scands alone or not,their own interest. When they cannot handle de- it is importnt to study whether user fees are dosemand, for example, because of a shortage ofdrivers to the marginal or average cost of railway opera-or trucks, thry may use JR Freight to transport tions. If the user fee is smaller than the marginalgoods. Since there is asymmetric information be- cost, there will be a possibility of cross-subsidiza-tween JR Freight as principal and truclcing compa- tion between passenger JRs and JR Frcight. If so,nies as agents, JR Freight can monitor imperfctly the user fee JR Frcight currendy pays may not bethe opportunistic behavior of trucing companies justified from the standpoint of efficiency.who may act cooperatively or non cooperatively to 5.52 Figure V-18 shows dcanges in ton-km ofmazximizetheirownprofits.TheMinistyofTrans- railwayfreighE from 1970 to 1991. Railwayfreighrport attempts to promotc use of railways in the showed a sharp dcdine inhe 1970sand 1980s,butfreight market from the viewpoint of coordination sinceprivamaonin 1 987denandfor railwayfreightamong transportation modes. But JR Frcight is has shwm an ovall incacasing trend. As shown inlosing its competitive edge mainly because oftimc- Figure V-19, howcver, demand began to dcasecost inefficicncy. again from 1992, owing mainly to the sluggish
F,gure V. 18: Trend of Freight Transport (Ton-kmnX=year Y=ton-km (billion)
60
0 - I I I
40s - 130 75 80 e, 90 95
2 -
Figure V-19: Trend of Operatng Cost hess Depreion)X=year Y=operaing Cost (less depreciaton) (billion yen)
4200. 4000. J _ _ _ _ _ _
36°o'~~~~~~~~ I U 3800. -3600-3400 - _ _ _ _ __ _ _ _ _
3200 3000. - _______
2800-
220 070 75 so 85 g0 95
94 Japanese National Railways Privatization Study II
economy. Inspitcofdecreasingdemands,the operar- structurc. Thirdly, avoidablc costs are calculateding cost ofJR Freight surprisingly increased sharply. undervariousscenarios. Finally, theesuimated avoid-The opeating costs readced peak at 1985, and siwce able costs are compared with the average cost andthen there havc becn paralle changa betwee de- marginal cost in ordcr to decermine whether thcmands and cosL This mc;ns that during the relevant user fee for the track usc is appropriate or not. Thisperiod theJNRfreightscionmayhavebern aniajor maygive an indication as to what extent JR Freightcause for the JNR's huge deficit. To restructure the is aoss-subsidized by JRs passenger.dcficit-ridden freight section, JR Freight neceded to 5.55 The avoidable costs aredefined as foliows:bc cut offfiom passenger transportation activities. Suppose that C(Qp,O) is Sand-Alonecost rooper-
Ezsmation of Cost Fion te only passenger railways (the cost of supplyingpalssengerscrvice in isolation),andC(O,Q) isStand-
5.53 JRs as a whole joindy supply two different Alone cost to operate only freight railways (dte costservices - passengcr and freight - using the same of supplying passenger service in isolation). Ct isinfrastructure. Since JR passenger companies own the sum of two Stand-Alonc cost, that is Ct =the track,JRFreight is supposed to pay user fees for C(Qp,O) + C(O,QfO.Assume tat Cj = C(Qp,QO isthe use of track based on the avoidable costs, as the joint cOst when a railway company suppliesdiscussed earlier. The problem is how to allocate both passenger and freight services at the samccommon costs which indude not only the cost of time. Since the avoidabl costs are defined as cstsproviding track but also the costs for signaling saved if either passengerscrvice or freight service isterminals, electricity generation stations, and so withdrawn, they are obtained by dividing incre-forth, since conmnon costs forxn a very substantial mental costs by output as follows:part of tl costC for railwayoperations. Moreover, AVCp = IC(Qp,Q) - C(O, Qf)l / Qp, forthere isalargeportionofaommoncostwhich isnot fixed Qfcearly traceable. JR passenger companies use an andaccounting method that allocates cormon costs to AVCf= IC(Qp,Qf) - C(Qp,O)l I Qf, foroneacivityoranother. Froman economicpointof fixed Qpview, however, accounting costs are of limited whereQfstandsforoutputoffreightserviceandguidance in setting user fees for the use of track Qp shows output of passenger service. There areGenerly speaking, the accounting method does twc kinds ofthe avoidable costs. The problem is innot conform to economic costing methods. The defining the base from which to begin to the scriesproblem is that there are significant differences of allocations, passenger service or fright service.associated with the costs of track used cxdusivdly Which definiuion is used depends on whethcr theforpassaergrservicesand that usedonlyfor freight. infrastructure of railway is mainly designed forThis means that the calculation ofavoidable cost is passenger service with freight service imposingchanged by its dcfinitions. The concept of avoid- additional costs or not. If priority is given toable cs becomes rather dubious as a mean to passenger service, AVCfshould be used. lfpriorityallocate common costs. It is important to study is given to frcight service, AVCp should be used.whvethrJR Freight is covring its specific costs plus However, it is a general understanding in Japancontribution to overheads from the standpoint of that passenger jRs provide important intercity ser-economic analysis, because if user fees forthe track vices and also play a key role of providing com-usearelessthan theavoidablecosts, thenJRFreight muter services in major urban areas. It may beis making a loss for JR passenger companies. reasonable to suppose thatJR passenger companies
5.54 To determine whether JR Freight may have priority over JR Freight. In this case, thecover the rlevant track costs fiom the viewpoint of avoidable costs are calculated on the basis of howcfficincy, the following procedure is used here: much JR passenger companies could savc cost offirst, operating costs of passenger and freight ser- operations if frcight servicrs were abolished. Thevices are estimated by Eimz-series and cross-sccion avoidable costs can be daetrmined by the joint costregression analyses using data of output of pasen- C(Qp,Qf) minus cost of passenger service C(Qp,ger and freiight and network conditions. Secondly, 0), that is AVCf.the aveage cost and marginal cost, economies of 5.56 To judge whether user fees are relevant ornetwork density, economies of scale, and econo- not, there is a need to know whether economies ofmies of scope are calculated to dearij the cost scopeandscaleexistinJRsoperationsasawholc. If
Japanese National Railways Privatization Study II 95
the joint cost (Cj) is smaller than the sum of Stand- Qf = output in freight transport ( ton-kIn)Alonc costs (Cc), this may indicate the existance Ni = nctwork variables (i.e. route-klm, tripeconomies of scopc in railway operations. In length ctc.), and D = dummy variablesotherwords, if the total costs ofsupplying jointly (ic. privatization dummy).passenger and freight services by monopoly arc 5.59 Since samples are small, simple log-linearsmallcr than those for supplying them separately cost function is used here. The advantagc of log-by two independent railway companies, this lincar cost function is that the coefficients of eachmay indicate that the joint production of pas- variable represent the elasticities of cost. To avoidsenger and freight services can save costs com- bias ofestimation, difrent sample sets and differ-pared with separable provisions of these thcse ct kinds of models are introduced. Basically twoservices. If the rcsult is the opposite and so kinds of cost specification are used as folowsdiseconomies of scope exist, the break-up of (for time-series sample)passenger service from freight service or vice ln(C) = a + bt* ln(Qp) + b2* ln(QL) + c* ln(N)versa may be desirable. Our measurement of + d* PRVeconomies of scope (ESP) is the ratio of the sum (for cross-sectional sample)of Stand-Alone costs to total costs as follows: ln(C) = a + b1
t ln(Qp) + bz* In(Qt9 + l; c*Economies of Scope (ESC) = [C(Qp,O) + ln(N;) + d*JR
C(O,Qo]/C(Qp,Qf) where PRVand JR aredummyvariables. In theIf ESC is greaer than onc, this means that first estimation equation the dummy PRV is as-
economies ofscope exist and if it is less dan one, it signed a onc for after privatization and a zero forshows diseconomies of scope. before privatization. In the second equation the
5.57 Disoconomies of scope in railway opera- dummy JR is a one for JR and a zero for privatetions might aise if the joint use of trac for passen- wager and frcight services have affeacte dversely each 5.60 TableV-i 5 shows the results of estimationother, for example, owing to oDnflict of scheduling in cass oftime-series ordinay last square methodand the need for managerial adjustment between (Model-i), first-order autoregressive methodthcL Thecre might be lag transaction costs for (Moddl-2), cross-sectional method (private rail-adjusng the two different operations. The joint ways only, Model-3), and cross-sectonal methodcost q could become larger than the sum of two (JRs plus private railways, Modcl-4). The R2's areStandAlone costs ifeconomies ofscopearcsmaller vey high, although the t-satistics are relativelythan diseconomies of scope. Whether or not the smalL Genelly speaking, route-km has high clas-joint cost becomes larger than the sum of Stand dcity in most models, which show that Icngth-of-Alonc costs may depend on whether or not routevariablemayhaveastrongimpactonchangesdiseconomiesofscope (cost-augmentingaacivies) in cost. In cross-sectional analysis, clasticity ofare larger than economaies of scopc (cost-saving passenger-kInisalsolargebothinthecaseofprivateactvities). In this case, the calculation ofavoidable railways only and in the case of JRs plus privatecost is far more complex than we expect. It is ailways, which may indicate that output ofserviceextremcly diffiaict o separate economics of scope is an important factor to set the cost. However,from diseconomies of scope in railway operations. diffrences in the size of output between JRs andInstead we will use regrcssion analysis to give over- the private railways arextrem ly large, which mayall assessment on the relvancy of user fee. give bias to the esimation results.
Esirnion of Cost FAnzeen ofiBs 5.61 Table V-16 shows the estmated averagecost and marginal cost of JRs using the above-
5.58 It iS assumed chat costs are explained by mentioned models. Average cost of passenger JRstwom knds of service OUtpUts, network faors, and in time-series analysis is about I1 yen per passenger-some dummy vaiables as follows: km and tat for cross-seccion analysis is in between 7
C = Cp + Cf= f (Qp, Qf, Ni, D) and 8 yen per passenger-kn. In case of jR Freight,where averag cost manges from 43 to 88 yen per ton-kmninCp = operang cost of paswnger the time-seriesanalysis, but in cross secionanalysis itCf= operatng cost of freight has hovered around 35 yen per con-km.Qp = output in passenger tmnsport (i.e. pas- 5.62 Economiesofnetworkdensity, economies
senger-km) of scale, and economics of scope using the same
96 Japanese National Railways Privatization Study II
model specificaEion are shown in Table V-17. production is smaller than individual cosEs of pro-Economics of network densicy are defined as the duccion. Thercareverylargeeconomiesofnetworkproportional increase in costs due to the propor- densiq in time series analysi :, alkhough in the casestional increase in output, fixing input prices, net- of cross section analysis cconomies of networkwork faicaors, and service output characteristics. density decline almost one-half compared withEconomics of scale are calculatcd as the propor- time-scries cases. As far as cconomies of scale aretional increase in cost resulting from the propor- concerned, they range from 1.00 to 1.58, which aretional increase in output and route length, fixing a litde higher than North American railways studyinput prices and service output characteristics. by Cave, Christensen, and Swanson [1981], butEconomies of scope mean that the cost of joint dosetotheresultofAmericanurbannailwaysstudyby
Table V-15: Estimaon Results: Coefficients and Standard Errors
Model Model-I Model-2 Model-3 Model-4type of time-series time-series cross-sectional cross-sectionalsample (1981-91) (1981-91) (private only) UR+private)
Mehod OLS ARI OIS OISln(Qp) 0.172 0.151 0.422 0.348(passge-kin) (0.348) (0.391) (0.062) (0.127)ln(Q ) 0.044 0.127 0.084 0.076(ton-kIn) (0.125) (0.161) (0.076) (0-157)ln(Lr) 0.505 0.353 0.493 0.533(route-kn) (0.601) (0.696) (0.120) (0.h23)ln(lp) -0.545 -0.462
trip icngth) - (0.084) (0.176)In0h) -0.108 -0.102
rdei trip lngh) - - (0.090) (0.186)PRV -0.209 -0.224 - -
(privatization dummy) (0.083) (0.095) - -
JR - 0.330(JR dummy) - (0.847)constant 28.982 28.995 24.495 25.769
(0.041) (0.048) (0.232) (0.866)RS*2 0.9091 0.9203 0.9600 0.8522Not= The numbers in the prnthesis ame de standar errors.
Table V-16: Estmated Average Cost and Marginal Costmodel-1 model-2 nodel-3 (cross- model-4 (cross-
(time-series: OLS) (time-series: AR1) sectional:private only) sectionaLJR+private)ype of COSt AC MC AC MC AC MC AC MCpassengerjRs 11.5 2.0 11.1 1.7 6.9 2.9 7.9 2.8ficightJR 43.7 1.9 87.8 11.1 34.2 2.9 35.5 2.7Note 1) AC is avenge incrementl cost (CI-Cp)/QQ and MC is margind cost. which is obtained by AC times dasticity.
2) These numbess are estimated results using 1991 statistics ofJR.
Table V-17: Economies of Network Density, Scale and Scope
model-I model-2 model-3 (cross- model-4 (cross-(time-series: OLS) (time-series: ARI) sectional:private only) sectional:JR+prIvate)
Economics ofnetwodC density 4.63 3.60 1.98 2.36Economies of scale 1.39 1.58 1.00 1.04Economies of scope 0.76 0.43 0.26 0.30
Japanese National Railways Privatization Study II 97
Viton 11980]. This cost study suggCsts dut there elasticity. Although samples are small, it mav bewould be diseconomies of scope in JRs, since every safe to condude that JR Freight docs nor covervalues show far less than 1. avoidable costs in any case. JR Freight pays only
5.63 TheestimaEionofavoidablecostsisshown 0.65 yen as the user fec which is far lower thanin Table V-18 under various scenarios. Scenario I the marginal cost cstimated here. From thisindicates thaE all joint costs, in other words, all econometric analysis there is little doubt that JRinacemental costs resulting from joint production Freight is subsidizedbyJR passengercompanies.of passenger and frcight service, are allocated to JR The relationship betwcen JR passenger compa-Frcight. Scenario 2 is that all joint costs are attrib- nies and JR Freight must be changed from theutable toJRpassengercompanies. In Scenario 3, all viewpoint of efficient resources allocation. How-joint costs are allocated by share ofoutputs assum- evCr, in the definition of avoidablc costs, rel-ing the average weight of a person to be 70kg. evant costs are tied to the particular railwayScenario 4 shows the estimation of avoidable cost policy. There arc social costs associated withusing JR Freight's marginal costs. The avoidable road transportation which may jusrifythe cross-cost per ton-km in this case is estimated as being subsidizationofJRFreightbyJRpasscngercompa-between 14 yen and 43.7 yen per ton-in. nies if social costs of railway freight is less than that
5.64 Table V-19 shows that the comparison for trucking. As the second-best theory suggsts, ifof user fee and average and marginal cost based prices in road scaors deviate from costs, there areon time-series model-1. Since clasticity of ton- sound economic reasons for railways to deviatekmu (InQf) is 0.044 and average cost is calculated from the marginal cost pricing. There is a strongby (Ct-Cp)/Qf, we can obtain the marginal cost need to study the costs of railvay freight ranspor-of 1.9 yen per ton-km by multiplying AC by the tation from the viewpoint of externalities.
Table V-18: Estimation of Avoidable Costsavoidable avoidable
cost for fieight's share cost cost per ton-kmdescription freight only of joint cost of frei*h (V/ton-kin)
Scenario 1 all joint cost is 381,314 784,991 1,166,305 43.7allocated to fxeight
Scenario 2 all joint cost is 381,314 0 381,314 14.3allocated to passenger
Scenario 3 all joint cost is allocated 381,314 476,411 857,725 32.1allocated by share of outputs
Scenario 4 of all joint costs, 381,314 50,725 432,039 16.2marginal cost of freight
No=e (1) Costs co clculate avoidable cDst are as followsC(Qp.O) (only pseger) = 2.060.970 billion yenC(O,Qf) (only fiecighr) = 381,314 billion yenCt (passnger & fhtight) = 3,227.275 billion yenCq=C(Qp.QO (joint cost) = 784,991 billion yen
Table V-19: Companison between Fae Level and Costs
JR pasen-JR freight ger revenue AC MC
average rate fromtrack use (average cost) (mainal cost)Ton-kmbasis 7.29 0.65 43.7 1.9
Note: AC (averag cost) and MC (marginal cost) are estimated by the time-series results(medtd1).
98 Japan( . National Railways Privatization Study II
Re.erences
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