Hirotaka Yamauchi: Aiming for Sustainable Railways

2022/12/15

Hajime Seki, the 7th Mayor of Osaka, graduated from the Higher Commercial School (now Hitotsubashi University) in 1893. After serving in the Ministry of Finance, he returned to his alma mater as a professor in 1897. He taught social policy and transportation theory. However, Seki was not satisfied with being a university professor and, upon request, became the Deputy Mayor of Osaka, eventually assuming the office of Mayor in 1923. While Seki is famous for his urban planning during his tenure as mayor, his greatest achievement was likely the development of the Midosuji Subway Line.

In constructing the Midosuji Line, Seki introduced a beneficiary-pays system. This was based on the City Planning Act and the Urban Building Act enacted in 1919. It involved drawing a circle with a 700-meter radius around subway station entrances and requesting contributions from landowners within that area. While the purpose of the contribution system was naturally to secure project funding, researchers of the time noted it was also to ensure fairness, based on the premise that land values in the surrounding area would rise due to the subway development. He put the theory of "returning development profits to the public" into practice.

"Every Tub Must Stand on Its Own Bottom." This famous idiom is interpreted in the railway world as "a business must be self-supporting." However, looking back at the history of railway development, there are few examples where railways succeeded solely on a self-supporting basis. As socio-economic infrastructure, railways generate significant external effects. The establishment and development of railway businesses have been realized by capturing and "monetizing" these external effects. The development along railway lines by Ichizo Kobayashi, the father of the revival of Hankyu Railway, was the pioneer of this approach.

Railway projects, which require massive capital investment and long gestation periods, have high fixed-cost ratios and significant economies of scale. Self-sufficiency only becomes possible when there is enough demand to sufficiently lower the unit cost of transport. However, demand is often insufficient, especially at the start of operations. As the region develops and passengers increase, a phase arrives to recover the initial investment. Even then, returning development profits is necessary to recover huge initial investments and fixed costs. The theoretical correctness of this method in terms of resource allocation has also been proven. It is an application of the Henry George Theorem, which analyzed optimal city size.

Triggered by the drop in demand due to the COVID-19 pandemic, the future of local lines and regional railways has become a topic of discussion. In the case of JR, local lines are supported by the transfer of profits from profitable lines (internal subsidies), but if the railway business as a whole becomes sluggish, that capacity is limited. The impact of the recent pandemic has been immense, shaking the very backbone of JR itself. Furthermore, there are cases where financial recovery becomes difficult due to damage to railway facilities caused by earthquakes or extreme weather.

In regional railways, internal subsidies between lines cannot be expected in the first place. The number of passengers for the 95 operators currently surviving (including 31 lines across 26 operators converted from the former Japanese National Railways' "Specified Local Lines") decreased by 22% from the peak in 1990 to 2019. Only 21% of all operators are profitable on an ordinary income basis; 80% are loss-making companies. And these are the figures from 2019, before the pandemic.

This year, marking the 150th anniversary of railways, a council of the Ministry of Land, Infrastructure, Transport and Tourism compiled a proposal aimed at "renewing regional mobility through collaboration between railway operators and local communities." The government will establish a "forum for discussion" between railway operators and local governments along the lines. Through these discussions, they will categorize lines into "sections where the public policy significance of operating a railway is recognized" and "sections where public policy significance can be achieved through BRT or buses," and then consider exit strategies. Of course, even in the former case, a corresponding burden on the region and users is a prerequisite, and operators are required to achieve thorough efficiency. In the latter case, a system that enables a smooth transition to BRT or bus transport is required.

Operators and regions discussing the future of railways is the only solution for the future of the railway business, and I believe it is a reasonable proposal given the current situation. However, as can be easily predicted, those discussions will take a long time and, in some cases, may worsen the situation further. Rational decisions are needed before it is "too late." Additionally, there are examples where regional railways have been revitalized through partnerships between local communities and innovative operators. So-called innovation is precisely what is important in such situations.

In doing so, the capture of external effects brought about by railways, as mentioned above, must be considered. Of course, it would be far-fetched to expect the same return of development profits along railway lines that Hajime Seki or Ichizo Kobayashi achieved for regional railways facing declining populations and decreasing users. However, there are external effects brought by regional railways that can be recognized precisely because we live in the modern era.

For example, to contribute to the realization of a decarbonized society, there are proposals to build regional power systems using railway facilities. This includes the introduction of renewable energy using railway land, power transmission and distribution systems laid along the lines, decarbonized urban development combining these elements, and the construction of regional power sources. Regional power sources are also effective for strengthening resilience.

Whether these constitute "external effects" in the strict sense is not the issue. For regional railways and local lines to be sustainable, their importance as social infrastructure must be emphasized, and cross-sectoral initiatives are necessary.