by Yasuyuki Matsui B.E., Civil Engineering

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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
..........................
................
Table of Contents.........................................
3
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........................... .......
Chapter
II
Road and Expressway System in Japan..
12
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......................... .......
3.2.3 Japan............................................
3.3 Objectives of Privatization...........................
3.3.1 Improvement of Economic Efficiency...............
3.3.2 Reduction of Public Funds Requirement............
3.3.3 Reduction of Intervention from Politics..........
3.3.4 Capturing Development Gain.......................
3.4 Types of Privatization................................
3.4.1 Divestiture .......................................
3.4.2 Contracting Out..................................
3.4.3 Franchise Arrangement.............................
3.4.4 Lease Arrangement.
.............
..........
3.5 Potential Problems of Privatization...
..................
3.5.1 Service Quality..................................
3.5.2 Control..................... ......................
3.5.3 Rate of Return Regulation .......................
Chapter IV
36
37
38
38
44
45
45
49
49
50
51
52
52
52
53
53
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
4.4.4
4.4.5
4.4.6
Return on Output Regulation......................
Return on Sales Regulation........................
Return on Cost Regulation.........................
Summary of Natural Monopoly Regulation............
Chapter V
82
82
84
86
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............. ........
6.2.2 Need for a Public Corporation............ ........
6.2.3 Increase in the Number of Entrants ....... ........
6.2.4 Preventing an Increase in Toll Barriers .........
6.2.5 Continuity of Toll Rate Policy.......... ........
6.2.6 Scope of Activities...................... ........
6.3 A Plan for Expressway Privatization .......... ........
6.3.1 New Construction ......................... ........
6.3.2 Existing Expressways..................... ........
6.4 Regulatory Framework......................... ........
........
.
6.4.1 Toll Rate Regulation ...............
6.4.2 Regulation of Congested Expressways...... ........
6.5 Which Project Should Be Privatized?.......... ........
.5.1 New Construction vs. Existing Expressway. ........
.5.2 Congested Expressways.................... ........
.5.3 Development Gain......................... ........
Networking
...........................
- - - - - - - - - - - - - - - - - - - ........
- - -- - - ------ --- a -Problems
- -.5.4
- - - -Chapter VII
125
126
127
128
129
130
130
130
133
134
134
138
142
142
144
145
146
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 ........................... ....
Figure 6-3
Demand Increase under Return on Output
Regulation ...........................
136
.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
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 .............................
Table 2-2
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
However, the monopolistic environment and
expressways.
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.
are identified.
Finally, the problems of expressway provision
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 TransTokyo 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
U.S.A.
West
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
retained (1000 vehicles)
* GNP (billion dollars)
188,670
32,070
25,740
25,800
26380
55,090
4,880
1,208
836
947
826
2,866
8.96
35.02
12.27
12.59
20.21
13.99
33.8
14.1
5.2
12.4
10.6
4.3
44.5
27.2
11.6
26.9
23.1
9.6
172
72
36
73
74
18
* Extension / Land Area
(km / 1000 km2)
* Extension / Population
(km / 1000 persons)
* Extension / Vehicles
(km / 1000 vehicles)
* Extension / GNP
(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
Growth rate
8,211
1.00
9,171
1.12
9,540
1.16
10,848
1.32
Source : Express Highway Research Foundation of Japan
(1992), Statistics and Graphs for Expressways
1991.
Congestion is defined as when the five minute
Note:
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 interstate 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:
of national highway network.
"primary" and "other" section
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
Type of road
Length
in operation
Administrative organization
National Expressway
5.076
Japan Highway Public Corporation
National Highway
Primary section
Other section
46,935
20,580
26,356
Ministry of Construction
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
Expressway
107
Honshu-Shikoku Bridge Authority
Toll road
Source : Ministry of
Ministry of
Note:
Figures are
Expressway,
Expressway,
Toll road
Construction, (1991), Roads in Japan.
Construction, (1992), Road Pocketbook.
as of April 1992 for the national
urban expressways and Honshu-Shikoku
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
Ltional highways
$27.5 billion
Total tax revenue
$63.0 billion
I
efectural roads
nicipal roads
$32.6 billion
T
Bonds or Debt
L
Toll road works
$24.2 billion
Toll road Funds
$31.0 billion
$49.1 billion
Interest payment
Debt repayment
$24.9 billion
Toll Revenuev
$15.2 billion
b
Source:
Note:
Ministry of Construction, (1991), Roads in Japan,
Express Highway Research Foundation of Japan,
(1992), Statistics and Graphs for Expressways 1991.
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 accesscontrolled 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
Japan Highway Public Corporation
Contract
Private Contractors
Japan Highway Public Corporationj
* Detailed design
• Financial arrangements
* Right-of-way acquisition
* Actual construction works
* 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:
Budget for expressways in 1992:
Y3,580 billion ($28.6 billion)
Revenue
Expenditure
Revenue from operation
Y1,445 ($11.6)
154.4 km
Construction
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
Y 1709 ($13.7)
47.7 %
Interest expense and
Debt repayment
Y1,962 ($15.7)
i
Debt from private funds
V344 ($2.8)
54.8 %
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-
20
2
10I5
65
65
21.7/m
_
13/km
Y16.6/km
Y7.5/km
70
70
75
75
Y23.0/km
80
80
85
85
Yea
89
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
Florida
Illinois
Everglades Parkway
East-West Tollway
North-West Tollway
Tri-State Tollway
Indiana Toll Road
Kansas Turnpike
Maine Turnpike
Massachusetts Turnpike
F. E. Everett Turnpike
New Hampshire Turnpike
New Jersey Turnpike
New York Thruway
James W. Shocknessy Turnpike
H. E. Bailey Turnpike
Muskogee Turnpike
Will Rogers Turnpike
Pennsylvania Turnpike
Richmond-Petersburg Turnpike
West Virginia Turnpike
Indiana
Kansas
Maine
Massachusetts
New Hampshire
New Jersey
New York
Ohio
Oklahoma
Pennsylvania
Virginia
West Virginia
Location
Mile
Toll
(dollar)
Toll rate
(cent/mile)
1-75
1-88
1-90
1-94
1-80,90
1-35,75
1-95
1-90
1-93
1-95
1-95
I-87,90
1-76,80,90
1-44
1--14
1-44
1-76
1-95
1-64,77
78
97
76
83
157
233
100
134
39
16
131
496
241
86
53
89
358
35
88
1.50
3.00
2.00
2-10
4.65
7.00
3.20
5.60
1.00
0.75
4.60
18. 10
4.90
2.10
1.30
200
14.70
1.50
3.75
1.92
3.09
263
2.89
296
3.00
3.20
4.18
2.56
4.69
3.51
3.65
203
244
2.45
2.25
4.11
4.29
4.26
136
4.42
3.16
Average
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.
to solve the problem.
Several reforms have been proposed
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
Privatized company
Amersham
Assoc. Brit. Ports
BAA
BA
British Gas
British Telecom
Britoil
Cable and Wireless
National Freight
Rolls-Royce
1979
(Em)
1988
(Em)
Increase
(%)
11
50
20
206
823
624
206
97
19
-87
27
38
127
241
1021
2531
149
345
63
141
145.45
-24.00
535.00
16.99
24.06
305.61
-27.67
255.67
231.58
Source: Suzuki, (1990), Regulation in the UK
Privatization Program.
Note:
.Mý
Figures are adjusted to 1987 prices.
Table 3-2
Return on Capital Employed Before and
After Privatization
Year
1979
(%)
Privatized company
Amersham
Assoc. Brit. Ports
BAA
BA
British Gas
British Telecom
Britoil
Cable and Wireless
National Freight
Rolls-Royce
n/a
16.1
2.1
13.7
20.3
4.8
n/a
24.1
11
n/a
1987
(%)
23.7
14.9
8.6
15.2
16.4
22.1
8.7
28.1
22.5
18.6
Increase
(%)
-7.45
309.52
10.95
-19.21
360.42
16.60
104.55
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.
is a single organization.
The player
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.
unpopular.
Tax-increase proposals have been very
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
Company
Railway
Revenue
Other
Revenue
Total
Revenue
Percentage of
Other Revenue
Tokvu
Seibu
Tobu
Odakvu
66
58
88
62
155
73
82
44
221
131
170
106
70.14
55.73
48.24
41.51
Meitetsu
68
51
119
42.86
Kintetsu
136
43
179
24.02
Nankai
Hankyu
50
77
41
47
91
124
45.05
37.90
Nishitetsu
Private company
Total
22
100
122
81.97
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)
The total extension as of
are in charge of its provision.
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
JR East
I
JNR
/
800
------------------------------------------------------------
--------------------------------------------------------
700
600
600
500
I
-----------------
500
400
400
300
related businessores
300
----------------------------
200
...........
..........
.-....._
100
200
nL,
80
I
81
I
82
L-'
83
84
I
I
85
86
I
I
87
L
I
t
89
88
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
The private sector develops
highway to the private sector.
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?
is no.
The answer
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.
to
Therefore, we have good reason
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
However, in most cases,
retained earnings of the company.
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.
are the owner of the public sector.
transferable.
Ultimately, all taxpayers
Public ownership is non-
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.
cases illustrate this possibility.
Some privatization
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 Industry 2
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 newlyentered 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
Business
Activities
Provision of
telecomunication
services through own
network and facilities
Special Type II
General Type II
Provision of telecommunication services
through network leased from Type I carriers
Large scale
nationwide or
international services
Start-up of
Services
Permission
from MPT
Registration
at MPT
Rates and
Charges
Authorization
from MPT
Notification
to MPT
Other services
Notification
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
Nevada Bell
Pacific Te:eohone
and Tele.ione
Telepnone
boutnern Bell
South Central
Bell
Ohio Bell
Indiana Bell
Michigan Beil
Illinois Bell
Southwestern Bell
Wisconsin TeleDhone
Bell A:lantic
New Jersey sell
Sell o: Pennsylvania
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
been introduced in some countries.
This has
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
Company Name
Total
Number of
Type of
Trackage
Employee
Business
(km)
JR Hokkaido
JR East
JR Central
JR West
JR Shikoku
3,177
7,657
2,003
5,323
881
12,719
82,469
21,410
51,538
4,455
Passenger service
Passenger service
Passenger service
Passenger service
Passenger service
JR Kyushu
JR Freight
2,406
15,000
12,005
Passenger service
Freight service
570
Telecommunication
279
550
64
2,520
Computer service
Railway research
Shinkansen leasing
Account settlement
JR Telecommunication
JR Information System
JR Technical Research Institute
Shinkansen Property Holding
JNR 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 crosssubsidization 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 newlydeveloped 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:
P:
Q:
w:
L:
K:
f:
Rate of return
Price
Quantity of product
Wage rate
Labor
Capital
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.
internal force to adjust the situation.
There is no
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
Thus,
production costs and to maximize the production level.
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
Revenue of the firm
P
C
Optimal
MR
Quantity
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 previous case.
The logic is the same as
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
Regulation
Optimal Equilibrilum
on Demand Curve
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-ofway, 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 fourlane, limited-access, 10 mile toll road (Route 125) in San
Diego County.
dollars.
The total cost is estimated to be 400 million
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.
to be 88.3 million dollars.
The total cost is estimated
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.
be 1.2 billion dollars.
The total cost is estimated to
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
Operator/Lessee
Owner/Lessor
Purchase payment
Private firm
Sale (Ownership)
* Depreciation tax shield
* Interest tax shield
Fund
for pur
Lease back
Lease payment
TRCV
* Construction
* Operation
ce
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
Tokyo Bay Coasval Highway
Tokyo Ou:er Loop Highway
S' * * *Melropolilan Central Connec:ing Highway
hle:ropol'.an Expressway
SEx:,ressway & Toll Roads
Na:tonal Highways
P:inc;pal Local Roads
O Tolyo Interna;ornal A;rort lHar~dal O Ch.ba.To•ane
)
igh;,y
O To.-e; E•press•ay
( Yokohamra-Yokosuka H.gh•ly
O Chuo Eipressway
o Th;rd-K;hn Hgray
O Kan.e:su Ex;ressý.ay
O Central Loop Rou:e
o To.oku E.,es-_sy
(D Looo No. 6
O Joanh Epressweay
o Loo.•No. 7
O H,;gash, KanGo E*;ressway
o Loop No. 8
O Ke;yo qShway
0 New Tokyo Interna:4nai A;,or
Source: Trans-Tokyo Bay Highway Corporation.
(Nart:a
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 TransTokyo 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
JHPC
TTB
Total
(million $)
%
1,692
(18.3)
7,518
Equity
480
Loans from private banks
1,925
Loan from government
2,000
Bonds guaranteed by government 3,113
100.0(81.7)
6.3( 5.2)
25.6(20.9)
33.6(21.7)
41.4(33.8)
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.
consists of three tunnels and two terminal stations.
It
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
Loan Drawn
To Completion
Date
After Completion
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,
R:
P:
Q:
I:
where
Revenue of the private company
Predetermined toll rate
Projected traffic volume
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
%
(million A$)
Source of funds
33.6
223
Loan from government
59.3
394
Bond issue by SHTC
6.0
40
Loan from joint venture
1.1
7
Equity from joint venture
100.0
664
Total
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
miles away?
five
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.
111
In addition to the
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
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
In
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.
sector can handle this well.
I think the public
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-ofway 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.
gains in economic efficiency may not be achieved.
If not,
Merely
transferring the ownership from JHPC to the private sector,
i.7;
=VneV4 V-11-T MVTr
wtout
cangingyy
aay
other
·
In r%
-w--4-
part
or
tLe
frameworl
or
IU
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
v% -!Y4
ziexbiiiry or private companies.
flnP41%1i 1ii -,tr %-F Y- -r= e
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.
131
(The
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.
will go directly into JHPC's account.
This revenue
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
Construction
User of expressways
Toll revenue
Maintenance
Operation
JHPC
Payment under
concession contract
Operating company
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.
134
The toll rate is
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,
Revenue of the firm per vehicle-km
Ro:
ACo: Average cost of firm's operation per km
Firm's profit per vehicle-km.
r:
where
At the beginning, the toll rate is regulated to be equal to
the current level:
Po = J + Ro,
Po:
J:
where
Current toll rate per km
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:
Qo:
Profit of the firm per km
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:
AC1:
r:
R1:
J:
nl:
Q1:
New toll rate per km
Average cost of firm's operation per km
Firm's profit per vehicle-km
New revenue of the firm per vehicle-km
Revenue of JHPC per vehicle-km
New profit of the firm per km
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
136
Q1
Traffic volume
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.
demand curve.
Line d-d shows the initial
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
Q1
Qo
137
Traffic volume
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 midsize 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.
the private cost of expressway usage.
This is called
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'
V
2m
G
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.
to Q',
Therefore, it increases the traffic volume from Q'm
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:
v:
T(C,N):
C:
N:
P:
x:
Social loss due to congestion
Value of time for expressway users
Delay time due to congestion
Capacity of expressway
Number of vehicles trapped in congestion
Toll rate
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.
problematic.
This is likely to be
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.
efficiency gain is to be expected.
Accordingly, an
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
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