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Issues in financing urban rail transit projects and value captures
0191-1607'89 s3.00 +.oll E 1989Pergamon Press plc
~~~~~~~RES..A. vd. 23.4. NO. 1.pp.35-u. 1989 Pnnted in Great Briram.
ISSUES IN FINANCING URBAN RAIL TRANSIT PROJECTS AND VALUE CAPTURES YOSHITSUGU HAYAW Department
of Civil Engineering, Nagoya University, Nagoya 464-01, Japan
Abstract-Urban rail transit projects are suffering from the cost burden in Japan because the current financing system is dependent on borrowed money by loans and bonds that are repaid mainly by fares. The fund cannot bear the increasing expenditure demand due to the accelerated construction demand and the rising cost of land acquisition. This paper reexamines the financing system and analyses the possible menus for fund-raising from the viewpoint of imbalance between benefit receivers and cost burdeners on the basis of benefit principle, referring to Japanese examples.
the subsidies are paid from the next year after the opening for 10 years in installments and, therefore, cannot cover the initial cost, the burden of the loan interest of the initial investment is very heavy. In 1987 the total annual budget for the subway subsidy was 42.3 billion yen, which covers only the construction cost for 1 or 2 kilometers in the city center of Tokyo. The amount of other subsidies in 1987 was 14.3 billion yen in total, which consists of monorail subsidy: 11.1 billion yen, new town rail transit subsidy: 0.5 billion yen, and subsidy for interest repayment for private railways: 2.7 billion yen (see Fig. 1) (Tsunashima and Kiryu, 1987). Because the total amount of public subsidies is kept at a low level, local transport agencies are forced to depend on bonds for 80%-90% of the total construction cost while private railways have to borrow much from the Japan Railway Construction Corporation, the Japan Development Bank, and other private banks. Therefore, for example, the interest payment comprises almost 40% of the total expenditure, on the average, of nine local transport agencies that have subways. To break such a bottleneck, funds without interest payment are often requested, especially in terms of the benefit principle.
1. INTRODUCTION
Japan, urban rail transit improvements are financed largely by loans and bonds that will be repaid mainly by fare revenue after the opening of the system. Transport operators must struggle to raise the required funds because the amount of public subsidies is quite limited. Moreover, construction costs are rising at a much higher rate than the funds, due to the land price increase in the urban areas. There are accelerating demands for the improvement of urban rail transit due to (1) the increase of commuting trips in the radial directions of cities due to the suburbanization of housing locations, (2) the serious congestion on the road networks in city centers and inner suburbs that bring nonneglectable social losses, and (3) the provision of access to new and redevelopment sites for urban revitalization. It is quite necessary to find other sources of funds for financing the new lines to meet the above-mentioned demands. The existing financing system is being discussed and reexamined from the viewpoint of the benefit principle so as to capture the increase of property values and profits due to the improvement of the transit (Ito, 1987). This paper examines the possible menus of financing urban rail transit in the context of the balance between beneficiaries and payers, relating them to the imputation process of the benefits. In
3. LOCATIONS MEASURES
2. EXLSTING PUBLIC IMPROVEMENT
FINANCING
OF URBAN
BENEFITS
FOR THE
RAIL TRrtliSIT
OF THE EXISTING
IN THE IMPUTATION OF TRANSPORT
FINANCIAL PROCESS
OF
IMPROVEiMENTS
3.1 Benefits of urban rail transit and their imputation process
existing public financing for urban rail transit consists of the following four types: (1) subsidy for subways, (2) subsidy for infrastructure of monorail, (3) subsidy for new town rail transit, and (4) subsidy for interest repayment of loans for private railway construction. The subsidy condition for subways, which is the most advantageous, is such that 10% of the construction cost is covered by the lending capita1 from the municipality and 63% is subsidised by the central and the prefectural government. However, because The
It is necessary to clarify the mechanism of generation of the benefits of urban rail transit and their imputation process to discuss the financial measures based on the benefit principle. Figure 2 shows a typical process of benefit imputation and the location of each existing measure. An urban rail transit line generates direct benefits for the new transit user in the form of savings in travel time and travel cost, while the users in the existing competing rail lines and the other modes 35
Y. HAYASHI
36
1: Subsidy 2: Subsidy 3: Subsidy 4: Subsidy 5: total
(Billion yen)
loo-
for for for for
interest burden subway new town rail infrastructure of monorail
80 _----
60-
_______
___
40-
-:-
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‘73
‘74
‘75
‘76
‘77
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‘78
‘79
'80
'81
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Fig. 1. Changes of public financing to urban rail transit projects.
will take an indirect benefit by the release of congestion due to the diversion of passengers to the new line. The benefits are also transferred outside the transport market; namely, houses, shops, and offices will be located due to the improvement of locational utility and profitability in the relevant areas and thus land values will increase. The latter will be imputed to the landowners in the form of income increases by realization of capital gains if the sites will be sold, which will be transferred from the transit user benefit. The tax revenue of the municipality will be increased in terms of the rise of inhabitant tax. If the sites will not be sold, the capital gains will be imputed to the landowners in the form of real estate value. The revenue from fixed assets tax and city planning tax will be increased accordingly. On the other hand, user benefit will also be transferred to the firms in terms of increase in profits in the area. In this case, corporate tax and enterprise establishment tax will be increased. 3.2 The locations of financial measures in the imputation process of benefits
Each financial measure can be located as follows according to Fig. 2. This is marked by the subscript numbers in the figure, which correspond to the numbers in Table 1 (discussed in Section 5). Fares are to capture the user benefits in the new line while the reserve fund system of fares is used in special cities to collect the user benefits in the existing lines (see Section 5.1 for details). The new town development charges and land readjustment projects return the development gains by means of providing the developed sites and thus raise the locational utility and profitability. Real estate tax, real property acquisition tax, and city planning tax are applied to capture the benefits in the case of increase of real estate values, while corporate tax and enterprise establishment tax capture the benefits in terms of increase of firms’ profits. The part contained in broken lines in Fig. 2 shows
the return of benefits. The main measure of return is by means of fares that compensate the loans and bonds. Namely, the benefits are captured in terms of direct user benefits at the stage of their generation. On the other hand, the indirect benefits, such as increase in incomes and real estate values of landowners and those in profits of shops and offices, are merely captured because the rates of the relevant local taxes are very low (e.g. real property acquisition tax 4%, real estate tax 1.4%). Excess charges of these local taxes can be made for the purpose of the improvement of infrastructure in principle, but, in reality, there are only a few examples that were made for urban rail transit schemes (see Table 1). There are quite a few urban rail transit projects that can pay in terms of cost-benefit ratio for the society but fail in terms of financial balance for the operator. This is because the large amount of benefits transferred to the landowners and enterprises are not returned to the operators, while only user benefits are charged. Therefore, as new financial measures, restoration of the final benefits gained such as excess charges of local taxes are to be examined. 4. CRITICAL
ISSUES IN THE EVALUATION FINANCIAL
OF
MEASURES
4.1 Principles of incidence The following are three main principles of incidence for infrastructure improvement: (1) the benefit principle, in which burdens are borne according to the amount of benefits received; (2) the abilityto-pay principle, in which burdens are borne according to the ability to pay; and (3) the cost causersto-pay principle, in which burdens are borne according to the amount of cost involved. Which principles to use should be judged considering which principles can allot the burden shares most fairly and efficiently. Several examples could be given as follows:
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(A) Type of benefit
Reserve fund system for special cities
Fare
tax
Provision of developed land by land rcadjustmenl
Fixed itsscls I;IX
0
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town developer charges
@ New
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l%l Decrease of discount rate for
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(B) Financial measure
1. Financial
users
users
Landowners
Land readjustment associ3lion Municipality
Developers . Japan Housing and Urban Renewal Corp. . Local public development agencies . Private developers
Users (enterprises)
Enterprises Inhabitants
Road users
Railway
Railway
(C) Benefit receiver to burden
Table
Municipality
Municipality
Prefecture
Prefecture Municipality
Prefecture
Central government
-
-
(D) Intervener of fund transfer
principle
-
-
Iild
Lending capitals Loans, subsidies
Provision of
Lending capitals Loans, subsidies Construction charges, provision of lqnd
Fare
Lending capitals Loans, subsidies
loans
Form of fund transfer
Subsidies,
(E)
measures based on the benefit
During
Before-during
During
After
Before-after
During
Before-during
After
(F) Time of fund reception?
Sendai city subway Kitakyushu city monorail
Kobe city subway Senhoku newtown railway Hokusou newtown railway
Several private railways
(Cl) Examples
tBefore
Enterprises
Enterprises
@I Enterprise special benefit assessment
@ Enterprise charges to support constructions = during construction;
Enterprises
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during
Enterprises
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= before construction;
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tax in
after
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.,
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Before-after
Before-after
Before-after
= after construction.
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Municipality
Municipality
Prefecture Municipality
Municipality
Lending capitals Loans, subsidics
Enterprises
@I Building CBD
During
Inhabitants Enterprises
63 Cost sharing forstationconstructions by municipality Provision of land Construction charges
Before-after
Lending capitals Loans, subsidies
Prefecture
Inhabitants Enterprises
@ City planning tax
Municipality
Before-after
Lending capitals Loans, subsidies
Prefecture Municipality
Inhabitant tax (individuals) Inhabitants
0
During
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40
Y. HAYASHI
It would be preferable to apply the benefit principle to the suburban railways, which are characterized as local public goods and where it is therefore easy to specify the benefit boundaries, while public financing through general taxes based on the abilityto-pay principle would be suitable in the case of lines located in the city center, where benefits are taken by many and unspecified persons and are spilled over to wider areas. Regarding the equity between generations, the present generation should pay for the infrastructure improvement on the basis of the ability-to-pay principle because the ability of the whole society will surely drop due to the great increase of the share of pensioners in Japan in the 21st century. The cost causer-to-pay principle implies that the burden should be allocated more to municipalities in the city center than to the suburb in the case of a radial commuter railway from the city center to a suburb because the construction cost increases due to the high land price in the center.
4.4 Ability to pay In the present financial system for urban rail transit, the main measures based on the benefit principle are (1) user charges in the form of fares and (2) developer charges in the form of land readjustment and new town rail charges. Under the current fare system, the fare burden will become too high to be paid solely for the new line, with exceptions in the case of the lines in which demand is very high while the construction cost is very low, and therefore the line will lose its competitive power to the other lines and modes (Ito, 1987). As developer charges are generally transferred to the final consumer of site, higher charges will decrease the site demand due to the rise of land prices and thus make the project not on a paying basis. There are natural limitations to the user charges and developer charges due to the above reasons.
4.2 Equity of incidence to benefit reception The equity of incidence to benefit reception should be kept (1) between interest groups, (2) between regions, and (3) between generations. The equity between interest groups depends on which stage of transfer the benefits are captured. There are biases in the incidence between interest groups due to the differences in the ability to capture benefits. Double capturing problems could occur according to the combination of financial measures. The equity between regions is, for example, to what extent should the city center pay according to the benefit principle or the cost causer-to-pay principle. The equity problem between generations occurs especially when the fund for construction is raised by bonds; namely, the beneficiary generation is not generally the same as the cost-bearing one.
Land acquisition costs dominate the total cost in the case of projects of urban rail transit. The expenditure demand, therefore, comes to a peak at the time of land acquisition before construction. However, as most of the funds are borrowed and then returned by fare revenues under the current financing system, the interest burden for the rail operators is very serious. Therefore, funds that can be obtained before construction begins are preferable. Financing through genera1 taxes and the reserve fund system of fares for special cities are examples. A pooling system of fare and tax revenues using the established fund for urban rail transit would be useful.
4.3 Ease of specification and captures of the benefit Suburban railways are characterized as local public goods because the users can be specified and therefore land values increase in specified areas. The benefit in which influence is limited to small areas or sites is defined as a special benefit (Southern California Rapid Transit District, 1985). On the other hand, in such a case as rail transits in the city centers or city ring-roads, the benefits are spilled over to wider areas and contribute to raise the regional economy because the users are merely limited. Such benefit is defined as a general benefit. It is easier to specify the benefit reception in the case of projects in which special benefit is dominant. The ease of captures of benefit depends upon quite a technical problem of measurement and captures. It is more difficult to charge the increase of real property value and the increase of profits than to charge user benefit in the form of fares.
4.5 Time lags between fund-raising and expenditure demand
5.
EXAMINING FINANCING
POSSIBLE URBAN
MEASURES RAIL
FOR
TRANSIT
5.1 The menu The possible measures of financing urban rail transit on the basis of benefit principle are classified into the three categories of (1) transit user charges, [2) increase of real property values, and (3) increase of profits from real property as shown in Table 1, where the numbers in circles denote existing measures and those in boxes are not existing but possible measures. The internalization of these benefits, which is shown in Table 2, is another measure for financing urban rail transit. The existing menus for each of the above categories are listed below: 5.1.1 User charges. There are two measures in this category: (0) fare revenue and (0) reserve fund system of fares for special cities. The latter is a system in which fare is charged excessively in advance for financing large improvement to strengthen the track capacity of existing railways in metropolitan areas. Although there is an inconsistency in that the burden payers are not always the same as the benefit
Financing urban rail transit projects and value captures
receivers as far as a single improvement project is concerned, this system has a big advantage because it can procure funds for additional investment without interest burdens. 5.1.2 Incidence due to the increase of real property values. There are four measures in this category: (0) new town developer charges, (0) provision of developed land by land readjustment projects, (a) excess charges of fixed assets tax, and (a) those of real property acquisition tax. As for (@) and (a), it is necessary to negotiate with the developers and landowners. In the application of (a) and (a), there are difficulties in specifying the benefit boundaries and in sharing the excess charges to rail transit projects when they are already used for the other purposes. 5.1.3 Incidence due to the increase of profits from real property. There are six measures in this category: (0) excess charges of prefectural and municipal inhabitant taxes, (@) excess charges of city planning tax, (a) cost sharing for station construction by municipality, (@) excess charges of prefectural and municipal inhabitant tax (to corporations), (@) excess charges of enterprise establishment tax, and (@) enterprise charges to support constructions. Implementing these measures provides funds before the construction while the specification of benefit boundaries is difficult. 5.1.4 Internalization of benefits by transport operators. There are three measures in this category: (8) development of the area along the railways that the rail operators prepurchase, and then selling the developed lands to receive the profits themselves; (8) profit making from the operation of shops and other real properties by the rail operators; and (0) assignment of the bonds to the enterprises located along the railways (see Table 2). (@) and (@) are often used by private rail operators. However, as far as the municipal subways are concerned, whether the lands can be prepurchased before the land price increases by the announcement of the rail projects is doubtful. (a,) has been applied only once, in the construction of the Tokyo Bay Bridge, but no examples have been cited so far in the cases of urban rail construction.
5.2 Detailed list of the menu According to the critical points discussed in Section 4, the following items should be examined to evaluate comparatively the financial measures: 1. groups of benefit receivers who should pay: (a) rail operators, (b) users of alternative railways or modes, (c) developers, (d) municipality and prefecture, (e) inhabitants, and (fl enterprises (employers) 2. interveners in fund-raising: (a) central government, (b) prefecture, and (c) municipality 3. forms of fund transfer: (a) fares, (b) loans, (c) subsidies, (d) lending capitals, (e) bonds, (fl enterprise charges to support constructions, and (g) provision of land
41
4. time of reception of fund: (a) before construction, (b) during construction, and (c) after the start of operation Tables 1 and 2 summarize the characteristics of each measure according to the above items. The last column of the tables shows the examples in Japan. The forms of transfer and the time of reception of the funds have tremendous implications for the following reasons: the most crucial problems in the fund-raising for urban rail transit are (1) heavy burden of interest on the borrowed money and (2) purchase of lands. By means of subsidies, lending capital, enterprise charges to support constructions, and provision of land, the funds can be given before construction while fares, loans, and bonds generate the burden of the interest. In the big cities of Japan, the purchase cost of land dominates the construction cost due to the high land prices and the burden of interest is heavy due to the long negotiation period with many landowners because the land is divided into many small plots in the urban areas. The compensation for land is required even for underground spaces, where the cost is still about 20%-50% of the surface land.
5.3 Correspondence of financial measures to the flow of benefit reception and burden between interest groups Having discussed the imputation process of benefits and the menus of financial measures for urban rail transit, we can finally examine the balance of benefit receipts and burden borne between interest groups. Figure 3 shows this relationship, where the numbers correspond to those in Table 1. Rail operators receive (0) fares for the return of provision of user benefits. They also receive (0) the reserve fund for the future improvement of the track capacity of the existing lines. The user benefits are transferred to the landowners in the form of rent increase, and consequently to the developers and the former landowners, who sold the land, in the form of capital gains. From the developers these benefits are returned to the prefecture in the form of new town developer charges that are further received by the rail operators through subsidies. However, the former landowners pay only the real property transfer tax (national tax), but, as this is an input in the general budget, the return for the rail operators is very small. To fulfill the imbalance between the landowners and operators, new measures such as land capital gains tax are required. Landowners pay the expenses for the purchased land to developers while they receive rents from inhabitants. The landowners pay fixed assets tax (0) and city planning tax (a) to municipalities, which are returned to rail operators in the form of subsidies. However, the returned value is hardly enough to cover the increase of service level due to the rail improvement project because the rates of the above taxes are very low.
tBefore
Profit making from the operation of shops and other real properties
during
@I Assignment of bonds to the enterprises
0
@ Area development
(B) Financial measure
= before construction;
Internalization of benefit by rail operators
benefit
(A) Type of
Rail operators (+ shop leaser)
Rail operators (- land purchaser)
after
Form of fund transfer
-
-
Before-after
After
Before-during
(F) Time of fund receptiont
by rail operators
Acquisition of land Enterprise revenue
(E)
of benefits
= after construction.
-
-
-
(D) Intervener of fund transfer
measures by internalization
(C) Benefit receiver to burden
2. Financial
= during construction,
Table
Examples
Special enterprise bond(Tokyo Bay Bridge Corp.) Special project bond Private bond
(G)
\ congestiontax
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Fig. 3. Flow of benefit receptions and burdens between interest groups.
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Y. HAYASHI
44
Enterprises operating offices and shops increase their profits due to the increase in customers and receive benefits for themselves. In return for these benefits, they pay an inhabitant tax (corporation) (a) and enterprise establishment tax (a) to prefectures, but this is not enough because of the low rates of taxes. All these tax collections are differentiated by municipality, while there are cases such as benefit assessments in Los Angeles that specify strictly the real properties that receive benefits (Stopher et af., 1987). As the main causers of congestion are the enterprises that are located in the city center, it is worth considering a congestion tax (m) to be paid to the prefectures, the decrease in the discount rate of season tickets (lZl)f and building tax in the central business district (CBD) (!Xl). As the inhabitants take up completely the burden for user benefits in the form of rent, the benefits will be thoroughly paid to the landowners when the rent will be appropriately raised. Besides these measures, specifications of fuel tax to a special budget is proposed: this implies that national tax revenue will be returned to the rail operators in the form of subsidies. As explained above, the imbalance between the benefit receivers and payers has been made clear in Fig. 3.
3. It would be necessary to establish a measure of burden on the enterprises in the city center that are the main causers of congestion. 4. The measure to establish funds for improvement of urban rail transit is desirable to avoid the heavy interest burden. While in this paper financial issues have been discussed mainly from the viewpoint of the balance between benefits and burdens, other measures to reduce the construction costs are being examined in many cities of Japan. These are new modes other than rails such as small-size subways using linear motor cars, monorails, guideway buses, and exclusive lane buses. These are expected to be useful not only in big cities but also in midsize cities. Acknowledgement-This paper is largely owing to the results of the discussions on financial issues in the study team on a new railway project in the Japan Railway Construction Corporation chaired by Professor Hideo Nakamura, University of Tokyo. The author is deeply indebted to him and the other members. However, the author is solely responsible for the content of the paper. This study was also partly funded by a research grant from the Ministry of Culture and Education.
REFERENCES 6. CONCLUDING
REMARKS
The issues of financial measures transit are summarized as follows:
for urban rail
1. There are as many different measures in Japan as there are in the United States (Johnston and Hoel, 1987), but the rate of return is low and there are only a few examples of each. 2. There is a problem in that there are no effective measures to return the great amount of benefits transferred to landowners in the form of increase in property values or profits.
tEnterprises
generally pay commuting costs in Japan.
Ito M. (1987) A study on new subsidy system for urban railway in Japan. Infrastructure Plan. Rev. 5, 163-170 (in Japanese). Johnston G. T. and Hoe1 L. A. (1987) Review of financing options for highways and transit. J. Transpn. Eng., ASCE. 113(10), 72-83. Southern California Rapid Transit District (1985) Benefit assessment summary report. Stopher P. R., Mansen D. J., Bevon L. and Corradino J. C. (1987) The theory and practice of benefit assessment for a major rail project in Los Angeles. Transpn. Res. Rec. (in press). Tsunashima K. and Kiryu K. (1987) Financing option for rail projects. I. Assoc. Rail. Faciliries 10, 16-20 (in Japanese).
~~~~~~~RES..A. vd. 23.4. NO. 1.pp.35-u. 1989 Pnnted in Great Briram.
ISSUES IN FINANCING URBAN RAIL TRANSIT PROJECTS AND VALUE CAPTURES YOSHITSUGU HAYAW Department
of Civil Engineering, Nagoya University, Nagoya 464-01, Japan
Abstract-Urban rail transit projects are suffering from the cost burden in Japan because the current financing system is dependent on borrowed money by loans and bonds that are repaid mainly by fares. The fund cannot bear the increasing expenditure demand due to the accelerated construction demand and the rising cost of land acquisition. This paper reexamines the financing system and analyses the possible menus for fund-raising from the viewpoint of imbalance between benefit receivers and cost burdeners on the basis of benefit principle, referring to Japanese examples.
the subsidies are paid from the next year after the opening for 10 years in installments and, therefore, cannot cover the initial cost, the burden of the loan interest of the initial investment is very heavy. In 1987 the total annual budget for the subway subsidy was 42.3 billion yen, which covers only the construction cost for 1 or 2 kilometers in the city center of Tokyo. The amount of other subsidies in 1987 was 14.3 billion yen in total, which consists of monorail subsidy: 11.1 billion yen, new town rail transit subsidy: 0.5 billion yen, and subsidy for interest repayment for private railways: 2.7 billion yen (see Fig. 1) (Tsunashima and Kiryu, 1987). Because the total amount of public subsidies is kept at a low level, local transport agencies are forced to depend on bonds for 80%-90% of the total construction cost while private railways have to borrow much from the Japan Railway Construction Corporation, the Japan Development Bank, and other private banks. Therefore, for example, the interest payment comprises almost 40% of the total expenditure, on the average, of nine local transport agencies that have subways. To break such a bottleneck, funds without interest payment are often requested, especially in terms of the benefit principle.
1. INTRODUCTION
Japan, urban rail transit improvements are financed largely by loans and bonds that will be repaid mainly by fare revenue after the opening of the system. Transport operators must struggle to raise the required funds because the amount of public subsidies is quite limited. Moreover, construction costs are rising at a much higher rate than the funds, due to the land price increase in the urban areas. There are accelerating demands for the improvement of urban rail transit due to (1) the increase of commuting trips in the radial directions of cities due to the suburbanization of housing locations, (2) the serious congestion on the road networks in city centers and inner suburbs that bring nonneglectable social losses, and (3) the provision of access to new and redevelopment sites for urban revitalization. It is quite necessary to find other sources of funds for financing the new lines to meet the above-mentioned demands. The existing financing system is being discussed and reexamined from the viewpoint of the benefit principle so as to capture the increase of property values and profits due to the improvement of the transit (Ito, 1987). This paper examines the possible menus of financing urban rail transit in the context of the balance between beneficiaries and payers, relating them to the imputation process of the benefits. In
3. LOCATIONS MEASURES
2. EXLSTING PUBLIC IMPROVEMENT
FINANCING
OF URBAN
BENEFITS
FOR THE
RAIL TRrtliSIT
OF THE EXISTING
IN THE IMPUTATION OF TRANSPORT
FINANCIAL PROCESS
OF
IMPROVEiMENTS
3.1 Benefits of urban rail transit and their imputation process
existing public financing for urban rail transit consists of the following four types: (1) subsidy for subways, (2) subsidy for infrastructure of monorail, (3) subsidy for new town rail transit, and (4) subsidy for interest repayment of loans for private railway construction. The subsidy condition for subways, which is the most advantageous, is such that 10% of the construction cost is covered by the lending capita1 from the municipality and 63% is subsidised by the central and the prefectural government. However, because The
It is necessary to clarify the mechanism of generation of the benefits of urban rail transit and their imputation process to discuss the financial measures based on the benefit principle. Figure 2 shows a typical process of benefit imputation and the location of each existing measure. An urban rail transit line generates direct benefits for the new transit user in the form of savings in travel time and travel cost, while the users in the existing competing rail lines and the other modes 35
Y. HAYASHI
36
1: Subsidy 2: Subsidy 3: Subsidy 4: Subsidy 5: total
(Billion yen)
loo-
for for for for
interest burden subway new town rail infrastructure of monorail
80 _----
60-
_______
___
40-
-:-
0-r-w ‘72
‘73
‘74
‘75
‘76
‘77
/
_,/“-\
---______-_--_ m-----w
_-
‘78
‘79
'80
'81
'82
-____--'83
'84
'85
_
.r,r3”, I
'86 '87
Fig. 1. Changes of public financing to urban rail transit projects.
will take an indirect benefit by the release of congestion due to the diversion of passengers to the new line. The benefits are also transferred outside the transport market; namely, houses, shops, and offices will be located due to the improvement of locational utility and profitability in the relevant areas and thus land values will increase. The latter will be imputed to the landowners in the form of income increases by realization of capital gains if the sites will be sold, which will be transferred from the transit user benefit. The tax revenue of the municipality will be increased in terms of the rise of inhabitant tax. If the sites will not be sold, the capital gains will be imputed to the landowners in the form of real estate value. The revenue from fixed assets tax and city planning tax will be increased accordingly. On the other hand, user benefit will also be transferred to the firms in terms of increase in profits in the area. In this case, corporate tax and enterprise establishment tax will be increased. 3.2 The locations of financial measures in the imputation process of benefits
Each financial measure can be located as follows according to Fig. 2. This is marked by the subscript numbers in the figure, which correspond to the numbers in Table 1 (discussed in Section 5). Fares are to capture the user benefits in the new line while the reserve fund system of fares is used in special cities to collect the user benefits in the existing lines (see Section 5.1 for details). The new town development charges and land readjustment projects return the development gains by means of providing the developed sites and thus raise the locational utility and profitability. Real estate tax, real property acquisition tax, and city planning tax are applied to capture the benefits in the case of increase of real estate values, while corporate tax and enterprise establishment tax capture the benefits in terms of increase of firms’ profits. The part contained in broken lines in Fig. 2 shows
the return of benefits. The main measure of return is by means of fares that compensate the loans and bonds. Namely, the benefits are captured in terms of direct user benefits at the stage of their generation. On the other hand, the indirect benefits, such as increase in incomes and real estate values of landowners and those in profits of shops and offices, are merely captured because the rates of the relevant local taxes are very low (e.g. real property acquisition tax 4%, real estate tax 1.4%). Excess charges of these local taxes can be made for the purpose of the improvement of infrastructure in principle, but, in reality, there are only a few examples that were made for urban rail transit schemes (see Table 1). There are quite a few urban rail transit projects that can pay in terms of cost-benefit ratio for the society but fail in terms of financial balance for the operator. This is because the large amount of benefits transferred to the landowners and enterprises are not returned to the operators, while only user benefits are charged. Therefore, as new financial measures, restoration of the final benefits gained such as excess charges of local taxes are to be examined. 4. CRITICAL
ISSUES IN THE EVALUATION FINANCIAL
OF
MEASURES
4.1 Principles of incidence The following are three main principles of incidence for infrastructure improvement: (1) the benefit principle, in which burdens are borne according to the amount of benefits received; (2) the abilityto-pay principle, in which burdens are borne according to the ability to pay; and (3) the cost causersto-pay principle, in which burdens are borne according to the amount of cost involved. Which principles to use should be judged considering which principles can allot the burden shares most fairly and efficiently. Several examples could be given as follows:
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in
Increase of real property value
User benefit in existing lines and in other modes
User hcncfil new lint
(A) Type of benefit
Reserve fund system for special cities
Fare
tax
Provision of developed land by land rcadjustmenl
Fixed itsscls I;IX
0
0
town developer charges
@ New
season ticket
l%l Decrease of discount rate for
•l Congestion
lZl Special accounts (fuel tax, automobile tax)
0
0
(B) Financial measure
1. Financial
users
users
Landowners
Land readjustment associ3lion Municipality
Developers . Japan Housing and Urban Renewal Corp. . Local public development agencies . Private developers
Users (enterprises)
Enterprises Inhabitants
Road users
Railway
Railway
(C) Benefit receiver to burden
Table
Municipality
Municipality
Prefecture
Prefecture Municipality
Prefecture
Central government
-
-
(D) Intervener of fund transfer
principle
-
-
Iild
Lending capitals Loans, subsidies
Provision of
Lending capitals Loans, subsidies Construction charges, provision of lqnd
Fare
Lending capitals Loans, subsidies
loans
Form of fund transfer
Subsidies,
(E)
measures based on the benefit
During
Before-during
During
After
Before-after
During
Before-during
After
(F) Time of fund reception?
Sendai city subway Kitakyushu city monorail
Kobe city subway Senhoku newtown railway Hokusou newtown railway
Several private railways
(Cl) Examples
tBefore
Enterprises
Enterprises
@I Enterprise special benefit assessment
@ Enterprise charges to support constructions = during construction;
Enterprises
03 Enterprise establishment tax
during
Enterprises
@ Inhabitant tax (corporations)
= before construction;
Increase of profits from real property
tax in
after
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Lending capitals Loans, subsidies
Lending capitals Loans, subsidies
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,,
During
.,
Before-after
Before-after
Before-after
Before-after
= after construction.
-
Municipality
Municipality
Prefecture Municipality
Municipality
Lending capitals Loans, subsidics
Enterprises
@I Building CBD
During
Inhabitants Enterprises
63 Cost sharing forstationconstructions by municipality Provision of land Construction charges
Before-after
Lending capitals Loans, subsidies
Prefecture
Inhabitants Enterprises
@ City planning tax
Municipality
Before-after
Lending capitals Loans, subsidies
Prefecture Municipality
Inhabitant tax (individuals) Inhabitants
0
During
Lending capitals Loans, subsidies
Prefecture
Landowners
I!!3 Land capital gain tax
During
Prefecture
Lending capitals Loans, subsidies
Landowners
@ Real property acquisition tax
,*”
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sI
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Sendai city subway
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Existing JR lines Private lines (Musashisagawa, etc.)
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40
Y. HAYASHI
It would be preferable to apply the benefit principle to the suburban railways, which are characterized as local public goods and where it is therefore easy to specify the benefit boundaries, while public financing through general taxes based on the abilityto-pay principle would be suitable in the case of lines located in the city center, where benefits are taken by many and unspecified persons and are spilled over to wider areas. Regarding the equity between generations, the present generation should pay for the infrastructure improvement on the basis of the ability-to-pay principle because the ability of the whole society will surely drop due to the great increase of the share of pensioners in Japan in the 21st century. The cost causer-to-pay principle implies that the burden should be allocated more to municipalities in the city center than to the suburb in the case of a radial commuter railway from the city center to a suburb because the construction cost increases due to the high land price in the center.
4.4 Ability to pay In the present financial system for urban rail transit, the main measures based on the benefit principle are (1) user charges in the form of fares and (2) developer charges in the form of land readjustment and new town rail charges. Under the current fare system, the fare burden will become too high to be paid solely for the new line, with exceptions in the case of the lines in which demand is very high while the construction cost is very low, and therefore the line will lose its competitive power to the other lines and modes (Ito, 1987). As developer charges are generally transferred to the final consumer of site, higher charges will decrease the site demand due to the rise of land prices and thus make the project not on a paying basis. There are natural limitations to the user charges and developer charges due to the above reasons.
4.2 Equity of incidence to benefit reception The equity of incidence to benefit reception should be kept (1) between interest groups, (2) between regions, and (3) between generations. The equity between interest groups depends on which stage of transfer the benefits are captured. There are biases in the incidence between interest groups due to the differences in the ability to capture benefits. Double capturing problems could occur according to the combination of financial measures. The equity between regions is, for example, to what extent should the city center pay according to the benefit principle or the cost causer-to-pay principle. The equity problem between generations occurs especially when the fund for construction is raised by bonds; namely, the beneficiary generation is not generally the same as the cost-bearing one.
Land acquisition costs dominate the total cost in the case of projects of urban rail transit. The expenditure demand, therefore, comes to a peak at the time of land acquisition before construction. However, as most of the funds are borrowed and then returned by fare revenues under the current financing system, the interest burden for the rail operators is very serious. Therefore, funds that can be obtained before construction begins are preferable. Financing through genera1 taxes and the reserve fund system of fares for special cities are examples. A pooling system of fare and tax revenues using the established fund for urban rail transit would be useful.
4.3 Ease of specification and captures of the benefit Suburban railways are characterized as local public goods because the users can be specified and therefore land values increase in specified areas. The benefit in which influence is limited to small areas or sites is defined as a special benefit (Southern California Rapid Transit District, 1985). On the other hand, in such a case as rail transits in the city centers or city ring-roads, the benefits are spilled over to wider areas and contribute to raise the regional economy because the users are merely limited. Such benefit is defined as a general benefit. It is easier to specify the benefit reception in the case of projects in which special benefit is dominant. The ease of captures of benefit depends upon quite a technical problem of measurement and captures. It is more difficult to charge the increase of real property value and the increase of profits than to charge user benefit in the form of fares.
4.5 Time lags between fund-raising and expenditure demand
5.
EXAMINING FINANCING
POSSIBLE URBAN
MEASURES RAIL
FOR
TRANSIT
5.1 The menu The possible measures of financing urban rail transit on the basis of benefit principle are classified into the three categories of (1) transit user charges, [2) increase of real property values, and (3) increase of profits from real property as shown in Table 1, where the numbers in circles denote existing measures and those in boxes are not existing but possible measures. The internalization of these benefits, which is shown in Table 2, is another measure for financing urban rail transit. The existing menus for each of the above categories are listed below: 5.1.1 User charges. There are two measures in this category: (0) fare revenue and (0) reserve fund system of fares for special cities. The latter is a system in which fare is charged excessively in advance for financing large improvement to strengthen the track capacity of existing railways in metropolitan areas. Although there is an inconsistency in that the burden payers are not always the same as the benefit
Financing urban rail transit projects and value captures
receivers as far as a single improvement project is concerned, this system has a big advantage because it can procure funds for additional investment without interest burdens. 5.1.2 Incidence due to the increase of real property values. There are four measures in this category: (0) new town developer charges, (0) provision of developed land by land readjustment projects, (a) excess charges of fixed assets tax, and (a) those of real property acquisition tax. As for (@) and (a), it is necessary to negotiate with the developers and landowners. In the application of (a) and (a), there are difficulties in specifying the benefit boundaries and in sharing the excess charges to rail transit projects when they are already used for the other purposes. 5.1.3 Incidence due to the increase of profits from real property. There are six measures in this category: (0) excess charges of prefectural and municipal inhabitant taxes, (@) excess charges of city planning tax, (a) cost sharing for station construction by municipality, (@) excess charges of prefectural and municipal inhabitant tax (to corporations), (@) excess charges of enterprise establishment tax, and (@) enterprise charges to support constructions. Implementing these measures provides funds before the construction while the specification of benefit boundaries is difficult. 5.1.4 Internalization of benefits by transport operators. There are three measures in this category: (8) development of the area along the railways that the rail operators prepurchase, and then selling the developed lands to receive the profits themselves; (8) profit making from the operation of shops and other real properties by the rail operators; and (0) assignment of the bonds to the enterprises located along the railways (see Table 2). (@) and (@) are often used by private rail operators. However, as far as the municipal subways are concerned, whether the lands can be prepurchased before the land price increases by the announcement of the rail projects is doubtful. (a,) has been applied only once, in the construction of the Tokyo Bay Bridge, but no examples have been cited so far in the cases of urban rail construction.
5.2 Detailed list of the menu According to the critical points discussed in Section 4, the following items should be examined to evaluate comparatively the financial measures: 1. groups of benefit receivers who should pay: (a) rail operators, (b) users of alternative railways or modes, (c) developers, (d) municipality and prefecture, (e) inhabitants, and (fl enterprises (employers) 2. interveners in fund-raising: (a) central government, (b) prefecture, and (c) municipality 3. forms of fund transfer: (a) fares, (b) loans, (c) subsidies, (d) lending capitals, (e) bonds, (fl enterprise charges to support constructions, and (g) provision of land
41
4. time of reception of fund: (a) before construction, (b) during construction, and (c) after the start of operation Tables 1 and 2 summarize the characteristics of each measure according to the above items. The last column of the tables shows the examples in Japan. The forms of transfer and the time of reception of the funds have tremendous implications for the following reasons: the most crucial problems in the fund-raising for urban rail transit are (1) heavy burden of interest on the borrowed money and (2) purchase of lands. By means of subsidies, lending capital, enterprise charges to support constructions, and provision of land, the funds can be given before construction while fares, loans, and bonds generate the burden of the interest. In the big cities of Japan, the purchase cost of land dominates the construction cost due to the high land prices and the burden of interest is heavy due to the long negotiation period with many landowners because the land is divided into many small plots in the urban areas. The compensation for land is required even for underground spaces, where the cost is still about 20%-50% of the surface land.
5.3 Correspondence of financial measures to the flow of benefit reception and burden between interest groups Having discussed the imputation process of benefits and the menus of financial measures for urban rail transit, we can finally examine the balance of benefit receipts and burden borne between interest groups. Figure 3 shows this relationship, where the numbers correspond to those in Table 1. Rail operators receive (0) fares for the return of provision of user benefits. They also receive (0) the reserve fund for the future improvement of the track capacity of the existing lines. The user benefits are transferred to the landowners in the form of rent increase, and consequently to the developers and the former landowners, who sold the land, in the form of capital gains. From the developers these benefits are returned to the prefecture in the form of new town developer charges that are further received by the rail operators through subsidies. However, the former landowners pay only the real property transfer tax (national tax), but, as this is an input in the general budget, the return for the rail operators is very small. To fulfill the imbalance between the landowners and operators, new measures such as land capital gains tax are required. Landowners pay the expenses for the purchased land to developers while they receive rents from inhabitants. The landowners pay fixed assets tax (0) and city planning tax (a) to municipalities, which are returned to rail operators in the form of subsidies. However, the returned value is hardly enough to cover the increase of service level due to the rail improvement project because the rates of the above taxes are very low.
tBefore
Profit making from the operation of shops and other real properties
during
@I Assignment of bonds to the enterprises
0
@ Area development
(B) Financial measure
= before construction;
Internalization of benefit by rail operators
benefit
(A) Type of
Rail operators (+ shop leaser)
Rail operators (- land purchaser)
after
Form of fund transfer
-
-
Before-after
After
Before-during
(F) Time of fund receptiont
by rail operators
Acquisition of land Enterprise revenue
(E)
of benefits
= after construction.
-
-
-
(D) Intervener of fund transfer
measures by internalization
(C) Benefit receiver to burden
2. Financial
= during construction,
Table
Examples
Special enterprise bond(Tokyo Bay Bridge Corp.) Special project bond Private bond
(G)
\ congestiontax
., /,*,*,,
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,“,
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Fig. 3. Flow of benefit receptions and burdens between interest groups.
&nd market>
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,,
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.
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construction and
alternativemodes
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_v._ML-a
Y. HAYASHI
44
Enterprises operating offices and shops increase their profits due to the increase in customers and receive benefits for themselves. In return for these benefits, they pay an inhabitant tax (corporation) (a) and enterprise establishment tax (a) to prefectures, but this is not enough because of the low rates of taxes. All these tax collections are differentiated by municipality, while there are cases such as benefit assessments in Los Angeles that specify strictly the real properties that receive benefits (Stopher et af., 1987). As the main causers of congestion are the enterprises that are located in the city center, it is worth considering a congestion tax (m) to be paid to the prefectures, the decrease in the discount rate of season tickets (lZl)f and building tax in the central business district (CBD) (!Xl). As the inhabitants take up completely the burden for user benefits in the form of rent, the benefits will be thoroughly paid to the landowners when the rent will be appropriately raised. Besides these measures, specifications of fuel tax to a special budget is proposed: this implies that national tax revenue will be returned to the rail operators in the form of subsidies. As explained above, the imbalance between the benefit receivers and payers has been made clear in Fig. 3.
3. It would be necessary to establish a measure of burden on the enterprises in the city center that are the main causers of congestion. 4. The measure to establish funds for improvement of urban rail transit is desirable to avoid the heavy interest burden. While in this paper financial issues have been discussed mainly from the viewpoint of the balance between benefits and burdens, other measures to reduce the construction costs are being examined in many cities of Japan. These are new modes other than rails such as small-size subways using linear motor cars, monorails, guideway buses, and exclusive lane buses. These are expected to be useful not only in big cities but also in midsize cities. Acknowledgement-This paper is largely owing to the results of the discussions on financial issues in the study team on a new railway project in the Japan Railway Construction Corporation chaired by Professor Hideo Nakamura, University of Tokyo. The author is deeply indebted to him and the other members. However, the author is solely responsible for the content of the paper. This study was also partly funded by a research grant from the Ministry of Culture and Education.
REFERENCES 6. CONCLUDING
REMARKS
The issues of financial measures transit are summarized as follows:
for urban rail
1. There are as many different measures in Japan as there are in the United States (Johnston and Hoel, 1987), but the rate of return is low and there are only a few examples of each. 2. There is a problem in that there are no effective measures to return the great amount of benefits transferred to landowners in the form of increase in property values or profits.
tEnterprises
generally pay commuting costs in Japan.
Ito M. (1987) A study on new subsidy system for urban railway in Japan. Infrastructure Plan. Rev. 5, 163-170 (in Japanese). Johnston G. T. and Hoe1 L. A. (1987) Review of financing options for highways and transit. J. Transpn. Eng., ASCE. 113(10), 72-83. Southern California Rapid Transit District (1985) Benefit assessment summary report. Stopher P. R., Mansen D. J., Bevon L. and Corradino J. C. (1987) The theory and practice of benefit assessment for a major rail project in Los Angeles. Transpn. Res. Rec. (in press). Tsunashima K. and Kiryu K. (1987) Financing option for rail projects. I. Assoc. Rail. Faciliries 10, 16-20 (in Japanese).