International Transportation (69) 1 | 2017 21 PPP in Japan’s railway system - a success story Public private partnerships, Japan, rail service, railway infrastructure, railway operations, rural public transportation Public private partnerships for railways in Japan are different from those in other countries. Many railway lines in Japan are profitable and can easily generate enough revenues, so that there is no need for either the public sector to pay subsidies, nor for the private sector to invest money in public railways. However, due to declining passenger numbers in some areas, this model does not work anymore. In this paper the Japanese model of PPP is described, where the public sector takes over private railways to prevent them from being closed. The authors describe the main principles and the reasons of successful PPP-projects in Japan. Wilfried Wunderlich, Oliver Mayer I n the age of global warming, the Japanese government is committed to protecting the environment [1]. Consequently, it supports public transport via railways, as this is the most energy-efficient transport system with the lowest CO 2 emissions. However, railway systems are known to involve capital-intensive infrastructures [2]. For many countries, public private partnerships (PPP) represent an option for sharing the burden of costs. PPPs are agreements between governments and the private sector for the purpose of providing and maintaining public infrastructures, community facilities, and related services. PPPs have become popular in recent years, because the public sector cannot secure enough funds to maintain or operate the public infrastructure, including railways [3-5]. In the Japanese railway sector, however, PPPs play a different role. Many private and public railway lines in Japan are profitable. In densely populated urban areas, traffic volume is very high, so that steady revenues are generated. These revenues enable the railways to pay for necessary maintenance, buy new rolling stock, and finance small infrastructure improvements. However, demographic changes and the increased use of privately owned automobiles have resulted in a decline in the number of passengers in some areas. As a result, private railways are not always able to continue service on a loss-making line. In such cases, the public sector may have to step in to prevent the railway from being closed. When national polices support public transport, the first hurdle of securing funding is overcome. As shown in figure 1, financing is a matter of the railway operator. Different models of joint ventures (JV) for example, special purpose vehicles (SPVs), private finance initiatives (PFIs), designbuild-finance-operate (DBFO) projects, build-transfer-operate (BTO) projects, and others have been described and analyzed in the literature [4, 5]. However, these models have mainly been developed for the purpose of building new railway lines. In this paper, we focus on currently operating railways that are facing the problem of declining passenger numbers. In these cases, the general interest in regional transport, the citizens’ needs in the community, and, in particular, how the media report about the situation assume major roles. When railway infrastructure is designed and built, it should Public Private Partnership BEST PRACTICE The Akechi Railway (Gifu Prefecture) was converted 1985 into PPP. Photo: Oliver Mayer International Transportation (69) 1 | 2017 22 BEST PRACTICE Public Private Partnership then support the passengers that use it. Passenger acceptance of the infrastructure (e. g., satisfaction with convenience and comfort) is reflected in media reports. Hence, there are complex interactions in the railway business between stakeholders and they are represented in figure 1 with reverse arrows indicating the mutual dependencies. Railway operators in Japan are also trying to influence passenger motivation to travel by train by launching destination campaigns, public relation programs, or other marketing strategies in order to improve the social integration in the community [6]. Japan’s railway system Following Japan’s railway reform in 1987 and subsequent privatization of the former Japanese National Railway (JNR), today about half of Japan’s approximately 200 railway companies are privately owned. The largest railways in Japan are also private companies. About 90-95 % of the total number of rail passengers in Japan are transported on their lines, excluding subways. The equity participation of most railway companies is differentiated between shareholders. Unlike railway systems in most other countries, because the largest railways in Japan are private, they do not require any public support to finance their daily operations. Indeed, due to the large number of passengers, many railway companies have been profitable for many decades, and there has thus been no need for the public sector to engage in railway operations. Private railways in Japan can be grouped into two categories. The first group includes the traditional private railways that have been private since the beginning of their operations. Among them are large companies with a track length of 100 km or more (e. g., Seibu, Tobu, Odakyu, Meitetsu, Kintetsu, Hankyu, and Nishitetsu), but also small regional railways (e.g., Fuji Kyuko and Toyohashi Railway), and tramways (Okayama, Hiroshima, and Nagasaki). The second group consists of former public railways that have been privatized, for example, JR East, JR Central, and JR West (formerly JNR) as well as small local railways (e. g., the Semboku Rapid Railway). All subways and some tramways in Japan are publicly owned, as are JR Hokkaido, JR Shikoku, and JR Freight (formerly JNR), and some regional railways (e.g., South Hokkaido Railway, Echigo Tokimeki Railway, and Tosaden Kotsu). All other railways are jointly owned by the public and private sector and are thus PPP-railways (more commonly referred to in Japan as third-sector railways) [7, 8]. These railways include former JNR local lines (e.g., the Sanriku Railway) or former JR lines running parallel to new Shinkansen lines (e.g., the Shinano Railway, the Iwate Ginga Railway and the Aoi Mori Railway). These were handed over to prefectural governments, who are now in charge of operating them, often in cooperation with private companies, with a total of 45 lines. However, in many cases, operating results have been mediocre [7]. Because land prices in Japan are very high and infrastructure must withstand earthquakes, construction costs for new railway lines are relatively high. Thus, since the 1960s, about 50 new lines in Japan have been built and operated by companies whose basic capital is jointly held by the public and private sectors. These new lines mainly operate in Figure 2: Wakayama Electric Railway was rescued after the transfer into PPP Photo: Oliver Mayer Figure 3: Hitachinaka Seaside Railway is a PPP between the former private railway operator and the local government. Photo: Oliver Mayer Railway Operator Politicians Media Financing Travel motivation Passengers Information Communication Maintenance Service Comfort Community interests Regional interests National interests Acceptance Length Contract Diversification Diversity Ethics Public interest Figure 1: Relationships between railway operators and their stakeholders, such as passengers, media and politicians. International Transportation (69) 1 | 2017 23 Public Private Partnership BEST PRACTICE urban and suburban areas, but they also provide freight service for newly developed harbors (e. g., Sendai Airport Transit, Yurikamome, Tsukuba Express, Yokohama Minatomirai Railway, Chiba Monorail, Osaka Monorail, Linimo, and Keiyo Rinkai Railway). The last group of PPP (third-sector) railways consists of formerly private railways that have been transferred to the public sector in recent years, as the private owners have no longer had sufficient funds to continue operations. These include, for example, the Wakayama Electric Railway (illustrated in figure 2), the Hitachinaka Seaside Railway (figure 3), the Yokkaichi Asunaro Railway (figure 4), the Iga Railway, Manyosen, and the Echizen Railway (see also table 1). PPPs prevent private railways from-closing Most railway lines in Japan are profitable due to high passenger numbers. Unprofitable routes can be supported by pooling income generated from profitable routes operated by the same train company or by profits from non-railway business. Government subsidies for loss-making lines have traditionally only been granted if the lines were owned by public or public-private companies; private railways have never been eligible for any kind of grants to cover operating deficits. Therefore, if a private railway line was in deficit, ultimately it was closed and transportation was replaced by bus service. Once the downward spiral started, it was hard to be stopped, as illustrated in figure 5. Recent examples include the tramway system of Gifu and the Hitachi Electric Railway (both closed in 2005), the Kashima Railway (closed in 2007) or the Towada Kanko Railway (closed in 2012). A train is a mass transportation system and can be expected to be profitable when the population density in its region is higher than a certain level, which is according to our investigations in the range of 150 to 1000 persons per square kilometer, unless there are other socio-demographic characteristics of the residents in the service area. A recent example of closure in December 2016 was the JR Rumoi Line in Hokkaido in a sparsely populated rural area. Recently, however, closure of railway lines has not been positively accepted by the general public [8]. Hence, viable railways with potential for passenger growth or regional development have been kept open. In all these cases, the public sector has become involved in railway ownership and/ or operations (a previously unknown practice in these regions), thus allowing the railway to continue providing service (see figure- 5). A list of some of these railways and their new ownership structures is provided in Table 1. In some cases, the ownership of the infrastructure was separated from the railway operations. This is a common system in Europe, but a new concept in Japan. The Kishigawa Line of the private Nankai Railway was transferred into a PPP consisting of Okayama Electric Railway and Wakayama City in 2006, forming Wakayama Electric Railway (figure 2). Unique marketing of a “stationmaster cat” helped to attract media attention, resulting in an increase in revenues. The Hitachinaka Seaside Railway (figure 3) is a PPP with Hitachinaka City holding the majority of shares, and Ibaraki Transport, the former private owner, a minority. This new railway was formed in 2008, as Ibaraki Transport could not secure enough funds on its own to keep the railway running. The line had been opened in 1913 and has been privately owned and operated ever since, but falling passenger numbers forced the public sector to get involved in operating a railway. The Yokkaichi Asunaro Railway is another example of a successful transition from private to public ownership. It is a small railway consisting of two lines (Utsube and Hachioji lines) with a total length of Year Railway Former owner New owner(s) 2002 Manyo Line Kaetsuno Railway Takaoka City, Imizu City, Toyama Prefecture, others (mainly public) 2002 Aoi Mori Railway JR East Aomori Prefecture and others (mainly public) 2003 Echizen Railway Keifuku Electric Railway Fukui City and others (mainly public) 2006 Wakayama Electric Railway Nankai Wakayama Electric Railway (operator, fully private) Wakayama City (property owner, fully public) 2008 Hitachinaka Seaside Railway Ibaraki Transport Hitachinaka City and Ibaraki Transport (mainly public) 2008 Fukui Railway Meitetsu Group Fukui Town Management, Sabae Chamber of Commerce, and others (mainly public) 2010 Aoi Mori Railway Aoi Mori Railway Aoi Mori Railway (in charge of train operation only), Aomori Prefecture (new infrastructure owner, fully public) 2015 Ainokaze Toyama Railway JR West Toyama Prefecture, Toyama City, and others (mainly public) 2015 Yokkaichi Asunaro Railway Kintetsu Kintetsu, Yokkaichi City (operator, mainly private), Yokkaichi City (infrastructure owner, fully public) 2015 Kyoto Tango Railway Kitakinki Tango Railway Willer Trains (operator, fully private), Kyoto Prefecture, Kyotango City, and others (infrastructure owners, mainly public) Note: Unless different ownership for operator and infrastructure is mentioned, the railways are integrated companies owning the infrastructure and operating trains. Table 1: Recent PPP-developments in Japan’s railway sector Figure 4: Yokkaichi Asunaro Railway is an example of successful PPP Photo: Oliver Mayer International Transportation (69) 1 | 2017 24 BEST PRACTICE Public Private Partnership 7- km, running in the industrial city of Yokkaichi, the largest city in Mie Prefecture with a population of 310,000. Originally built by the Mie Railway between 1912 and 1922, the two lines were absorbed in 1965 by Kintetsu, Japan’s largest private railway. The lines, running as urban railways with a narrow gauge of 762 mm, are unique in Japan. During Japan’s economic boom after the Second World War, passenger numbers on the two lines rose, reaching a peak of 7.2 million passengers in 1970. However, in the following decades, increased suburbanization and motorization led to a 50 % decrease in railway passengers (3.6 million passengers in 2013). By 2010, although the lines were losing JPY 270 million (Yen; about EUR 2.2 million) a year, the losses were fully covered by Kintetsu. Because Kintetsu was a private railway company and profitable as a whole, the Utsube and Hachioji lines were not eligible for public subsidies. In 2012, Kintetsu was no longer willing to cover these losses and suggested closing the two lines and converting the track into a bus rapid transit system. However, Yokkaichi City rejected this proposal, preferring instead to keep the railway running by transferring the two lines to a public railway system. For this to happen, the two lines had to be separated from Kintetsu. Thus, in 2015, a new railway company, the Yokkaichi Asunaro Railway, was formed, with Kintetsu retaining 75 % of ownership and Yokkaichi City 25 %. The Yokkaichi Asunaro Railway company has remained in charge of train operations, but does not own the tracks or the rolling stock, which is unusual in Japan. Instead, all infrastructure and rolling stock have been transferred from Kintetsu to Yokkaichi City for free. The city is responsible for covering maintenance costs. A third of these maintenance costs have been subsidized by the state and a further sixth by the prefecture, so that Yokkaichi City effectively pays only half of the costs. Because the city has leased all infrastructure to the railway for free, the railway’s operations were profitable in its first year, thus resulting in a total financial burden for Yokkaichi city of around JPY 100 million (about EUR 900,000) a year. This arrangement is valid until March 2025 and will be reviewed thereafter [9]. Yokkaichi Asunaro Railway’s name refers to its narrow gauge lines. In Japanese, naro means “narrow”, and asu means “tomorrow/ the future”, thus indicating that this type of railway has a future. Indeed, without Yokkaichi City’s involvement, it would not have a future. This is only one example of a Japanese public-private partnership according to which the public sector has taken over financial responsibility for a deficit-making private railway line. Similar examples are the Iga Railway and Yoro Railway, also both formerly Kintetsu lines, in the Mie and Gifu Prefectures. The dilemma of Japanese railway companies As mentioned above, there are three main types of railway financing systems in Japan, namely, private railways, joint privatepublic railways, and public railways. All three types face severe decreases in revenues owing to declines in passenger volume, especially in rural areas. This situation is depicted in figure 5 (parts a and c), which summarizes the relationships that exist when a new business is opened (as adapted from textbooks on entrepreneur businesses). The stakeholders and funding bodies must reach the breakeven point. After that, the investment is compensated for by the revenues, and even a rise in profit can be expected. Figure 5 (parts b and d) show the situation when the conditions for revenues worsen, as it is the case for rural railways in the present age of changing demography and high usage of privately owned motor vehicles. The downward spiral, spurred on by negative reports in the media, results in a further decline and is followed by deficit. When the media reports about the situation, it usually focuses on the railway itself and a last glowing up of positive revenues is achieved. This is the last chance of hope to turn a declining business into success. Instead of the worst alternative of closing and scrapping (see figure 5 parts b (4) and d (4), there is the option of making a transition (figure 5 b (3)) from a purely public or private financing system to a PPP. The transition itself increases the motivation of the stakeholders and may reduce the business operating expenses. There is another point where a transition is even more likely to be a success. If a major change in the business environment is Stakeholders visibility; Founders motivation Investment Profit Dead valley Plateau of productivity Slope of enlightenment Amortization Break even Profit gain Inflated expectations Basic analysis Set-up Stable commercial operation Time [years] (1) Profit loss Red account Innovation (1) Downward circle starts Countermeasure Last glowing up (a) (b) (c) (d) Media attraction Disillusiont n e m (4) Dismantling, scrap, sell Loss of interest (4) Closure (2) Transition (3) Transition (2) Transition (3) New ownership Figure 5: Financial situation when opening a new business (a), when closing (b), and the stakeholder visibility or founder’s mentality when opening (c), and when closing a new business (d). Figure 6: A typical third-sector railway is the Aoi Mori Railway, and the train is bearing the local mascot. Its ownership was transformed into a PPP after the construction of a high-speed line. Photo: W. Wunderlich International Transportation (69) 1 | 2017 25 Public Private Partnership BEST PRACTICE expected, countermeasures can be implemented. A typical example for this case is the opening of a high-speed line, which leads to a loss of most of the long-distance travelers on the old line. If it is already foreseeable that the revenues from the remaining regional or even local traffic will be much less than before, then this is the point where a transition of the old line is appropriate. Starting from a much higher level of public acceptance prevents the occurrence of a destructive spiral of downgrading and the company can be saved at its present level. An example can be seen in the third-sector railways founded on former JR lines, where the long-distance traffic was converted to Shinkansen [6]. Typically, the prefecture owns the majority of the shares (more than 51 %), the municipalities along the line hold minor shares, and local businesses own from 10 % to 20 %. As around a dozen long-distance freight trains are using such railway lines, there is also national interest to keep them in service. Figure 6 shows a train in Hachinohe belonging to the Aoi Mori Railway, which runs the local services to Aomori. By displaying the mascot in large size, the connection to local communities is strengthened and social acceptance improved [6]. The secret, however, why PPP has been successful in Japan is related to the prevalent work mentality of the operating staff as well as the managers. Let us explain how this psychosocial and cultural attitude against work affects the financial situation. Railways are a predominant example of how to maintain security. In Japan, the following four pillars of risk prevention are commonly embraced [10]: (1) reduce risk factors, (2) be aware of safety, (3) promote priority improvement plans, and (4) provide individual training to prepare for dealing with critical situations. When converting this concept to financing, it means that instead of increasing control mechanisms such as watchdogs or regulators, it is better to address the question, whether inherent safety design can prevent human errors. Adequate and appropriate training is the best safety protection measure to deal with human or system failure, together with observation and detailed documentation of work progress. In addition, eliminating the influence of the most uncontrollable or irrational factors (e.g., short-term decisions of individuals, financial instability, or incorrect forecasts of passenger volume) have been mentioned as representing the most critical success factors (CSF) for PPPs [4]. Instead of analyzing the situation passively, active measures of leadership are the key to success. Such examples are training of the staff, simple contracts, training to prevent unethical behavior, and open discussion to prevent asymmetric flow of information are a few issues that have already been discussed in the guidelines of good governance (GGG) as factors of psychosocial and cultural attitude making further PPPs sustainable [11]. Conclusion The examples of successful PPPs for railways in Japan were based on the willingness of local or prefectural politicians to make decisions for maintaining public transport, as shown with the Yokkaichi Asunaro Railway. Although it still might be a long way from CSF to GGG in PPPs, the more private-public partnerships are achieved, the more successful and sustainable such projects will be. ■ REFERENCES  [1] Okano-Heijmans, Maaike (2012), Japan’s ‘green’ economic diplomacy: environmental and energy technology and foreign relations, The Pacific Review, 25 [3], 339-364, doi: 10.1080/ 09512748.2012.685090  [2] Boll, Philip (2007), Investitionen in Public Private Partnership-Projekte [Engl.: Investment in Public Private Partnership-Projects], Schriften zur Immobilienökonomie, Band 43. Rudolf Müller Verlag.  [3] Shaoul, Jean; Stafford, Anne; Stapleton, Pam (2012), The Fantasy World of Private Finance for Transport via Public Private Partnerships, International Transport Forum Discussion Paper 6, doi: 10.1787/ 5k8zvv6tn2bven, or http: / / hdl.handle.net/ 10419/ 68822  [4] Osei-Kyei, Robert; Chan, Albert P. C. (2015), Review of studies on the Critical Success Factors for Public-Private Partnership (PPP) projects from 1990 to 2013, International Journal of Project Management, 33, 1335- 1346, doi: 10.1016/ j.ijproman.2015.02.008  [5] van de Velde, D. M. (1999), Organisational forms and entrepreneurship in public transport, Part 1: classifying organisational forms, Transport Policy, 6, 147-157  [6] Wunderlich, Wilfried (2016), Rail network developments: Japanese railways go for better social integration, Internationales Verkehrswesen, 68[3], 51-53. Online Supplement, http: / / www.internationalesverkehrswesen.de/ rail-transport-in-japan/  [7] Mayer, Oliver (2017), Mehr Stagnation als Hoffnung: Ein Überblick über Drittsektor-Bahnen im ländlichen Raum Japans [Engl.: More stagnation than hope: An overview of third-sector railways in rural Japan], Bulletin of Aichi University of Education, Humanities and Social Science, 66, 135-144, http: / / hdl.handle. net/ 10424/ 7016  [8] Saito, Takahito (2015), Overcoming Difficulties Faced by Local Railway Transport, Japan Railway & Transport Review, 65[3], 6-17, http: / / www.ejrcf.or.jp/ jrtr/ jrtr65/ pdf/ 6-17_web.pdf  [9] Personal communication with the department of Urban Planning, Yokkachi City, March 17, 2017 [10] Watari, Chiharu (2014), Outline of the JR East Group Safety Plan 2018 - The Sixth 5-year Safety Plan, Japan Railway & Transport Review, 64[10], 76-83, http: / / www.ejrcf.or.jp/ jrtr/ jrtr64/ pdf/ 76-83_web.pdf [11] United Nations Economic Commission for Europe (2008), Guidebook on promoting good Governance in Public-Private-Partnerships, http: / / www.unece.org/ fileadmin/ DAM/ ceci/ publications / PPP.pdf Wilfried Wunderlich, Dr. Professor, Tokai University, Faculty of Engineering,Hiratsuka (JP) wi-wunder@rocketmail.com Oliver Mayer, M.A. Professor, Aichi University of Education, Department of Educational Administration and Governance, Kariya (JP) omayer@auecc.aichi-edu.ac.jp 04-06 October 2017 Casa Convalescència, Barcelona, Spain The 45th European Transport Conference Booking Discounts - Deadline 30 th June 2017 Delegates are now invited to book their place at the European Transport Conference to benefit from an Early Booking Discount. 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