FT has a nice article on the Japanese Shinkansen railway network. Since its privatisation starting in the mid-eighties, Japanese railway network has come to be managed as a super-efficient system and with no subsidy for the bulk of the network.
1. And despite the lack of subsidy, prices have rarely been increased over the past three decades.
2. The big difference in the models of privatisation,
In Britain, the tracks were split from the trains, and the rolling stock was split from railway operations. Today, the tracks are publicly owned by Network Rail. Companies regularly compete for franchise areas such as the West Midlands, leasing their rolling stock from another company. In Japan, however, the former Japan National Railways was split up along regional lines and then everything was sold together. JR East, centred on the city of Tokyo, owns its tracks, its trains and its stations outright. A private JR Central operates from Nagoya and JR West from Osaka, but the unprofitable JR Hokkaido, which operates many rural lines on Japan’s northernmost island, is still 100 per cent publicly owned...
Perhaps even more important than the difficulty of managing operations, however, are the effects this system has on investment. Network Rail, as a publicly-owned infrastructure company, does not gain directly if passenger revenue goes up. Nor does it face direct commercial pressure to keep down costs. The rail franchises, meanwhile, have a declining incentive to invest as the period of their 10-year franchise runs out... Japan’s famous shinkansen high-speed railways actually operate on something close to the UK system: the tracks are built and owned by a government fund. However, the government hands them over to the JR companies to operate on fixed-price, 30-year leases, so the companies treat them as their own. However, Britain split up its system for a reason, and that reason was competition.
3. The ideological underpinnings are important,
“The basis of railway companies in Japan is they think they will contribute forever. They feel they have a responsibility to local societies,” says Hironori Kato, a professor of civil engineering at the University of Tokyo. “This kind of mindset is quite important to make a successful railway business.”... One... feature of Japan’s railways is noteworthy: the ability of rivals to co-operate. Touch-and-go payment cards work interchangeably across the country. In Tokyo, suburban trains now run straight into subway tunnels and out the other side of the city; a single journey may use the tracks of five different railway companies. Even then, the companies do not run rival trains, but share rolling stock and run a fully integrated service. The motivation for each company is adding value to its own stretch of railway, helped by some robust pressure from the transport ministry... Britain, meanwhile, had an ideological goal in mind: competition. The vision of those who privatised the service was not just to introduce a profit motive, but for different companies to run trains on the same tracks, competing for customers. It was hoped that the regular fight for franchises would drive down costs.
A powerful reminder to those who view profit maximising self-interest and competition as the driving force behind effective markets.
4. As also the importance of strong regulation, especially important given the monopoly status of each rail operator in their areas,
The ministry collects detailed information on costs from all of Japan’s private railways. Based on that information, the ministry sets an upper limit on fares. “How do we determine the upper limit? It’s set based on an appropriate profit and appropriate costs under efficient management,” he says. If a company can cut costs and run itself more efficiently than rivals it can earn greater profits: this is known as yardstick competition. One important consequence is ruling out the complicated fare structures found in the UK. Since prices cannot go above the cap, even for last minute booking or at the height of the rush hour, companies instead operate a simple, distance-based fare.
5. And competition,
Japan’s railways may be organised along geographical lines, but they are not a series of regional monopolies. Rather, many companies run lines in the same area, interlaced with each other, which sometimes offers a choice. For example, between Tokyo and Yokohama there are three competing routes, as there are between Osaka and Kobe. For an individual traveller, one operator is usually more convenient, but higher prices are noticed. There is a third, more abstract, but still crucial form of competition. Every line radiating out of a city such as Tokyo serves a particular slice of suburbs — and those suburbs compete. Since new construction is much easier in Japan than in the UK, the rivalry is fierce, especially as the population starts to drop. Overprice or underinvest in your railway and passengers will ultimately move elsewhere.
6. The revenue streams from integrated rail and property development,
This competition between railway areas is linked to another vital part of the business model for Japanese railways: real estate. “The railway is about one-third of our total sales,” says Mr Shiroishi. “By name we’re a railway company but that’s just one of our functions.” Another one-third of revenues comes from real estate development along the Tokyu lines, especially at its Shibuya terminus. The final third comes from services to passengers such as supermarkets, convenience stores and hotels. These other arms allow the railways to capture some of the land value that their passengers create. Every station in Japan is a real estate opportunity and many have a shopping mall built above or below them.
7. Finally, the equivalence with road transport,
Another economic strength of Japan’s railways, particularly the shinkansen, is a level playing field with roads. A one-way shinkansen ticket from Tokyo to Osaka costs ¥13,620 ($124) but the motorway toll is similar. It is unlikely Japan could run profitable high-speed rail if the state provided free roads as an alternative. There are no urban congestion charges but parking is all off-street and formidably expensive. Added to the sheer density of Japan’s population, the result is ample demand for railways, letting them run frequent trains and cover their costs at reasonable prices.
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