CFS Discussion Paper Series

(31?21 Public Disclosure Authorized CFSDiscussion Paper Series JapaneseNational Railways PrivatizationStudy II: Public Disclosure Authorized InstitutionalizingMajor PolicyChange andEx.amimng Economic Implications Authors Public Disclosure Authorized Koichiro Fukui KiyoshiNakamura Tsutomu Ozaki Hiroshi Sakamaki Fumitoshi Mizutani Public Disclosure Authorized Cofinancing and Financial Advisory Services (CFS) Private Sector Development and PrivatizationGroup (CFSPS> TheWorld Bank December 1994 CFSDiscussion Paper Series, No. 107 Japanese National Railways Pnvatization Study II: Institutionalizing Major Policy Change and Examining Economic Implications Atwhors: Koichiro Fukui, Japan Development Bank Kiyoshi Nakamura, Professor, Waseda University Tsutomu Ozaki, Japan Development Bank Hiroshi Sakamaki, Japan Development Bank Fumitoshi Mizutani, Associate Professor, Kobe University Foradditional copies of thispublicathn pleasecontact: Cofinancingand FinancialAdvkory Senvces. Room Q-5030. (202) 473-1228. Foreword Ihe hardwork of rstructuring a statr-ownedenterprise and preparingit for privaxiztion goeson well afia the initi hecadyreorganization-which marks the beginning of the process-has ended. Even after finl planshave been developedand agreedto, a nced persistsfor flexibilityand fine uming in the tacil planning process,which proceedsin paralle with the implementationof rcstructuringof a large state enterprise.This volumeallows us to lookinside the processof enterpriseresrructuring. With unique clarity and insightit explainsthe responsesand resourcfailnessofJapanese authorities in continuingto guide one of te lagest smte-ownedenterprises-Japanese National Railways-through the thicketsand challngs ofprirarzation. It allowsus tomeasure theprogresswhhhas bcenmade sinceambitious prinati2aiion plans wereagreed to in 1986 and cxplainsthe ongoingneed for fine tuning of restructuringefFirts in responseto unanticipatedshifs in dte busines and competitiveenvironments. The need to run a railroadon a day-to- day basis fiurthercomplicaues the process. This paper is pamtof a seics publishedby CFS, and is a sequd to an calier volumcon the privatization and zer staue reorgaization ofJapaneseNational Raihways.The seriesis intendedto communicarethe experienceand insighs of priatizntion practitionersto their colieaguesaround the world, and this most rent volumneaccomplished these objectives admirably. On behalfofCFS I would liketo thank di authors for their valuablecontribution to the art and scienmcof priraciation. Inder Sud, Dircaor, Cofinancingand Finandal AdvisorvServices Acknowledgements Theauthorsexpressspecialthan to Mes TakayukiNayakadAkraSatoofdrejapan Development Bank who fonneda teamwith authorsand assistedin the completio:-ofthis study.The authorswouldalso like tO hk two Proessors of HamrardUniversity, Dr. John R. Meyerand Dr. JoseA. G6merz-Ibafiezfor their constuctive advice.This paper was initited as a component of the World Bank Study entitled "Compartive Analysisof Railrad Privaization.' managed by Mr. Ron Kopicic of Co-financingand FmancialAdvisory Services, thc World Bank,but also has been completedas an independentstudy and constiotes the sequelto the lreadypublished Wodd Bank DiscussionPaper, 'JapaneseNational Railways PrivadzationStudy, Japanese Expeice and Lessonsfor DevelopingCounties (No.172, 1992). The authors expresstheir appreatn for the insihtfisueion of Messrs.Louis Thompson, Kvin Young and DhrmvaSahaioftheWorld Bank,HiromichiToya and Kunio Kishimoo ofthe MinistryofTransport in Japan, Shuhitro Yamanouchiof JR East, an YasushiTanahashi ofJR Freghr. The authors also xpressappreciation for the informationalsupport of Messr Akio Koike of JR Hokkaido, Knlo Aold and Toshini N*gswa of JR East, Ksumi Myawa, MasayaSakta and Mahiko Emumaof JR Cntl Makol Shibata,Masshi Nonaka and KojiNakura of JR West, Hachiya Hirono and MicdinobuSogava ofJR Shikok, Masahir Iimamuraand KenjiMon ofJR Kyushu,Yasuo K cluiandTahshiAbeofJR Frgh MinoruSuzuki Masaito MoriandYujiSegawaofJNRSetdement Corporation,YodLiali Komasu of the KinidNippon Railtay, YasuhiroKao of the NagoyaRailroad, and Fumihiro yaA, Hiddei Napo and ShigeyoshiFujiar of the Japan Devlopment Bank. The authors finaly would like tOCxpress their gratitudefor the generoussupport of MissAyano Takei and other stiff fiom the Intenational Coopertion Deparment of the Japan DevelopmentBank. IntroductoryNote This report followsan carlicrreport by the same authors investigatingthe resultsof the 'privatization' ofJapanescNational railways UNR). It takesalongerrangeviewoftheoutcome: what happened,why,what succeded and what did not? Observcrsofthc railwayrestruacuringscene are fortunate to havethse reports becausethey finallypermit an answerto thesequestions. It is no longer necessaryto sayr 'Results look promising,but it is premature to daim succes" Now, for some questions,there arc answers. Byanyrcalisticmeasure the processwasasuccess.Traffichasgrownstronglyonallpartsofthenewsystem becausea profit orientationhas made indiffcrcnceto customrs a luxurythe new companicsURs) cannot afford. With revenucsup, hugcdeficits havc becnconvcrted into solidprofits through increasedattention to cost control. A bloated laborforcc has becn reducedand labor productivityhas grown rapidly. One of the railwaysUR East) is wcll along towardtre privatization,and credibleplans to scll shres in two more (JRWestandJRCentral) havebeenestablished.Mechanismshavc becnestablished topermitpublic-private partnershipsto financethe heavyburden of newcapacity expansion. If the Governmenthad not chosento intervenein the sale of railwayassets(because the real estatemarketwas overheated)and if the stockofthe three HonshuJR's had beensoldbeforethe "bubblec economyhad burst (ra thanwaitingfor thccurrent marketwhich is too weak),all of the originalJNR debt woult alsohave bcen repaid instead of fallingmore tan $ 100billion short. All inall, it is doubtfiulifeventheoriginalproponentsofprivatiza0onactuaLlyhoped forrcsultsasfivorableasactuallyhappened. Certainlyther arefewgovenmmentsesewhcrein theworld that took on such a largc problemand made so much progress. The reasonsfor success,while alwayshard to implement,are simplcin concept. Definc objctives dcarly and credibly,and build a consensusfor reachingthe.r Whcre an adequatemarket easts, adapt tkh solution to the demands of that market ratder than remaining in a government nodc of operation: in particular, mak maximum use of the pressuresof compctitionand the techniquesof rhe private sector. Finally,identify winners and compensatclosers. But the reportalso highlightsa seriesof importnt issuesthat remainto be resolved. These are * TvffRquLzion. When and how will thc Govemrnencallow the JR's to have more rate flesibility so ticy and the large privaterailways can expecttO earn adequateprofits? * The threeHonshu Raihmay 'WiUprivatization be completed? How (unlike the privateraiwas which are predominantlyurban passengeroriented) will the Honshu JR's continue to managea mixtureof suburban and interciEypassenger seruvices which might be better handled by sepaate entities,or even transfered in part to the priva raiways or localgovenments? * Th thre d raikvys. The revenuestabilization fund mednism is unstable(becase offluc- tuations in inteest rates)and is a barrir to privatization:should it be replacedby a contract for public serviceswhich would be pxedictableand could easilybc tmnsferredto a privateoperator? Should the local govermeCntsof the threeislands be askedto make a contribution to the contact paymentsneeded? * The Fnght Railway. Is there a rationalcost-sharing formula betwe freight and passengerwhich would not price freight off most main lines? Is dtere any hope that freight could affbrdto pay for capacityexpansion - and can the countryaffort to pay for more highwaycapacity expnsion? Is there a better balancebewveen private and public rolesin rail fieight sevices, and (givean agreed method for line operacingcost allocation)would it not be possible,even imperaive, to privaize JR Freighi through a limited auctionor evena compettve, privateplacement? There is much the Bankand itsborrowers can learn from thejapaneseexperience and, giventhe issues which still remain,there will be good reasontO kp a closeeye on developments. LouisS. TIompson Raia Adviser The Wodd Bank ExecutveSummary The fis half of the present centurywas some- 1970s.In particular,the deficitsgencrated byJNR, thing of a goldenage for railwaysin many coun- the Foodstuff Control SpeciadAccount, and the tries. In Japan the first railwaywas built between National Health Insurance System posed a real Tokyo and Yokohamain 1872 by the Govern- problemforlgovernmentfinance.Expendituresfor ment. New line construction folowed in various thesethreeitems aloncaccountedfornearly lOYoof areasand by the rurn of the centuzythe mileageof the tota budget. In March 1981, the Provisional privately-runrailway lines exceededthat of Gov- Committee on AdministrativeReform was ap- cmnmcntowned lines. Immediatelyafter the Russo- pointedunder theCabinet's jurisdiction andcharged JapaneseWar (1904-1905),the JapaneseMilitary with divisingdrastic measures necessary to achieve becameconvinced of the raihvay'sstrategic impor- fiscal reform without raising taxes. In 1982 the tance and lobbied for nationalization.The Rail- ProvisionalCommittee proposed the privatization waysNationalzation Lawwasenacted in 1906xnd ofJapan'sthree largestpublic corporations-JNR, cxistinglines, both private and pub)ic, were inte- Japan MonopolyCorporation (tobbaco and salt), grated

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