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A study of vertical separation in Japanese passenger railways
Accepted Manuscript Title: A study of vertical separation in Japanese passenger railways Author: Fumio Kurosaki PII: DOI: Reference:
S2213-624X(17)30284-5 https://doi.org/10.1016/j.cstp.2017.09.004 CSTP 196
To appear in: Received date: Revised date: Accepted date:
27-9-2016 10-9-2017 25-9-2017
Please cite this article as: Kurosaki, Fumio, A study of vertical separation in Japanese passenger railways.Case Studies on Transport Policy https://doi.org/10.1016/j.cstp.2017.09.004 This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
A study of vertical separation in Japanese passenger railways Fumio KUROSAKIa a
Institute of Transportation Economics, 34 Shinanomachi Shinjuku-ku, Tokyo 160-0016, Japan Tel.: +81-3-5363-3103; fax: +81-3-5363-3115.
E-mail address: [email protected]
Highlights · Characteristics of vertical separation in the Japanese railway sector are clarified. · Difference of vertical separation in Japan and that in EU countries is clarified. · A public-private contract in regional rail transport in Japan is proposed.
Abstract In recent years, the Japanese railway sector adopted vertical separation in certain circumstances. This research investigated the recent Japanese policies and clarified the characteristics of vertically separated railways in Japan compared with those in Europe. When we consider the current status of Japanese railways where traffic is dense on many lines, the study concludes that a single railway company should manage railway operations as a whole even if the public sector retains ownership of the infrastructure. As one of the lessons learned from European experiences, it appears worthwhile to introduce railway operations based on a public–private contract for more cases in regional rail transport in Japan.
Keywords vertical separation, coordination problems, public–private contract, railways, EU Directives
1. Introduction Different from the railways in Europe, most of the passenger railways in Japan own the infrastructure, and thus maintain an integrated structure. Besides the costs of train operation, they also pay the maintenance costs of the infrastructure. Nevertheless, it has been difficult to cover all the investment into infrastructure through 1
revenues after completion of most railway projects. As for local railways, following a decrease in population, fare revenue has also been decreasing in many cases. Accordingly, it has become difficult for these local railways to sustain an integrated organizational structure, where the fare revenue covers the infrastructure as well as O&M costs. To address these difficulties, the Japanese government has enacted new legislation to promote the construction of railway infrastructure and to operate unprofitable railways utilizing public finances. In these cases, vertical separation, where the railway infrastructure is owned by a public entity that is different from the railway operator, is adopted to realize public financial support for the railway sector. However, the management of the vertically separated railways in Japan is largely different from that in Europe, where the EU has enacted policies aimed at introducing competition in the railway sector since the 1990s. These differences have not yet been investigated well mainly because the new legislation was enacted in Japan only a few years ago. Thus, this study tries to clarify the characteristics of vertical separation in Japanese passenger railways compared with European railways and highlights the differences between them. Then, the study aims to withdraw some lessons that the Japanese railways can learn from the experiences of the European railways.
2. Research design and methodology In order to attain aforementioned research aim, this study first investigates recent Japanese legislation that promotes the introduction of vertical separation in the railway sector. Then, the study compares Japanese cases of vertical separation with those found in Europe, where railway policies have been enacted by the EU since the 1990s. The research will be conducted on the basis of
the available data and literature;
interviews with experts who are familiar with recent railway policies in Japan and Europe; and
a comparative analysis of the cases in Japan and those in European countries.
The study consists of the seven chapters. Following this chapter, Chapter 3 discusses the transport market and railway management in Japan. Chapter 4 investigates the legal schemes that make it possible to introduce vertical separation into the Japanese railway market. There are legal schemes that can be applied to construction projects and those that can be applied to unprofitable railway operations. Thus, the investigation will be made for both situations. Chapter 5 discusses the distinct characteristics of railway operation in Japan. Following the investigation into the current market conditions and characteristics of Japanese passenger railway operation, Chapter 6 discusses the lessons that the railway sector in Japan should learn 2
from railway operations in EU countries. Then, Chapter 7 briefly concludes the study.
3. Transport market and railway management in Japan 3.1 Transport market in Japan Japan has a favorable transport market, which is advantageous for passenger railway operation. The country is surrounded by sea, and a large part of the land is covered by mountains. Accordingly, many cities are located along the coastal lines. These geographical characteristics are suitable for the passenger railway network and its operation. In addition, Japan has some metropolitan areas, such as Tokyo, Nagoya, Osaka, and Fukuoka and several other large cities on the line. These conditions enabled many railways profitable. Besides profitable intercity passenger services including high-speed railways, some conventional railway networks in the abovementioned metropolitan areas are also profitable, and they cover infrastructure maintenance costs as well. Although the market share of railways has been decreasing, the railway sector still garners approximately 29% of the transport market in terms of passenger-kms (MLIT, 2015). Although Europe has developed the passenger railway networks to a large extent, this rate is much higher than the average rate in the three European countries. Fig. 1 compares the market share (passenger-kms) of railways in Japan and the average in the UK, Germany and France. Owing to the transport market being advantageous for railway operations and their efficient train operations, many Japanese passenger railways, such as 16 major private railways and three mainland JR companies, transport a sufficient number of passengers to sustain their infrastructure. 11 public authorities also operate the subway systems in profit though 70% of the construction investments are covered by the government and local governments. The traffic densities of these profitable railways are much higher than those in European countries. Nevertheless, market conditions for public transport are largely different depending on the regions in Japan. Accordingly, the traffic densities of those railways differ largely between the urban and local railways (Fig. 2). Although there are many mid-to-small private railway companies in Japan, more than half suffer from a deficit (Table 1). The railway operations segment of the three island JR companies (JR Hokkaido, JR Shikoku, JR Kyushu), which were created through the reform of the Japanese National Railways (JNR), has been unprofitable as well, and their loss has been covered by other revenue, such as interest from the Management Stabilization Funds, which will be explained in the next section.
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3.2 Reform of the Japanese National Railways This section overviews the reform of JNR in 1987. During the era of JNR, it accumulated heavy debts, especially in the freight sector as railways in Japan are passenger-dominated. In addition to financial difficulties, JNR also faced severe criticism for its ineffective management. Thus, JNR reform was finally undertaken in April 1987. Through the reform, the JNR railway network was split and transferred to six passenger companies. The freight division was transferred to a nationwide freight operator (JR Freight), and it was designed so that JR Freight accesses the railway network, which is owned by each passenger company.
Following the JNR reform in 1987, the present six JR passenger companies operate passenger rail transport while retaining the infrastructure. Although the three island JR passenger companies received Management Stabilization Funds (MSF) from the government at the time of JNR reform to support their management, each of the six JR passenger companies operated their railways through revenue, without receiving government subsidies to operate their railways. In brief, while JR Freight forms a vertically separated structure, the six JR passenger companies comprise a vertically integrated structure. As a result of the JNR reform, the trend of transport volume has changed clearly. Despite the improvement of GDP, JNR had failed to improve the output until the reform in 1987. However, the passenger traffic transported by the six JR passenger railway companies started to increase with much higher rate than before (Fig. 4). As this growth rate is higher than that of other Japanese private railways, it is generally recognized that this change could be achieved as the newly-established JR passenger companies started to provide customer-oriented services based on the condition of each region. Although JR Hokkaido and JR Shikoku are suffering from financial difficulties because of the low interests of MSF and decrease of population in the region, the above-noted recognition is particularly the case in the three railways (JR East, JR Central, JR West) in Honshu and JR Kyushu, of which shares were already listed.
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Certainly, even within a single organization, especially in the case of large and bureaucratic railway companies, there are some conflicts between different departments as they have different responsibilities and interests as well. Nevertheless, most of the management decisions can be made within the organization without making a contract. Thus, in general, those conflicts are much less than the coordination problems between the different organizations in the vertically separated European railways, where many decisions and operations must be made by a contract between the segregated organizations.
4. Vertical separation in the Japanese railways sector Alike the six JR passenger companies and the subway systems, vertical integration is dominant in the private railways in Japan. Despite its dominance, the Railway Business Act in Japan stipulates the licenses for the railway businesses, including those by vertically separated structure. Section 4.1 outlines this Act. In these years, there are two main scopes for which the Japanese railway sector requires public financial support: 1) to implement large-scale construction projects and 2) to support unprofitable railways. A vertically separated structure is adopted to provide public financial support in these two scopes. Sections 4.2 and 4.3 outline Japanese laws and regulations and how railway construction and operations are managed in each scope. 4.1. The Railway Business Act in Japan The division and corporatization of the Japanese National Railways (JNR) on 1st April 1987 changed the framework of the railway business, and the Railway Business Act was newly established in Japan. The Act stipulates three types of railway licenses required to enter into the railway business: 1) Class 1: Enterprises that provide rail passenger and/or freight services while holding their rail infrastructure. 2) Class 2: Enterprises that provide rail passenger and/or freight services using rail infrastructure owned by another organization. 3) Class 3: Enterprises that own infrastructure only for renting it to a Class 2 Enterprise. (In practice, Class 3 also stipulates enterprises that build rail infrastructure for a sale to a Class 1 Enterprise. However, these enterprises are not related to vertical separation as the license for this case is applied to the only construction process. Thus, these enterprises will not be discussed in the following parts of this paper.)
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Most railways in Japan have a Class 1 license; however, there is no one-to-one relationship between a rail enterprise and type of license. As a license can be given to each line, a railway company can have different kinds of licenses. The main reason for stipulating the three types of railway licenses is to accommodate JR Freight, which was established as a division of JNR. JR Freight does not own the tracks for the trunk lines, and it accesses the JR Passenger Companies’ tracks to run its trains. JR Freight, therefore, has a Class 2 license. Another reason for legally separating the categories is to promote investment. Because railway facilities require vast amounts of capital for construction, it is necessary to separate the construction/ownership of these facilities from the businesses of operating them. This capital burden strains railway business management and makes it more difficult to launch new railway lines. Therefore, to construct and sustain railways, it has proved necessary to divide railway enterprises into entities that construct and administer the railway and those that operate it and to alleviate the capital burden of construction from the operating entity as much as possible (Kamata, 1997). In Japan, the following combinations of enterprises can be defined as “vertical separation,” where the railways are managed by an entity different from the infrastructure owner: Combination 1: a Class 2 Enterprise accesses the track of a Class 1 Enterprise. Combination 2: a Class 2 Enterprise accesses the track of a Class 3 Enterprise. The freight railway operation, where JR Freight accesses the JR Passenger Companies’ tracks, can be categorized as Combination 1, and the JR Passenger Companies only have a Class 1 license and do not need to obtain a Class 3 license. This is because the Class 3 license is for an enterprise that does not provide passenger and/or freight services by itself. On the other hand, the railway operation implemented only as a Class 1 Enterprise can be defined as “vertical integration” in Japan. This study also follows the same definition to discuss “vertical integration” and “vertical separation.” 4.2. Vertical separation for construction projects 4.2.1. New Shinkansen lines Although construction works were implemented to extend the Shinkansen lines since the JNR reform, each JR passenger company cannot cover the construction costs of these projects. Thus, construction and operation schemes for these projects were modified so that the management of JR companies would not be worsened. Then, the new lines and extensions of Shinkansen lines have been constructed and operated based on the new scheme since JNR reform in 1987. Briefly, the new scheme stipulates that the Japan Railway Construction, Transport and 6
Technology Agency (JRTT), a wholly government-financed entity, carries out Shinkansen construction works as a public project after the JNR reform. The JRTT not only implements construction works but also owns the infrastructure after completion of the projects. JRTT leases the infrastructure assets to a JR passenger company, which operates the Shinkansen trains. Thus, the newly constructed sections are operated by a vertically separated structure, which is different from the initial Shinkansen lines that had been constructed during the JNR era. Each JR passenger company pays track usage fees based on the calculation explained in the section below. Regarding financial resources for the construction works, except for the usage fees, which would be allocated for the works, the current financial scheme stipulates that the government and regional governments along the line bear the resources of the works by a ratio of 2:1. As a rule, in commencing the construction works, the local communities should agree to separate the management of the conventional lines parallel to newly constructed Shinkansen lines from the JR companies. As these conventional lines are unprofitable, this separation alleviates the financial burden of JR companies, and in general, the regional governments should manage the railways utilizing their finances if they wish to continue the operation (Kurosaki, 2013).
4.2.2. Urban railway lines Similar to the new Shinkansen lines discussed above, in 2005, the new Act was established to construct the infrastructure of urban railway lines by utilizing vertical separation. The official name of the Act is “Act on Enhancement of Convenience of Urban Railways.” As the Japanese railway network is already mature, the Act aims to utilize the present railway network to the best of its ability. Specifically, the Act can be applied to 1) construct the missing link between the lines to promote the level of the passenger railway services and 2) construct facilities around a station to promote connectivity with other transportation modes. Once the project is admitted, a public entity, such as the JRTT, constructs the infrastructure and retains ownership of the asset even after the completion of the project. Regarding financial resources for the construction works, the Act stipulates that the concerned three parties, the government, regional governments, and the public entity bear the financial resources of the works by the same ratio. 4.2.3. Track usage fees and maintenance works in the two schemes For the aforementioned schemes for the new Shinkansen lines and urban railway lines, the 7
amount of track usage fees that the operator of a new line pays to the public entity is an essential factor from the viewpoint of the relationship between the operator and the public entity. That amount is calculated based on similar ideas, which are stipulated by the legislation. In brief, this amount is equal to the operator’s net increase of benefits through the commencement of transport services, and the net increase in benefits is calculated by comparing: 1) estimated revenues and expenses generated by the construction project; and 2) estimated revenues and expenses that would likely be generated if the construction project were not implemented. Then, the amount of track usage fees is fixed based on the expected revenue and expenses over a 30-year period after opening. For calculating the expenses of the new operator, the taxes and maintenance fees are included. The scheme is designed so that the operation of newly constructed lines should not worsen the financial situation of the operator. Precisely speaking, track usage fees of New Shinkansen lines is set within the range of benefit of Shinkansen being constructed, and those of the Act on Enhancement of Convenience of Urban Railways is set as the benefit amount. Thus, though the limit of the track usage fees is not exactly the same, the two schemes stipulate the similar calculation for track usage fees. Regarding the maintenance works of infrastructure, although the maintenance fees are included as an expense in calculation of the aforementioned track usage fees, each operator implements/orders the works practically, which is in stark contrast to the case in EU countries. In European railways, although the track usage fees can cover the maintenance costs in some cases, an infrastructure manager pays the maintenance costs and implements/orders the maintenance works. In the case of Japan’s two schemes, as train operators and infrastructure managers do not need to negotiate about neither the daily maintenance works nor the amount, they do not face coordination problems regarding the infrastructure maintenance works. As for the received track usage fees, they are utilized for a part of investment in other projects. Concerned parties have promoted the projects for Shinkansen lines and urban railway lines based on the two schemes without receiving particular criticisms since, in theory, an operator neither gains nor loses by the construction projects, which are promoted as public works.
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4.3. Vertical separation for unprofitable railway operations Vertical separation can also be utilized to provide public financial support for unprofitable railways. Recently, laws and regulations were established to sustain unprofitable railways by utilizing vertical separation. As a background of recent establishment of the legislation to support unprofitable railways, there is predicted population decrease in Japan. The National Institute of Population and Social Security Research (2012) projected that the population of the working cohort, which is closely related to the number of railway passengers, will decrease 17% by 2030 (Fig.7). Thus, there is a significant possibility that the number of railway passengers will decrease and that the number of unprofitable railways will increase in the future. To manage the financial difficulties of those unprofitable passenger railway services and other public transport, the government enacted or revised four Acts as follow: 1) “Act on Revitalization and Rehabilitation of Local Public Transport Systems” was enacted in October 2007. This Act made it possible to support unprofitable public transport by the region. 2) “Act on Revitalization and Rehabilitation of Local Public Transport Systems” was revised in October 2008. This revision made it possible to support unprofitable passenger railways through vertical separation. 3) “Basic Act on Transport Policy” was enacted in December 2013. This basic Act outlines the principle for the transport of the nation. 4) “Act on Revitalization and Rehabilitation of Local Public Transport Systems” and “Act on Special Measures Concerning Urban Renaissance” were revised in May 2014. The revision means that the policies for transport and urban planning have been integrated to establish better and sustainable public transport and urban systems. Source: National Institute of Population and Social Security Research (2012) As a background to the establishment of these Acts, there is the fact that several kinds of issues, such as urban sprawl, motorization, a decrease of the passengers of public transport, and difficulties of the management of public transport companies, have been worsening as a vicious circle. Thus, integrated measures are required to solve these issues, and the Japanese government aims to establish compact cities by integrating both transport and urban policies. As for the railway sector, the government made it possible to subsidize a third of the investment costs when the local governments have sufficient will to sustain the railways by utilizing vertical separation.
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5. Characteristics of passenger railway operations in Japan Japanese rail sector has recently had some examples of vertical separation, whereby the infrastructure owner is different from the operator. However, the way of railway operation in Japan is so different from that in European countries. In brief, a Japanese railway operator performs all railway operations and management, including maintenance and control of the infrastructure. In some cases, the public sector finances construction works as shown in Section 4.2; however, in the process of daily operation most railway companies implement/order the maintenance works of the infrastructure paying the costs. In other cases, where the public sector supports the management of unprofitable railways as shown in Section 4.3, the public sector takes some financial responsibilities of the maintenance costs of the infrastructure. Nevertheless, in both cases, a single railway company takes full responsibilities to operate the daily railway operation1, which is contrast to railway operations and management in European countries (Table 2).
On the other hand, the recent railway policy in Europe aims to introduce competition within the railway sector utilizing open access, where two or more railways compete on the same track in the same market. Up to the present, open access has been stipulated to the freight railway market and the international passenger railway market already. The policies and regulations to liberalize domestic passenger railways are stipulated in Railway Package 4, which is now final legislation processes. Nevertheless, despite the advantages of introducing competition among operators, as the railway operation in EU countries is obliged to be split into infrastructure and operation, the railway sector faces the coordination problems in various stages, such as investment, service production planning, timetabling, and other daily operations (Velde et al. 2012; Velde 2015).
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There are some exceptional cases in Japan. For example, Kobe Rapid Transit Railway Co., Ltd. has only infrastructure and does not operate trains, and was established as a joint-venture among the four private operators and the local government, etc. However, this case can be regarded as an exceptional arrangement to make it possible that the four operators in the region access the infrastructure. In relation to the arrangement with other railways, operation of through train services in Japan is worth noting. In Japan, in principle, through-train services are operated by two integrated railways. Even though rolling stock run over the two railways, responsibility of train operation is clearly separated into the two integrated railways. To attain the clear separation of the responsibility, crews change at the border station. However, there are some exceptional operations in cases where changing crews is practically difficult at the border or where one railway is too small to hire and provide the necessary training for the drivers. However, these flexible measures are done by the two integrated railways in general. 10
6. Discussion Based on clarifications of the characteristics of Japanese railways in the above sections, Section 6.1 discusses the issue of competition, and Sections 6.2 and 6.3 try to withdraw some lessons that Japan can learn to operate the regional railway transport. 6.1. Competition in the railway sector While Sweden first introduced vertical separation to realize equal footing with other transport modes through its railway reform in 1988, the EU policies have put more focus on 1) liberalization of the market and 2) promoting competition among operators. It is true that an appropriate type of competition can be utilized to make the railway management efficient. However, it should also be noted that certain types of competition affect railway management to a large extent. Table 3 investigates: 1) the type of competition in the railway sector; 2) the status in Japanese railway market; 3) necessities to separate the rail management into some entities. The outline is explained in the following. Firstly, the railways compete with other modes in the transport market, and this is the most severe competition in most countries including Japan. Secondly, different railways can compete on the paralleled lines. In Japan, there are several sections, especially in Tokyo and Kansai metropolitan areas, on which two passenger railways compete on their own track. Thirdly, since several companies operate railways in the market, they compete in various terms such as profitability, service levels, reputation, and so on. For regulating the fare level, Japanese government has introduced yard-stick competitions by making three groups within the railway sector. Fourthly, railways can compete through competitive biddings. Although the case is so limited in Japan, competitive bidding was implemented to select the operator for Kyoto Tango Railways. As the cases in the Japanese railway sector shows, although the ownership of infrastructure should be separated to implement competitive biddings, railway operation can be integrated under these four types of competition. However, there is no example of “competition in the market” in the Japanese railway sector2. In order to attain fair competition in the market (open access), it would be necessary to separate certain function of railway operation. For example, EU regulation stipulates that the body responsible for path allocation must be independent of any transport operator.
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The Act on Enhancement of Convenience of Urban Railways does not deny the possibility of open access (Kanayama, 2004). However, in the case of the section that is under construction utilizing the Act, the concerned two railways which will access the section negotiated and fixed a future border station already. Thus, it is prospected that the concerned railways will operate through train services similar to the traditional means although they have to pay access charges set as the benefit amount. 11
In relation to the competition in the railway sector, this study investigated two key issues that should be considered at the time of planning the appropriate railway management model in Japan for the future. First, the EU introduced an open access policy for revitalizing international rail freight transport so that a single operator can cross the border without many difficulties. This policy has been applied to the domestic freight rail market and the international passenger rail market since the EU aims to establish a single transport market through mutual access to the infrastructure. In relation to these facts, the railway sector in Japan does not operate international rail transport as the country is surrounded by sea. Thus, Japan does not have the same aim as the EU aims. Second, recent studies, such as Kurosaki (2008) and Velde et al. (2012) showed that vertically separated railways in Europe, where railway operation is split into more than two entities, worry about coordination problems and that those problems become particularly severe when the infrastructure capacity is limited. In relation to these research results, Section 5 studied that the Japanese passenger railway management is integrated and operated by a single railway company and this integrated management also applies to the vertically separated railways that the infrastructure is owned by the entity other than the railway operator. In practice, infrastructure capacity is very limited by the number of trains on the trunk lines of the Japanese railway networks. For example, the passenger traffic density in Japan is 35.5 thousand passengers (average of JR 6 companies) whereas that in Europe is 9.1 thousand passengers (average of the UK, France, and Germany) according to the data in 2013. As these figures show, the conditions of the railway operation are largely different between the two regions. Therefore, the results of the two previous studies imply that coordination problems will be largely enlarged provided the passenger railway operation is split into multiple entities for introducing open access in Japan. As shown above, when we consider the characteristics of the railway operation in Japan and conditions of the Japanese railway market in comparison with the experiences of the European railway sector and results of the studies, it is difficult to find reasonable reasons to adopt the policy for “competition in the market (open access/on-track competition)” to improve the operation and management of the Japanese railways. On the other hand, it is worth noting that many railway companies in Japan have improved their performances without introducing “competition in the market.” This shows that introducing other types of competition can also work for improving the railways’ performances. In addition, as seen in Section 3.2, corporatization and division through JNR reform resulted in the improvement of the performances of the passenger railways. In particular, as the shares of the three JR passenger companies in the main island (JR East, JR Central, and JR West) and of 12
Kyushu (JR Kyushu) were listed, their management could become more independent from the government. This made it possible for them to operate and manage the railways with less business restrictions, and they started to operate and manage railways reflecting their market conditions. Listing shares is one of the forms of private participation in the railway industry, and, similar to introducing competition, it provides an incentive to make the management and operations more efficient. Even though there have been many railway operators and train lines that went out of business mainly because of decrease of passengers, the experiences
in Japan show that improvement of the performances could be attained without increasing the number of operators on the same track, which tends to increase coordination problems within the industry. 6.2. Railway operation by a public–private contract In Japan, traditionally, when certain railway lines face management difficulties, the line has been operated by establishing an independent semi-public railway company. Certainly, since the new railway company is semi-public, i.e., a joint venture between public and private, it has been relatively easy to offer a subsidy on this kind of organization. If existing railway with sufficient scale and ability invests, it might be possible for the company to utilize its technology and know-hows of the managerial skills. Nevertheless, operating unprofitable railways by an independent semi-public railway company has some disadvantages:
The newly established small railway company cannot manage railways with an economy of scale.
A semi-public company has a risk to operate the railway inefficiently provided the loss is covered by the public.
On the other hand, such unprofitable railways can be operated based on a public–private contract, and such management has become common in European regional railways. Although the similar cases have been very limited in Japan so far, there is a case that a local railway line has been operated by a public–private contract. For example, Kyoto Tango Railway has been operated since 2015 by a private operator selected through applications open to the public. Certainly, different from establishing a new semi-public company and offering a subsidy, it is difficult to design an appropriate contract between the public and a private sector. Nevertheless, railway operation based on a public–private contract has the following advantages:
Since the existing railway company or its subsidiary can operate the railway system, it is possible to utilize technical and managerial skills of the existing railways.
The existing railway company can operate railways with economies of scale. 13
A private company makes efforts to increase the revenue and to operate the railways efficiently.
In relation to the last factor, the traditional semi-public railway company has a risk that the company tends to lose incentives to be efficient since the company inherits both social and commercial aims as a nature of a joint venture between public and private. This tendency might be enlarged when the annual loss is covered by subsidy. However, when the railway system is operated by a private company and the amount of the subsidy is fixed based on the contract, the aforementioned tendency might be avoided or lessened more effectively. This is because, different from the annual subsidy which can increase in accordance with the increase of the loss, improvement of the efficiency results in the increase of the company’s profit in the context of a public-private contract. In the Japanese railway market, there are several large-to-medium size railway companies that have sufficient technical and managerial skills. From the viewpoint of the current conditions and advantages mentioned above, it might be possible for the Japanese railway sector to gain large benefits by introducing railway operations based on a public–private contract. 6.3. Lessons from the European experiences: Case in regional railway transport in Germany Section 4.3 studied that it is projected that population of Japan will decrease largely in the near future, and it has become essential issues for many local governments to establish compact cities. To attain the aim preventing urban sprawl, they should revitalize regional railway transport services in coordination with the appropriate urban policies. For drawing lessons for the aforementioned aim, this section focuses on the case of the regional railway transport in Germany. In the process of railway reform in Germany, major changes were implemented to operate regional passenger railway traffic. It is named “regionalization”, and responsibilities to provide the regional passenger services were shifted from the federal government to the regional states since 1996. During the process, the financial responsibilities to procure the regional public transport services were also shifted from the federal government to the regional states. The legislations stipulated that the states can receive a certain part of the federal petroleum tax revenues so that the states can utilize it to procure the regional passenger transport including railway services. Before the regionalization, the federal government was responsible for the regional transport, but it was difficult for the government to plan and procure the regional public transport appropriate for each region. Since the regionalization, it has become possible for each state to plan the regional public transport based on the conditions of each region in coordination with other public transport modes and regional planning. 14
Although it had been possible for each state to procure the regional transport services by way of negotiation with a specific operator for several years since the regionalization, it has become mandatory to hold a competitive tendering for making a contract to procure the regional transport services since 2011. Thus, at present, “competition for the market” is utilized to procure the regional railway services in Germany.
Fig. 8 shows that the transport volume of the regional railway services has been increasing in the long-term in Germany. It should also be noted that they have been increasing under the circumstances where the population has been declining since 2003. Thus, this case implies that the current schemes, such as financial arrangements for reginal transport, coordination with regional planning, procurement of regional transport through competitive tendering, have been working for positive results in regional railway transport services in Germany. And, it appears the experiences in Germany have many lessons to tackle with the challenges which many Japanese local governments are to manage.
7. Conclusion This study first investigated recent Japanese legislation and how vertical separation is introduced in the Japanese railway sector. Then, as the structure and management of vertically separated railways in Japan are largely different from those implemented in Europe, the study also clarified the differences between them. Different from railway operation in EU countries, where EU railway regulations have to be applied, the Japanese railway operation sets a stark contrast, and the study indicated that Japanese passenger railway company controls the infrastructure and keeps vertically integrated operation except exceptional cases. As Japan does neither have the same background as the one in the EU nor need to follow EU railway regulation, the Japanese railway sector does not have reasonable reasons to introduce open access. There are large possibilities that continuing the current vertically integrated operation results in the efficient railway operation rather than introducing open access on the Japanese railway network where traffic is dense. For drawing lessons from the experiences of European railways, Section 6.3 studied that the regional passenger rail transport in Germany could increase the number of its passengers despite the relatively difficult market conditions where the population decreases. This case shows that the regional unprofitable rail services in Japan also retain the potential that it can be improved 15
by taking the similar measures such as coordinated transport planning integrated with regional planning and utilization of the public finance to procure transport services. In the process of procurement, it appears worthwhile to introduce a public-private contract to make the most of the technical and managerial abilities of the existing railways. Appropriate railway operation and management depend on various surrounding conditions such as the transport market, geographic condition, status of the existing railways, financial status of the (regional) government, and aims of transport policies. In Japan, as it is prospected that the population will decrease in the near future, it has become essential for many local governments to prevent urban sprawling and to establish sustainable city. To attain this aim, the current regional transport is to be revitalized in many cases. The experiences in Europe as seen in the case of the regional transport in Germany appear to have fruitful lessons to take measures for revitalizing the regional rail transport in Japan for the future.
Acknowledgements For this study, I have undertaken an interview with Dr. Kanayama. Thus, I would like to thank him who has provided valuable information to finalize this paper. As I have also received valuable comments from anonymous reviewers, I also express my appreciation to them.
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References BMVI, 2015. Verkehr in Zahlen 2015/2016, Bundesministerium für Verkehr und digitale Infrastruktur Eurostat, 2014. Railway Statistics, Available from http://ec.europa.eu/eurostat Hijikata, M. 2013. Financial Support Policies for Regional Public Transport in Germany, Unpublished Presentations submitted to the 33rd Meeting for Transport Research Institutions (Overseas), 11 June 2013 Kamata, S. 1997. Japanese Railways as Vertically Segregated Operations, Rail International, 28, 183-189. Kanayama, Y. 2004. Interpretation of Vertical Separation of Railways in Japan for Enhancing the Social Benefit (Tetsudou no Koueki-sei wo takameru Nihon-ban Jyouge Bunnri no kanngaekata), Subway, 150, 11-16. Kurosaki, F., 2008. An Analysis of Vertical Separation of Railways, Ph.D. thesis, Institute for Transport Studies, The University of Leeds Kurosaki, F., 2013. Shinkansen Investment Before and After JNR Reform, OECD Discussion Paper 2013 Issue 27, OECD/ITF Round Table The Economics of Investment in High Speed Rail, New Delhi, India Kurosaki, F. and Okuda, K., 2013. On-Rail Competition in Korea: A Comparison with Railways in Japan and Europe, Journal of the Eastern Asia Society for Transport Studies, Vol. 10, pp.392-411 MLIT, 2015. Railways in terms of the Figures 2015 (Suuji de Miru Tetsudou 2015), Institute for Transport Policy Studies National Institute of Population and Social Security Research, 2012. Available from http://www.ipss.go.jp/syoushika/tohkei/newest04/sh2401top.html Velde, V., 2015. European Railway Reforms: Unbundling and the Need for Coordination, Transportation and Economy, Vol. 75 Issue 5, pp.23-30 Velde, V., Nash, C., Smith, A., Mizutani, F., Uranishi, S., Lijesen, M., and Zschoche, F., 2012. EVES-Rail Economic Effects of Vertical Separation in the Railway Sector, Report for CER
17
9%
5%
3%
29%
65% 88%
Road Road
Railways
Railways
Air
Air
Transport market in Europe
Transport market in Japan (FY2009)
(Average of the UK, Germany, France: FY 2011)
Fig. 1. Comparison of the market share between Japan and Europe Source: MLIT (2015)
16 Major Private Railways Japan
3 Mainland JR Companies 3 Island JR Companies the UK France Germany Sweden 0
50,000
1,00,000 1,50,000 (passengers/day)
Fig. 2. Comparison of traffic densities of the railways in Japan and Europe Source: Eurostat (2014)
18
JR Freight (a nationwide freight operator)
JR Hokkaido
Track Access Track is owned by each passenger company
JR East
JR West JR Central JR Shikoku
JR Kyushu
Fig. 3. Outline of the JNR reform in 1987
Real-term GDP
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
6,00,000 5,00,000 4,00,000 3,00,000 2,00,000 1,00,000 0
1977
300 250 200 150 100 50 0
1975
Billion Passenger-kms
JNR Reform
Real-term GDP (billion yen)
Source: Author
Passenger-km
Fig. 4. Trend of rail passenger transport in Japan* Source: Kurosaki (2008) * The figure includes the passenger transport of JNR and the six JRs. It does not include that of other private railways.
19
Fig. 5. Outline of the new Shinkansen lines Source: Revision of Kurosaki (2013)
b a
Case without the Project
Case with the Project
: Expected Revenue
: Expected Expenses
The amount of track usage fees is calculated based on “b-a”
Fig. 6. Track usage fees stipulated by the two schemes Source: Author
20
(Ten thousand)
Projections
14,000 12,000 10,000
8,000 6,000 4,000
2,000
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
0
Working Ages (15-64 years old)
Other Ages
Fig. 7. Trends and projections of the population in Japan
(100 million person kms)
600
(Thousands)
90,000 88,000 86,000 84,000 82,000 80,000 78,000
Regionalization
500 400 300 200 100
76,000 74,000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
0
Regional Rail Transport (Left)
Population in Germany (Right)
Fig. 8. Regional railway services in Germany Source: Revision of Hijikata (2013) referring BMVI (2015)
21
Table 1. Classification of passenger railways and the number of companies in Japan Classification
Number of Companies
JR Companies
6
Major private railway companies
16
Semi-major companies
5
Public authorities
11
Mid-to- small private railway companies
128
Monorail, new transit systems, cable railways, etc.
33
Source: MLIT (2015)
22
Table 2. Comparison of vertically separated railways in Japan and Europe Vertical Separation in Japan
Railway Company
Vertical Separation in Europe Railway Operator 1
Train Operation & Infrastructure Management
Train Operation Railway Operator 2
Infrastructure Owner
Infrastructure Manager
Coordination problems Infrastructure Management (e.g. slot allocation)
A railway company implements all factors of the railway operation including infrastructure management. Thus, they do not have many coordination problems through vertical separation.
Railway operation is separated into different independent organizations. Railway operators perform train operations, and an infrastructure manager performs infrastructure management, such as track maintenance and signaling. The sector faces coordination problems through vertical separation. Source: Revision of Kurosaki and Okuda (2013) Table 3. Types of competition in the Japanese railway sector and the necessity to separate railway management into different organizations Type of competition
Status in Japanese rail market
1) Competition with other modes of transport
Largely exists
Necessities to separate the rail management into some entities Not necessary
2) Competition between tracks
Exists in some lines
Not necessary
3) Yard-stick competition / profitability competition
Largely introduced
Not necessary
4) Competition for the market (Competitive bidding) 5) Competition in the market (Open access / On-track competition)
Introduced in a few cases Not introduced
Not necessary
Source: Author’s analysis
23
Necessary
S2213-624X(17)30284-5 https://doi.org/10.1016/j.cstp.2017.09.004 CSTP 196
To appear in: Received date: Revised date: Accepted date:
27-9-2016 10-9-2017 25-9-2017
Please cite this article as: Kurosaki, Fumio, A study of vertical separation in Japanese passenger railways.Case Studies on Transport Policy https://doi.org/10.1016/j.cstp.2017.09.004 This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
A study of vertical separation in Japanese passenger railways Fumio KUROSAKIa a
Institute of Transportation Economics, 34 Shinanomachi Shinjuku-ku, Tokyo 160-0016, Japan Tel.: +81-3-5363-3103; fax: +81-3-5363-3115.
E-mail address: [email protected]
Highlights · Characteristics of vertical separation in the Japanese railway sector are clarified. · Difference of vertical separation in Japan and that in EU countries is clarified. · A public-private contract in regional rail transport in Japan is proposed.
Abstract In recent years, the Japanese railway sector adopted vertical separation in certain circumstances. This research investigated the recent Japanese policies and clarified the characteristics of vertically separated railways in Japan compared with those in Europe. When we consider the current status of Japanese railways where traffic is dense on many lines, the study concludes that a single railway company should manage railway operations as a whole even if the public sector retains ownership of the infrastructure. As one of the lessons learned from European experiences, it appears worthwhile to introduce railway operations based on a public–private contract for more cases in regional rail transport in Japan.
Keywords vertical separation, coordination problems, public–private contract, railways, EU Directives
1. Introduction Different from the railways in Europe, most of the passenger railways in Japan own the infrastructure, and thus maintain an integrated structure. Besides the costs of train operation, they also pay the maintenance costs of the infrastructure. Nevertheless, it has been difficult to cover all the investment into infrastructure through 1
revenues after completion of most railway projects. As for local railways, following a decrease in population, fare revenue has also been decreasing in many cases. Accordingly, it has become difficult for these local railways to sustain an integrated organizational structure, where the fare revenue covers the infrastructure as well as O&M costs. To address these difficulties, the Japanese government has enacted new legislation to promote the construction of railway infrastructure and to operate unprofitable railways utilizing public finances. In these cases, vertical separation, where the railway infrastructure is owned by a public entity that is different from the railway operator, is adopted to realize public financial support for the railway sector. However, the management of the vertically separated railways in Japan is largely different from that in Europe, where the EU has enacted policies aimed at introducing competition in the railway sector since the 1990s. These differences have not yet been investigated well mainly because the new legislation was enacted in Japan only a few years ago. Thus, this study tries to clarify the characteristics of vertical separation in Japanese passenger railways compared with European railways and highlights the differences between them. Then, the study aims to withdraw some lessons that the Japanese railways can learn from the experiences of the European railways.
2. Research design and methodology In order to attain aforementioned research aim, this study first investigates recent Japanese legislation that promotes the introduction of vertical separation in the railway sector. Then, the study compares Japanese cases of vertical separation with those found in Europe, where railway policies have been enacted by the EU since the 1990s. The research will be conducted on the basis of
the available data and literature;
interviews with experts who are familiar with recent railway policies in Japan and Europe; and
a comparative analysis of the cases in Japan and those in European countries.
The study consists of the seven chapters. Following this chapter, Chapter 3 discusses the transport market and railway management in Japan. Chapter 4 investigates the legal schemes that make it possible to introduce vertical separation into the Japanese railway market. There are legal schemes that can be applied to construction projects and those that can be applied to unprofitable railway operations. Thus, the investigation will be made for both situations. Chapter 5 discusses the distinct characteristics of railway operation in Japan. Following the investigation into the current market conditions and characteristics of Japanese passenger railway operation, Chapter 6 discusses the lessons that the railway sector in Japan should learn 2
from railway operations in EU countries. Then, Chapter 7 briefly concludes the study.
3. Transport market and railway management in Japan 3.1 Transport market in Japan Japan has a favorable transport market, which is advantageous for passenger railway operation. The country is surrounded by sea, and a large part of the land is covered by mountains. Accordingly, many cities are located along the coastal lines. These geographical characteristics are suitable for the passenger railway network and its operation. In addition, Japan has some metropolitan areas, such as Tokyo, Nagoya, Osaka, and Fukuoka and several other large cities on the line. These conditions enabled many railways profitable. Besides profitable intercity passenger services including high-speed railways, some conventional railway networks in the abovementioned metropolitan areas are also profitable, and they cover infrastructure maintenance costs as well. Although the market share of railways has been decreasing, the railway sector still garners approximately 29% of the transport market in terms of passenger-kms (MLIT, 2015). Although Europe has developed the passenger railway networks to a large extent, this rate is much higher than the average rate in the three European countries. Fig. 1 compares the market share (passenger-kms) of railways in Japan and the average in the UK, Germany and France. Owing to the transport market being advantageous for railway operations and their efficient train operations, many Japanese passenger railways, such as 16 major private railways and three mainland JR companies, transport a sufficient number of passengers to sustain their infrastructure. 11 public authorities also operate the subway systems in profit though 70% of the construction investments are covered by the government and local governments. The traffic densities of these profitable railways are much higher than those in European countries. Nevertheless, market conditions for public transport are largely different depending on the regions in Japan. Accordingly, the traffic densities of those railways differ largely between the urban and local railways (Fig. 2). Although there are many mid-to-small private railway companies in Japan, more than half suffer from a deficit (Table 1). The railway operations segment of the three island JR companies (JR Hokkaido, JR Shikoku, JR Kyushu), which were created through the reform of the Japanese National Railways (JNR), has been unprofitable as well, and their loss has been covered by other revenue, such as interest from the Management Stabilization Funds, which will be explained in the next section.
3
3.2 Reform of the Japanese National Railways This section overviews the reform of JNR in 1987. During the era of JNR, it accumulated heavy debts, especially in the freight sector as railways in Japan are passenger-dominated. In addition to financial difficulties, JNR also faced severe criticism for its ineffective management. Thus, JNR reform was finally undertaken in April 1987. Through the reform, the JNR railway network was split and transferred to six passenger companies. The freight division was transferred to a nationwide freight operator (JR Freight), and it was designed so that JR Freight accesses the railway network, which is owned by each passenger company.
Following the JNR reform in 1987, the present six JR passenger companies operate passenger rail transport while retaining the infrastructure. Although the three island JR passenger companies received Management Stabilization Funds (MSF) from the government at the time of JNR reform to support their management, each of the six JR passenger companies operated their railways through revenue, without receiving government subsidies to operate their railways. In brief, while JR Freight forms a vertically separated structure, the six JR passenger companies comprise a vertically integrated structure. As a result of the JNR reform, the trend of transport volume has changed clearly. Despite the improvement of GDP, JNR had failed to improve the output until the reform in 1987. However, the passenger traffic transported by the six JR passenger railway companies started to increase with much higher rate than before (Fig. 4). As this growth rate is higher than that of other Japanese private railways, it is generally recognized that this change could be achieved as the newly-established JR passenger companies started to provide customer-oriented services based on the condition of each region. Although JR Hokkaido and JR Shikoku are suffering from financial difficulties because of the low interests of MSF and decrease of population in the region, the above-noted recognition is particularly the case in the three railways (JR East, JR Central, JR West) in Honshu and JR Kyushu, of which shares were already listed.
4
Certainly, even within a single organization, especially in the case of large and bureaucratic railway companies, there are some conflicts between different departments as they have different responsibilities and interests as well. Nevertheless, most of the management decisions can be made within the organization without making a contract. Thus, in general, those conflicts are much less than the coordination problems between the different organizations in the vertically separated European railways, where many decisions and operations must be made by a contract between the segregated organizations.
4. Vertical separation in the Japanese railways sector Alike the six JR passenger companies and the subway systems, vertical integration is dominant in the private railways in Japan. Despite its dominance, the Railway Business Act in Japan stipulates the licenses for the railway businesses, including those by vertically separated structure. Section 4.1 outlines this Act. In these years, there are two main scopes for which the Japanese railway sector requires public financial support: 1) to implement large-scale construction projects and 2) to support unprofitable railways. A vertically separated structure is adopted to provide public financial support in these two scopes. Sections 4.2 and 4.3 outline Japanese laws and regulations and how railway construction and operations are managed in each scope. 4.1. The Railway Business Act in Japan The division and corporatization of the Japanese National Railways (JNR) on 1st April 1987 changed the framework of the railway business, and the Railway Business Act was newly established in Japan. The Act stipulates three types of railway licenses required to enter into the railway business: 1) Class 1: Enterprises that provide rail passenger and/or freight services while holding their rail infrastructure. 2) Class 2: Enterprises that provide rail passenger and/or freight services using rail infrastructure owned by another organization. 3) Class 3: Enterprises that own infrastructure only for renting it to a Class 2 Enterprise. (In practice, Class 3 also stipulates enterprises that build rail infrastructure for a sale to a Class 1 Enterprise. However, these enterprises are not related to vertical separation as the license for this case is applied to the only construction process. Thus, these enterprises will not be discussed in the following parts of this paper.)
5
Most railways in Japan have a Class 1 license; however, there is no one-to-one relationship between a rail enterprise and type of license. As a license can be given to each line, a railway company can have different kinds of licenses. The main reason for stipulating the three types of railway licenses is to accommodate JR Freight, which was established as a division of JNR. JR Freight does not own the tracks for the trunk lines, and it accesses the JR Passenger Companies’ tracks to run its trains. JR Freight, therefore, has a Class 2 license. Another reason for legally separating the categories is to promote investment. Because railway facilities require vast amounts of capital for construction, it is necessary to separate the construction/ownership of these facilities from the businesses of operating them. This capital burden strains railway business management and makes it more difficult to launch new railway lines. Therefore, to construct and sustain railways, it has proved necessary to divide railway enterprises into entities that construct and administer the railway and those that operate it and to alleviate the capital burden of construction from the operating entity as much as possible (Kamata, 1997). In Japan, the following combinations of enterprises can be defined as “vertical separation,” where the railways are managed by an entity different from the infrastructure owner: Combination 1: a Class 2 Enterprise accesses the track of a Class 1 Enterprise. Combination 2: a Class 2 Enterprise accesses the track of a Class 3 Enterprise. The freight railway operation, where JR Freight accesses the JR Passenger Companies’ tracks, can be categorized as Combination 1, and the JR Passenger Companies only have a Class 1 license and do not need to obtain a Class 3 license. This is because the Class 3 license is for an enterprise that does not provide passenger and/or freight services by itself. On the other hand, the railway operation implemented only as a Class 1 Enterprise can be defined as “vertical integration” in Japan. This study also follows the same definition to discuss “vertical integration” and “vertical separation.” 4.2. Vertical separation for construction projects 4.2.1. New Shinkansen lines Although construction works were implemented to extend the Shinkansen lines since the JNR reform, each JR passenger company cannot cover the construction costs of these projects. Thus, construction and operation schemes for these projects were modified so that the management of JR companies would not be worsened. Then, the new lines and extensions of Shinkansen lines have been constructed and operated based on the new scheme since JNR reform in 1987. Briefly, the new scheme stipulates that the Japan Railway Construction, Transport and 6
Technology Agency (JRTT), a wholly government-financed entity, carries out Shinkansen construction works as a public project after the JNR reform. The JRTT not only implements construction works but also owns the infrastructure after completion of the projects. JRTT leases the infrastructure assets to a JR passenger company, which operates the Shinkansen trains. Thus, the newly constructed sections are operated by a vertically separated structure, which is different from the initial Shinkansen lines that had been constructed during the JNR era. Each JR passenger company pays track usage fees based on the calculation explained in the section below. Regarding financial resources for the construction works, except for the usage fees, which would be allocated for the works, the current financial scheme stipulates that the government and regional governments along the line bear the resources of the works by a ratio of 2:1. As a rule, in commencing the construction works, the local communities should agree to separate the management of the conventional lines parallel to newly constructed Shinkansen lines from the JR companies. As these conventional lines are unprofitable, this separation alleviates the financial burden of JR companies, and in general, the regional governments should manage the railways utilizing their finances if they wish to continue the operation (Kurosaki, 2013).
4.2.2. Urban railway lines Similar to the new Shinkansen lines discussed above, in 2005, the new Act was established to construct the infrastructure of urban railway lines by utilizing vertical separation. The official name of the Act is “Act on Enhancement of Convenience of Urban Railways.” As the Japanese railway network is already mature, the Act aims to utilize the present railway network to the best of its ability. Specifically, the Act can be applied to 1) construct the missing link between the lines to promote the level of the passenger railway services and 2) construct facilities around a station to promote connectivity with other transportation modes. Once the project is admitted, a public entity, such as the JRTT, constructs the infrastructure and retains ownership of the asset even after the completion of the project. Regarding financial resources for the construction works, the Act stipulates that the concerned three parties, the government, regional governments, and the public entity bear the financial resources of the works by the same ratio. 4.2.3. Track usage fees and maintenance works in the two schemes For the aforementioned schemes for the new Shinkansen lines and urban railway lines, the 7
amount of track usage fees that the operator of a new line pays to the public entity is an essential factor from the viewpoint of the relationship between the operator and the public entity. That amount is calculated based on similar ideas, which are stipulated by the legislation. In brief, this amount is equal to the operator’s net increase of benefits through the commencement of transport services, and the net increase in benefits is calculated by comparing: 1) estimated revenues and expenses generated by the construction project; and 2) estimated revenues and expenses that would likely be generated if the construction project were not implemented. Then, the amount of track usage fees is fixed based on the expected revenue and expenses over a 30-year period after opening. For calculating the expenses of the new operator, the taxes and maintenance fees are included. The scheme is designed so that the operation of newly constructed lines should not worsen the financial situation of the operator. Precisely speaking, track usage fees of New Shinkansen lines is set within the range of benefit of Shinkansen being constructed, and those of the Act on Enhancement of Convenience of Urban Railways is set as the benefit amount. Thus, though the limit of the track usage fees is not exactly the same, the two schemes stipulate the similar calculation for track usage fees. Regarding the maintenance works of infrastructure, although the maintenance fees are included as an expense in calculation of the aforementioned track usage fees, each operator implements/orders the works practically, which is in stark contrast to the case in EU countries. In European railways, although the track usage fees can cover the maintenance costs in some cases, an infrastructure manager pays the maintenance costs and implements/orders the maintenance works. In the case of Japan’s two schemes, as train operators and infrastructure managers do not need to negotiate about neither the daily maintenance works nor the amount, they do not face coordination problems regarding the infrastructure maintenance works. As for the received track usage fees, they are utilized for a part of investment in other projects. Concerned parties have promoted the projects for Shinkansen lines and urban railway lines based on the two schemes without receiving particular criticisms since, in theory, an operator neither gains nor loses by the construction projects, which are promoted as public works.
8
4.3. Vertical separation for unprofitable railway operations Vertical separation can also be utilized to provide public financial support for unprofitable railways. Recently, laws and regulations were established to sustain unprofitable railways by utilizing vertical separation. As a background of recent establishment of the legislation to support unprofitable railways, there is predicted population decrease in Japan. The National Institute of Population and Social Security Research (2012) projected that the population of the working cohort, which is closely related to the number of railway passengers, will decrease 17% by 2030 (Fig.7). Thus, there is a significant possibility that the number of railway passengers will decrease and that the number of unprofitable railways will increase in the future. To manage the financial difficulties of those unprofitable passenger railway services and other public transport, the government enacted or revised four Acts as follow: 1) “Act on Revitalization and Rehabilitation of Local Public Transport Systems” was enacted in October 2007. This Act made it possible to support unprofitable public transport by the region. 2) “Act on Revitalization and Rehabilitation of Local Public Transport Systems” was revised in October 2008. This revision made it possible to support unprofitable passenger railways through vertical separation. 3) “Basic Act on Transport Policy” was enacted in December 2013. This basic Act outlines the principle for the transport of the nation. 4) “Act on Revitalization and Rehabilitation of Local Public Transport Systems” and “Act on Special Measures Concerning Urban Renaissance” were revised in May 2014. The revision means that the policies for transport and urban planning have been integrated to establish better and sustainable public transport and urban systems. Source: National Institute of Population and Social Security Research (2012) As a background to the establishment of these Acts, there is the fact that several kinds of issues, such as urban sprawl, motorization, a decrease of the passengers of public transport, and difficulties of the management of public transport companies, have been worsening as a vicious circle. Thus, integrated measures are required to solve these issues, and the Japanese government aims to establish compact cities by integrating both transport and urban policies. As for the railway sector, the government made it possible to subsidize a third of the investment costs when the local governments have sufficient will to sustain the railways by utilizing vertical separation.
9
5. Characteristics of passenger railway operations in Japan Japanese rail sector has recently had some examples of vertical separation, whereby the infrastructure owner is different from the operator. However, the way of railway operation in Japan is so different from that in European countries. In brief, a Japanese railway operator performs all railway operations and management, including maintenance and control of the infrastructure. In some cases, the public sector finances construction works as shown in Section 4.2; however, in the process of daily operation most railway companies implement/order the maintenance works of the infrastructure paying the costs. In other cases, where the public sector supports the management of unprofitable railways as shown in Section 4.3, the public sector takes some financial responsibilities of the maintenance costs of the infrastructure. Nevertheless, in both cases, a single railway company takes full responsibilities to operate the daily railway operation1, which is contrast to railway operations and management in European countries (Table 2).
On the other hand, the recent railway policy in Europe aims to introduce competition within the railway sector utilizing open access, where two or more railways compete on the same track in the same market. Up to the present, open access has been stipulated to the freight railway market and the international passenger railway market already. The policies and regulations to liberalize domestic passenger railways are stipulated in Railway Package 4, which is now final legislation processes. Nevertheless, despite the advantages of introducing competition among operators, as the railway operation in EU countries is obliged to be split into infrastructure and operation, the railway sector faces the coordination problems in various stages, such as investment, service production planning, timetabling, and other daily operations (Velde et al. 2012; Velde 2015).
1
There are some exceptional cases in Japan. For example, Kobe Rapid Transit Railway Co., Ltd. has only infrastructure and does not operate trains, and was established as a joint-venture among the four private operators and the local government, etc. However, this case can be regarded as an exceptional arrangement to make it possible that the four operators in the region access the infrastructure. In relation to the arrangement with other railways, operation of through train services in Japan is worth noting. In Japan, in principle, through-train services are operated by two integrated railways. Even though rolling stock run over the two railways, responsibility of train operation is clearly separated into the two integrated railways. To attain the clear separation of the responsibility, crews change at the border station. However, there are some exceptional operations in cases where changing crews is practically difficult at the border or where one railway is too small to hire and provide the necessary training for the drivers. However, these flexible measures are done by the two integrated railways in general. 10
6. Discussion Based on clarifications of the characteristics of Japanese railways in the above sections, Section 6.1 discusses the issue of competition, and Sections 6.2 and 6.3 try to withdraw some lessons that Japan can learn to operate the regional railway transport. 6.1. Competition in the railway sector While Sweden first introduced vertical separation to realize equal footing with other transport modes through its railway reform in 1988, the EU policies have put more focus on 1) liberalization of the market and 2) promoting competition among operators. It is true that an appropriate type of competition can be utilized to make the railway management efficient. However, it should also be noted that certain types of competition affect railway management to a large extent. Table 3 investigates: 1) the type of competition in the railway sector; 2) the status in Japanese railway market; 3) necessities to separate the rail management into some entities. The outline is explained in the following. Firstly, the railways compete with other modes in the transport market, and this is the most severe competition in most countries including Japan. Secondly, different railways can compete on the paralleled lines. In Japan, there are several sections, especially in Tokyo and Kansai metropolitan areas, on which two passenger railways compete on their own track. Thirdly, since several companies operate railways in the market, they compete in various terms such as profitability, service levels, reputation, and so on. For regulating the fare level, Japanese government has introduced yard-stick competitions by making three groups within the railway sector. Fourthly, railways can compete through competitive biddings. Although the case is so limited in Japan, competitive bidding was implemented to select the operator for Kyoto Tango Railways. As the cases in the Japanese railway sector shows, although the ownership of infrastructure should be separated to implement competitive biddings, railway operation can be integrated under these four types of competition. However, there is no example of “competition in the market” in the Japanese railway sector2. In order to attain fair competition in the market (open access), it would be necessary to separate certain function of railway operation. For example, EU regulation stipulates that the body responsible for path allocation must be independent of any transport operator.
2
The Act on Enhancement of Convenience of Urban Railways does not deny the possibility of open access (Kanayama, 2004). However, in the case of the section that is under construction utilizing the Act, the concerned two railways which will access the section negotiated and fixed a future border station already. Thus, it is prospected that the concerned railways will operate through train services similar to the traditional means although they have to pay access charges set as the benefit amount. 11
In relation to the competition in the railway sector, this study investigated two key issues that should be considered at the time of planning the appropriate railway management model in Japan for the future. First, the EU introduced an open access policy for revitalizing international rail freight transport so that a single operator can cross the border without many difficulties. This policy has been applied to the domestic freight rail market and the international passenger rail market since the EU aims to establish a single transport market through mutual access to the infrastructure. In relation to these facts, the railway sector in Japan does not operate international rail transport as the country is surrounded by sea. Thus, Japan does not have the same aim as the EU aims. Second, recent studies, such as Kurosaki (2008) and Velde et al. (2012) showed that vertically separated railways in Europe, where railway operation is split into more than two entities, worry about coordination problems and that those problems become particularly severe when the infrastructure capacity is limited. In relation to these research results, Section 5 studied that the Japanese passenger railway management is integrated and operated by a single railway company and this integrated management also applies to the vertically separated railways that the infrastructure is owned by the entity other than the railway operator. In practice, infrastructure capacity is very limited by the number of trains on the trunk lines of the Japanese railway networks. For example, the passenger traffic density in Japan is 35.5 thousand passengers (average of JR 6 companies) whereas that in Europe is 9.1 thousand passengers (average of the UK, France, and Germany) according to the data in 2013. As these figures show, the conditions of the railway operation are largely different between the two regions. Therefore, the results of the two previous studies imply that coordination problems will be largely enlarged provided the passenger railway operation is split into multiple entities for introducing open access in Japan. As shown above, when we consider the characteristics of the railway operation in Japan and conditions of the Japanese railway market in comparison with the experiences of the European railway sector and results of the studies, it is difficult to find reasonable reasons to adopt the policy for “competition in the market (open access/on-track competition)” to improve the operation and management of the Japanese railways. On the other hand, it is worth noting that many railway companies in Japan have improved their performances without introducing “competition in the market.” This shows that introducing other types of competition can also work for improving the railways’ performances. In addition, as seen in Section 3.2, corporatization and division through JNR reform resulted in the improvement of the performances of the passenger railways. In particular, as the shares of the three JR passenger companies in the main island (JR East, JR Central, and JR West) and of 12
Kyushu (JR Kyushu) were listed, their management could become more independent from the government. This made it possible for them to operate and manage the railways with less business restrictions, and they started to operate and manage railways reflecting their market conditions. Listing shares is one of the forms of private participation in the railway industry, and, similar to introducing competition, it provides an incentive to make the management and operations more efficient. Even though there have been many railway operators and train lines that went out of business mainly because of decrease of passengers, the experiences
in Japan show that improvement of the performances could be attained without increasing the number of operators on the same track, which tends to increase coordination problems within the industry. 6.2. Railway operation by a public–private contract In Japan, traditionally, when certain railway lines face management difficulties, the line has been operated by establishing an independent semi-public railway company. Certainly, since the new railway company is semi-public, i.e., a joint venture between public and private, it has been relatively easy to offer a subsidy on this kind of organization. If existing railway with sufficient scale and ability invests, it might be possible for the company to utilize its technology and know-hows of the managerial skills. Nevertheless, operating unprofitable railways by an independent semi-public railway company has some disadvantages:
The newly established small railway company cannot manage railways with an economy of scale.
A semi-public company has a risk to operate the railway inefficiently provided the loss is covered by the public.
On the other hand, such unprofitable railways can be operated based on a public–private contract, and such management has become common in European regional railways. Although the similar cases have been very limited in Japan so far, there is a case that a local railway line has been operated by a public–private contract. For example, Kyoto Tango Railway has been operated since 2015 by a private operator selected through applications open to the public. Certainly, different from establishing a new semi-public company and offering a subsidy, it is difficult to design an appropriate contract between the public and a private sector. Nevertheless, railway operation based on a public–private contract has the following advantages:
Since the existing railway company or its subsidiary can operate the railway system, it is possible to utilize technical and managerial skills of the existing railways.
The existing railway company can operate railways with economies of scale. 13
A private company makes efforts to increase the revenue and to operate the railways efficiently.
In relation to the last factor, the traditional semi-public railway company has a risk that the company tends to lose incentives to be efficient since the company inherits both social and commercial aims as a nature of a joint venture between public and private. This tendency might be enlarged when the annual loss is covered by subsidy. However, when the railway system is operated by a private company and the amount of the subsidy is fixed based on the contract, the aforementioned tendency might be avoided or lessened more effectively. This is because, different from the annual subsidy which can increase in accordance with the increase of the loss, improvement of the efficiency results in the increase of the company’s profit in the context of a public-private contract. In the Japanese railway market, there are several large-to-medium size railway companies that have sufficient technical and managerial skills. From the viewpoint of the current conditions and advantages mentioned above, it might be possible for the Japanese railway sector to gain large benefits by introducing railway operations based on a public–private contract. 6.3. Lessons from the European experiences: Case in regional railway transport in Germany Section 4.3 studied that it is projected that population of Japan will decrease largely in the near future, and it has become essential issues for many local governments to establish compact cities. To attain the aim preventing urban sprawl, they should revitalize regional railway transport services in coordination with the appropriate urban policies. For drawing lessons for the aforementioned aim, this section focuses on the case of the regional railway transport in Germany. In the process of railway reform in Germany, major changes were implemented to operate regional passenger railway traffic. It is named “regionalization”, and responsibilities to provide the regional passenger services were shifted from the federal government to the regional states since 1996. During the process, the financial responsibilities to procure the regional public transport services were also shifted from the federal government to the regional states. The legislations stipulated that the states can receive a certain part of the federal petroleum tax revenues so that the states can utilize it to procure the regional passenger transport including railway services. Before the regionalization, the federal government was responsible for the regional transport, but it was difficult for the government to plan and procure the regional public transport appropriate for each region. Since the regionalization, it has become possible for each state to plan the regional public transport based on the conditions of each region in coordination with other public transport modes and regional planning. 14
Although it had been possible for each state to procure the regional transport services by way of negotiation with a specific operator for several years since the regionalization, it has become mandatory to hold a competitive tendering for making a contract to procure the regional transport services since 2011. Thus, at present, “competition for the market” is utilized to procure the regional railway services in Germany.
Fig. 8 shows that the transport volume of the regional railway services has been increasing in the long-term in Germany. It should also be noted that they have been increasing under the circumstances where the population has been declining since 2003. Thus, this case implies that the current schemes, such as financial arrangements for reginal transport, coordination with regional planning, procurement of regional transport through competitive tendering, have been working for positive results in regional railway transport services in Germany. And, it appears the experiences in Germany have many lessons to tackle with the challenges which many Japanese local governments are to manage.
7. Conclusion This study first investigated recent Japanese legislation and how vertical separation is introduced in the Japanese railway sector. Then, as the structure and management of vertically separated railways in Japan are largely different from those implemented in Europe, the study also clarified the differences between them. Different from railway operation in EU countries, where EU railway regulations have to be applied, the Japanese railway operation sets a stark contrast, and the study indicated that Japanese passenger railway company controls the infrastructure and keeps vertically integrated operation except exceptional cases. As Japan does neither have the same background as the one in the EU nor need to follow EU railway regulation, the Japanese railway sector does not have reasonable reasons to introduce open access. There are large possibilities that continuing the current vertically integrated operation results in the efficient railway operation rather than introducing open access on the Japanese railway network where traffic is dense. For drawing lessons from the experiences of European railways, Section 6.3 studied that the regional passenger rail transport in Germany could increase the number of its passengers despite the relatively difficult market conditions where the population decreases. This case shows that the regional unprofitable rail services in Japan also retain the potential that it can be improved 15
by taking the similar measures such as coordinated transport planning integrated with regional planning and utilization of the public finance to procure transport services. In the process of procurement, it appears worthwhile to introduce a public-private contract to make the most of the technical and managerial abilities of the existing railways. Appropriate railway operation and management depend on various surrounding conditions such as the transport market, geographic condition, status of the existing railways, financial status of the (regional) government, and aims of transport policies. In Japan, as it is prospected that the population will decrease in the near future, it has become essential for many local governments to prevent urban sprawling and to establish sustainable city. To attain this aim, the current regional transport is to be revitalized in many cases. The experiences in Europe as seen in the case of the regional transport in Germany appear to have fruitful lessons to take measures for revitalizing the regional rail transport in Japan for the future.
Acknowledgements For this study, I have undertaken an interview with Dr. Kanayama. Thus, I would like to thank him who has provided valuable information to finalize this paper. As I have also received valuable comments from anonymous reviewers, I also express my appreciation to them.
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References BMVI, 2015. Verkehr in Zahlen 2015/2016, Bundesministerium für Verkehr und digitale Infrastruktur Eurostat, 2014. Railway Statistics, Available from http://ec.europa.eu/eurostat Hijikata, M. 2013. Financial Support Policies for Regional Public Transport in Germany, Unpublished Presentations submitted to the 33rd Meeting for Transport Research Institutions (Overseas), 11 June 2013 Kamata, S. 1997. Japanese Railways as Vertically Segregated Operations, Rail International, 28, 183-189. Kanayama, Y. 2004. Interpretation of Vertical Separation of Railways in Japan for Enhancing the Social Benefit (Tetsudou no Koueki-sei wo takameru Nihon-ban Jyouge Bunnri no kanngaekata), Subway, 150, 11-16. Kurosaki, F., 2008. An Analysis of Vertical Separation of Railways, Ph.D. thesis, Institute for Transport Studies, The University of Leeds Kurosaki, F., 2013. Shinkansen Investment Before and After JNR Reform, OECD Discussion Paper 2013 Issue 27, OECD/ITF Round Table The Economics of Investment in High Speed Rail, New Delhi, India Kurosaki, F. and Okuda, K., 2013. On-Rail Competition in Korea: A Comparison with Railways in Japan and Europe, Journal of the Eastern Asia Society for Transport Studies, Vol. 10, pp.392-411 MLIT, 2015. Railways in terms of the Figures 2015 (Suuji de Miru Tetsudou 2015), Institute for Transport Policy Studies National Institute of Population and Social Security Research, 2012. Available from http://www.ipss.go.jp/syoushika/tohkei/newest04/sh2401top.html Velde, V., 2015. European Railway Reforms: Unbundling and the Need for Coordination, Transportation and Economy, Vol. 75 Issue 5, pp.23-30 Velde, V., Nash, C., Smith, A., Mizutani, F., Uranishi, S., Lijesen, M., and Zschoche, F., 2012. EVES-Rail Economic Effects of Vertical Separation in the Railway Sector, Report for CER
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9%
5%
3%
29%
65% 88%
Road Road
Railways
Railways
Air
Air
Transport market in Europe
Transport market in Japan (FY2009)
(Average of the UK, Germany, France: FY 2011)
Fig. 1. Comparison of the market share between Japan and Europe Source: MLIT (2015)
16 Major Private Railways Japan
3 Mainland JR Companies 3 Island JR Companies the UK France Germany Sweden 0
50,000
1,00,000 1,50,000 (passengers/day)
Fig. 2. Comparison of traffic densities of the railways in Japan and Europe Source: Eurostat (2014)
18
JR Freight (a nationwide freight operator)
JR Hokkaido
Track Access Track is owned by each passenger company
JR East
JR West JR Central JR Shikoku
JR Kyushu
Fig. 3. Outline of the JNR reform in 1987
Real-term GDP
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
6,00,000 5,00,000 4,00,000 3,00,000 2,00,000 1,00,000 0
1977
300 250 200 150 100 50 0
1975
Billion Passenger-kms
JNR Reform
Real-term GDP (billion yen)
Source: Author
Passenger-km
Fig. 4. Trend of rail passenger transport in Japan* Source: Kurosaki (2008) * The figure includes the passenger transport of JNR and the six JRs. It does not include that of other private railways.
19
Fig. 5. Outline of the new Shinkansen lines Source: Revision of Kurosaki (2013)
b a
Case without the Project
Case with the Project
: Expected Revenue
: Expected Expenses
The amount of track usage fees is calculated based on “b-a”
Fig. 6. Track usage fees stipulated by the two schemes Source: Author
20
(Ten thousand)
Projections
14,000 12,000 10,000
8,000 6,000 4,000
2,000
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
0
Working Ages (15-64 years old)
Other Ages
Fig. 7. Trends and projections of the population in Japan
(100 million person kms)
600
(Thousands)
90,000 88,000 86,000 84,000 82,000 80,000 78,000
Regionalization
500 400 300 200 100
76,000 74,000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
0
Regional Rail Transport (Left)
Population in Germany (Right)
Fig. 8. Regional railway services in Germany Source: Revision of Hijikata (2013) referring BMVI (2015)
21
Table 1. Classification of passenger railways and the number of companies in Japan Classification
Number of Companies
JR Companies
6
Major private railway companies
16
Semi-major companies
5
Public authorities
11
Mid-to- small private railway companies
128
Monorail, new transit systems, cable railways, etc.
33
Source: MLIT (2015)
22
Table 2. Comparison of vertically separated railways in Japan and Europe Vertical Separation in Japan
Railway Company
Vertical Separation in Europe Railway Operator 1
Train Operation & Infrastructure Management
Train Operation Railway Operator 2
Infrastructure Owner
Infrastructure Manager
Coordination problems Infrastructure Management (e.g. slot allocation)
Status in Japanese rail market
1) Competition with other modes of transport
Largely exists
Necessities to separate the rail management into some entities Not necessary
2) Competition between tracks
Exists in some lines
Not necessary
3) Yard-stick competition / profitability competition
Largely introduced
Not necessary
4) Competition for the market (Competitive bidding) 5) Competition in the market (Open access / On-track competition)
Introduced in a few cases Not introduced
Not necessary
Source: Author’s analysis
23
Necessary