The Value of Money
Introduction
The Japanese National Railway (JNR) was originally known as the Imperial Government Railway up to the end of the Second World War (Watanabe, 1994). According to Watanabe (1994) the Japanese National Railway was formed in 1906 from the merger of Tokaido, other government-built main lines and some newly nationalized private lines. The company became a public corporation in 1949 and reported profits up to 1964 when it started making losses (Watanabe, 1994). To correct this loss making position, the corporation embarked on a strategy of increasing train ticket prices each year as from 1974.
The one way Shinkansen train ticket from Tokyo to Osaka which had originally been set at 2,480 Yen was increased to 5, 050 Yen in 1974 and further to 10, 800 Yen in 1981(Yamaguchi, & Yamasaki, 2009). In fact the ticket from Tokyo to Osaka as at 1987 was being sold at 13, 100 yen which was an increase of 10,620 from what it was before the strategy to increase the fares was adopted (Yamaguchi, & Yamasaki, 2009). Despite these strategies the company’s deficits rose to 1,000 billion yen annually whereas annual government subsidies rose to 670 billion yen by 1980 (Watanabe, 1994). Among other factors the loss making position was contributed largely by the huge capital investment in Shinkansen lines and systems which increased the long-term debt burden and led to high finance costs (Watanabe, 1994).
When all efforts to turnaround JNR into a profit making entity failed, the corporation in 1987 was split into seven railway companies-JR East, JR Central (Tokai), JR West , JR Hokkaido, JR Shikoku, JR Kyushu and a nationwide freight company known as JR Freight (Watanabe, 1994). The seven companies were set up as wholly-owned subsidiaries of JNR Settlement Corporation; a corporation set up solely for that purpose (Watanabe, 1994). The companies were thereafter privatized through the offloading of shares to the public through the stock exchange shares in an initial public share offer (Watanabe, 1994). After the privatization government control was substantially reduced and the companies were henceforth treated as private railway companies (Watanabe, 1994).
Capital Cost
Due to the astronomical capital requirements of building new Shinkansen lines and systems, the government took up the role of funding the construction cost and other costs related to the improvement and expansion of any new shinkansen systems to be operated by the newly formed JRs companies after the split (Watanabe, 1994).A new development fund known as the “The Railway Development Fund” was set up to undertake this activity (Watanabe, 1994). Initially, at the time of the split, a Shinkansen Holding Corporation was incorporated to hold the Shinkansen systems assets. The three mainland JR companies operating these Shinkansen systems were required to lease the relevant assets from the Corporation at certain agreed fees (Watanabe, 1994). The fees were henceforth used to repay the long-term debts incurred when raising funds to construct the initial Shinkansen systems (Watanabe, 1994). Later the stakeholders realized that this arrangement could affect negatively the envisaged privatization of these JR companies (Watanabe, 1994).
The Shinkansen Holding Corporation was henceforth dissolved in 1991 and its assets transferred to the JR companies to facilitate privatization. A Railway Development Fund was thereafter formed with an initial capital outlay of 9,200 billion yen which was raised from the transfer revenues earned during the transfer of the assets to the JR companies. This debt of 9,200 billion yen was shared out between the JR companies and the government (Watanabe, 1994). At the point of formation the three mainland JR companies of JR Tokai, JR West and JR East were projected to make losses in the immediate future mainly because they had inherited only one-fifth or one-sixth of the passenger-density of the mainland companies (Watanabe, 1994). The stakeholders set up a Stabilization Fund to meet their operating losses during this period before they started making profits (Watanabe, 1994).
The JR companies took over long term debts amounting to 25,400 billion yen at the point of the split. In addition they took over debts amounting to 9,200 billion yen which were incurred when setting up the Railway Development Fund. They also took over debts which included pensions and other expenses of 7,100 billion yen; shinkansen construction projects debts of 4,500 billion yen and JR group’s long-term liabilities of 37,100 billion yen (Watanabe, 1994). The JR companies shared out the debts in proportion to their asset book values (Watanabe, 1994). The JNR Settlement Corporation took over debts totaling 25,500 billion yen and also 2,900 billion yen which were owed by the dissolved Shinkansen Holding Corporation (Watanabe, 1994). JNR Settlement Corporation planned to settle these debts with proceeds from the sale of the dissolved original JNR Corporation’s assets which were estimated to fetch7, 700 billion yen. The funds were to be generated from the sale of such assets as land and JR companies’ shares which were estimated to fetch 1,200 billion yen (Watanabe, 1994). The remainder of the debts estimated at 13.8 trillion yen was taken over by the Government and was to be settled using tax payers’ money. (Watanabe, 1994).
Construction cost
Due to the fact that over investment in shinkansen systems by the original JNR led to its financial collapse, a law outlining a nation-wide plan for Shinkansen expansion and construction was passed by the Japanese Diet on 1970 (Yamaguchi, & Yamasaki, 2009). Extension of the network north to Sapporo in Hokkaido and to Kagoshima in Kyushu and the development of Hokuriku Shinkansen connecting Tokyo and Osaka via Nagano and Toyama was envisaged in subsequent Development Plans (Yamaguchi, & Yamasaki, 2009). An important feature of the new Shinkansen funding plan was to avoid financial crisis from reoccurring in the new JR companies as it happened in the past (Yamaguchi, & Yamasaki, 2009). The financing plan implemented in 1989 for the expansion of Shinkansen to Nagano was to be funded from funds in the following ratio: 50% JR companies, 35% central government and 15% local government (Yamaguchi, & Yamasaki, 2009).
The financing plan was revised in 1996 to ensure JR companies only bear construction and expansion costs of shinkansen systems up to the level of their benefits (Yamaguchi, & Yamasaki, 2009). The rest of the investment cost was to be shared out in the ration of; 2/3 by the central government and the remaining 1/3 of the cost to be financed by the local government (Yamaguchi, & Yamasaki, 2009). For example in the period between 2005 and 2006 total investment on new Shinkansen systems amounted to 220 billion yen out of which the government contributed 32% in grants. The rest of the funds to finance the project were raised by the local authorities and the remainder by the JR Group companies respectively (Railway Gazette International, 2005).
Cash flow model
Since the privatization, the JR companies continued to project positive cash flow figures. According to M2 EquityBites (2011), JR Central recorded positive cash flows from its Tokaido Shinkansen bullet train business. The Tokaido Shinkansen connects Japan’s three biggest economic zones and hence it plays a central role in the passenger transportation system in Japan (M2 EquityBites, 2011). According to Jiji Press English News Service (2004), JR Central, for example, generates free cash flows of more than 200 billion yen each year. JR Central is therefore able to general adequate cash flows to meet its debt obligations due the favorable regulatory environment that has been put in place (M2 EquityBites, 2011).The JR companies keep their capital expenditure within certain limits that ensures they are below the benefits to be derived from each additional shinkansen system to be constructed and are able to generate a constant flow of free cash as a result (Jones, 1999).
Lenders and Financing
Construction of the Tokaido Shinkansen systems started in 1959. The construction cost was financed by a loan of UD$80 million which was extended by the World Bank (Fukada, 2008). Other funds were generated through a loan given by the government and funds generated through floatation of railway bonds in the debt markets (Watanabe, 1994). However, after the privatization, funding of new shinkansen developments was to be shared out by stakeholders in the following ratio; 50% JR companies, 35% central government and 15% local government (Yamaguchi, & Yamasaki, 2009). After privatization the government borrowed 300 billion yen from financial institutions to cover the costs of constructing new Shinkansen facilities and used about 320 billion yen in profits from selling existing Shinkansen facilities to JR firms as security. The government used this option due to the fact that interest rates remained low and was easier to access than other funding sources (Funaki, 2004).
Revenue Streams via the PPP
According to Watanabe (1994) the reforms which saw the formation of new JR companies in 1987 was an essential step of a long process of turn around. Several steps were taken which led to cost savings and revenue enhancement. Over staffing was addressed by first scaling down recruitment after 1977 and nearly stalling recruitment after 1982 (Watanabe, 1994). JNR workforce fell by 95,000, from 421,000 to 326,000, between 1980 and 1985 and the fall was escalated to 132,000 by 1999 which was roughly a 72 per cent reduction (Watanabe, 1994). JNR also closed loss making Shinkansen lines with fewer than 4000 passengers per kilometer per day to boost profitability pursuant to a JNR Rehabilitation Promotion Act of 1980(Watanabe, 1994). This led to a closure of about 45 lines by the end of 1999.
To improve net productivity levels per each employee and eradicate loss of revenue due to absenteeism and unauthorized leaves, JNR Settlement Corporation carried out inspections in all the seven JR companies during the period between 1982 to 1985 .This was done to crack down on unauthorized leaves and unjustified payments (Watanabe, 1994). This led to substantial savings. A system of workplace consultative meetings which was introduced due to trade union pressure in the early days before the split and which led to wastage of man-hours during working hours was also overhauled and made more reasonable (Watanabe, 1994). These measures increased staff morale levels increased overall productivity levels.
During the first six years of the existence of the JR companies, the average annual operating profits of the seven JR companies totaled 542 billion yen, as compared to an annual loss of 1,769 billion yen during the last five years of the JNR period before the split (Watanabe, 1994). The JR companies thereafter became net contributors to the government budget, except in 1989 when the Government provided a special subsidy to reduce the burden of cumulative debt (Watanabe, 1994).
The other revenue stream was the sustained growth in passenger traffic volumes on the Shinkansen lines as compared to pre reform period. According to Watanabe (1994) JR companies passenger traffic volumes grew at an annual rate of 3.4 per cent as from 1987 to 1992. Yet another revenue stream was the addition of new shinkansen lines. For example during the same period the Seikan Tunnel between Hokkaido and the mainland and the railway bridges connecting Shikoku with the mainland were opened in 1988 (Watanabe, 1994). These brought in additional revenues.
The JR companies also enhanced revenues by offering better and more diversified services than was the case before and also resorted to aggressive marketing strategies to increase passenger volumes (Watanabe, 1994). Yet another revenue source was the substantial decline in the interest rates on the long term debts which reduced the overall interest expense (Watanabe, 1994). This led to substantial savings. The JR companies also started focusing on non- railway business which grew to about 20 per cent of the total revenues earned in any given year (Watanabe, 1994).
Cost-benefit analysis
Although the total costs of constructing high speed shinkansen systems may be colossal the benefits exceed the costs by far. For example the Central Japan Railway is planning to introduce by 2027 a magnetic levitation train simply known as the “maglev” which will reach speeds of up to 310 miles per hour (Fender, 2011). This new train will serve the route between Tokyo and Nagoya which is around 165 miles and it is projected to cost between 4 trillion to 6 trillion yen (Fender, 2011). Shinkansen lines running in major population centers with convenient passenger terminals, frequent service, and travel times of two to four hours attract substantial passenger volumes (Fender, 2011).
The new maglev trains are expected to bring in annual cash flows of between 250-300 billion yen which will ensure the construction cost is recovered within a period of between 25-30 years (Asia Pulse, 2010). The benefits of the shinkansen systems include shortening of traveling time which increases the value of time (Fukada, 2008). For example when the 300 Series shinkansen bullet train was introduced, it reduced the travel time between Tokyo and Osaka to 2 1/2 hours (Fukada, 2008). The number of passengers who travel by the bullet trains is very large. Yamaguchi & Yamasaki (2009) noted that in the first six months of Shinkansen operation, 3.6 million passengers traveled on the Tokaido Shinkansen line. Shinkansen passenger volumes continued to increase and by 1975 the number of travelers hit the 157 million mark (Yamaguchi & Yamasaki, 2009). These passenger volumes could only be achieved by Shinkansen systems since they have a large passenger carrying capacity. In fact the first bullet trains which were known as the “Hikari” super-express and “Kodama” express trains consisted of twelve cars with a total of 987 seats (Yamaguchi & Yamasaki, 2009). Shinkansen increase the value of time in modern times and this in turn increase productivity levels in the economy.
The trains also encourage travel hence contribute to the increase of revenues for hotels, shops and leisure facilities (Fukada, 2008).The bullet train is viewed as a sign of prosperity and are unlikely to be abandoned in the foreseeable future (Fukada, 2008). The bullet trains also provide a lot of employment opportunities which is good for the economy.
Some people however argue that the bullet trains are contributing to uneven development by encouraging people to relocate to Tokyo and thus the areas with enormous populations are benefitting more than the ones which have fewer populations. Yet other people argue that the bullet trains cause certain types of pollution namely; air, noise, vibration, radio wave disorders and reduced eyesight ability (Fukada, 2008). However when the benefits are measured they tend outweigh the costs.
References
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Watanabe, S. (1994). Restructuring of the Japanese national railways: Implications for labour. International Labour Review, 133(1), 89-89. Retrieved from http://search.proquest.com/docview/224007469?accountid=45049
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