FEASIBILITY OF PRIVATIZATION OF EXPRESSWAY IN JAPAN by Yasuyuki Matsui B.E., Civil Engineering University of Tokyo, Tokyo, Japan (1987)
Submitted to the Department of Civil and Environmental Engineering in Partial Fulfillment of the Requirements for the Degree of Master of Science in Civil Engineering at the Massachusetts Institute of Technology February 1993
© Yasuyuki Matsui 1993 All rights reserved
The author hereby grants to MIT permission to reproduce and to distribute publicly copies of this thesis document in whole or in part.
Signature of Author Department of Civil and Environmental Engineering January 15, 1993
Certified by Professor Fred Moavenzadeh Director, Center for Construction Research and Education Thesis Supervisor
Accepted by Ole S. Madsen Chairman, Departmental Committee on Graduate studies FEASIBILITY OF PRIVATIZATION OF EXPRESSWAY IN JAPAN
by
Yasuyuki Matsui Submitted to the Department of Civil and Environmental Engineering in January 1993, in Partial Fulfillment of the Requirements for the Degree of Master of Science in Civil Engineering Abstract
Recently, privatization has become very popular worldwide as an efficient means of constructing and operating infrastructure facilities. Like many other countries, Japan also has adopted a policy in favor of privatization, and has privatized several industries. Now, the privatization of expressway projects has become a controversial issue as the Japanese government has begun considering it as one of the next candidates for privatization.
The purpose of this thesis is to examine the feasibility of privatizing expressway projects in Japan. With 5,000 km in operation and 6,500 km in various stage of planning, design or construction, the provision of an efficient expressway network is a national priority. Currently, because a public corporation, which is fully sponsored by the Japanese government, is the sole provider of the expressway network as toll roads, privatization may improve economic efficiency by bringing private parties into the projects.
However, not all privatization schemes have been successful. In particular, when competition is very limited as in expressway projects, the critical issues for successful privatization are to increase the competitive environment by dropping artificial barriers to entry into the market, and to adopt a regulatory framework which does not distort the private firm's incentive to reduce operation costs and increase usage of expressways. In addition, appropriate risk sharing by the public sector may be necessary to reduce the high risk of a new construction project, and to secure new entrants into the expressway projects.
Thesis Supervisor: Fred Moavenzadeh Title: Professor of Civil and Environmental Engineering Director, Center for Construction Research and Education Acknowledgments
There are many people and friends who have encouraged me to complete this thesis, and I would like to express my deepest appreciation to all of them. Above all, Professor Fred Moavenzadeh gave me valuable suggestions and comments toward this thesis despite his busy schedule. Mr. Tomoji Hirukawa, Mr. Hiromichi Miyake, and Mr. Kuniaki Mitani gave me the information about the Japan Highway Public Corporation, the Trans-Tokyo Highway Corporation, and the Japan Railway Groups. Finally, I have to add that the completion of my thesis is greatly indebted to my dedicated wife, Junko, who has always encouraged and supported my study throughout my stay at Massachusetts Institute of Technology. Had it not been for her kind support and dedication, I could not have completed this thesis.
Yasuyuki Matsui Table of Contents
Title...... 1 Abstract...... 2 Acknowledgments ...... 3 Table of Contents...... 4 List of Figures...... 8 List of Tables ...... 10
Chapter I Introduction ...... 11 1.1 Background...... 11 1.2 Objectives...... 12 1.3 Thesis Organization...... 12
Chapter II Road and Expressway System in Japan.. 15
2.1 Roads in Japan...... 15 2.1.1 Roads and Road Transportation...... 15 2.1.2 Classification of Roads and their Administration. 18 2.1.3 Financial System for Road Works...... 24 2.2 Expressway Projects...... 25 2.2.1 History of Expressway Development and Planning... 25 2.2.2 Procedures of Expressway Construction...... 27 2.2.3 Financial System for Expressway Projects...... 28 2.3 Problems of Expressway Projects...... 30 2.3.1 Profitability of Expressway Network...... 30 2.3.2 Management Responsibility of JHPC...... 32 2.3.3 Additional Financial Sources...... 33 2.4 Privatization of Expressway Projects...... 34
Chapter III Privatization ...... 35 3.1 Introduction...... 35 3.2 Privatization Trend ...... 35 3.2.1 Western European Countries...... 35 3.2.2 The United States...... 36 3.2.3 Japan...... 37 3.3 Objectives of Privatization...... 38 3.3.1 Improvement of Economic Efficiency...... 38 3.3.2 Reduction of Public Funds Requirement...... 44 3.3.3 Reduction of Intervention from Politics...... 45 3.3.4 Capturing Development Gain...... 45 3.4 Types of Privatization...... 49 3.4.1 Divestiture ...... 49 3.4.2 Contracting Out...... 50 3.4.3 Franchise Arrangement...... 51 3.4.4 Lease Arrangement...... 52 3.5 Potential Problems of Privatization...... 52 3.5.1 Service Quality...... 52 3.5.2 Control...... 53 3.5.3 Rate of Return Regulation ...... 53
Chapter IV Privatization, Competition and Regulation...... 55 4.1 Introduction...... 55 4.2 Real Merit of Privatization ...... 55 4.2.1 Competition in the Production Market ...... 58 4.2.2 Competition in the Capital Market...... 60 4.2.3 Threat of Takeover and Bankruptcy...... 61 4.2.4 Profit-Seeking Aspect...... 62 4.2.5 Transferability of the ownership...... 63 4.3 Privatization of Natural Monopolies and Promotion of Competition...... 64 4.3.1 Transition from Natural Monopoly to Competitive Market...... 65 4.3.2 Breaking up of Monopoly ...... 72 4.3.3 Auctioning a Monopoly Franchise...... 76 4.4 Regulation of a Natural Monopoly ...... o78 4.4.1 Rate of Return Regulation...... 79 4.4.2 Price Regulation ...... 81 4.4.3 Return on Output Regulation...... 82 4.4.4 Return on Sales Regulation...... 82 4.4.5 Return on Cost Regulation...... 84 4.4.6 Summary of Natural Monopoly Regulation...... 86
Chapter V Cases of Highway Privatization...... 88 5.1 Introduction...... 88 5.2 Cases of Selected Private Toll Highway Projects...... 88 5.2.1 California AB 680 Projects...... 88 5.2.2 Dulles Toll Road Extension Project...... 93 5.2.3 Trans-Tokyo Bay Highway Project...... 96 5.2.4 Channel Tunnel Project...... 100 5.2.5 Sydney Harbor Tunnel Project...... 104 5.3 Regulatory Framework for Private Highway Projects....106 5.3.1 Concession Procedure...... 107 5.3.2 Ownership ...... 107 5.3.3 No-Development Clause...... 108 5.3.4 Safety and Maintenance...... 109 5.3.5 Toll Rate and Rate of Return Regulation...... 110 5.3.6 Pre-determined Revenue Arrangement and Incentives for a Private Company...... 113 5.4 Financial Arrangements for Private Highway Projects..114 5.4.1 Common Financial Structure ...... 114 5.4.2 Debt and Equity...... 115 5.4.3 Financial Assistance from the Government ...... 117 5.5 Risk Sharing in Private Highway Projects...... 117 5.5.1 Planning Stage...... 118 5.5.2 Construction Stage...... 118 5.5.3 Operation Stage...... 121
Chapter VI A Plan for Expressway Privatization.. 125 6.1 Introduction...... 125 6.2 Special Considerations for Expressway Privatization...... 125 6.2.1 Rationale for Privatization...... 125 6.2.2 Need for a Public Corporation...... 126 6.2.3 Increase in the Number of Entrants ...... 127 6.2.4 Preventing an Increase in Toll Barriers ...... 128 6.2.5 Continuity of Toll Rate Policy...... 129 6.2.6 Scope of Activities...... 130 6.3 A Plan for Expressway Privatization ...... 130 6.3.1 New Construction ...... 130 6.3.2 Existing Expressways...... 133 6.4 Regulatory Framework...... 134 6.4.1 Toll Rate Regulation ...... 134 6.4.2 Regulation of Congested Expressways...... 138 6.5 Which Project Should Be Privatized?...... 142 .5.1 New Construction vs. Existing Expressway...... 142 .5.2 Congested Expressways...... 144 .5.3 Development Gain...... 145 .5.4 Networking Problems ...... ------a ------...... 146
Chapter VII Conclusion...... 147 Rationale for Privatization ...... 147 Privatization of Natural Monopoly Industries...... 147 Regulatory Framework ...... 148 Feasibility of Expressway Privatization...... 149
Reference...... 151 List of Figures
Figure 2-1 Share of Road Transportation in Freight Transport in Japan ......
Figure 2-2 Share of Road Transportation in Passenger Transport in Japan...... 16
Figure 2-3 Master plan for High-grade Trunk Road Network...... 21
Figure 2-4 Road Financial Sources in Japan in 1991... 25
Figure 2-5 Procedures of Expressway Construction..... 27
Figure 2-6 Trend of Toll Rates for Expressway in Japan...... 31 Figure 3-1 Changes in Sales per Employee in JNR Privatization Case ...... 42
Figure 3-2 Changes in Revenue from Related Business in JNR Privatization Case ...... 48 Figure 4-1 Classification of Japanese Telecommunications Carriers ...... 68
Figure 4-2 Bell Operating Companies...... 70 Figure 4-3 Regional Operation Territory of Six Passenger Companies...... 74 Figure 4-4 Production under Rate of Return Regulation...... 80 Figure 4-5 Behavior of a Firm under Return on Sales Regulation...... 83 Figure 4-6 Behavior of a Firm under Return on Cost Regulation (Inelastic Demand)...... 85 Figure 4-7 Behavior of a Firm under Return on Cost Regulation (Elastic Demand)...... 86
Figure 5-1 Concept of Sales-Leaseback Arrangement.... 95 Figure 5-2 Location of Trans-Tokyo Bay Highway...... 97 Figure 5-3 Standard Financing and Project Financing ...... 115 Figure 6-1 Structure of Privatization ...... 133 Figure 6-2 Cost Reduction under Return on Output Regulation ...... 136 Figure 6-3 Demand Increase under Return on Output Regulation ...... 137
Figure 6-4 Relationship between Annual Operation and Maintenance Costs and Average Daily Traffic Volume...... 139 Figure 6-5 Current Toll Rate for Expressways in Japan...... 140 List of Tables
Table 2-1 International Comparison of Expressway Networks ...... 17
Table 2-2 Trend of Expressway Congestion between Tokyo and Osaka...... 18
Table 2-3 Administration of Roads in Japan ...... 23 Table 2-4 Outline of JHPC...... 29
Table 2-5 Toll Rate of Selected Toll Roads in USA... 32
Table 3-1 Profit Before Income Tax Before and After Privatization...... 40
Table 3-2 Return on Capital Employed Before and After Privatization ...... 40 Table 3-3 Revenue Sources of the Major Private Railway Companies and JNR in 1987...... 47
Table 4-1 Twelve Companies Foamed from JNR...... 73
Table 4-2 Summary of Natural Monopoly Regulation.... 87 Table 5-1 Selection Criteria in the California AB 680 Projects...... 90 Table 5-2 Financial Sources for the Trans-Tokyo Bay Highway Project ...... 99
Table 5-3 Interest Rate of Bank Loans in the Channel Tunnel Project...... 104 Table 5-4 Financial Sources for the Sydney Harbor Tunnel Project...... 106 Chapter I
Introduction
1.1 Background
Recently, privatization has become a worldwide trend.
In developed countries, the growth of the public sector has
created the financial constraints, and many countries are
attempting to reduce the size of their governments. In the Eastern European countries, which had been considered socialist countries, the collapse of the former Soviet Union
has caused a privatization boom. Even in less developed
countries, the situation is similar. As a condition for loan
guarantees, the IMF and World Bank require Structural
Adjustment, in which one of the major issues is the reduction
of state involvement in production activities which distort the market structure of the country. 1
In Japan, with a national debt of about Y170 trillion
(approximately $1.4 trillion), the government has decided to
reduce the size of the public sector and has privatized
several public corporations such as the Nippon Telephone and Telegram (NTT) and the Japan National Railway (JNR). As a part of this movement, the privatization of expressway projects has been discussed recently, and the Trans-Tokyo Bay
Highway Project, the first privatized toll highway, has been
1. The World Bank, (1989), Sub-Saharan Africa, from Crisis to Sustainable Growth. set up as an example.
1.2 Objectives The objective of this thesis is to investigate the feasibility of privatization for expressway projects, and, in particular, to investigate a possible privatization scheme which might achieve efficiency gains in expressway construction and operation. The Japan Highway Public Corporation (JHPC) has been the sole provider of expressways as a toll road for about 35 years, and it currently operates about 5,000 km of expressways. However, the monopolistic environment and government control of JHPC's management may possibly reduce the economic efficiency of expressway provision. Therefore, if properly structured, privatization offers the possibility of increasing economic efficiency.
1.3 Thesis Organization Following the introduction, I explain expressway practices in Japan to identify the characteristics and problems of the Japanese expressway system in Chapter II. First of all, the current situation in road and expressway development, their administration and financial issues are presented. Next, the procedures involved in expressway projects and the role of the Japan Highway Public Corporation are reviewed. Finally, the problems of expressway provision are identified. In Chapter III, I discuss general topics of privatization. These include the recent world movement towards privatization with examples from the United Kingdom, the United States and Japan, the objectives of privatization, common structures and methods of privatization, and possible problems inherent in privatization.
An expressway project shows decreasing average cost because of the large initial investment toward the fixed road asset. Thus, it has an element of a natural monopoly industry. For such industries, where competition is very limited, it seems that success of the privatization depends on the competitive environment of the market and on the regulatory framework of the privatization scheme.
Therefore, in Chapter IV, I examine some privatization and deregulation cases that have introduced competitive forces into natural monopoly industries such as telecommunications and railroad industries. I also examine several regulatory methods for natural monopoly industries and their possible advantages and disadvantages.
In Chapter V, I consider five cases of privatized toll highway and tunnel projects, namely the California AB 680
Projects, the Dulles Toll Road Extension Project, the Trans-
Tokyo Bay Highway Project, the Channel Tunnel Project, and the Sydney Harbor Tunnel Project. Each case is examined to identify such characteristics as concession conditions, regulatory framework, financial structure, and risk sharing between private companies and the public sector. These characteristics are deemed to be helpful in considering the privatization plan for expressway projects in Japan.
Based on the above analysis, I discuss a plan for expressway privatization in Chapter VI. The special
considerations of the privatization plan, the basic structure
of the privatization scheme, the method of privatization, and the toll rate and other regulations are proposed. Suitable candidates for privatization may then be identified.
Finally, Chapter VII contains the conclusions of this thesis. Chapter II Road and Expressway System in Japan
2.1 Roads in Japan 2.1.1 Roads and Road Transportation Road infrastructure in Japan, as in all modern countries, is one of the most basic elements of infrastructure for human activities. It plays a vital role not only for industrial and economic activities, but also for people's everyday life and leisure activities. From the end of World War II until today, the Japanese government has placed high priority on road improvement projects, and has executed this through the implementation of ten Five-Year Road Improvement Plans. As a result, an expressway network of more than 5,000 km as well as other one million km of secondary roads have been completed.1 Along with economic growth and road improvement, the share of road transportation for domestic freight and passenger transport has significantly increased. For freight transport, the share of road transportation has increased from 12 % to 51 % in ton-kilometers for the 34 year period from 1955 to 1989 (Figure 2-1). For passenger transport, the share has increased from 17 % to 67 % in person-kilometers during the same period (Figure 2-2).
1. Ministry of Construction, (1991), Roads in Japan. Figure 2-1 Share of Road Transportation in Freight Transport in Japan
Source : Ministry of Construction, (1991), Roads in Japan.
Figure 2-2 Share of Road Transportation in Passenger Transport in Japan
Source : Ministry of Construction, (1991), Roads in Japan. However, compared with other industrialized countries,
such as the United States, Germany, and France,
the level of road infrastructure in Japan is relatively
scarce in quantity and low in quality in the light of the economic strength and population of the country (Table 2-1).
Table 2-1 International Comparison of Expressway Networks
West U.S.A. Germany England France Italy Japan
* System Extension (km) 83,964 8,721 2,993 6,950 6,083 5,288
* Land Area (1000 km2) 9,373 249 244 552 301 378
* Population (1000 persons) 248,760 61,990 57,200 56,160 57,520 i23,120
* Number of motor vehicle 188,670 32,070 25,740 25,800 26380 55,090 retained (1000 vehicles) * GNP (billion dollars) 4,880 1,208 836 947 826 2,866
* Extension / Land Area 8.96 35.02 12.27 12.59 20.21 13.99 (km / 1000 km2) * Extension / Population 33.8 14.1 5.2 12.4 10.6 4.3 (km / 1000 persons) * Extension / Vehicles 44.5 27.2 11.6 26.9 23.1 9.6 (km / 1000 vehicles) * Extension / GNP 172 72 36 73 74 18 (km / million dollars) Source : Ministry of Construction, (1991), Roads in Japan. Note : 1. System extension values are based on IRF, World Road Statistics 1990, except Japan. Japanese figure is as of March 1991. 2. Figures for population and number of vehicles are as of 1989. 3. GNP figure is 1988 nominal value. In addition, traffic congestion has become a fact of everyday life not only within cities, but also on major inter-city expressways (Table 2-2), and the number of the traffic accidents continues to grow. Thus, further improvement of road networks is considered to be indispensable for better national welfare.
Table 2-2 Trend of Expressway Congestion between Tokyo and Osaka
Year 87 88 89 90
Number of Congestion 8,211 9,171 9,540 10,848 Growth rate 1.00 1.12 1.16 1.32 Source : Express Highway Research Foundation of Japan (1992), Statistics and Graphs for Expressways 1991. Note: Congestion is defined as when the five minute average driving speed becomes less than 50 km per hour.
2.1.2 Classification of Roads and their Administration Under the current Road Law, roads in Japan can be classified into the following four categories based on the administrative organization and its function: (1) National Expressway; (2) National Highway; (3) Prefectural road; (4) municipal road. In addition to the above four categories, there exist other special types of roads: (5) Urban Expressway; (6) Honshu-Shikoku Expressway.
(1) National Expressway Network The national expressway network is the most important
road network in Japan, and it is comparable to the inter-
state highway network in the United States. This network
consists of fully access-controlled motorway with two or more
lanes in each direction, and its design speed is typically 80 to 120 km per hour. The master plan for the national
expressway network requires the completion of 11,520 km of
expressways, of which 5,076 km was open to traffic as of April 1, 1992.1
With regard to its financial system and administrative
organization, the network has been constructed, maintained
and operated by the Japan Highway Public Corporation, which
is fully sponsored by the Japanese government, and is funded through the use of a toll road system.
(2) National Highway
The national highway system is the primary road network which covers the entire nation, connecting cities and/or the national expressways. The total extension as of April 1990 was about 47,000 km, of which 2,480 km is designated as national highway motorway. 2
1. Japan Highway Public Corporation, (1992), Annual Report.
2. Ministry of Construction, (1991), Roads in Japan. National highway motorway is the other type of fully
access controlled motorway, which supplements the national expressway system, and forms a part of a 14,000 km network of
high-grade trunk roads together with the national expressways. Although its function and design standard are
almost identical to that of the national expressways, the
major difference is that, in general, the Ministry of Construction is in charge of the construction and maintenance
of this network as toll-free roads. The total planned length
of the network is 2,480 km, of which 433 km was open to traffic as of April 1992.1 The master plan for high-grade trunk roads is shown in Figure 2-3.
The remainder of the national highway can be further
classified into two categories: "primary" and "other" section
of national highway network. The Ministry of Construction is
in charge of construction and maintenance for the primary
section of the national highways, which accounts for about 44% of the total system. On the other hand, the other
section of the system is constructed and administered by prefectural governments, and the Ministry of Construction is responsible only for the funding.
(3) Prefectural Road
Prefectural roads form the secondary network within any region, and prefectural governments are in charge of its
1. Ministry of Construction, (1992), Road Pocketbook. Figure 2-3 Master Plan for High-grade Trunk Road Network (6) Honshu-Shikoku Expressway
The Honshu-Shikoku Expressway is a special section of
the national highway motorway which connects Honshu (the main
island) to Shikoku. The series of long bridges including the Akashi Kaikyo Bridge, the world's longest, makes this
expressway technically complex and financially difficult.
Thus, a special public corporation called the Honshu-Shikoku Bridge Authority constructs and operates the 180 km of
Honshu-Shikoku Expressway as a toll road, of which 108 km was open to traffic as of April 1992.1
Finally, a summary of the roads and their administration is shown in Table 2-3. Table 2-3 Administration of Roads in Japan
Length Type of road in operation Administrative organization
National Expressway 5.076 Japan Highway Public Corporation Toll road
National Highway 46,935 Primary section 20,580 Ministry of Construction Other section 26,356 Prefectural Governments
Prefectural Road 128,782 Prefectural Governments
Municipal Road 934,319 Municipal governments
Urban Highways 470 Urban Expressway Public Corporations Toll road
Honshu-Shikoku 107 Honshu-Shikoku Bridge Authority Toll road Expressway Source : Ministry of Construction, (1991), Roads in Japan. Ministry of Construction, (1992), Road Pocketbook. Note: Figures are as of April 1992 for the national Expressway, urban expressways and Honshu-Shikoku Expressway, and as of April 1990 for other roads.
1. Ministry of Construction, (1992), Road Pocketbook 2.1.3. Financial System for Road Works
With regard to the financial sources for road projects, a strict distinction should be made between toll road
projects and general toll-free road projects. National
expressways and urban expressways adopt the toll road system
and are financed by revenue from tolls. On the other hand,
most other types of roads, except for some bridges, tunnels,
and bypass routes, are financed by general tax and earmarked taxes such as a gasoline tax.
In fiscal 1991 alone, the total tax funding available
for road projects was approximately 63 billion dollars.
Fifty three percent of the revenue came from earmarked taxes
such as gasoline tax and annual vehicle owner tax. Ninety
five percent of the revenue was used for general toll free road projects. 1
The financial sources for toll road projects vary between projects. However, in general, the majority of the
initial construction cost is financed by loans from the public investment fund, which is collected through the postal savings system.2 An outline of road financial sources is shown in Figure 2-4.
1. Ministry of Construction, (1992), Road Pocketbook.
2. The Japanese government conducts banking business at post offices. The money collected through this system is used for' the purpose of public investment. Figure 2-4 Road Financial Sources in Japan in 1991
I Total tax revenue Ltional highways $63.0 billion $27.5 billion I efectural roads nicipal roads $32.6 billion
T L Bonds or Debt Toll road Funds Toll road works $31.0 billion $49.1 billion $24.2 billion
Toll Revenuev Interest payment $15.2 billion Debt repayment $24.9 billion
b
Source: Ministry of Construction, (1991), Roads in Japan, Express Highway Research Foundation of Japan, (1992), Statistics and Graphs for Expressways 1991. Note: Dollar figures are converted from Japanese yen at the exchange rate of $1 = Y125.
2.2 Expressway Projects 2.2.1 History of Expressway Development and Planning In the 1950's, after the devastation of World War II, the Japanese government began to improve and reconstruct public infrastructure in order to establish economic development and the construction of a modern nation. Thus, road improvement was considered to be indispensable for the development of the nation as the demand for road transportation grew. However, the Japanese highway network was considered decades behind that of the United States and European countries at that time, and the Japanese government had to improve its road system at a very fast pace, so it was .impossible to meet the demand for and expectation of road
construction within the very limited governmental budget.
Therefore, a toll road system was established in 1952,
in which the road construction cost is financed from various
sources of borrowing and later repaid with toll revenues from
road users. At that time, both central and local governments
initiated toll road projects in various ways. However, with the advent of the plan to construct the first access-
controlled modern expressway between Tokyo and Osaka areas, the need -for a nationwide authority which would concentrate
on the construction and operation of the proposed expressway was recognized. As a result, the Japan Highway Public
Corporation (JHPC) was established for the construction and operation of toll roads in 1956. JHPC started the construction of the proposed expressway the following year, and the first 70 km section was completed and opened to traffic in 1963.
In 1965, the National Expressway Construction Act, which contained a plan to construct 32 national expressway routes with a total length of 7,600 km, was authorized by the parliament. Since then, expressway construction has been steady and speedy. Approximately 200 km of newly constructed expressway was opened to traffic annually, and a total of 4,000 km was under operation in 1987.
In the meantime, rapid economic development had greatly increased the demand for road transportation, and the vast benefits afforded by expressway construction had been widely recognized. As a result, the National Expressway Construction Act was reviewed in 1987 and further extended to include 43 routes with a total of 11,520 km of national expressways, of which 5,076 km was open to traffic as of April 1, 1992.1
2.2.2 Procedures of Expressway Construction Figure 2-5 shows a summary of the expressway construction procedure.
Figure 2-5 Procedures of Expressway Construction
National Expressway Committee * Routes to be constructed are determined Survey order
Japan Highway Public Corporatio * Surveys and Initial design
Execution plan Ministry of Construction * Approval of the execution plan
Construction order * Detailed design Japan Highway Public Corporation • Financial arrangements * Right-of-way acquisition Contract
Private Contractors * Actual construction works
Japan Highway Public Corporationj * Maintenance and operation
Source: Japan Highway Public Corporation, (1992), General Information.
1. Japan Highway Public Corporation, (1992), Annual Report. Based on the National Expressway Construction Act, which authorized the basic plan for 11,520 km of expressway network, the National Expressway Committee, which is composed of the prime minister and sector ministers (10 persons), diet members (13 persons), and scholars and other experts (8 persons), decides the routes that should be constructed in a certain period, and orders JHPC to start surveys and preliminary designs. Next, JHPC prepares an execution plan based on the surveys and preliminary designs, and presents it to the Ministry of Construction for approval. After getting approval, JHPC starts detailed designs, financial arrangements and right-of-way acquisition, and contracts actual construction works to private contractors. When completed, the expressway is operated as a toll road by JHPC, and the cost of construction and operation is repaid from the toll revenue.
2.2.3 Financial System for Expressway Projects
As is mentioned in the previous section, construction and operation of the expressway network is executed by the
Japan Highway Public Corporation (JHPC). JHPC is fully sponsored by the Japanese government, and its main scope of operation is construction and maintenance of the expressway network and other toll roads, tunnels, and bridges. Table 2-4 shows an outline of JHPC and its financial sources. Table 2-4 Outline of JHPC
Japan Highway Public Corporation (Nihon Doro Kodan) Equity capital: 766 billion Yen (6.1 billion dollars), (All capital from government.) Scope of business: Construction and operation of expressways and other toll roads (Figures are as of August 1991) Expressways in operation: 4,939.4 km under construction: 1,769.6 km Other toll roads in'operation: 660.2 km under construction: 154.4 km Budget for expressways in 1992: Y3,580 billion ($28.6 billion)
Revenue Expenditure
Revenue from operation Construction Y1,445 ($11.6) 40.4 % Y1,190 ($9.5) 33.2 %
Maintenance and Operation Subsidies from government Y82 ($0.7) 2.3 % Y428 ($3.4) 12.0 % Debt from government funds Interest expense and Y 1709 ($13.7) 47.7 % Debt repayment
Y 1,962 ($15.7) 54.8 % i Debt from private funds V344 ($2.8) 9.6% Note: Figures in billions
Source: Japan Highway Public Corporation, (1992), Annual Report. In principle, JHPC constructs expressways using loans
from the government, and bond issues called the Road Bond
which are guaranteed by the government. The majority of the
governmental loan comes from the public investment fund, which is collected through the postal saving system. The
Road Bond is the other financial resource, and is accepted by various financial institutions in Japan and in the Eurobond market.
JHPC collects tolls for 30 years after the opening of an
expressway, and repays the loan through the toll revenues.
The government provides subsidies so that the overall
interest payment will be 6.5% of the total debt JHPC has.
That is to say, when the total interest payment is 7% of the
total debt amount, the government will subsidize 0.5% of the interest payment.
2.3 Problems of Expressway Projects
2.3.1 Profitability of Expressway Network
During the 1970s, Japan experienced severe inflation due
to the oil crisis. Average construction costs more than
tripled within a decade. In addition, the traffic volume on the newly constructed expressways stagnated. Consequently, these expressways suffered severe losses.
At first, these losses were covered by the surplus from some profitable routes, but soon toll rates were increased to secure the overall profitability of the network. This cycle was repeated, and toll rates were increased several times. As a result, the level of toll rates becomes very high.
Figure 2-6 shows the trend of the toll rate increase. For a mid-size passenger car, it is 23.0 yen per kilometer
($0.3/mile), which is approximately ten times higher than
that in the United States (Table 2-5).
Despite the high toll rates, the profitability of the expressway network is still in danger. In 1987, the revenue
from thirteen routes out of twenty expressways in operation
did not cover the operation cost plus interest payment, not
to mention the amortization payment for the initial construction cost.1
Figure 2-6 Trend of Toll Rates for Expressway in Japan
Toll mte (yen/km) 2 5 - 220 21.7/m Y23.0/km 10I- _ 13/km Y16.6 /km 5 Y7.5/km Yea 65 70 75 80 85 89 65 70 75 80 85 89
Source: Express Highway Research Foundation of Japan, (1992), Statistics and Graphs for Expressways 1991. Note: Rates are for a mid-size passenger car.
1. Japan Highway Public Corporation, press conference material in 1987. Table 2-5 Toll Rates for Selected Toll Roads in USA
State Name Location Mile Toll Toll rate (dollar) (cent/mile)
Florida Everglades Parkway 1-75 78 1.50 1.92 Illinois East-West Tollway 1-88 97 3.00 3.09 North-West Tollway 1-90 76 2.00 263 Tri-State Tollway 1-94 83 2-10 2.89 Indiana Indiana Toll Road 1-80,90 157 4.65 296 Kansas Kansas Turnpike 1-35,75 233 7.00 3.00 Maine Maine Turnpike 1-95 100 3.20 3.20 Massachusetts Massachusetts Turnpike 1-90 134 5.60 4.18 New Hampshire F. E. Everett Turnpike 1-93 39 1.00 2.56 New Hampshire Turnpike 1-95 16 0.75 4.69 New Jersey New Jersey Turnpike 1-95 131 4.60 3.51 New York New York Thruway I-87,90 496 18. 10 3.65 Ohio James W. Shocknessy Turnpike 1-76,80,90 241 4.90 203 Oklahoma H. E. Bailey Turnpike 1-44 86 2.10 244 Muskogee Turnpike 1--14 53 1.30 2.45 Will Rogers Turnpike 1-44 89 200 2.25 Pennsylvania Pennsylvania Turnpike 1-76 358 14.70 4.11 Virginia Richmond-Petersburg Turnpike 1-95 35 1.50 4.29 West Virginia West Virginia Turnpike 1-64,77 88 3.75 4.26
Average 136 4.42 3.16 Source: Rand McNally, Road Atlas 1992. Note: Rates are for a passenger car.
2.3.2 Management Responsibility of JHPC The management responsibility of JHPC is very limited and unclear. Obviously, the most important management decision-making task is that of investment. That is to say, which routes should be constructed? What length should be completed within a specific period? When will be the best time to construct a particular section? All these decisions are crucial to the profitability of JHPC.
However, the National Expressway Committee, the majority of whose members are politicians, is responsible for investment decisions. Although managers of JHPC propose an investment plan, it is decided in terms of political matters, not in terms of management issues. Thus, the managers of JHPC have no choice but to accept the plan decided upon by the committee. Therefore, even if profitability is adversely affected, the responsibility for such decision-making remains unclear.
2.3.3 Additional Financial Sources Construction of an additional 6,500 km of expressways will require a substantial amount of financial resources. Until now, as a public corporation, JHPC's financial plan has been under strong governmental control. Currently, more than 85 percent of funds for expressway construction come from governmental loans. Because more than twenty percent of the total government expenditure has been used for debt repayment for about a decade, a strict borrowing limit in the national budget has been set to reduce the debt reliance of the public sector. In addition, the Japanese government promised to the United States government through the Structural Impediment Initiative Talk in 1990 that Japan will invest Y430 trillion (approximately $3.4 trillion) in public infrastructure works within the next ten years. As the expenditure for public infrastructure works for the last ten years is estimated to be Y263 trillion (approximately $2.1 trillion), the promised amount is 1.6 times larger than that spent in the last ten years.1 Furthermore, the Japanese economy is suffering the largest depression since World War II. Tax revenue is sluggish and public financial resources are becoming very limited. Therefore, other financial sources for expressway projects are necessary to complete the 11,520 km of expressway network.
2.4 Privatization of Expressway Projects Taking these various problems into account, the restructuring of procedures for expressway projects has recently been discussed. Several reforms have been proposed to solve the problem. For instance, the National Expressway Committee proposed that the pay-back period for expressway projects should be prolonged to 35 years, and governmental subsidy for interest payments should be increased. 2 Along with these measures, the possibility of private sector involvement in expressway projects has been proposed, and the private Trans-Tokyo Bay Highway Company has been set up to construct and operate the Trans-Tokyo Bay highway, the first privatized toll highway project in Japan.
1. Yamada, Akira, (1991), "Y430 trillion public investment and financial issues for local governments" in Revision of Administrative Organization and the Third Sector. Figures are nominal values. 2. Ministry of Construction, (1992), Road Construction for the Wealthy Society. Chapter III Privatization
3.1 Introduction Privatization is currently a worldwide trend. There are many countries which have implemented privatization programs as a part of their domestic policy. This chapter reviews general topics on the subject of privatization. First, the recent world movement towards privatization is discussed, and the objectives of privatization are examined using some examples from the United Kingdom, the United States, and Japan. Then, the common structures, methods, and possible problems of privatization schemes are analyzed.
3.2 Privatization Trend 3.2.1 Western European Countries Perhaps one of the most well-known cases is that of Great Britain, where privatization usually means the sale of state-owned enterprises to private ownership. With the advent of the Thatcher government in 1979, the British government began to sell its state-owned enterprises, such as British Telecom, British Airways, British Gas, British Steel and many others, to the private sector.1 In addition to the sale of the state owned enterprises,
1. Vickers, John and George Yarrow, (1989), "Privatization in Britain", in Privatization and State Owned Enterprises. the British government, in cooperation with the French government, granted the concession to construct and operate the Channel Tunnel connecting Britain and France to the private sector. This Channel Tunnel project is the most remarkable example of participation by a private company in the provision of infrastructure, which was traditionally performed by the public sector.1 France provides another example. Private companies there have been participating in motorway operation since the 1960s. 2 Furthermore, nine industrial companies, thirteen insurance companies, thirty eight banks, four finance companies, and one communication agency were selected as candidates for privatization in 1986. 3
3.2.2 The United States In the United States, privatization usually refers to involvement of the private sector in projects that were traditionally performed by the public sector,4 and cases of the privatization of state-owned enterprises are very limited and rare, although the sales of Conrail in 1987 does provide
1. Economist, (1987), "The Channel Tunnel", October 10, 1987. 2. OECD Scientific Expert Group, (1987), Toll Financing and Private Sector Involvement in Road Infrastructure Development. 3. Fraser, Robert, and Michael Wilson, (1988), Privatization: The UK Experience and International Trends. 4. Bozdogan, Kirkor, (1991), Privatization of Transportation Infrastructure. one such example. 1 At the beginning, contracting out publicly operated services to the private sector became a popular practice in the early 1970s and has been widely used since then. The range of services which have been contracted out includes transportation services, public works, jail operation, parks, and so on. 2 Recent practices go beyond merely contracting out, to the point where the private sector participates in infrastructure projects as planner, owner, operator, or some combination of these. Toll bridges and highways, urban mass transit, high-speed rail and airport development are the most common projects for private participation. California is one of the most advanced states in terms of private participation in infrastructure development. The AB 680 Projects provide striking examples of highway privatization. 3
3.2.3 Japan In Japan, privatization has been one of the major policy issues for several years. In the context of the
1. Murphy, Kevin J., (1989), "The Performance and Management of United States Federal Government Corporations", in Privatization and State Owned Enterprises. 2. Clarkson, Kenneth W., (1989), "Privatization at the State and Local Level", in Privatization and State Owned Enterprises. 3. Bozdogan, Kirkor, (1991), Privatization of Transportation Infrastructure. privatization of state-owned enterprise, the Nippon Telephone
and Telegraph (NTT), which is the largest company in Japan in terms of the number of employees, was privatized in 1985, and
this was followed by the Japan National Railway (JNR) in 1987.
The privatization of JNR is thought to be an especially successful case because service quality has been increased rapidly and the annual fare increases that had continued for
a decade have stopped.1 The success of the JNR case, together with financial and administrative reform in the government, have engendered a favorable opinion towards privatization. Thus, the possibility of privatizing other public organizations has been widely discussed.
At the same time, private sector involvement in the provision of new infrastructure facilities has also been widely advocated and executed under the slogan of "Minkatsu"
(introduction of vitality of private sector). The new Kansai
Airport and the Trans-Tokyo Bay Highway are the two outstanding examples of "Minkatsu" projects.2
3.3 Objectives of Privatization 3.3.1 Improvement of Economic Efficiency
Probably the primary objective of privatization is
1. East Japan Railway Company, (1991), Restructuring the JNR and the Present Situation of JR East.
2. Minkatsu Project Study Group, (1987), Minkan Katsuryoku no Dounyu (Introduction of Private Sector Vitality). efficiency gains. The underlying notion is that "the private sector is inherently more efficient than the public sector, and, therefore, can build and operate facilities at less cost
than the public sector."l Generally speaking, the notion that the private sector is more efficient than the public sector is supported by numerous empirical studies although there are some studies that are against the proposition. For example, Pryke executed a comparative study between public and private performance in four industries in 1982. These industries were airlines, ferry services, and gas and electrical utilities. His conclusion was that "public enterprise has performed relatively poorly, has used labor and capital inefficiently and has been less profitable" and that "what public ownership does is to eliminate the threat of take-over and ultimately of bankruptcy."2 Another example is from privatized companies in Britain. Suzuki conducted a comparative study of privatized companies in Britain, which analyzed their performance before and after privatization, in 1990. 3 Table 3-1 shows profit before income tax before and after privatization. This represents the
1. Gomez-Ibanez, Jose A. et al, (1991), "The Prospects for Privatising Infrastructure", Journal of Transportation Economics and Policy , September, 1991, pp.257. 2. Pryke, R. (1982), "Comparative Performance of Public and Private Enterprises", Fiscal Studies, July 1982. 3. Suzuki, Hiroaki, (1990), Reculation in the U.K. Privatization Program. Table 3-1 Profit Before Income Tax Before and After Privatization
Year 1979 1988 Increase (Em) (Em) (%) Privatized company Amersham 11 27 145.45 Assoc. Brit. Ports 50 38 -24.00 BAA 20 127 535.00 BA 206 241 16.99 British Gas 823 1021 24.06 British Telecom 624 2531 305.61 Britoil 206 149 -27.67 Cable and Wireless 97 345 255.67 National Freight 19 63 231.58 Rolls-Royce -87 141 Source: Suzuki, (1990), Regulation in the UK Privatization Program. Note: Figures are adjusted to 1987 prices.
Table 3-2 Return on Capital Employed Before and .Mý After Privatization
Year 1979 1987 Increase (%) (%) (%) Privatized company Amersham n/a 23.7 Assoc. Brit. Ports 16.1 14.9 -7.45 BAA 2.1 8.6 309.52 BA 13.7 15.2 10.95 British Gas 20.3 16.4 -19.21 British Telecom 4.8 22.1 360.42 Britoil n/a 8.7 Cable and Wireless 24.1 28.1 16.60 National Freight 11 22.5 104.55 Rolls-Royce n/a 18.6 Source: Suzuki, (1990), Regulation in the UK Privatization Program.
40 profitability of the company. Table 3-2 shows return on
capital employed before and after privatization. This is the
efficiency criterion with respect to capital investment. Both the profitability and efficiency of most companies were
improved significantly after privatization. Privatization of the Japan National Railway (JNR) provides another striking example. JNR had been the only nationwide rail operator in Japan for about one hundred years. Since the mid-1960s, JNR's profitability had crumbled due to the rapid growth of road and air transportation. The management of JNR had failed to cope with the situation and had accumulated a debt of Y37.1 trillion (approximately $300 billion) by April 1, 1987, when JNR was broken into six private regional passenger railway companies, one nationwide freight railway company, and other five related business companies.'
Because six new passenger companies compete with each other in service quality and management efficiency, the performance of the former JNR has been greatly improved since privatization, and the annual fare increase has been stopped.
Figure 3-1 illustrates the changes in sales per employee, showing that the figures more than tripled after privatization. 2
1. Sakita, Masami, (1989), "Restructuring of the Japanese National Railways: Review and Analysis", Journal of Transportation Economics and Policy, January, 1989.
2. East Japan Railway Company, (1991), Restructuring the JNR and the Present Situation of JR East. Figure 3-1 Changes in Sales per Employee in JNR Privatization Case
(in millions of dollars)
80 81 82 83 84 85 86 87 88 89 90 Fiscal year
Source: East Japan Railway Company, (1991), Restructuring the JNR and the Present Situation of JR East. Note: JR East is one of six privatized passenger company. However, when there is no competition within the industry, the opposite result has been reported. Ross claimed, in reviewing literature on comparative cost studies in the electric power industry, that " public electric firms are apparently more efficient distributors of electricity than private firms (most of which are regulated by government commissions)." The reasons he cited are that
"profit maximization under rate-of-return regulation may require excessive capital; and private firms are more concerned about demand creation and maintenance than public firms, and thus incur greater sales and advertising expense."l In summary, as Donahue pointed out, "public versus private matters, but competitive versus non-competitive usually matters more." 2 My impression of the critical condition for efficient operation is not the problem of ownership but the degree of competition in the industry and the regulatory framework.
In most cases of public sector operation, there is no competition due to artificial barriers to entry, and also no risk of bankruptcy due to governmental subsidies. The player is a single organization. However, when privatization takes place and artificial barriers to entry are abandoned, more than one player may be involved in the game. Although the
1. Ross, Randy L., (1988), Government and the Private Sector: Who should do what?.
2. Donahue, J. (1989), The Privatization Decision: Public Ends, Private Means. actual operation is performed by only one private company, the threat of takeover by potential entrants might lead to more efficient operation. Even in a monopolistic franchise agreement, this franchise agreement can be negotiated by many qualified operators, or it can be decided through a competitive bidding process. Therefore, I think, if privatization increases the competitive environment of an industry, privatization would achieve efficiency gains compared to monopolistic public operation.
3.3.2 Reduction of Public Funds Requirement The governments of most industrialized countries have faced very tight budgets due to the increasing size of the public sector. Tax-increase proposals have been very unpopular. Even in the case of debt financing, there is some borrowing limit in most countries. Therefore, privatization could be another financial source and could reduce the requirement for public funds. In Japan, for example, because approximately twenty percent of the total government expenditure has been used for debt repayment for about a decade, a strict borrowing limit has been set up to reduce public sector debt reliance.
3.3.3 Reduction of Intervention from Politics Public corporations are mostly under the strong supervision of a governmental ministry or department, and the
44 government will often intervene in the decision-making of
-public corporations.
In particular, in the case of transportation
infrastructure developments such as airports, railroads, and highways, .the investment decision-making is often distorted by intervention from politicians because these facilities are expected to bring considerable benefits to their own constituency.
In the Japan National Railway case, the routes of the national railways were decided by politicians as a political matter, not as an economic matter. Many routes -have suffered losses as a result, including some of the Shinkansen (Bullet
Train) routes. 1
When a company is privatized, and even if the government or politicians want the private company to invest in some unprofitable facilities, the owners of the company usually have the power to refuse such pressure. They will not invest in unprofitable projects unless sufficient financial assistance is provided.
3.3.4 Capturing Development Gain
For transportation development projects such as highways and railways, the development gain is often very substantial, and to capture such a development gain is sometimes very
1. Sakita, Masami, (1989), "Restructuring of the Japanese National Railways: Review and Analysis", Journal of Transportation Economics and Policy , January, 1989. important to ensure the profitability of these projects.
However, public corporations often fail to capture the development gain. On the other hand, private companies often succeed in capturing some of the development gain through business operations which are closely related to the project.
The railway industry in Japan provides a good illustration of this matter. Private rail operators engage in various types of business activities which are related to the operation of the railway. Typical related business activities are summarized as follows: 1
(1) restaurant, bar and department store operation at stations;
(2) housing and community development along railway lines;
(3) construction of amusement parks and
professional baseball franchises along railway lines;
(4) advertisement activities at stations or in trains; (5) travel agencies, etc.
On the other hand, the Japan National Railway (JNR) was not eager to capture these business activities before
1. Sakita, Masami, (1989), "Restructuring of the Japanese National Railways: Review and Analysis", Journal of Transportation Economics and Policy , January, 1989. privatization. Table 3-3 shows the revenue sources of the
major private railway companies and JNR. The portion of
revenue from activities other than railway operation was
about 50 % of total revenue in private railway companies, while it was only 10 % in JNR before privatization.
Table 3-3 Revenue Sources of the Major Private Railway Companies and JNR in 1987
Railway Other Total Percentage of Company Revenue Revenue Revenue Other Revenue
Tokvu 66 155 221 70.14 Seibu 58 73 131 55.73 Tobu 88 82 170 48.24 Odakvu 62 44 106 41.51 Meitetsu 68 51 119 42.86 Kintetsu 136 43 179 24.02 Nankai 50 41 91 45.05 Hankyu 77 47 124 37.90 Nishitetsu 22 100 122 81.97 Private company Total 627 636 1263 50.36
JNR 1415 178 1593 11.17 Sources: 1.Sakita, Masami, (1989), "Restructuring of the Japanese National Railways: Review and Analysis", Journal of Transportation Economics and Policy, January, 1989. 2.East Japan Railway Company, (1991), Restructuring the JNR and the Present Situation of JR East. Note: Figures are in billions of yen.
However, after privatization, the Japan Railway Groups (the former JNR) began to seek business activities which are provision. The total extension as of April 1990 was about 129,000 km.1
(4) Municipal Road Municipal roads are the fundamental infrastructure for daily life. Municipal governments (city, town, or village) are in charge of its provision. The total extension as of April 1990 was about 934,000 km.2
(5) Urban Expressway Urban expressways are inner-city motorways, and are located in four major metropolitan areas in Japan. They are constructed as a part of city planning to maintain and improve city function by providing fast and reliable traffic routes in metropolitan areas. They are fully access- controlled motorways with a somewhat lower design standard than the national expressways. All urban expressways are toll roads which are constructed and operated by public highway corporations funded by both national and local governments. As of April 1, 1992, such organizations exist in the Tokyo metropolitan, Osaka-Kobe, Nagoya, and Fukuoka-Kitakyushu area, and operate a total of 470 km of urban expressways.3
i, 2. Ministry of Construction, (1991), Roads in Japan. 3. Ministry of Construction, (1992), Road Pocketbook. related to the railway operation. Consequently, revenue from the rail-related businesses has increased rapidly (Figure
4-2), and has contributed to the overall profitability.
Figure 4-2 Changes in Revenue from Related Business in JNR Privatization Case
(millions of dollars) (number of stores) nr~h / UVU -'--"""-"------
JNR I JR East 800
------
700 ------600
600 500
I ------500 400
400 300
300 related businessores 200 ------.-..... _ ...... - ...... 200 100
nL, I I L-' I I I I L t I 80 81 82 83 84 85 86 87 88 89 90 Fiscal year
Source: East Japan Railway Company, (1991), Restructuring the JNR and the Present Situation of JR East. Note: JR East is one of six privatized passenger company. 3.4 Types of Privatization There are many types and means of privatization. For example, privatization normally means sale and transfer of a state-owned enterprise to private ownership in Britain and France. On the other hand, in the United States, privatization refers to private sector involvement with the production and operation of goods and services which are traditionally provided by the public sector. Therefore, the meaning of the term "privatization" has to be defined clearly.
3.4.1 Divestiture Divestiture is the most strict meaning of privatization, and is commonly referred as privatization of public enterprise. It involves sale and transfer of the ownership of an existing public organization to private ownership. In the British case, public stock offering has been the most common method of privatization. The British government sold shares of 37 public corporations and companies from 1979 to 1988.1 British Telecom, British Gas, and British Airways are examples of public corporations that were sold through public stock offerings. The other method is the direct sale of public corporations to private companies. Sealink (ferry operation)
1. Suzuki, Hiroaki, (1990), Regulation in the U.K. Privatization Program. and British Transport Hotels (a subsidiary of British .Railways) are examples of public corporations that were sold directly to the private sector.1 Sometimes, public companies are sold to their own managers or employees (management and/or employee buy-out). The National Bus Company and National Freight Corporation are examples of management and/or employee buy-outs. 2
3.4.2 Contracting Out Contracting out is the most commonly used technique for the privatization of an operational function in the public sector. It is the transfer of a service or operational function from an existing public organization to the private sector without a change of ownership. In the United States, quite a wide variety of public services and operations have been contracted out to private companies, such as transportation service, public works, jail operation, parks, etc. 3 However, because all of the expressway construction process and most of the toll collection and maintenance operations have been already contracted out in Japan, merely contracting out is not the main concern in this thesis.
1,2. Vickers, John and George Yarrow, (1989), "Privatization in Britain", in Privatization and State Owned Enterprises.
3. Clarkson, Kenneth W., (1989), "Privatization at the State and Local Level", in Privatization and State Owned Enterprises. 3.4.3 Franchise Arrangement A franchise arrangement refers to the monopoly privileges awarded to private firms in a specific area. Utility firms and toll highway concessions are examples of franchise arrangements. Because a franchisee company gains monopolistic power, the government usually regulates the price of the service, the profit level of the company, and the quality of the service. A franchise arrangement can be awarded both for the construction of a new facility and for the operation of an existing facility. In the case of new development of an infrastructure project, two types of arrangement are often used. One is the build-operate-transfer (BOT) arrangement, and the other is the build-transfer-operation (BTO) arrangement. The BOT arrangement is one type of franchise agreement where the government gives a franchise concession to a private developer, and the private developer builds a facility and operates it for a fixed period. After the arrangement expires, ownership of the facility is transferred to the public sector. The Channel Tunnel Project is an example of the BOT arrangement. The BTO arrangement is another type of franchise agreement. At first, the government gives a franchise concession to a private developer, and the private developer builds a facility. Upon completion of the facility, the ownership of the facility is transferred to the public sector, but the private sector operates it for a fixed period under the BTO agreement. Private toll road projects in
California are striking examples of the BTO arrangement.
3.4.4 Lease Arrangement
In a lease arrangement, the public sector leases existing facilities such as an airport and air rights of a highway to the private sector. The private sector develops the facility and operate it. Perhaps one of the most striking examples is that of the development of Copley Place in Boston, Massachusetts.
The Massachusetts Turnpike Authority concluded a 99-year air right lease contract with a private developer over an interchange in downtown Boston. Offices, hotels, parking spaces and residences for the local government have been developed. The Massachusetts Turnpike Authority receives 1.2 million dollars per year as a lease payment, and the city of
Boston had received 550 million dollars in property taxes in the first ten years. 1
3.5 Potential Problems of Privatization 3.5.1 Service Quality
When a private company tries to maximize its profitability, it often tries to cut costs. When a private company pursues cost over-reduction, levels of service
1. Weiss, Barbara, ed. (1986), Public/Private Partnership: Financing a Common Wealth. quality and safety standards may be reduced. In highway projects, for example, the maintenance level of pavement, frequency of cleaning and mowing, and safety facilities such as road lighting may be reduced. Therefore, the level of maintenance and service quality should be monitored by a public authority.
3.5.2 Control When the government turns over the ownership of a public corporation or an asset to a private firm, there is no guarantee of how the private company will continue to operate it. The private company may change the scope of operation, and may abandon some unprofitable operations. It may be possible for the private company to go bankrupt, or to sell the company to somebody else. In the case of an infrastructure project, where substantial externalities are involved, and abandonment of the service may reduce social welfare significantly, the government should have some control over the firm's assets to secure the service which is deemed indispensable to society.
3.5.3 Rate of Return Regulation In the cases of privatization of natural monopoly industries and franchise agreements, rate of return is often regulated by public authority. However, there are some problems concerning the regulation of rate of return. The first one is the obvious one. What percentage is considered to be fair, and against what capital or investment should the rate of return be calculated? It is very difficult to decide a rate of return which is fair for a project.
Although a fair rate of return can be identified, how to monitor it is another problem. In British privatization cases, for example, the "PRI minus X" formula is used to achieve a fare rate of return, where annual price increase must be X percent less than the rate of price inflation.
However, the profit level of some privatized corporations, such as British Gas, has reportedly increased by 30 percent compared with that before privatization. This raised public concern about monitoring privatized companies. 1
The third problem is that rate of return regulation tends to distort the firm's resource allocation. According to Averch and Johnson, a firm operating under rate of return regulation has the incentive to overcapitalize its investment in order to receive the maximum absolute profit.2
1. Vickers, John and George Yarrow, (1989), "Privatization in Britain", in Privatization and State Owned Enterprises.
2. Averch, H., and L. Johnson, (1962), "Behavior of the Firm Under Regulatory Constraint", American Economic Review, vol. 52, No.5. Chapter IV Privatization, Competition and Regulation
4.1 Introduction As discussed in the previous chapter, not all privatization schemes are effective. This is especially true when the competitive environment of the industry is limited, such as in natural monopoly industries, where it seems that the success of privatization depends greatly on its structure or regulatory framework. Therefore, when a privatization scheme is put into practice, the structure of the industry should be reorganized so as to increase the competitive environment. In this chapter, I examine the competitive forces which may make a private company operate more efficiently than a public organization. Then, I review some privatization and deregulation cases, and techniques which have introduced competitive forces into natural monopoly industries. Finally, I consider the regulatory framework for a natural monopoly industry. The merits and problems of several regulatory methods that are used for the regulation of natural monopolies are discussed.
4.2 Real Merit of Privatization Why do we expect that privatization leads to better performance? Are managers in private companies more talented than their counterparts in public corporations? When the Japan National Railway was privatized and broken into twelve
companies, most of the managers came from the public sector.
However, within a few years, the performance of the former
JNR companies had been improved significantly. Obviously,
the essence lies not in the ability of the managers but in
the constraints and opportunities which these managers face. 1
In the previous chapter, I raised several possible
merits of privatization that are widely claimed in many
privatization practices. I reexamine the real merits of privatization in this section.
(1) Privatization and Political Interference
It is often said that privatization reduces the
interference from politicians. Is it true that privatization
in itself reduces interference from politicians? The answer
is no. The change of decision-making procedures associated with privatization may reduce the 'political interference.
For example, in Japan, the investment plan of the Japan
Highway Public Corporation must be approved by the government. On the other hand, in the case of the privatized
Trans-Tokyo Bay Highway Corporation, the investment plan must be presented to the government, but it is not necessary to be approved by the government. Therefore, we have good reason to believe that interference from politicians should
1. Kay, J. A., and D. J. Thompson, (1986), "Privatization: A Policy in Search of a Rationale", The Economic Journal, March 1986. decrease. The important thing is the change of procedures associated with privatization, but not the act of privatization itself. If the private Trans-Tokyo Bay Highway
Corporation were required to follow the same procedures as
JHPC, there would be no change. In the same way, if JHPC's investment decision requirement were changed from approval by the government to notification of the government, the same effect could be expected.
(2) Privatization as Additional Source of Funds
Similarly, it is often claimed that privatization increases the sources of funding. However, "privatization alone will not increase the pool of available capital."' In cases where the public sector borrowing limit is constrained by statutory regulation, privatization may bring in additional capital. But this is merely the transfer of borrowing power and there is no economic gain involved.
Simply dropping the rule may bring in additional capital to the industry without adopting any privatization procedures because, if we assume that the expected performance of the public sector is the same as that of the private sector, the public sector can borrow money in the capital market with the same conditions as the private sector.
However, if investors think that, for some reasons,
1. Jose A. Gomez Ibanez, et al. "The prospect for Privatising Infrastructure", Journal of Transport Economics and Policy, September, 1991. the public sector is a less efficient operator than the private sector, privatization may indeed introduce some more capital into the industry. Therefore, only when an efficiency gain is expected to be possible, can the merit of additional capital be achieved.
(3) Privatization and Efficiency In the above two cases, it is obvious that the merits of privatization come from deregulation or liberalization.
Although it is not as simple as these two cases, I believe the efficiency gain of privatization also comes from liberalization, deregulation, and enhanced competition.
If all the other conditions are same, it is quite natural to believe that public ownership and private ownership do not matter at all in themselves in determining the performance of corporations. However, privatization often changes the rules of the market or the corporation itself. The changes associated with privatization may increase the performance of the company. Therefore, I examine the factors which are expected to increase the performance of privatized companies.
4.2.1 Competition in the Production Market
In the production market, if the market is in a competitive situation, consumers can choose goods and services from various companies. Unless these companies meet the needs of consumers, they cannot survive in the market. Thus, competition in the production market makes companies
become more sensitive to the preferences of consumers.
Normally, a public corporation is operated in a
monopolistic environment due to some statutory powers. If
the industry is a monopoly because of artificial barriers to
entry, simply dropping the barriers to entry will enhance competition. This type of privatization will probably improve efficiency. 1
Sometimes, barriers to entry may arise not only for
artificial regulatory reasons, but also for technological
reasons. Natural monopoly industries provide one such
example. Even if the government abandons all artificial
barriers to entry, technological barriers may prohibit a new
firm from entering the industry. However, in some cases,
even if the actual entry does not occur, the contestability
of the market may be increased.2 If the monopolist does not produce efficiently, there is at least the possibility that a new firm could enter the market and take over the incumbent
firm. Therefore, increased contestability introduces some kinds of competitive force in the market.
1. Vickers, John and George Yarrow, (1991), "Economic Perspectives on Privatization", Journal of Economic Perspectives, vol. 5, No. 2.
2. Kay, J. A., and D. J. Thompson, (1986), "Privatization: A Policy in Search of a Rationale", The Economic Journal, March 1986.
59 4.2.2 Competition in the Capital Market
For a private company to invest in a project, it has to raise funds. Sometimes, these funds may come directly from retained earnings of the company. However, in most cases, especially when the amount of the investment is large, these funds come from the capital market.
Investors in the capital market, whether institutional investors or individual investors, try to maximize their returns on an investment with due consideration of the risk associated with that investment. Therefore, if the company is expected to be an efficient operator of a project, it can get financial resources with lower interest costs. On the other hand, if the performance of the company is expected to be low, the company will have to pay more to get funding.
Because of this difference in capital cost, the company with high performance can further expand its business more easily than the company with low performance. If this situation continues, the high-performance company may eventually take over the low-performance company. Through this mechanism, the capital market helps to allocate financial resources to the most efficient operators.'
However, the financial mechanism of the public sector is different from that of the private.sector, and some public corporations do not use the capital market for fundraising.
1. Suzuki, Hiroaki, (1990), Regulation in the U.K. Privatization Program. For example, tax is one important way to raise money in the public sector. In many countries, the public sector has its own investment funds, to which the private sector has no access. Even when public corporations have to raise money in the capital market, most public corporations raise funds in a non-competitive manner, with various forms of special advantages over the private sector. This absence of competition reduces the forces to manage the corporation efficiently. In the United States, the public sector can issue tax-exempt bonds such as the general obligation bond. In this case, the resource allocation mechanism in the capital market does not work because investors may be attracted not by the performance of the public corporation, but by the tax-exempt status of the bond. Similarly, in toll highway projects in Japan, the Japanese government guarantees the repayment of the Road Bond, which raises the initial construction cost of the project, even if the project goes badly. Investors are indifferent to the management ability of the public toll highway corporation that operates the toll highway. Therefore, the competitive forces of the capital market do not work to influence public corporations.
4.2.3 Threat of Takeover and Bankruptcy
A private company faces the risk of bankruptcy even if the company operates in a monopolistic situation. When it .cannot earn enough money to continue operation, it has to go
bankrupt. This will lead to the incentive to manage the -company efficiently. 1
In contrast, the risk of bankruptcy for a public
corporation may be low. When it accumulates losses, the
government tends to provide subsidies to continue its
operation. If this situation continues, the incentive to manage the corporation efficiently is reduced. When a public corporation is privatized, and if the newly privatized company faces the risk of the bankruptcy, it will probably have more incentive to operate efficiently than before privatization.
On the other hand, if the privatization is structured such that the newly privatized company faces no fear of bankruptcy, or if the government provides whatever subsidies the newly privatized company may want, privatization may not change the performance of the company.
4.2.4 Profit-Seeking Aspect
A private company is a profit-seeking organization. If its operation is not distorted by inept regulations, it has the incentive to maximize profit, and, therefore, to try to increase production efficiency.
I. Vickers, John and George Yarrow, (1991), "Economic Perspectives on Privatization", Journal of Economic Perspectives, vol. 5, No. 2. On the other hand, a public corporation is usually not a profit seeking organization. When a manager in the public sector achieves production efficiency and makes a profit, the profit does not normally accrue to the corporation, and rather it should be returned to society. Normally, a surplus should be returned by reducing unit price or increasing service quality. However hard a manager may try to achieve efficiency, the merit does not accrue to him.
4.2.3 Transferability of Ownership Public ownership is diffuse. Ultimately, all taxpayers are the owner of the public sector. Public ownership is non- transferable. Even if the performance of the public corporation is increased, no one can sell its ownership on the market, and it is impossible to get capital gain. The diffuseness and non-transferability of public ownership reduce the owner's incentive to monitor the performance of public corporations. Thus, managers of a public corporation have less incentive to take care of owner's expectation. On the other hand, private ownership is transferable. When the performance of a private corporation deteriorates, stock holders can sell their shares through the stock market, and accordingly, the price of the stock will be lowered. Therefore, the stock price indicates the performance of the private company. This monitoring system through the stock market gives the managers of the private company the incentive to operate efficiently. If they do not manage well, their position will soon be in danger. In addition to the monitoring merit, a person who can manage the company more efficiently can buy the ownership because his or her valuation of the firm is higher than the market value of the firm. Thus, private property can be allocated in an efficient manner. 1
4.3 Privatization of Natural Monopolies and Promotion of Competition In the previous section, I mentioned several reasons why private corporations are expected to perform better than public corporations. Among these, I believe the most important thing is to increase the competition and contestability of the industry. Liberalization and deregulation will enhance the competition, or at least the contestability, of the industry. Accordingly, an efficiency gain is to be expected. In that sense, privatization should be considered within the framework of deregulation, liberalization, and enhanced competition. When a privatization scheme is put into practice, it should be structured so as to increase the competitive environment of the industry or project.
1. Crain, W. Mark, and Asghar Zardkoohi, (1978), " A Test of the Property-Rights Theory of the Firm: Water Utilities in the United States", Journal of Law and Economics, October, 1978. However, there are several obstacles to promoting .competition in nationalized industries. In most cases, nationalized industries have some element of market failure, externality, natural monopoly, or unprofitable nature. Above all, the natural monopoly position seems to be the largest obstacle to competition. If two firms compete against each other in provision of goods and services in a natural monopoly industry, the economic efficiency may be lower than in the case of one monopolistic provider.1 Is it possible to introduce competition in natural monopoly industries? The answer is yes. Some privatization cases illustrate this possibility. Therefore, in this section, I examine several cases and methods which deal with the promotion of competition and contestability in natural monopoly industries.
4.3.1 Transition from Natural Monopoly to Competitive Market (1) Telecommunications Industry2 The privatization and deregulation of the telecommunications industry gives us a successful example.
1. Kay, J. A., and D. J. Thompson, (1986), "Privatization: A Policy in Search of a Rationale", The Economic Journal, March 1986.
2. The general description of this section is based on Tsujiyama, Kiyoyuki, (1987), A Comparative Analysis of NTT, AT&T and Bellsouth Privatization and Divestiture. In most countries, telecommunication services had been a nationalized monopoly or regulated monopoly. The main reasons for this situation are summarized as follows:
(1) Telecommunication services are deemed to be basic infrastructure, and these services should be
accessible throughout the nation.
(2) Telecommunication services exhibit economies of scale. Therefore, one network firm can provide more
efficient operation than two or more networks.
(3) Telecommunication services are strategically
important for national defense and security, so that government intervention is justifiable.
However, the development of microwave, optical fiber, and satellite communications dissolved the economies of scale problem in long-distance telecommunication services. In addition, if access to the telecommunication network is permitted on an equal basis, any firms can provide telecommunication services without having their own facilities. Under these circumstances, many countries have tried to privatize and deregulate the industry. 1
In Japan, the telephone service had been a public monopoly since it began in 1890. After World War II, the publicly owned Nippon Telegraph and Telephone Public
1. Suzuki, Hiroaki, (1990), Regulation in the U.K. Privatization Program. Corporation (NTT) was established, and operated as a monopoly on domestic telecommunication services. However, the
Japanese government privatized NTT on April 1, 1985. Along with the privatization of NTT, deregulation of the industry introduced competition into the market.
In outline, NTT holds all the local telecommunication networks throughout Japan. Because economies of scale exist,
NTT is the only company which has extensive local telecommunication networks. However, NTT has to provide its networks to other companies on an equal basis.
For long-distance services, NTT and several newly- entered firms have their own networks. Newly-entered firms use NTT's local networks, and connect NTT's local networks to their long-distance facilities. Within this framework, competition has been introduced, and eight new companies have been permitted to compete with NTT. These firms are called
"type I" firms under the current law.
There is also another type of firm which does not have any networks at all and is called "type II" firm. These firms mostly provide such services as value added network
(VAN) business, personal computer communication and voice mail, using networks leased from type I firms. More than 250 companies had entered the market as type II firms within the first two years after 1985, and the number of new entrants is still increasing. A summary of telecommunications carrier classification is shown in Figure 4-1. Figure 4-1 Classification of Japanese Telecommunications Carriers
Type II Carriers
Regulation Type I Carriers Special Type II General Type II
Provision of telecommunication services Provision of through network leased from Type I carriers Business telecomunication Activities services through own Large scale network and facilities nationwide or Other services international services
Start-up of Permission Registration Notification Services from MPT at MPT to MPT
Rates and Authorization Notification Charges from MPT to MPT
Source: Tsujiyama, A Comparative Analysis of NTT, AT&T and Bellsouth Privatization and Divestiture, Note: MPT: Ministry of Post and Telecommunications
In the United States, AT&T had long monopolized
telephone services, operating as a monopoly under regulation.
But with the entry of MCI into long-distance telephone
service in 1969, the wave of deregulation and liberalization began, and long-distance telephone services were fully liberalized in 1980.
Furthermore, on January 1, 1984, the twenty two Bell Operating Companies, which have local telecommunication networks were divested from AT&T and reorganized into seven regional holding companies, (Figure 4-2) which completed the restructuring of the US telecommunications industry. The twenty two Bell Operating Companies operate as monopolies in a local area, but they are required to provide access to all long-distance carriers under the same conditions. As a result, AT&T, MCI, US Sprint and about 500 smaller carriers compete against each other. This competition among firms had reduced long-distance rates by approximately 30 percent from January 1984 to January 1987. Figure 4-2 Bell Operating Companies
and Tele.ione Telepnone Nevada Bell boutnern Bell Pacific Te:eohone South Central Ohio Bell Bell A:lantic Bell Indiana Bell Michigan Beil New Jersey sell Illinois Bell Sell o: Pennsylvania Southwestern Bell Wisconsin TeleDhone Oamond State Teleanone Chesaceake & Potomac Teeonrone Companies (4)
Source: Richard Vietor and David Dyer, ed., (1986), Telecommunication in Transition. (2) Rail industry
Similar to the telecommunications industry, the railroad industry contains possibilities for enhancing competition by separating the ownership of the physical assets of a railway from train operation. It is believed that railway operation exhibits economies of scale and economies of scope. Here, economies of scope means that one company can produce numerous services at less cost than those services could be produced by separate firms. 1
Therefore, if one company, possibly belonging to the public sector, owns the physical infrastructure of the railway and leases the operation rights to many firms, it will introduce competition in railroad operation.2 This has been introduced in some countries. In particular, Australia provides a striking example.
In Australia, railroads have remained state-owned monopolies. However, during the 1950s due to strong competition with road freight transportation, the share of rail freight transportation began decreasing. At that time, state-owned railways withdrew from the marketing function of inter-state freight traffic services into purely line-haul activities. The marketing function was taken over by groups
1. Baumol, J. William, and Robert D, Willig, (1986), "Contestability: Development Since the Book", Oxford Economic Papers, vol. 38 (supplement).
2. Keeler, Theodore E., (1983), Railroads, Freight, and Public Policy, Washington. of freight forwarders competing against each other.' These
freight forwarders buy rail transportation capacity from railway companies, arrange the schedule of trains, collect
the freight, hire trains, and carry the freight. Through this system, Australia has developed a highly efficient
railway freight transportation system even though the railway itself is the state-owned monopolies. 2
4.3.2 Breaking up a Monopoly
In the previous two cases, liberalized access to a
public network, such as telecommunications and railroads, has
introduced competition in industries which were previously regarded as a natural monopoly, and thus has improved the economic efficiency of these industries. When this option is not feasible, the break-up approach gives another option for enhancing the competitive environment of a natural monopoly industry.
When one large public monopoly with substantial market power is privatized, merely transferring ownership from the public to the private sector may not enhance the competition or contestability of the market. Reorganization of a large public corporation into several regional companies will provide some competitive forces to the market.
1. Joy, Stewart, (1964), "Unregulated Road Haulage: The Australian Experience", Oxford Economic Paper, vol.16.
2. Keeler, Theodore E., (1983), Railroads, Freight, and Public Policy, Washington. As I have already mentioned, the reorganizing of AT&T
into 22 Bell Operating Companies is one such example, while
another is the privatization of the Japan National Railway (JNR).
JNR had been the only nationwide railway operator in
Japan for about one hundred years before it was broken into
six regional passenger railway companies, one freight
company, and other five affiliated companies on April 1, 1987. Table 4-1 shows the scope of the twelve newly-formed private companies, and Figure 4-3 shows the regional
operation territory of the six passenger companies.
Table 4-1 Twelve Companies Formed from JNR
Total Number of Type of Company Name Trackage Employee Business (km) JR Hokkaido 3,177 12,719 Passenger service JR East 7,657 82,469 Passenger service JR Central 2,003 21,410 Passenger service JR West 5,323 51,538 Passenger service JR Shikoku 881 4,455 Passenger service JR Kyushu 2,406 15,000 Passenger service JR Freight 12,005 Freight service
JR Telecommunication 570 Telecommunication JR Information System 279 Computer service JR Technical Research Institute 550 Railway research Shinkansen Property Holding 64 Shinkansen leasing JNR Account Settlement 2,520 Account settlement Source: Sakita, Masami, (1989), "Restructuring of the Japanese National Railways: Review and Analysis", Journal of Transportation Economics and Policy, January 1989. Figure 4-3
Regional Operation Territory of Six Passenger Companies
JR Hokkaido
JR Kyus
JR Central JRShikoku If JNR had remained one organization after .privatization, the competitive operational environment would not have been expected to increase. Therefore, JNR was broken into six regional passenger companies to enhance the competitive environment at the same time with its privatization. The merits of this reorganization can be summarized as follows: (1) Although each of the six newly-privatized regional passenger companies has monopoly power in its own operational territory, the government can get information from each firm and compare their relative performances. This would increase the government's ability to monitor the private companies, and the situation would approach a yardstick competition. (2) This would reduce the monopsonistic power of JNR. Therefore, competitive forces from other industries would make the newly privatized companies' production technology become more efficient. (3) This would increase the threat of takeover and bankruptcy, because the absolute size of each company becomes much smaller than it was before privatization. (4) This would reduce the inter-regional cross- subsidization practice. Ticket price is expected to reflect the cost and demand in each region. However, if economies of scale in an industry are substantial, the break-up of a monopoly runs the risk of reducing the efficiency of the industry. Generally, as the number of firms in the industry increases, competitive forces are also increased, but the benefits from economies of scale are reduced at the same time. Thus, special consideration should be given to the trade-off between the number of firms and the size of firms in a reorganization plan.
4.3.3 Auctioning a Monopoly Franchise Auctioning a monopoly franchise is a similar approach to the break-up concept. Normally, in the break-up of a monopoly process, a competitive bidding process to choose the operating company is simply not feasible due to the size of the company. However, the auctioning method employs a competitive bidding process to choose an operating company for the franchise. It is applicable both to privatization of an existing company or facility and to that of a newly- developed project. The concept is very simple. When increasing returns exist in the production technology, and production by one firm is desirable, the selection of the franchisee should be through a competitive bidding process. Suppose that many companies possess the same technology for producing goods and services. If one company tries to get the franchise concession, the firm has to bid as high as the expected profit from the concession right. Otherwise, this firm knows .that other companies may bid a higher price, so that it will
not get the franchise concession. Therefore, a competitive
bidding process should achieve the situation in which the
operating firm earns a fair rate of return, or no excess
profit.1 However, if the technology or demand of the market
change, this zero-excess-profit situation would not be guaranteed to continue. If the market equilibrium changes,
the price is adjusted automatically by market forces in a
competitive market. However, in a monopoly franchise, market
forces do not function, and some extra forces are necessary to achieve a desirable equilibrium.
In general, there are two ways to cope with this
problem. One is to repeat the auction process within a short
period of time, and the other is regulate the firm's behavior. 2
The repetition of the auction procedure is a simple way
to achieve the optimal point with confidence. However, there
are two problems involved in this alternative. The first is
the cost of the auction itself. If the cost of preparing the
auction is very high, the repeated-auction procedure raises the bidding price and reduces the overall efficiency.
Secondly, if the costs of entry to and exit from the market are not negligible, the incumbent operator has advantages
1,2. Train, Kenneth E., (1991), Optimal Regulation: The Economic Theory of Natural Monopoly. pp. 299-306 over other firms. In reality, costs of entry and exit do exist in most cases, whether they are large or small, and so, repeated auctioning may not be feasible in many cases.
In the case of regulation, there are also several problems involved. The first and the most important issue is the structure of the regulation. Regulation should be set so as not to distort the firm's incentive to operate efficiently. Because there are several ways to structure regulations, and because they have a strong impact on the firm's performance, I examine regulations for monopolistic firms in the next section.
4.4 Regulation of a Natural Monopoly
In the case of privatizing a natural monopoly, where competition is limited, regulation is necessary to achieve better social welfare. Because the structure of regulation seriously affects the firm's performance, regulation is useful if properly structured. However, if ill-structured, it will make the resource allocation even worse. Therefore,
I discuss the characteristics of regulation that are commonly used for the regulating a natural monopoly.1
1. Most of the argument in this section is based on Train, Kenneth E., (1991), Optimal Requlation: The Economic Theory of Natural Monopoly. 4.4.1 Rate of Return Regulation Rate of return regulation has been the most popular form of regulation applied to natural monopoly industries. Because many utility companies in the United States have been privately operated, rate of return regulation has been utilized especially in the United States. Under this regulation, the regulated firm is allowed to earn only fair return on its capital 'investment. It is defined as following formula: ROR = (PQ - wL)/K 5 f, where ROR: Rate of return P: Price Q: Quantity of product w: Wage rate L: Labor K: Capital f: Fair rate of return.
Other aspects of firm's activities, such as price level, input level and output level, are not regulated in this model. One problem of rate of return regulation is that it tends to reduce production efficiency by using overcapitalized technology. When the firm's feasible return is less than f, the firm chooses the most efficient mix of capital and labor to maximize the return on investment, and no problems are observed. However, as Averch and Johnson first pointed out,1 when the firm's feasible return is higher
1. Averch, H., and L. Johnson, (1962), "Behavior of the Firm Under Regulatory Constraints", American Economic Review, vol. 52, No.5. than f, the firm will increase capital investment, decrease labor input, and try to maximize the absolute amount of profits. Accordingly, the firm tends to adopt overcapitalized technology in the production of goods, and to reduce the efficiency of production.
The second problem is that the firm's output level never exceeds the point where marginal revenue becomes negative.
If marginal revenue is negative, the firm can increase its profit by decreasing usage of labor and produce a smaller amount of output. Normally, the optimal output level in the transportation industry occurs in the inelastic portion of the demand. Thus, it will never reach the optimal point even if technological inefficiency does not happen (Figure 4-4).
Figure 4-4 Production under Rate of Return Regulation
Price rve cost curve t technology revenue curve
intity place in this area. I MR Point 4.4.2 Price Regulation Price regulation is another popular method for monopoly regulation. This method has been used mainly in privatized monopolies in the United Kingdom, where what is known as "PRI - X" price regulation is common. Under price regulation, only the maximum price level is regulated, and the regulated company is free to choose the input and output levels. If the regulated price is appropriate, price regulation will achieve the optimal production level while offering the firm an incentive to operate efficiently. However, the problem of price regulation is that it is not a self-sustaining system. If the conditions of demand or supply change, the optimal equilibrium also changes. Unless the regulated price is adjusted to the new situation, the optimal equilibrium will no longer be realized. For example, if the regulated price is high, the firm receives excess revenue. If the price is low, the company cannot continue its operation without receiving subsidies. There is no internal force to adjust the situation. Therefore, the regulated price should be reviewed at reasonable intervals.1
1. Beesley M. E. and S. C. Littlechild, (1989), "The Regulation of Privatized Monopolies in the United Kingdom", Rand Journal of Economics, vol.20, No.3. 4.4.3 Return on Output Regulation Under this regulation, the regulated firm is allowed to earn a certain amount of profit on each unit of output. If the profit is not to exceed the allowed level per unit, the price can be set at whatever level the firm may want. Similarly, the firm is free to choose the output and input levels. Because the profit per unit of output is constant at any production level, the firm tries to maximize its production level so as to maximize its profit. If the firm can reduce production costs, the sales price is also reduced. Then, the sales quantity is expected to increase, and so is the profit. Therefore, the firm has a strong incentive to reduce production costs and to maximize the production level. Thus, the firm is expected to achieve the optimal production level under return on output regulation. Another benefit of return on output regulation is that the equilibrium is sustainable. If demand or supply changes, the regulation contains the internal force required to achieve the optimal equilibrium point automatically. Unlike direct price regulation, the regulator does not have to change the profit level per output in accordance with changes in demand and technology.
4.4.4 Return on Sales Regulation Under this regulation, the regulated firm is allowed to earn a certain amount of profit with respect to revenue. If the profit is not to exceed the allowed level, the price can be set at whatever level the firm may want. The firm is free to choose the input and output levels. Figure 4-5 shows the firm's behavior under return on sales regulation. In the figure, the optimal point is assumed to be in the inelastic portion of the demand. Because the firm tries to maximize the total revenue, production takes place at the point where the marginal revenue is equal to zero. Therefore, the production level is fixed at Q in the figure.
Figure 4-5 Behavior of a Firm under Return on Sales Regulation
A& D: Demand curve Price WC: Average cost curve with best technology 4R: Marginal revenue curve P ): Production level C P Revenue of the firm C
Optimal Quantity MR Point
Then, if the firm produces goods in an efficient manner, such that the firm's average cost is equal to C, the firm earns a profit of PC*Q. However, if the firm produces goods inefficiently, such that the firm's average cost is C', the firm can earn a profit of P'C'*Q, which is larger than the
profit if the firm produces in an efficient manner.
Therefore, the firm does not have the incentive to produce efficiently.
In the case where the optimal point is located in the elastic portion of the demand, return on sales regulation is
equivalent to return on output regulation, as it achieves the optimal equilibrium as the return on output regulation does.
If the firm does not produce in an efficient manner, the total revenue decreases. Thus, the firm will try to produce efficiently and to produce the maximum possible quantity of products.
4.4.5 Return on Cost Regulation
Under this regulation, the regulated firm is allowed to earn a certain amount of profit on cost. If the profit is not exceed the allowed level, the price can be set at whatever level the firm may want. The firm is free to choose the input and output levels.
Figure 4-6 shows the firm's behavior under return on cost regulation. In this figure, the optimal point is assumed to be in the inelastic portion of the demand. At first, let us assume that the firm expands its production using efficient technology until point A in the figure.
Then, to increase its profit, the firm can either increase its output using efficient technology until point B, or it can increase the cost by producing the same quantity of product in an inefficient manner until point E. At point B, .the firm will no longer increase production because, by wasting same amount of cost as would be required to produce one additional goods, the firm can increase its profit more than by producing any additional goods. Therefore, the firm never produces more goods than Q, and will continue to increase its cost until reaching point F, where it can maximize total profit. On the other hand, if the firm wastes one unit of resources without producing any goods at point E, it cannot increase the sales price, and its total profit is decreased. However, by using the same amount of cost to produce additional goods, the firm can increase its profit. Then, by the same logic, the firm will increase the output until reaching point F. Therefore, the return on cost regulation reduces the firm's incentive to produce efficiently if the
Figure 4-6 Behavior of a Firm under Return on Cost Regulation (Inelastic Demand)
Irve Price cost curve ;t technology i revenue curve on level
ntity MR Point optimal point is located in the inelastic portion of the demand. In the case where the optimal point is located in the elastic portion of the demand, return on cost regulation achieves the optimal equilibrium. The logic is the same as the previous case. At first, the firm produces at point A. If it uses efficient technology, maximizing its profit moves the firm's production level to point B, which is the optimal production level. If it begins wasting resources at point A and continue to waste until point C, it must increase production level until point B to receive maximum possible profit.
Figure 4-7 Behavior of a Firm under Return on Cost Regulation (Elastic Demand)
urve Price cost curve st technology .1 revenue curve
.ntity
4.4.46 Summary of Natural Monopoly Regulation Table 4-2 shows a summary of the regulatory method examined in this section. If the optimal point is located in the elastic portion of the demand, price regulation, return on output regulation, return on sales regulation, and return on cost regulation achieve the optimal equilibrium, where the firm's excess profit is zero. However, because the optimal point is normally located in the inelastic portion of demand, only price regulation and return on output regulation can achieve the optimal equilibrium.
Table 4-2 Summary of Natural Monopoly Regulation
Optimal Equilibrilum on Demand Curve Regulation Elastic Inelastic Sustainability
Rate on return Non-optimal Non-optimal Unsustainable
Price Optimal Optimal Unsustainable
Return on output Optimal Optimal Sustainable
Return on sales Optimal Non-optimal Sustainable
Return on cost Optimal Non-optiaml Sustainable
Price regulation is not a self-sustaining system. If the conditions of demand or supply change, the optimal equilibrium also changes. Unless the regulated price is adjusted to the new situation, it will no longer achieve the optimal equilibrium. On the other hand, return on output regulation is a self-sustaining system. Therefore, in that sense, return on output regulation is superior to the price regulation. Chapter V Cases of Highway Privatization
5.1 Introduction In this chapter, several cases of highway privatization are reviewed. Because all of the cases involve the development of new highways, my analysis focuses on private sector participation in the construction and operation of new highways and tunnel facilities. The success of privatization depends greatly on the structure of the chosen scheme. Even if the public sector ceases to construct toll highways, the role and responsibility of the government remains very important in successful implementation of the privatization procedure. Therefore, I focus on regulatory frameworks, financial structures, and risk sharing between private companies and the public sector.
5.2 Cases of Selected Private Toll Highway Projects 5.2.1 California AB 680 Projects1 (1) Project In July 1989, the State of California enacted the
1. The general description in this section is based on the following publications: * CALTRANS, (1989), Privatization: Building a Bridge Between Government and Business. * Public Works Financing, October 1990. * Cohen Yuval, (1991), "California's Private Infrastructure Initiative," Journal of Transportation Economics and Policy, September, 1991. * Bozdogan, Kirkor, (1991), Privatization of Transportation Infrastructure. California Assembly Bill 680. This bill authorized the
California Department of Transportation (CALTRANS) to award franchise concessions to build and operate toll transportation facilities for up to 35 years to private consortia. These consortia would typically consist of developers, engineering firms, contractors, and financial institutions. It also authorized CALTRANS to lease air space or development rights adjacent to the facility for up to 99 years. According to the CALTRANS advertisement issued in October 1989,1 the main characteristics and requirements of the project are as follows: (1) Project may be any type or size of transportation
facility;
(2) Project must have an existing free transportation
system which competes with it;
(3) Project is privately financed, built and operated,
but is owned by the state at all times;
(4) Transportation facilities are leased to the private
developer for up to 35 years;
(5) Non-transportation facilities can be developed in
the air space or on land adjacent to the right-of- way, and can be leased for up to 99 years.
In November 1989, CALTRANS issued the Request for
1. California Department of Transportation, (1989), Privatization: Building a Bridge Between Government and Business. Qualification, and about 400 private firms and individuals expressed their interest in the project. Finally, ten private consortia were chosen, and these proceeded to the proposal stage. On August 1, 1990, eight proposals were submitted by eight groups. The proposals were reviewed based on the criteria listed in Table 5-1.
Table 5-1 Selection Criteria in the California AB 680 Projects
(1) The transport service provided by the project proposal (20 points) (2) The socio-economic benefits associated with the proposal (10 points) (3) The degree of local support for the project (15 points) (4) Relative ease of implementation (15 points) (5) Relative experience and expertise of sponsor (15 points) (6) Degree to which proposal supports California's energy conservation goals (10 points) (7) Degree to which non-toll revenues support proposal cost (15 points) (8) Degree of technical innovation associated with the proposal (10 points) (9) Degree of proposal's support for US Civil Rights goals (10 points) Source: Cohen Yuval, (1991), "California's Private Infrastructure Initiative," Journal of Transportation Economics and Policy, September, 1991. On September 15, 1990, the final four projects were selected as follows:
(A) The National Tollroad Authority Corporation, sponsored by the Perot Consortium, proposed a four-lane, limited-access, 11.2 mile, cars-only toll road which would be an extension of the Orange Freeway in Orange County. The total cost is estimated to be 700 million dollars. Most of the right-of- way is publicly owned. The congestion pricing concept and electronic toll collection would be employed.
(B) California Transportation Ventures, Inc., sponsored by the Parsons Brinckerhoff Development Group, proposed a four- lane, limited-access, 10 mile toll road (Route 125) in San
Diego County. The total cost is estimated to be 400 million dollars. The right-of-way is on vacant land, and about 60 % of it is owned by three developers. The congestion pricing concept and electronic toll collection would be employed.
(C) The California Private Transportation Corporation, a subsidiary of CRSS Commercial Group Inc., proposed constructing four HOV lanes along a 10 mile section in the median of the Riverside Freeway. The total cost is estimated to be 88.3 million dollars. There is no need to buy additional rights-of-way, and the environmental assessment has been completed. Cars with two more occupants will be free of charge, while single-occupant cars will be charged at
variable rates based on the congestion pricing concept.
(D) The California Toll Road Company, sponsored by Parsons
Municipal Consortium, proposed an 85 mile, five-lane toll road connecting 1-680 at Sunol in the south San Francisco Bay area to 1-80 at Vacavillein. The total cost is estimated to be 1.2 billion dollars. The project is divided into two phases: phase one is a 40 mile section from 1-680, and phase two is the rest of the highway.
(2) Financial Arrangement
The federal and California State Governments will not give any grants, nor guarantee any debt for the projects.
However, municipal and county governments may assist the private firms. Toll rates can be set at any level depending only on the market conditions, but the profit level will be negotiated with CALTRANS, and will depend on the risk taken. Any excess toll revenue must be taken by the state.
(3) Characteristics of Selected Projects
CALTRANS prefers the build-transfer-operate project delivery method rather than the build-operate-transfer method, which is widely used in other projects. This represents CALTRANS' strong desire to control the project more tightly. It will reduce the liability risk of the private firms as owner, but will increase the potential political risk. Another characteristic is the relative ease of implementation. As Yuval Cohen pointed out, "the projects chosen by the private consortia were the most feasible to build and most easily financed from tolls and from other revenues related to real estate. Most of the right-of-way are already in public hands and dedicated to the proposed project. "I
5.2.2 Dulles Toll Road Extension Project 2
(1) Project
In July 1988, the State of Virginia enacted the Virginia
Highway Transportation Act. The act authorized private firms to build and operate toll roads. Soon, the Toll Road
Corporation of Virginia (TRCV) was established to develop the
Dulles Toll Road Extension Project, which is a four-lane, access-controlled, 14 mile extension of the existing Dulles
1. Cohen Yuval, (1991), "California's Private Infrastructure Initiative," Journal of Transportation Economics and Policy, September, 1991.
2. The general description in this section is based on the following publications: * Gomez-Ibanez, Jose A. et al, (1991), "The Prospects for Privatising Infrastructure" Journal of Transportation Economics and Policy , September, 1991..... * Bozdogan, Kirkor, (1991), Privatization of Transportation Infrastructure. * Atkinson, R. Clark, (1991), Private Development of Transportation Infrastructure. Toll Road from Dulles Airport to Leesburg, Virginia. The total cost was initially estimated to be 198.8 million dollars, but a recent review reveals that the cost will be about 250 million dollars. The arrangement is the build-operate-transfer agreement where TRCV finances and builds the highway, operates it for forty years, and transfers the ownership to the state of Virginia after the concession period is over. Highway development is monitored by the Virginia Department of Transportation (VDOT), and financial and operational issues are monitored by the Virginia State Corporation Commission (VSCC). As for the implementation of the project, the state of Virginia had previously considered the project as a state development project and had already executed surveys such as environmental assessment. This has significantly reduced TRCV's burden in the planning stage. In addition, only twenty five property owners were involved in the right-of-way acquisition. No significant opposition to the acquisition of the right-of-way had been heard, and most owners donated the right-of-way in anticipation of the land value increase associated with the project.
(2) Financial Arrangement The financial arrangement is a so-called sales-leaseback arrangement. Figure 5-1 shows the basic concept of the sales-leaseback arrangement. Under the arrangement, TRCV will construct the highway and sell it to another private firm that can receive depreciation and interest tax benefits. The private firm will lease back the highway to TRCV for operation.
Figure 5-1 Concept of Sales-Leaseback Arrangement
Owner/Lessor Operator/Lessee
Purchase payment
Private firm Sale (Ownership) TRCV
* Depreciation tax shield Lease back * Construction * Interest tax shield * Operation Lease payment
Fund ce for pur ce
Financial institution
In the construction stage, TRCV was expected to contribute 4 million dollars in equity, and the remaining portion of the debt was financed by a group of commercial banks at a floating rate of approximately 10 % annually. After completion of construction, an additional 30 million dollars of equity would be financed through placement of common and preferred stocks in TRCV. The lease payment is equivalent amortization of the debt with an annual interest rate of approximately 10 %. The toll rate will be regulated by VSCC, so that overall return on equity would be 20 % of the investment. In terms of financial assistance from the government, no guarantee or financial support will be expected. However, if profitability of the firm were to become threatened, VSCC may raise the toll rate to secure the profitability of the project.
5.2.3 Trans-Tokyo Bay Highway Projectl (1) Project The Trans-Tokyo Bay Highway is the first privatized highway project in Japan. It is a 15.1 Km toll highway across central Tokyo Bay. A 10 km under-water highway tunnel, which is the longest in the world, will cross the west side of the bay, and the remaining 5 km will be a bridge section. The construction of the highway is expected to bring in substantial externalities to the Tokyo Bay area. The total project cost is estimated to be 1,150 billion yen (Approximately 9.2 billion dollars). The location of the project is shown in Figure 5-2.
1. The general description of this section is based on the following publications: " Oka, Akira, (1992), "Financing Methods for Large Construction Projects", Proceedings on IWABSE. * Trans-Tokyo Bay Highway Corp., (1991), Annual Report 1991. . Act of Trans Tokyo Bay Highway, (1986). Figure 5-2
Location of Trans-Tokyo Bay Highway
O Tolyo Interna;ornal A;rort lHar~dal Tokyo Bay Coasval Highway O To.-e; E•press•ay ) O Ch.ba.To•ane igh;,y Tokyo Ou:er Loop Highway O Chuo Eipressway ( Yokohamra-Yokosuka H.gh•ly S' * * *Melropolilan Central Connec:ing Highway O Kan.e:su Ex;ressý.ay o Th;rd-K;hn Hgray hle:ropol'.an Expressway O Central o To.oku E.,es-_sy Loop Rou:e SEx:,ressway & Toll Roads (D Looo No. 6 Na:tonal O Joanh Epressweay Highways o Loo.•No. 7 P:inc;pal O H,;gash, Local Roads KanGo E*;ressway o Loop No. 8 O Ke;yo qShway 0 New Tokyo Interna:4nai A;,or (Nart:a
Source: Trans-Tokyo Bay Highway Corporation. The project is to be executed by two organizations. One
is the Japan Highway Public Corporation (JHPC), and the other is the Trans-Tokyo Bay Bridge Corporation (TTB), which is the
first public-private joint venture for toll road operation in
Japan, and was established on October 1, 1986. Syndicates of
various private companies, as well as some local governments
and JHPC, invested in TTB. The scope of TTB's operation is
not limited to the Trans-Tokyo Bay Highway. TTB will also develop such facilities as hotels, an amusement park,
theaters, and multipurpose exhibition halls, which will
enhance the usage of the highway.
Before actual construction began, JHPC had conducted
basic planning, the right-of-way acquisition, fishery
compensation, and other coordinating activities. TTB is in
charge of financing the initial construction cost, of the detailed design and of the actual construction and operation of the highway.
After completion of the construction, TTB will sell the
ownership of the highway to JHPC. JHPC will pay back the purchase payment over a 30-year period. The amount of this payment is pre-determined, and does not depend on the revenue of the highway. Thus, the risk of the construction is taken by TTB, while the risk of highway traffic volume is taken by
JHPC. This arrangement will significantly reduce TTB's risk in the project. (2) Financing Arrangement
Table 5-2 shows the financial sources for the Trans-
Tokyo Bay Highway. The costs of right-of-way acquisition, fishery compensation and other coordinating activities are financed by JHPC, and are estimated to be 211 billion yen
(approximately 1.7 billion dollars), or 18 % of the total cost.
The other costs will be financed by TTB. They are estimated to be 939 billion yen (approximately 7.5 billion dollars), or 82 % of the total cost. Sixty billion yen has already been financed in the form of equity. The remainder of the costs are to be financed by loans or bond issues.
Table 5-2 Financial Sources for the Trans-Tokyo Bay Highway Project
Amount Source of funds (million $) % JHPC 1,692 (18.3) TTB 7,518 100.0(81.7) Equity 480 6.3( 5.2) Loans from private banks 1,925 25.6(20.9) Loan from government 2,000 33.6(21.7) Bonds guaranteed by government 3,113 41.4(33.8)
Total 9,210 (100.0) Source: Trans-Tokyo Bay Highway corporation, Trans-Tokyo Bay Highway. Note: Dollar figures are converted from Japanese yen at the exchange rate of $1 = Y125. As of April 1, 1991, TTB had received 7.7 billion yen
(approximately 62 million dollars) as bank loans, bearing an interest rate of 7.4 % per annum. Most of these loans were long-term loans with repayment due 10 years later.
Government-guaranteed bonds were issued several times, and had raised 12.9 billion Yen (approximately 103 million dollars). These bonds were ten-year coupon bonds bearing interest rates ranging from 4.9 % to 6.4 %. With regard to loans from the government, interest rates were subsidized so that the overall interest burden for TTB would become 6.049 % annually. In addition, these loans have much longer loan periods of up to 35 years, which should stabilize the financial situation of TTB.
5.2.4 Channel Tunnel Project
(1) Project1
The Channel Tunnel Project is a 31-mile underwater tunnel which connects Kent, England and Calais, France. It consists of three tunnels and two terminal stations. Shuttle trains carrying cars, passengers and freight will travel between the two terminals in 33 minutes. Four proposals had
1. The general description in this section is based on the following publications: * "The Channel Tunnel", Economist, October 10,1987. * Holliday, I. M., and R. W. Vickerman, (1990), "The Channel Tunnel and Regional Development: Policy Responses in Britain and France", Regional Studies, vol. 24.5. * Bozdogan, Kirkor, (1991), Privatization of Transportation Infrastructure.
100 been seriously studied by the British and French governments
before the franchise concession was granted in 1986 to the
Channel Tunnel Consortium, which is composed of ten
contractors and five banks.
Under the concession agreement, the private consortium has the right to construct and operate the tunnel. The
concession period is for 55 years from July 29, 1987 to July
28, 2042. After the concession period is over, the tunnel will be taken over by the British and French governments.
The project is monitored by an international commission under the jurisdiction of both governments. The committee is primarily concerned with safety, health and security problems. The two governments have pledged not to interfere with the commercial strategy and pricing policy of the tunnel, and also have promised not to permit another new connection until 2020. However, they would not provide any financial aid or guarantees toward the project.
The project cost was initially estimated to be £4,874 million,1 but, due to geological difficulties, Eurotunnel is experiencing both construction delays and cost overruns. As of August 1990, the estimated construction cost had increased by 40 % from the initial construction cost estimate. 2 The first tunnel link was completed in 1990, and
1. Okano, Shinichi, (1988), A Financial Evaluation of the Eurotunnel Project.
2. Takesue, Naoki, (1991), Financial Evaluation of Refinancing of the Eurotunnel Project.
101 operation is expected to begin in 1993.
(2) Financial Arrangement
According to the initial financing plan, £1,023 million, which accounted for 21 % of the project cost, would be financed as equity. The remaining portion of the cost would be financed by an international syndicate of about 200 banks.
Initially, the bank syndicate agreed to provide £5,000 million of loan credit.1
However, due to construction cost overruns, an additional £566 of equity is to be raised, and the credit agreement with syndicate banks was revised and further extended up to a maximum drawing right of £6,800 million. As of August 1990, the Channel Tunnel Group had already drawn
£1,764 million, and so it may draw further £5,036 million if the project can meet the financial requirements set by the syndicate banks. These requirements include the following:2
A) Debt coverage ratio in 2012, which is the net present
value of forecasted operating cash flow up to 2012
divided by the present value of all debt due up to 2012, should be more than 1.10.
1,2. Takesue, Naoki, (1991), Financial Evaluation of Refinancing of the Eurotunnel Project.
102 B) Debt coverage ratio in 2020 should be more than 1.40.
C) Debt service coverage ratio, which is the ratio of
forecasted net cash flow in any year to the interest
payment in the same year, should be more than a
specified number in each year.
D) Dividend payment will not be allowed until the following conditions are met. They are: the Channel
Tunnel Group retains earnings sufficient to cover
interest payments for the following three month
period; the aggregate debt-repayments are made on
schedule; and debt coverage ratio in 2012 is more than 1.25.
With regard to the interest rates of these loans, the rates will be tied to the LIBOR (London Interbank Offer
Rate), which is a floating interest rate in the U.K., plus some additional charges summarized in Table 5-3. 1
1. Takesue, Naoki, (1991), Financial Evaluation of Refinancing of the Eurotunnel Project.
103 Table 5-3 Interest Rates of Bank Loans in the Channel Tunnel Project
To Completion After Completion Loan Drawn Date Date Up to £4,000 million LIBOR + 1.50% LIBOR + 1.25% Between £4,000 and £6,300 million LIBOR + 1.75% LIBOR + 1.50% More than £6,300 LIBOR + 2.50% LIBOR + 2,25% Source: Takesue, Naoki, (1991), Financial Evaluation of Refinancing of the Eurotunnel Project.
5.2.5 Sydney Harbor Tunnel Project1 (1) Project In July 1986, the New South Wales Government in Australia announced that a private consortium would construct and operate two two-lane road tunnels under Sydney Harbor, which were estimated to cost 664 million Australian dollars. The Sydney Harbor Tunnel Company (SHTC), which is jointly owned by Transfield Pty. Ltd., an Australian engineering company, and Kumagai Gumi Ltd., a Japanese contractor, had received the franchise concession.
1. The general description in this section is based on Mills, Gordon, (1991), "Commercial Funding of Transport Infrastructure: Lessons from Some Australian Cases", Journal of Transportation Economics and Policy, September, 1991.
104 The arrangement is a build-operate-transfer agreement where SHTC finances and builds the tunnels, operates them for thirty years, and transfers ownership to the New South Wales Government thereafter. The construction and operation is to be monitored by the Department of Main Roads.
One characteristic of this project is the Ensured
Revenue Stream Agreement. Under this agreement, the government will pay the private company a pre-determined amount of revenue specified by the following formula:
R = P*Q*I, where R: Revenue of the private company P: Predetermined toll rate Q: Projected traffic volume I: Weighted index.
The first and second terms are pre-determined numbers, and the third term reflects an inflation adjustment, which consists of a weighted index of four components: consumer price index, wage index, electricity index, and debt service and repayment index.
(2) Financial Arrangement
Table 5-4 shows the financial arrangement for the Sydney
Harbor Tunnel Project. About one third of the total funds will come from a governmental loan. The loan is interest- free, with repayment due at the end of the concession period (in 2022). This is equivalent to a 180 million dollar grant from the government. Due to this governmental loan, the
105 joint venture of Transfield and Kumagai Gumi must cover only 7 % of the total cost through investing their own money.
Table 5-4 Financial Sources for the Sydney Harbor Tunnel Project Amount Source of funds (million A$) % Loan from government 223 33.6 Bond issue by SHTC 394 59.3 Loan from joint venture 40 6.0 Equity from joint venture 7 1.1 Total 664 100.0 Source: Gordon Mills, (1991), "Commercial Funding of Transport Infrastructure: Lessons from Some Australian Cases", Journal of Transportation Economics and Policy, September, 1991.
5.3 Regulatory Framework for Private Highway Projects Generally speaking, because private highway companies can enjoy monopolistic power over the operation of their highways, the success of privatization depends to a large extent on the regulatory framework imposed on the projects. If the regulation is merely formulated to protect the operation of the private companies, their incentive to operate efficiently may be greatly reduced, and the outcome of privatization may be just a transfer of the operating rights. On the other hand, if the regulation is formulated appropriately, the possibility for efficiency gain will be high and promising. Thus, in this section, I review the regulatory frameworks of the selected projects.
106 5.3.1 Concession Procedure First of all, the concession procedure should be competitive. Whether the selection procedure is by proposal or negotiation, several organizations should be considered, and invited to the process. However, a competitive process does require more time and cost. In practice, the Channel Tunnel Project and the California AB 680 Projects are examples of competitive procedures in which several private consortia proposed their plans, whereas the other projects did not follow the competitive process, but rather negotiated with only one private firm. An uncompetitive selection procedure may sacrifice the possibility of introducing competition. If the arrangement is mere transfer of the franchise right from the public sector to a private firm, efficiency gains may not be achieved.
5.3.2 Ownership All of the agreements in the cases examined here are either BTO or BOT schemes. In the case .of a BTO arrangement, as in California, the public sector retains ownership of the highway at all times. In the case of a BOT arrangement, ownership will be transferred to the public sector after the franchise period is over. In either case, the assets of the highway must be returned to the government. Through this agreement, the government can effectively retain the future ownership of the highway.
107 If the government retains no control over private toll highway assets, the private company may terminate the operation of the toll highway, build office buildings on its right-of-way, and sell it to other companies. Thus, there is no guarantee that the highway infrastructure will remain in the future.
5.3.3 No-Development Clause In a private toll highway franchise agreement, it is typical for the public sector to promise to a private company not to develop a road or other transportation facilities that would reduce the traffic volume of the toll highway. For example, in the California AB 680 Projects, CALTRANS has promised not to develop competing highways and other transportation systems throughout the concession period. In the Channel Tunnel Project, the British and French governments pledged not to approve another link until 2020. This reflects the fact that the private sector perceives the potential risk of competition from the government to be very high. However, the agreement is sometimes very vague. In the Channel Tunnel case, agreeing not to build another link is very clear, but in normal highway cases, it is very difficult to decide what kind of road improvement would constitute default of the clause. For example, if the government constructs a new highway parallel to the toll road within a distance of one mile, it would constitute default of the
108 clause, but what happens if the new highway is located five miles away? Another possible problem is that, even if the
state government does not construct a competing road, a local government may build it. Furthermore, when a toll road becomes very congested, constructing another route would improve social welfare, but would also decrease the private
firm's profitability. In such a situation, the government would have a strong incentive to break the agreement.
To respond to the possibility of such a breach, there is a clause in the concession contract which specifies the amount of compensation for possible damages. In the case of a privately developed bridge between Fargo, North Dakota and
Moorhead, Minnesota, the local governments agreed with the private firm which would develop and operate the bridge, that the governments can built a new competing bridge if they reimburse the firm for 90 percent of its lost revenue. 1
5.3.4 Safety and Maintenance
Because private firms have an incentive to reduce operation costs, safety facilities and maintenance standards might be reduced due to privatization. Therefore, the level of maintenance and other safety facilities should be clearly stipulated in the regulation agreement. What
1. Allen, Joan W., (1989), "Use of the Private Sector for State Transportation Activities", in Joan W. Allen et al. ed., The Private Sector in State Service Delivery: Examples of Innovative Practices.
109 constitutes default by the company should be also made clear.
5.3.5 Toll Rate and Rate of Return Regulation In regulating a franchise agreement, price regulation and rate of return regulation are the two most important elements of regulation. Two combinations are found in the privately developed highway projects. The first case is in the California AB 680 Projects, where the toll rate is not regulated, but rate of return is. The second case is that of the Dulles Toll Road, in which both toll rate and rate of return are regulated. Other cases of private highway development do not have such regulations. In the Trans-Tokyo Bay Highway and Sydney Harbor Tunnel cases, the private companies will receive a.predetermined payment from the public sector, and in the Channel Tunnel case, there is no regulation concerning the toll rate and rate of return.
(1) California AB 680 Projects In the California case, the toll rate is not regulated, and the private companies are free to charge at any level depending on the market condition, but the overall rate of return is regulated by the public authority (CALTRANS). If any excess revenue is collected by the private firms, the state government must receive this excess revenue. When the rate of return does not reach the maximum specified rate, the private company would charge the monopoly price to try to maximize the revenue from the toll road.
110 Thus, the toll road would be underutilized and the "dead
weight" loss to society may be large. However, the company
has the incentive to operate the toll road efficiently
because any cost reduction would accrue to it.
When the rate of return exceeds the limit, the private
company has no incentive to operate efficiently because any
cost reduction would not accrue to the company. On the contrary, the company would try to invest more to obtain the
maximum possible absolute amount of profit.
One possible benefit of this arrangement is that the
private company has the flexibility to change the toll. In
the California case, three of the four projects will adopt
road pricing schemes which will change toll rates depending on the traffic conditions. If the toll rate is related to
the rate of return, and under close monitoring by the public
authority, the evaluation of such a pricing scheme is more
complicated and difficult.
From CALTRANS's perspective, this regulation is desirable. Despite the resource allocation problem, CALTRANS will receive any excess revenue from the private company.
Therefore, CALTRANS has the incentive to adopt this agreement. The possible loser in this kind of agreement may be users of the toll road, since their payment might be smaller if the toll were regulated.
As for the base rate of return, the private company can earn from 17 percent to 21.25 percent of invested capital, depending on the risk of the project. In addition to the
111 base rate of return, CALTRANS allows private firms to receive bonus returns. These bonus returns are related to public policy goals such as the number of passengers per car, the safety of the road, the cost of toll collection and other things. The bonus arrangement is expected to be a very effective incentive to achieve the above goals. 1
(2) Dulles Toll Road Project In the Dulles Toll Road Case, any toll rate change must be approved by the public authority, and the public authority will decide the toll rate on the basis that the private company should receive a fair rate of return. Under this regulation, the private company's incentive for efficient operation is small. When the operation cost increases and profitability decreases, the private company can ask the public sector to raise the toll rate. On the other hand, when profitability increases and reaches the maximum rate of return, the private company has no incentive to reduce the operation cost. Compared with the California case, however, the resource allocation problem may be smaller due to the direct price regulation. As for the rate of return, roughly 30 percent return on equity investment will be allowed during the first five-year
1. Bozdogan, Kirkor, (1991), Privatization of Transportation Infrastructure.
112 period. This return rate will decrease over time, and will reach about 14 % on equity at the 14th year, then will remain same over the project lifespan. The average return over the life of the project will be approximately 20 %. The high return at the early stage of the project is intended to enhance the attractiveness of the investment. 1
5.3.6 Pre-determined Revenue Arrangement and Incentives for a Private Company As I have already mentioned, the revenue of the private company is pre-determined in the Trans-Tokyo Bay Highway and Sydney Harbor Tunnel cases. The companies' incentive to reduce maintenance and operation costs remains, because any cost reduction will accrue to the companies. From this point of view, the private companies have a strong incentive to operate efficiently. However, the private companies do not have any incentive to promote the usage of the highways. On the contrary, they have an incentive to reduce usage of the highways because reduction of usage leads to a lower operation cost. As for the practical problems, when the reconstruction of the highway is necessary, or traffic accidents occur, the companies might close the highways with little justification.
1. Bozdogan, Kirkor, (1991), Privatization of Transportation Infrastructure.
113 5.4 Financial Arrangements for Private Highway Projects
5.4.1 Common Financial Structure
The financial structure in all of the selected privately
developed highways takes the form of project financing.
According to Beidleman et al., "project finance is a method
of funding an enterprise based on the cash flows that the project is expected to generate. Generally, it is most
appropriate for projects with high capital requirements,
large and complex risks, and consequent inability to raise
sufficient funds from conventional sources." I
The distinction between standard corporate finance and project finance is as follows. In standard corporate
finance, financial institutions lend money directly to the company that will execute the project. Even if the project turns out to be failure, the company will have to pay back the loan from the revenue of other operations. However, when the capital expenditure of the project is very large and
failure of the project might cause bankruptcy of the company, the parent company will found a new project company which will undertake the project. Financial institutions lend money to the project company, which relies only on revenue from the project. If the project turns out to be a failure, the parent company loses its equity investment in the project
1. Beidleman, Carl, Donna Fletcher, and David Veshosky, (1990), "On Allocating Risk: The Essence of Project Financing", Sloan Management Review, Spring 1990.
114 company, but has no responsibility to repay the loan. In doing so, the parent company can insulate itself from bankruptcy, and thus it can undertake a risky mega-project more easily. The typical financial arrangement is shown in Figure 5-3.
Figure 5-3 Standard Financing and Project Financing
Standard Financing Project Financing
5.4.2 Debt and Equity
The debt-to-equity ratio in project financing varies from project to project, and it might "range all the way from less than one to one to as high as three or four to one." I In general, as the debt ratio rises, the project might fail to earn enough cash flow to repay the debt service burden, and
1. Nevitt, Peter K.,(1983), Project Financing.
115 will increase the financial risk of the lenders. On the other hand, a high debt ratio might increase the return on the equity investment, and it also increases the benefit of the interest tax shield.
In the selected private toll highway projects, the ratio of equity financing to initial investment cost varies as follows: 21 % in the Channel Tunnel Project, 15 % in the
Dulles Toll Road Project, 6 % in the Trans-Tokyo Bay Highway
Project, and 1 % in the Sydney Harbor Tunnel Project. In the cases of the Channel Tunnel Project and the Dulles Toll Road
Project, in which the risk of the projects is high and no government guarantee is available, the requirement for equity financing is relatively high. However, in the cases of the Trans-Tokyo Bay Highway Project, in which government guarantees the repayment of debt, and the Sydney Harbor
Tunnel Project, in which government provides a substantial portion of the financial sources, the requirement for equity is rather small.
However, when the equity investment is a nominal amount and the private company faces difficulties in the project, the private company's incentive to continue the project might be small because of the nominal loss which it would sustain.
Thus, I think at least a certain amount of equity investment is necessary to keep the private company involved in the project.
116 5.4.3 Financial Assistance from the Government When the profitability of the project is estimated to be low, government has to provide some assistance to persuade the private sector to take part in the project. In the Trans-Tokyo Bay Highway, loans from the public sector, bond guarantees by the government, subsidies for interest payments, and equity participation from the public sector are all provided to secure the profitability of the project.
5.5 Risk Sharing in Private Highway Projects A toll highway project is considered to be very risky, and this is one of the major reasons that the private sector does not become involved in such projects. For example, Japanese law allows any private companies to build and operate toll roads under the approval of the Ministry of Construction. However, the private sector did not undertake such projects until recently, when the Trans-Tokyo Bay Highway Company was set up. Even in the Trans-Tokyo Bay highway project, public sector involvement is wide and extensive. Without public sector involvement, this project would not have started. To promote private sector participation in toll highway projects, it is important to reduce tht risk of the project. Thus, how to share the risk between the public and private sectors is examined in this section.
117 5.5.1 Planning Stage Construction of a highway requires substantial negotiations with various governmental agencies concerning environmental issues, city planning, execution plans, and so on. Usually, these negotiations take a long time and much effort. From the private sector perspective, the risk seems to be quite large, and indeed to be one of the largest obstacles to a private highway project. I think the public sector can handle this well. Already-approved plans are less risky, and at least, public cooperation is indispensable for executing a private highway project. For example, in the California AB 680 Projects, "Environmental reviews are well underway or have been completed by public agencies for major sections of all four of the projects." l As for the Dulles Toll Road, basic surveys had been carried out by the Virginia Department of Transportation. The public sector was in charge of the basic planning, fishery compensation and other coordination issues in the Trans-Tokyo Bay Highway.
5.5.2 Construction Stage (1) Right-of-way Acquisition This is the most difficult issue in Japan, and is the reason why so many projects face problems, often very serious ones. For example, one of the most prominent cases in Japan
1. Public Works Financing, October 1990.
118 is the Narita Airport Project. Narita Airport is the most important international airport in Japan, and the government has taken every possible measure to solve the right-of-way problem. Although construction was expected to be completed by 1990,1 it has not yet been completed due to the right-of- way acquisition problem. Similarly in highway construction, right-of-way acquisition is the main factor determining the completion date of a project. The right-of-way acquisition problem accounts for construction delays in the largest number of cases. The public sector has the power of eminent domain. Sometimes, the legitimacy afforded by being a public undertaking can help to solve the problem. Therefore, a private firm may perceive a higher risk than that of the public sector, which would lead to higher construction costs. None of the five privately developed highways considered here have serious problems in right-of-way acquisition.
(2) Construction Cost Overrun Construction projects often encounter the unforeseeable events and conditions which raise the construction cost. For example, in case of the Channel Tunnel Project, a 40 % overrun in construction costs has been reported mainly due to
1. Imidas (Innovative Multi-Information Dictionary Annual Series), (1988).
119 excavation problems. 1 In highway construction, design failure or unexpected change of the subsurface conditions often increase the cost of the project. Basically, these risks should be borne by private developers. If the government takes the risk, the private sector's incentive to minimize construction costs is reduced. In the five private toll highway cases, the private consortia take all the construction risks in four of the projects.
However, in the Trans-Tokyo Bay Highway Project, the public sector takes the cost overrun risks due to natural disasters such as typhoons, earthquakes, or wars. Because such risks cannot be managed by both parties, for the public sector to underwrite these risks is deemed to reduce the risk to the private company without affecting its performance on the project.
(3) Construction Delay
Construction delays can have a serious impact on a project. Not only do they increase the debt service cost associated with initial construction, but they also delay the collection of tolls.
With regard to construction delays associated with permit problems and right-of-way acquisition, I think both
1. Takesue, Naoki, (1991), Financial Evaluation of Refinancing of the Eurotunnel Project.
120 the public and private sectors should share the risk. If the
public sector does not share the risk, it has no incentive to
expedite the procedure. As for delays associated with actual
construction, the private sector should take all the risks, except for some emergency events which it cannot control.
5.5.3 Operation Stage
(1) Maintenance and Operation Cost Overrun
The costs of labor and material for highway maintenance
and operation may increase more than anticipated due to
general inflation, or may increase merely due to inefficient
operation. In general, the risks of such cost overruns
should be taken by the operating company because it can best manage the situation.
In the selected private toll highway projects, the risk of cost overruns for technical and management reasons is
taken by the private companies. However, in the case of cost overruns due to inflation, the public sector takes the risk in some projects. For example, in the Sydney Harbor
Tunnel Project, a formula which reflects the inflation rate is introduced to calculate the revenue of the private company.
(2) Traffic Volume
Perhaps the traffic volume risk is one of the major unknown factors in highway projects. Although some portion of the traffic volume depends on the company's operation
121 policies such as pricing structure, service standard of the highway, demand promotion activities, etc., the majority of the traffic volume depend on external factors that the company cannot control. These include such factors as economic growth, demographic change, competition from other modes of transportation, competition from other highway routes and the price of gasoline. The government can manage some of the above circumstances better than the private sector. For example, the government usually has the right to increase gasoline taxes or other road-user taxes which might reduce the usage of the highway. In addition, the government retains the right to allow the development of other transportation facilities, such as railways and other highways. This risk seems very important to the private sector, so that most agreements include some "no development" clause to reduce the risk of governmental exploitation. Therefore, when the private sector perceives that the risk of traffic volume uncertainty is high, the government should share the risk, and reduce obstacles to private participation. However, if government takes all of the traffic volume risk, the private sector has no incentive to promote the usage of the road and to prevent inefficient use of highways, as is the case in the Sydney Harbor Tunnel Project and the Trans-Tokyo Bay Highway Project.
122 (3) Inflation
Inflation has a complicated effect on a project. In one
respect, inflation will increase the cost of maintenance and operation. When the interest rate of the debt is a floating
rate, inflation will also increase the interest rate.
However, inflation reduces the real value of the initial investment; and also reduces the relative value of the toll
rate to drivers.
Generally speaking, if the toll rate can be increased in
accordance with the inflation rate, inflation will increase
the profitability of the project. If the toll rate is fixed
and no change is allowed, the private company will suffer
from additional operation expenses and higher interest
payments. Therefore, the risk of inflation can be dissolved, or at least reduced, by connecting toll rate increases with
the inflation rate.
(4) Political Risk
The political risks include the possibility that the
policy of the government might change, that the government might raise the income tax rate, that the government might
develop another competitive mode of transportation, that the
government might not permit toll increases in a timely manner, and so on.
The initial investment requirement of a highway project is very high, and if, for some reasons, the private company has to terminate operation, the asset value of the highway is
123 not high, and is hard to liquidate. Therefore, the political *risk of governmental exploitation in highway projects seems to be very high. Without strong commitment by the government to support the project and not to exploit a private firm's fair profit, private development of a highway may not be feasible.
i
124 Chapter VI A Plan for Expressway Privatization
6.1 Introduction Based on the argument in previous chapters, in this chapter, I put forward a plan for privatization of expressway projects in Japan. First of all, I explain the rationale for expressway privatization plans and special considerations. Then the method of privatization and the regulatory framework is described in detail. Finally, possible candidates for privatization are also discussed.
6.2 Special Considerations for Expressway Privatization 6.2.1 Rationale for Privatization An expressway project shows the characteristics of market failure: (1) because of the "lumpiness" of the expressway capacity, an expressway shows economies of density, where the marginal cost decreases as the usage of the expressway increases; and (2) because there is usually only one expressway route between any two points, and because the quality of road services such as design speed are very different from other roads, the competition for an expressway is very limited, and thus the operating agency has monopoly power. Therefore, expressway projects have been executed solely by the Japan Highway Public Corporation (JHPC), which is affiliated with the Japanese government.
125 As a result, there is little competition in the provision of expressways. This lack of a competitive environment, along with the strong possibility of political intervention and high initial construction cost, is thought to be one of the major reasons for the decreasing profitability of expressway projects. To deal with the
situation, privatization of expressway projects has been widely discussed as a measure to increase the economic efficiency of expressway provision. Therefore, when privatization of expressway projects is put into practice, it should be structured so as to increase the competitive environment of expressway projects. If not, gains in economic efficiency may not be achieved. Merely transferring the ownership from JHPC to the private sector,
i.7; =VneV4 V-11-T MVTr · -w--4-In r% IU wtout cangingyy aay other part o r tLe frameworl or allowing any other parties into the expressway project, is not expected to change the situation for the better.
6.2.2 Need for a Public Corporation If expressway projects are opened to the private sector, is it useless to keep a public corporation which is in charge of them? Or is it necessary to keep such a public corporation? I think that a public corporation is necessary for three reasons. Firstly, the Japanese government has already decided to construct about 6,500 km of additional toll expressway routes. However, even if the government provides financial
126 assistance or subsidies to the projects, some of the routes may not be financially feasible for private companies, for reasons such as low traffic volume and the high risk of right-of-way acquisition, environmental problems, construction technology, political intervention, etc.
Therefore, in such cases, a public corporation is necessary to complete the expressway network.
Secondly, after privatization takes place, some private companies will operate expressways. If a private concession holder goes bankrupt or causes a breach of the concession agreement, there might be no organization to take over the expressway in the absence of a public corporation.
Thirdly, for the time being, there is no empirical evidence that the private sector can achieve better results for overall social welfare than the public sector in expressway projects. Even if the private company can achieve production efficiency, allocation problems may lead to an inferior level of social welfare. Therefore, both the public and private sectors should compete with each other until the result of the efficiency question is resolved.
6.2.3 Increase in the Number of Entrants
Even if artificial barriers to entry are abandoned, there would be no guarantee that private companies will take part in expressway projects. If entrants are very limited, competitive forces are also very limited. This is likely to happen in expressway projects in Japan, because most of the
127 new expressway routes will be in a secondary network through mountainous areas, the traffic volume is expected to be
smaller, and construction costs are expected to be higher than existing expressway routes, and so the profitability of
the projects seems destined to be low. Therefore, to
encourage the private sector into the project despite the
problem of low profitability, the privatization plan should include some forms of assistance and risk sharing from the public sector.
However, these arrangements should be as simple as
possible, and should not increase intervention from the
public sector. Such intervention might decrease the possible benefits of privatization by reducing the management ziexbflnP41%1iiiry i 1ii -,tr or%-F Y-private -r= e companies.v% -!Y4
6.2.4 Preventing an Increase in Toll Barriers
In the Japanese expressway network, the closed toll collection system has been adopted. Under this system, expressway users receive a magnetic ticket at the entrance interchange they use, and pay their tolls later at the exit interchange. There are no toll barriers on the main expressway except for some sections around large cities.
Thus, when the number of operating companies increases, there may be the possibility of constructing a new toll barrier between two companies.
Because, no such facility is necessary if there is only one operating agency, the construction of a new toll barrier
128 would increase the cost of construction and operation of an expressway, and would also increase the operating cost of vehicles by forcing them to stop at the barrier. Therefore, the privatization plan should be arranged so as not to increase such facilities if possible.
6.2.5 Continuity of Toll Rate Policy
In the whole project cycle, construction costs account for a substantial part of the total cost of an expressway project. Thus, it affects the toll rate of the expressway network significantly. Currently, the toll rate is determined based on the total profitability of the expressway network, and the same rate is applied to all routes depending on the roadside characteristics such as urban or rural areas, tunnel sections and bridge sections.
However, the average construction cost of a four-lane expressway (two lanes in each direction) has increased by a factor of eight from 0O.60 billion per km in 1965 to Y4.82 billion per km in 1990, and is expected to increase from now on. Therefore, when privatization takes place, if the toll rate is determined based on the average cost of each expressway section or the profitability of each company, toll rates of expressways might differ significantly from route to route, or from company to company. Users of the expressway who face toll rate increases due to privatization will strongly oppose the scheme, and so such schemes may not be feasible. Therefore, privatization should not change the
129 price level drastically, and should consider the continuity of the toll pricing policy.
6.2.6 Scope of Activities
The private company's scope of activities should not be limited to expressway operation. It can operate other business activities which enhance the usage of the expressway, or make the most of the existing expressway facility. For instance, the private company may develop office buildings, apartments and hotels using the air right of the expressway. It can also develop parking lots beneath the expressway right-of-way. Furthermore, it can make new interchanges to develop shopping malls or leisure facilities such as golf courses and ski slopes. The revenue from these activities should be accrued at least partly to expressway users in the form of a toll rate reduction. This can be achieved by retaining some percentage of the revenue for that purpose.
6.3 A Plan for Expressway Privatization 6.3.1 New Construction (1) Procedure After the National Expressway Committee decides on the expressway routes which should be constructed, the Japan Highway Public Corporation will execute initial surveys, will
130 coordination with various governmental agencies, and will prepare for basic planning.
Then, private companies which are interested in these projects will be invited to the proposal stage, and to compete with JHPC. These private companies will develop their own proposals based on the basic planning and will incorporate development plans which are associated with expressway construction. These proposals, along with JHPC's proposal, will be evaluated for the concession contract. If there is a proposal which is better than JHPC's, the private company which submitted the proposal will be awarded the concession contract. If not, JHPC will execute the project.
(2) Contract
The concession contract will be a build-transfer-operate contract. Taking the integrity of the expressway network into consideration, JHPC will remain the owner of the entire network at all times. The private company which receives the concession will finance, construct and operate the expressway. Because JHPC and private companies should be allowed to compete with one another on an equal footing, the private company should receive the same benefits that JHPC currently enjoys. These include:
(A) The private company should not have to pay any
taxes, such as income tax and property tax for the revenue and facilities of the expressway. (The
131 revenue and facilities other than expressways should not be tax-exempt.)
(B) The private company should have access to the Public
Investment Funds, which are collected through the
postal savings system. This would allow the company to receive loans with low interest.
(C) The government should guarantee revenue bonds,
which the private company issues to raise funds for the expressway project.
(D) The government should provide subsidies to the
private company when the overall interest payment exceeds 6.5 % of its total debt.
(3) Toll Rate
Because the same toll rate is adopted on all expressways currently in the network, the toll rate should not fluctuate widely from section to section or from company to company after privatization is put into practiced. Therefore, the toll rate which users of the expressway will pay should be fixed at the current level for the time being. This revenue will go directly into JHPC's account. On the other hand, private companies should propose the rate they would require from JHPC based on vehicle-kilometers traveled on the expressway. The company which proposes the lowest rate will receive the concession. Figure 6-1 summarizes the basic structure of the privatization plan.
132 Figure 6-1 Structure of Privatization UserConstruction of expressways Toll revenue Maintenance JHPC Operation
Operating company Payment under concession contract
There are several benefits under this-type of
arrangement. Firstly, because all the revenue goes to JHPC,
there is no need to construct additional toll barriers even
if the operating companies are different, and the toll rate will not fluctuate from company to company or from section to
section. Secondly, even when the estimated traffic volume of
the new expressway construction project is very low, the private company can bid much a higher rate than the actual toll rate, so that the private company can take part in a
low-profitability project. Finally, there is a high degree of flexibility to incorporate any bonus plans into the payment agreement from JHPC to the private company because the payment is not tied to the actual toll revenue of the expressway.
6.3.2 Existing Expressways Privatization of existing expressways seems to be promising because the risk and the amount of required investment in such projects are much smaller than in new
133 construction projects. The privatization procedure is almost the same as that for new construction. The concession rights for operating existing expressways should be offered to private companies through a competitive bidding or proposal system. JHPC will lease the facility to private companies if their bids are better than JHPC's expectation. If not, JHPC should continue to operate the expressway. To increase the competitive environment, any qualified private company should be allowed to operate a toll expressway, and artificial barriers to entry into a toll expressway project should be reduced to as few as possible.
6.4 Regulatory Framework 6.4.1 Toll Rate Regulation After the initial auction procedure, the company should be regulated based on return on output regulation. As discussed in Chapter IV, return on output regulation does not distort the firm's incentive to reduce operation costs and to increase demand for the expressway in the way that normal rate on return regulation does. Better still, as opposed to direct price regulation such as the "RPI - X" scheme used in the U.K., return on output regulation is a self-sustaining regulatory system. Even if the conditions of demand or supply change, the optimal equilibrium can be achieved without any external adjustment force. Specifically, the regulated firm is allowed to earn a certain amount of profit on traffic volume. The toll rate is
134 regulated at the level of average cost plus fixed profit per vehicle-kilometer. That is to say, at the auction, the private firm proposes
Ro = ACo + r, where Ro: Revenue of the firm per vehicle-km ACo: Average cost of firm's operation per km r: Firm's profit per vehicle-km.
At the beginning, the toll rate is regulated to be equal to
the current level:
Po = J + Ro, where Po: Current toll rate per km J: Revenue of JHPC per vehicle-km.
Here, the revenue taken by JHPC is not necessarily a positive
figure. When the operation cost is very high and traffic volume is very low, it may be negative. At this time, the private firm receives a profit of
no = r*Qo, where no: Profit of the firm per km Qo: Traffic volume.
Because of the competitive bidding process, the profit level of the firm can be considered to be the fair level for the initial period.
After time elapses, the demand and average operation cost will change from the initial state, and the firm might earn some excess revenue. Therefore, the toll rate should be reviewed according to the following formulas:
135 P1 = J + AC1 + r, while R1 = AC1 + r and al = r*Q1, Pl: New toll rate per km AC1: Average cost of firm's operation per km r: Firm's profit per vehicle-km R1: New revenue of the firm per vehicle-km J: Revenue of JHPC per vehicle-km nl: New profit of the firm per km Q1: Traffic volume.
Under this regulatory framework, the firm has the incentive both to reduce its operating cost and to increase demand. Figure 6-2 shows the situation when the firm's operation cost is lowered.
Figure 6-2 Cost Reduction under Return on Output Regulation
*Qo*Qo *QI *Q1
Po
P1
J
Qo Q1 Traffic volume
136 At first, the firm faces the demand curve d-d, and
operates with an average cost of ACo. At that time, the toll rate is Po and traffic volume is Qo, so the profit of the
firm is no = r*Qo. When the operation technology of the firm
becomes more efficient, the toll rate will be reduced to P1,
due to the operation cost reduction. As a result, the
traffic volume will be increased to Q1, and so will be the
firm's total profit (al = r*Q1). Therefore, the firm has the
incentive to reduce operation costs.
Similarly, Figure 6-3 shows the situation when demand
for the expressway is increased. Line d-d shows the initial demand curve. At that time, the toll rate is Po, traffic volume is Qo, and the firm's profit is no. When the demand
is increased to line d'-d', the toll rate will be set to P1,
Figure 6-3
Demand Increase under Return on Output Regulation
I
Po
P1
J
Qo Q1 Traffic volume
137 and traffic volume will be increased to Q1, as will be the firm's profit (al = r*Q1).
6.4.2 Regulation of Congested Expressways In considering the toll rate, it should be separated into two categories. One is the pricing for uncongested expressways, and the other is for congested expressways. On uncongested expressways, the marginal cost of expressway usage is similar to the marginal cost of expressway maintenance and operation. Maintenance and operation costs vary depending on the traffic volume, but the marginal cost of maintenance and operation remains rather stable. Figure 6-4 shows the relationship between annual operation and maintenance costs per kilometer and average daily traffic volume on the 26 expressway routes in Japan. Roughly speaking, the cost of maintenance and operation is proportionate to the traffic volume although it differs depending on types of vehicles and characteristics of roadway condition. Based on the figure, the marginal cost for maintenance and operation of an expressway is estimated to be approximately Y2.9 per vehicle-kilometer for a usage of mid- size car.
138 Figure 6-4
Relationship between Annual Operation and Maintenance Costs and Average Daily Traffic Volume
(thousand yen) y = 1.057x + 2719.498, R-squared: .894
Average Daily Traffic Volume Source: JHPC, Maintenance and Operation Budget in 1989
On a congested expressway, the marginal cost of expressway usage becomes the marginal maintenance and operation cost plus the marginal social cost due to the congestion. Drivers who use a expressway have to bear their own costs for their trips on the expressway. This is called the private cost of expressway usage. This private cost includes such items as the fuel consumed by vehicles, the wear on vehicles, and the time cost of trips. When the traffic volume is relatively small with respect to the capacity of the highway, the private cost is stable. As the traffic volume grows and approaches the expressway capacity,
139 however, the total amount of the private cost is increased dramatically by traffic congestion. This increased portion of the total private cost is called the social cost due to congestion.
Figure 6-5 shows the current toll structure for expressways. Here, MC shows the marginal cost curve, and lines d-d and d'-d' show the demand curve for an uncongested highway and for a congested highway respectively. Currently, the toll rate is set to P on both uncongested and congested sections.
Figure 6-5 Current Toll Rate for Expressways in Japan Price
d' G
V 2m Q'm Q' Trafic Volume
140 On an uncongested expressway, because the marginal cost of highway usage is much less than P, drivers have to pay more money than their real cost of highway usage. This decreases the traffic volume from Qm to Q by charging extra amount of money and causes further underutilization of the expressway. The total loss to society can be defined as equivalent to Area ABC.
On the other hand, on a congested highway, the current toll level does not charge drivers for the full cost of their usage. Therefore, it increases the traffic volume from Q'm to Q', and further increases the social cost of congestion.
The total loss to society is equivalent to Area FGH. If the private operator can increase the toll level to P'm and reduce the traffic volume in some way, that may lead to an increase in social welfare, as well as in the revenue of the expressway network.
Therefore, toll rate regulation on a congested expressway should be different from that on an uncongested expressway. For example, assuming that the loss to society due to congestion is only the time loss, the social loss can be calculated as
W = v*T(C,N)*N(P,x), where W: Social loss due to congestion v: Value of time for expressway users T(C,N): Delay time due to congestion C: Capacity of expressway N: Number of vehicles trapped in congestion P: Toll rate x: Measures to change N such as traffic control.
141 There are three ways to reduce the social loss. One is to reduce traffic volume by using some form of congestion toll. Another method is to reduce traffic volume by using traffic control techniques. The third is to increase the capacity of the expressway itself. In all cases, the maximum revenue from any attempt should not exceed the total reduction in the loss to society. If the revenue exceeds the total reduction in the loss to society, the total welfare gain of expressway users becomes negative. Another important point is that the firm's profit should not be decided based on the revenue of the measure, but on the increase in social welfare.
6.5 Which Project Should Be Privatized? 6.5.1 New Construction vs. Existing Expressway In general, I conclude that privatization of newly constructed expressway routes seems to be very difficult, and that the benefits of privatization may not be large for the following reasons: (A) Because the profitability of these projects seems very low, substantial financial assistance may be necessary to encourage private companies to invest in the projects. This assistance will reduce the management flexibility of the private company. (B) Because the risk of the projects seems very high, private companies require high returns on their investment. For example, in the cases of the
142 California AB 680 Projects and the Dulles Toll Road
Projects, private companies claim approximately 20 %
return on their investments. Therefore, even if
privatization achieves efficient provision of
expressways, the benefits will be accrue to the
private companies in the form of high returns, and
the possibility that users of expressways will not
receive any benefits is quite high.
(C) In the planning stage, because the basic planning of expressway network has already been decided, the
flexibility in route choice is very small. In
addition, negotiations with governmental agencies are
so substantial that it is almost impossible for
private companies to promote their own proposals.
Thus, the benefit of privatization at the planning
stage, if any, may be very small.
(D) In the actual construction stage, construction works have already been contracted to private contractors
by a competitive bidding process. Thus, it is not
plausible that privatization would bring substantial
efficiency gains at the construction stage unless the
private companies themselves formulate the basic
plans for each project.
On the other hand, privatization of existing expressways seems to be feasible, because the risk and the amount of required investment in such projects are much smaller than in
143 new construction projects. In addition, there is the
possibility of achieving efficiency gains by introducing
competition into these projects and of developing new
business activities which are related to the expressways.
6.5.2 Congested Expressways
On congested expressways, congestion pricing or better traffic management may lead to an improvement in social welfare. For a long time, economists and transportation
experts have argued over the need for congestion pricing.
Despite all these debates, congestion pricing schemes have
not actually been implemented in Japan because of problems in
the method of charging.
However, the recent development of information
technology has solved this problem. For example, in 1983 the
Hong Kong Government has introduced a road pricing scheme on several routes in downtown Hong Kong, which uses the automatic vehicle identification technology. 1 The application and improvement of this technology makes congestion pricing appear very promising. Privatization may introduce better application of such pricing schemes as in the California AB 680 Projects, where three of the four private highway operators will adopt some forms of congestion pricing technology.
1.Catling, Ian, and Brain J. Harbord, (1985), "Electronic Road Pricing in Hong Kong", Traffic Engineering and Control, December, 1985.
144 Other than congestion pricing, there are many possibilities for improving social welfare with regard to congested expressways. Introduction of high-occupancy lanes is one such example, and a reversible lane system to adjust to peak demands may be another possibility. The private sector may find a way to allocate the limited road capacity to the most needy parties. Therefore, the privatization of congested expressways may be more desirable and promising than that of uncongested expressways, where the possibility of welfare improvement is limited mainly to the improvement of maintenance efficiency.
6.5.3 Development Gain As I mentioned when discussing the private railway industry in Japan in Chapter II, the private sector may seek the development gain of an expressway project more vigorously than the public sector does. It may find more business activities to take advantage of expressway facilities such as air-right development, or it may' execute real estate development along with the expressway. Some part of the revenue from associated development activities can be used to reduce the toll rate of the expressway. Thus, privatization may be desirable when the possibilities for associated development activities seem promising.
145 6.5.4 Networking Problems
Expressway provision in Japan has reached only about
45 % of the total planned network. Although the expressway network has already been completed in some regions, it has not in other regions. In areas which do not have a completed expressway network, completion of additional routes may completely change traffic volumes on the existing network.
In such a case, the operating companies of the existing network will claim for recovery of the losses caused by the opening of a new route. However, it may be very difficult to assess precisely the effect of the new route, and the arrangement may become complicated. This is likely to be problematic. In that sense, expressways in areas where the network has already completed seem to be the best candidates for privatization.
146 Chapter VII Conclusion
7.1 Rationale for Privatization Privatization has various objectives. Among these, the ultimate goal is to improve economic efficiency as this leads to better national welfare. If privatization does not bring any economic gains, there is no rationale for promoting privatization except for ideological or political concerns. Not all privatization practices are successful. In particular, when competition is very limited, simply transferring the ownership or operation right from the public sector to the private sector may not improve efficiency. Therefore, it is important to increase the competition or contestability of the industry. Liberalization and deregulation will enhance the competition, or at least contestability, within an industry. Accordingly, an efficiency gain is to be expected. In that sense, privatization should be structured so as to increase the competitive environment of the industry or project.
7.2 Privatization of Natural Monopoly Industries There are several obstacles to promoting competition in nationalized industries. In the case of a natural monopoly industry, provision by one firm can result in more efficient production than if two or more firms provide the same
147 services. However, even in such a case, it may be possible to increase the competitive environment of the industry. The privatization of NTT, the deregulation of AT&T, and the case of the Australian railroad industry provide good examples. The liberalized access right to a public network, such as for telecommunications and railroads, has introduced competition into industries which were previously regarded as natural monopolies, and thus has improved the economic efficiency of these industries. Restructuring one large monopoly company into several regional smaller companies, as in the case of privatizing the Japan National Railway, is another possible means of increasing the competitive environment, by creating a situation of yardstick competition and destroying the monopoly power of the large incumbent corporation. Auctioning a monopoly franchise is the third approach, in which any qualified parties can bid competitively to obtain the operation right of the monopoly firm.
7.3 Regulatory Framework In the case of privatization of a natural monopoly, regulation is necessary to avoid having excess profit accrue to the private operator. However, if it is ill-structured, regulation will reduce the firm's incentive to operate efficiently, and thus the benefits of privatization may not be realized. The rate of return regulation currently used in many utility firms and by some private toll highway projects
148 is one such example. When the maximum possible profit is .regulated, and the regulated firm reaches this maximum level, the firm loses incentive to improve efficiency, or in some cases, intentionally reduces its efficiency. I think the fundamental elements of regulation for natural monopoly industries are the following two aspects: the firm must have an incentive to reduce operation costs; and the firm must have the incentive to increase output. Any regulations which distort these principles may lead to poor performance of the private firm.
7.4 Feasibility of Expressway Privatization A toll expressway project shows economies of density, where the marginal cost decreases as usage of the highway increases, and the operating agency has some kind of monopoly power due to limited competition from other highway routes. Thus, in Japan expressway projects have been executed solely by the Japan Highway Public Corporation (JHPC), which is affiliated with the Japanese government. As a result, there is little competition in the provision of expressways, and so the privatization of expressway projects has the potential to increase efficiency if it is structured so as to increase the competitive environment of the expressway projects, as I propose in Chapter VI. In the privatization of existing expressways, the required initial investment and the risk involved are relatively small, so that privatization would be feasible and
149 would be beneficial, especially for congested expressways and
for those where there are many possibilities for associated development gain.
However, I think that the privatization of new
expressway construction may not be feasible due to the low
profitability and high risk involved. Therefore, the
Japanese government or JHPC must share the risk of new
expressway development so as to induce private companies to
enter the expressway business. Problems at the planning stage, such as environmental issues and of right-of-way
acquisition, seem to be the critical factor in determining whether or not a private company will participate in the project. Thus, the public sector should handle these problems in conjunction with its private counterpart to pave the road for the privatization of new expressways.
150 Reference
Act of Trans Tokyo Bay Highway, (1986), (In Japanese).
Allen, Joan W., (1989), "Use of the Private Sector for State Transportation Activities", in The Private Sector in State Service Delivery: Examples of Innovative Practices, ed. Joan W. Allen et al., Washington, D.C.: The Urban Institute Press.
Atkinson, R. Clark, (1991) Private Development of Transportation Infrastructure, Master thesis in Department of Urban Studies and Planning, MIT.
Averch, H. and L. Johnson, (1962), "Behavior of the Firm Under Regulatory Constraint", American Economic Review, vol. 52, No.5, pp. 1053-1069. Bailey, Robert W, (1991), "Uses and Misuses" in Privatization, ed. Roger L. Kemp, Jefferson: McFarland & Company Inc.. Baumol, J. William, and Robert D, Willig, (1986), "Contestability: Development Since the Book," -Oxford Economic Papers, vol. 38 (Supplement), pp. 9-36.
Beesley, M. E. and S. C. Littlechild, (1989), "The Regulation of Privatized Monopolies in the United Kingdom", Rand Journal of Economics, vol.20, No.3, pp.454-472.
Boustany, Sami A., (1992), Privatization and Its Role in the Reconstruction of Lebanon, Master thesis in Department of Civil Engineering, MIT.
Bozdogan, Kirkor, (1991), Privatization of Transportation Infrastructure., Prepared for John A. Volpe National Transportation System Center, US Department of Transportation.
California Department of Transportation, (1989), Privatization: Building a Bridge Between Government and Business.
Catling, Ian and Brain J. Harbord, (1985), "Electronic Road Pricing in Hong Kong", Traffic Engineering and Control, December, 1985, pp. 608-615.
151 Clarkson, Kenneth W., (1989), "Privatization at the State and Local Level", in Privatization and State Owned Enterprises, ed. Paul W. MacAvoy et al, MA: Kluwer Academic Publishers.
Cohen, Yuval, (1991), "California's Private Infrastructure Initiative," Journal of Transportation Economics and Policy, September, 1991, pp. 299-302.
Colman, William G, (1989), State and Local Government and Public-Private Partnerships, New York: Greenwood Press.
Crain, W. Mark and Asghar Zardkoohi, (1978), " A Test of the Property-Rights Theory of the Firm: Water Utilities in the United States", Journal of Law and Economics, October 1978, pp. 395-408.
Delmar, Clare E., (1986), The Private Sector: A Solution to the Infrastructure Crisis?, Report for Economic Development Administration, Department of Commerce.
Domberger, Simon, (1986), "Economic Regulation through Franchise Contracts", in Privatization and Regulation, ed. John Kay, et al., Oxford, UK: Oxford University Press.
Donahue, John D., (1989), The Privatization Decision: Public Ends, Private Means, New York: Basic Books.
East Japan Railway Company, (1991), Restructuring the JNR and the Present Situation of JR East, Tokyo, Japan.
East Japan Railway Company, (1989), Tetsudou Gairon (Railway), Tokyo, Japan, (In Japanese).
East Japan Railway Company, (1991), Annual Report 1991, Tokyo, Japan, (In Japanese).
Economist, (1987), "The Channel Tunnel", October 10, 1987.
Express Highway Research Foundation of Japan, (1992), Toukei to Gurafu de Miru Kousokudouro 1991, (Statistics and Graphs for Expressways 1991), Tokyo, Japan, (In Japanese).
Fraser, Robert and Michael Wilson, (1988), Privatization: The UK Experience and International Trends, Harlow, UK: Longman Group UK Limited.
Geltner, David and Fred Moavenzadeh, (1987), "An Economic Argument for Privatization of Highway Ownership", Transportation Research Record, vol. 1107, pp.14-20.
152 Gomez-Ibanez, Jose A. et al, (1991), "The Prospects for Privatising Infrastructure", Journal of Transportation Economics and Policy, September, 1991, pp. 259-278.
Gormley, William T. Jr. ed., (1991), Privatization and Its Alternatives, Madison: The University of Wisconsin Press.
Haffar, Ramzi Mukhtar, (1991), Public/Private Partnerships and Their Role in Providing Needed Projects in Jordan, Master thesis in Department of Civil engineering, MIT.
Hatry, Harry P, (1991), "Problems" in Privatization, ed. Roger L. Kemp, Jefferson, NC: McFarland & Company Inc..
Helm, Dieter and George Yarrow, (1988), "The Assessment: The Regulation of Utilities", Oxford Review of Economic Policy, vol.4, No.2.
Holliday, I. M., and R. W. Vickerman, (1990), "The Channel Tunnel and Regional Development: Policy Responses in Britain and France", Regional Studies, vol. 24.5, pp. 455-466.
Imidas (Innovative Multi-Information Dictionary Annual Series), (1988), Tokyo, Japan: Shueisha.
Joy, Stewart, (1964), "Unregulated Road Haulage: The Australian Experience", Oxford Economic Paper, vol.16, July 1964, pp. 275-286.
Japan Highway Public Corporation, (1992), Annual Report, Tokyo, Japan, (In Japanese).
Japan Highway Public Corporation, (1992), General Information, Tokyo, Japan..
Kahn, Alfred E., (1988), The Economics of Regulation, Cambridge, MA: MIT Press.
Kay, J. A., and D. J. Thompson, (1986), "Privatization: A Policy in Search of a Rational", The Economic Journal, March 1986, pp. 18-32.
Kay, John, Colin Mayer, and David Thompson, ed., (1986), Privatization and Regulation, Oxford, UK: Oxford University Press.
Keeler, Theodore E., (1983), Railroads, Freight, and Public Policy, Washington, D.C.: The Brookings Institution.
153 SMills, Gordon, (1991), "Commercial Funding of Transport Infrastructure: Lessons from Some Australian Cases", Journal of Transportation Economics and Policy , September, 1991, pp. 279-298.
Ministry of Construction, (1991), Roads in Japan, Tokyo, Japan: Japan Road Association.
Ministry of Construction, (1992), Road Pocketbook, Tokyo, Japan: Zenkoku Douro Riyousha Kaigi, (In Japanese).
Ministry of Construction, (1992), Yutori Shakai no Tameno Michizukuri (Road Construction for the Wealthy Society), Tokyo, Japan: Road Public Relation Center, (In Japanese).
Minkatsu Project Study Group, (1987), Minkan Katsurvoku no Dounyu (Introduction of Private Sector Vitality), Tokyo, Japan: Taisei Shuppan Kai Co., (In Japanese).
Murphy, Kevin J., (1989), "The Performance and Management of United States Federal Government Corporations", in Privatization and State Owned Enterprises, ed. Paul W. MacAvoy et al, MA : Kluwer Academic.
Nevitt, Peter K., (1983), Project Financing, London: Euromoney Publications.
OECD Scientific Expert Group, (1987), Toll Financing and Private Sector Involvement in Road Infrastructure Development, Paris, France.
Oka, Akira, (1992), "Financing Methods for Large Construction Projects", Proceedings on IWABSE.
Okano, Shinichi, (1988), A Financial Evaluation of the Eurotunnel Project, Master thesis in Department of Civil Engineering, MIT.
Pryke, R. (1982), "Comparative Performance of Public and Private Enterprises", Fiscal Studies, July 1982.
Public Works Financing, October 1990.
Rand McNally, (1992), Road Atlas 1992.
Roger, Stephanie, (1990), Eurotunnel: An Innovative Approach to Project Financing, Master thesis in Department of Civil Engineering, MIT.
154 Ross, Randy L., (1988), Government and the Private Sector: Who should do what?, New York: RAND Corporation.
Sakita, Masami, (1989), "Restructuring of the Japanese National Railways: Review and Analysis", Journal of Transportation Economics and Policy, January, pp. 29-45.
Suzuki, Hiroaki, (1990), Regulation in the U.K. Privatization Program, Master thesis in Sloan School of Management, MIT.
Takesue, Naoki, (1991), Financial Evaluation of Refinancing of the Eurotunnel Project, Master thesis in Department of Civil Engineering, MIT.
Todman, Lynn Chatman, (1990), Private Finance of Transportation Infrastructure, Doctor thesis in Department of Urban Studies and Planning, MIT.
Train, Kenneth E., (1991), Optimal Regulation: The Economic Theory of Natural Monopoly, Cambridge, MA: MIT Press.
Trans-Tokyo Bay Highway Corp., (1991), Annual Report 1991, Tokyo, Japan.
Vickers, John and George Yarrow, (1991), "Economic Perspective on Privatization", Journal of Economic Perspectives, vol. 5, No. 2, pp. 111-132.
Vickers, John and George Yarrow, (1989), "Privatization in Britain", in Privatization and State Owned Enterprises, ed. Paul W. MacAvoy et al, MA: Kluwer Academic.
Vickers, John and George Yarrow, (1988), Privatization: An Economic Analysis, Cambridge MA: MIT Press.
Walton, C. Micael, and Mark A. Euritt, (1990), "Highway Finance and the Private Sector: Issues and Alternatives", Transportation Research, vol. 24A, pp. 265-276.
Waterson, Michael, (1988), Regulation of the Firm and Natural Monopoly, New York, NY: Basil Blackwell Ltd..
Weiss, Barbara, ed. (1986), Public/Private Partnership: Financing a Common Wealth, Washington D.C.: Government Finance Research Center.
The World Bank, (1989), Sub-Saharan Africa from Crisis to Sustainable Growth, Washington D.C..
155 Yamada, Akira, (1991), "430 Trillion Public Investment and Financial Issues for Local Governments" in Revision of Administrative Organization and the Third Sector, Tokyo, Japan: Jichitai Kenkyusha, (In Japanese).
Zeckhauser, Richard J. and Murray Horn, (1989), "The Control and Performance of State-Owned Enterprises", in Privatization and State Owned Enterprises, ed. Paul W. MacAvoy et al, MA: Kluwer Academic Publishers.
156