maintaining public transport in japan’s countryside ... · a passenger density of 5 to 15. it...

2 Japan Railway & Transport Review • November 1996

Special Feature

Copyright © 1996 EJRCF. All rights reserved.

Rural Railways

Maintaining Public Transport in Japan’sCountryside - Burden Sharing and Subsidies

Mitsuhide Imashiro

Local Bus on Mountain Road (Transportation News)

Bankrupt Local Bus Company

In March 1968, Kochi Prefectural Trans-port Co. Ltd., a local bus company, wentbankrupt. The company had been capi-talized at ¥240 million and its debts to-talled ¥2,123 million, nearly nine timesits capital. This made news because thedirector in charge of accounting disap-peared and the company was found toowe a large amount of money to a ‘loanshark.’ More importantly, it cast darkshadows over the future of local bus com-panies. The company was relatively large,serving the people of Kochi Prefecture inShikoku, one of the four main Japaneseislands. Most of the local bus companiesin Japan were established as small, pri-vate enterprises in the 1920s and 1930s.Under the wartime controls in the 1940s,they were unified on a prefectural basisresulting in one to several companies ofrelatively large scale in each prefecture.There were two bus operators in KochiPrefecture, and the Company was thelarger of the two. The entire prefecturewas well served by many routes includ-

ing those from the Prefectural capital,Kochi City (population 300,000) to CapeAshizuri. From the end of WWII to theearly 1960s, the Company’s buses wereknown as the ‘red buses’ among the localpeople who rode them regularly. TheCompany thrived from the profitable ex-press bus services between cities and ex-panded to the less-profitable ruralareas. Then, full-scale motorization be-gan as part of the rapid postwar economicgrowth. At the same time, many peoplemoved from rural to urban areas. Localbus companies, including Kochi Prefec-tural Transport Co., soon found themselvessuffering from these social changes.The bankruptcy meant sudden abolitionof bus services for local people, for high-school students riding the bus everydayand for elderly people who had to go tohospital regularly. The community sud-denly faced the need to secure a meansof transportation for the ‘transportationpoor’. The Prefectural government pre-pared a temporary grant to maintain thebus services after the company waswound up. The grant helped save the busservices for a time, but the Company’s

main bank stopped all loans until it couldsubmit realistic rehabilitation plans. TheCompany carried out the first plan in May1968. The plan called for reducing thecapital by 70% and converting loans into¥200 million of equity. The plan alsocalled for selling the Company’s headoffice in the centre of Kochi City, whichalso served as its bus terminal, as well asthe sale of a toll road that the Companyowned.The Company’s shareholders changedcompletely after the equity swap. Halfthe management team was also replaced.The president, who was a member of thelocal plutocracy, was replaced by a gov-ernment officer from Kochi Prefecturalgovernment. The first plan was imple-mented smoothly and a second plan wasfinalized in January 1969. It called for40% reduction in the number of employ-ees by voluntary resignation and dis-missal. It also called for abolishment ofsome bus lines representing 48% in route-km or 17% in vehicle-km. The personnelcut was to be achieved by lowering theretirement age and by introducing “oneman” bus operation. But the plan wasopposed by the labour union and wasabandoned. The partial bus route aboli-tion plan aroused strong oppositionamong the communities along the routes.But they also began serious discussionabout securing public transportation as-suming that the Company’s routes wereto be ended.After the second plan failed, a third re-construction plan was proposed in Octo-ber 1970. It was no more than a re-intro-duction of the second plan but with thepercentage of personnel cuts reduced to33% and temporary postponement of abo-lition of ten of the bus routes. The newplan was carried through after an agree-ment was reached with the labour unionthat no one was to be fired against his orher will. But the plan created victims andmany people left the company reluctantly.The number of employees fell from over

3Japan Railway & Transport Review • November 1996Copyright © 1996 EJRCF. All rights reserved.

1800 in 1966 to only 900 in 1973. Theabolition plan affected 62 routes (760 km)primarily in the mountain areas. Someroutes (14%, 105 km) were abolishedcompletely with no substitute transport.They were the least busy routes with a pas-senger density of 3 or less. The local au-thorities financed substitute services forthe remaining 655 km.

Grants and Burden Sharing

The local governments were forced toaccept responsibility for maintaining somemeans of public transport after the busroutes were abolished. The routes weresalvaged by three methods, which laterbecame a precedent for keeping publictransport in other depopulated areas. Thefirst method was breaking up the Com-pany into smaller new companies to runthe least-profitable bus routes. The newcompanies had the lowest possible wagesfor employees and highest possible busfares for passengers. The employees thatleft Kochi Prefectural Transport Co., es-tablished four companies using thismethod.The second method was to allow a localtaxi company holding a license to oper-ate charter buses, to operate scheduledbuses. Charter-bus operators are prohib-

ited from operating scheduled busesunder Article 24 of the Road Transport Act,although the law also permits such op-eration when services by the scheduledbus license holder are not feasible. Again,the second method was implemented atlow wages and costs.The third method was for municipalitiesto operate scheduled buses themselves.Since none of the municipalities had li-censes to operate either taxis or charteredbuses, they needed to rely on non-com-mercial vehicles to provide services. TheRoad Transport Act (Article 101) prohib-its provision of such commercial servicesby non-commercial vehicles except as alast resort. The substitute buses run bythe municipalities were nicknamed ‘Ar-ticle 101 buses’ referring to the excep-tional provision of the Act.The only grant for local bus companies inJapan at that time was the Bus PurchasingGrant for remote islands. The grant avail-ability was expanded after 1967 to de-populated areas on the four main islandsas well. In 1969, a new grant was intro-duced to compensate for the loss of busservice operators in remote islands andareas. In the new system, central govern-ment and local governments (prefecturesand municipalities) shared the cost ofcompensating for bus operators’ deficits.Still another grant was introduced in 1970

to help municipalities purchase substitutebuses. A special grant for local bus com-panies was added in 1972 after a seriesof financial crises and scandals similar tothe case of Kochi Prefectural Transport Co.The grant was primarily for bus routes witha passenger density of 5 to 15. It includeda grant for purchasing buses from the cen-tral government and the prefecture at aratio of 50% or 33% each. There wasalso compensation for deficits from thecentral government and the prefecture ata ratio of 50% each, or from the centralgovernment, prefecture and municipalityat a ratio of 17% each. Such a grant wasnot considered appropriate for bus routeswith a passenger density of less than 5.However, a special grant was made avail-able in justifiable cases to be borne bythe central government and prefecture ata ratio of 25% each.Grants were not deemed necessary forroutes with passenger densities over 15because their operation should be profit-able. The operators of profitable busroutes are expected to solve their finan-cial problems themselves by cross-subsi-dies between profitable and unprofitableroutes. An operator with a higher degreeof monopoly has a better chance of re-ceiving government grants. This revealsthe Ministry of Transport’s intent to in-crease the business scale of each opera-tor in order to restrict competition. How-ever, I wonder if such a measure is reallyeffective for bus operations which haveno scale merits. The Ministry of Trans-port is proud of the grants for local buscompanies in that it was able to maintainbus services in all parts of the country ata relatively small annual cost amountingto ¥10 billion. However, an unavoidablecut in grants is foreseen due to budgetproblems. This will present a new prob-lem for local bus companies because theirprofit level has dropped so low that theycannot survive without the grants. A ma-jor cut will certainly mean serious prob-lems.

Diesel Railcars on JNR Shibetsu Line in Hokkaido (now closed) (T. Iizuka)

4 Japan Railway & Transport Review • November 1996 Copyright © 1996 EJRCF. All rights reserved.

Rural Railways

Students Form Majority of Provincial Train Passengers (T. Iizuka)

The cost of substitute bus operations afterthe closure of Kochi Prefectural TransportCo. was borne by the central government,the prefecture and the municipalities at aratio of 1:2:3. This is a large burden for alocal government in the countryside with-out a substantial financial base. Despitethe plans, the Company soon faced a newcrisis in March 1971 and filed an appli-cation under the Company RehabilitationLaw. The court appointed a receiver tobegin the necessary procedures, but theplan presented by the receiver was op-posed by the large shareholders who werealso large creditors, and the plan wasabandoned. The management was re-placed and a voluntary reconstructionplan was introduced. It mainly consistedof another equity swap, debt writeoff bythe Bank of Shikoku and an increase inworking hours for employees. The Com-pany survived by burden sharing of theshareholders, creditors and the employ-ees, although the financial crisis has neverbeen resolved completely.

JNR Measuresfor Provincial Lines

Buses are the last resort for public trans-portation in depopulated areas in Japanbecause there are no substitutes such asshared taxis. Obviously, the bus is betterthan the railway in terms of cost in a low-density transport market. Accordingly,during the 1960s, private railway compa-nies in local areas in Japan adopted apolicy of abolishing railways and runningbuses instead. A total of 1500 km of lineswere closed during the 10-year periodaround 1970. This represented nearly40% of the route-km of local, private rail-ways in the 1960s. Naturally, JNR’s pro-vincial lines were as unprofitable as theprivate lines. JNR began its rationaliza-tion efforts in the 1950s. In 1968, it an-nounced a plan to abolish 2600 km along83 lines, representing nearly 40% of pro-vincial lines, and replace them with buses.But it managed to close only 120 km, or amere 5% of the plan, because local com-munities showed vehement opposition tothe plan, unlike the opposition to similarplans of private railways.

Construction of government provinciallines began in the 1920s. The RailwayConstruction Act was passed in 1922, andrailway lines were built in many parts ofthe country. Construction continued formore than 50 years until the 1970s. TheAct was legislated by the Hara Cabinet,Japan’s first cabinet after universal suf-frage. Local communities, anxious tohave railways in their towns and cities,formed ‘railway construction forums’while their local parliamentarians lobbiedthe central government demanding thatconstruction start in their areas immedi-ately. These forums became powerfulpressure groups during elections. Whilethe local parliament members were ea-ger for construction of provincial lines, therailway bureaucrats insisted that it wasmore important to increase the capacitiesof the trunk lines such as the Tokaido andSanyo lines. However, political pressurewon and led to the Railway ConstructionAct.But, within 10 years of the Act, privatecompanies were introducing bus servicesin rural areas as well. During the 1930s,some private railways lost the competi-tion and abandoned their lines. But theconstruction of government provinciallines continued. Severe fuel shortagesduring WWII seriously damaged bus com-panies and railways regained their posi-tion as the major means of transport.After the defeat in 1945, rural transportrelied heavily on provincial railway lines.The war delayed the transition from pri-vate railways to buses in rural areas fortwo decades. The delay lasted for anotherthree decades as far as JNR’s provinciallines were concerned.JNR went into deficit in 1964 and suffereda serious financial crisis every year after.The situation grew critical about 10 yearslater when the deficit had spiralled tonearly ¥1 trillion. JNR’s cost calculationindicated that nearly 33% of the deficitarose from provincial lines, which repre-sented 40% of total route-km but only 5%


of passenger- and tonne-km. Their cost/revenue ratio was over 500%. The gov-ernment legislated the JNR RehabilitationAct in 1980 to reduce JNR’s deficits byeither replacing the least profitable pro-vincial railway lines with buses or de-manding that local communities maintainthese lines at their cost. In short, the soleobject of the Act was to relieve JNR of theunprofitable provincial lines. New pro-vincial lines under construction were tobe terminated or to be taken over bylocal communities. The Railway Reha-bilitation Act was passed towards theend of JNR’s history, just 7 years beforeprivatization. Naturally, no one imaginedprivatizing JNR at that time.As shown in Fig. 1, the Railway Rehabili-tation Act classified railway lines on thebasis of traffic density and route-km. As arule, those lines with a traffic density of4,000 or less were to be closed in threesteps as shown. Public transportation wasto be provided by privately-run buses, inwhich case any deficit from the bus op-eration during the first 5 years was to becompensated entirely by government sub-sidy. If a local government wanted to keeplines open, they were to be maintainedonly as a private railway. The law pro-vided a government subsidy for half of anydeficit during the first 5 years of privateoperation. This meant that local govern-ments had two options: abandon the rail-way and switch to cheaper bus operation,or stick with the railway at extra cost.Nearly half of affected communities chosethe bus, while the other half preferred therailway. In addition to the deficit com-pensation subsidy, the government alsooffered temporary subsidies to buy rail-cars or buses, build new garages, or to besaved for future deficits.

Third-sector Railways

Most of the railway companies that tookover JNR’s provincial lines were estab-lished in the form of joint stock compa-nies, capitalized by the local government(prefecture, municipality) and privatecompanies. Since profits were not fea-sible from the railway business, muchcould not be expected of private compa-nies and most investors were local banksand shippers. This type of company capi-talized by a local government and privatecompanies is called a third-sector com-pany. With few exceptions, all the rail-way companies that took over JNR’s pro-vincial lines were the third-sector com-panies. Their book values were not highbecause the main assets were the infra-

structure inherited free-of-charge fromJNR and railcars purchased with subsidies.This means large capital was not neces-sary, but in some cases the big differencesbetween the book value of assets and theactual construction cost could be prob-lematic. For example, Sanriku RailwayCompany, the first third-sector railwaycompany, was capitalized at only ¥300million while construction costs were ashigh as ¥50 billion.The Sanriku Line faces the Pacific Oceanalong the northeastern part of Japan run-ning mainly through undeveloped farm-ing and fishing villages. A railway con-struction forum had been formed there formany years. After lobbying over threegenerations, a new line was constructedover a relatively long route of 100 km.The railway provided transport for stu-

Step 3

Step 2

Figure 1 Outline of Division of Lines

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ffic

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/day

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Trunk Lines

Step 1

Provincial Lines

8000

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30 50

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Trunk Line Network


Rural Railways

Passenger Density of JNR Provincial Lines / Third-Sector LinesUnit: Traffic Density

1965 1975 1977-1979 1983 1984 1985 1986 1987 1988 1989 1990 1994

Chihoku / Hokkaido Chihoku Kogen 1799 1107 943 … … 726 677 … … 516 476 456

Ohata / Shimokita 2490 1667 1524 1081 1090 1162 811 717 … 537 513 423Kuroishi / Konan 1999 2176 1904 1297 1165 711 685 648 … 565 592 487Aniai / ANJ North line 2562 1587 1524 1039 982 927 845 728 693 — — —Kakunodate / ANJ South line — 372 284 182 176 170 193 199 227 — — —

Akita Nairiku Jyukan — — — — — — — — — 567 515 494Yashima / Yuri Kogen 3958 2201 1876 1310 1151 1153 982 901 884 886 869 996Nagai / Yamagata 3935 2395 2151 1589 1555 1445 1377 … 1466 1286 1298 1249Kuji / Sanriku North line — 530 762 684 1224 1123 1009 944 936 957 981 805Miyako / (Sanriku North) — 692 605 831 — — — — — — — —Sakari / Sanriku South line — 928 971 865 1158 1075 991 892 858 846 866 717

Sanriku (Total) — — — — 1202 1107 1003 926 910 920 942 775Marumori / Abukuma Kyuko — 1270 1082 906 926 870 1207 1391 1753 1804 2049 2304Aizu / Aizu 2195 1562 1333 1101 1016 960 971 1390 1317 1248 1258 1291Ashio / Watarase Keikoku 2491 1732 1315 858 884 886 581 626 1271 828 892 960Moka / Moka 3205 1820 1620 1427 2024 2066 1943 … 1406 1398 1443 1777Kihara / Isumi 3286 1680 1815 2256 2248 2307 1930 2015 1339 1267 1266 1045Akechi / Akechi 2124 1525 1623 1119 1132 1354 1221 1178 1171 1161 1134 1034Hutamata / Tenryu Hamanako 3320 1904 1518 1077 1022 959 1466 955 1057 1090 1163 1097Okata / Aichi Kanjyo — — 2757 … … 2951 2930 3049 3298 3756 4162 4934Ise / Ise — 2007 1508 … … 1354 2634 1268 1332 1480 1876 2905Etsuminan / Nagaragawa 2948 1620 1392 1058 993 976 907 896 798 745 812 823Tarumi / Tarumi 2049 1192 951 652 864 798 869 876 1110 1026 1088 1041Shigaraki / Shigaraki Kogen 2452 1667 1574 2079 2079 2078 1529 1372 1328 1318 1413 1276Miki / Miki 2268 1496 1384 1088 1027 822 631 514 548 545 519 472Noto / Noto 2139 2542 2045 1581 1500 1454 1392 2197 1267 1193 1194 1290Kamioka / Kamioka — 477 445 255 394 265 239 194 161 138 167 161Miyazu / Kitakinki Tango 5600 3659 3120 … … 2365 2164 … … 1060 1467 1442Hojo / Hojo 3599 1957 1609 973 883 667 637 643 616 647 690 647Wakasa / Wakasa 3268 1781 1555 2058 2028 2023 1768 1138 1099 1009 1009 906Gan-nichi / Nishikigawa 2201 1398 1420 1231 1155 981 874 1030 997 971 971 887Nakamura / Tosa Kuroshio 1801 2583 2289 … … 1689 1629 … 1543 1509 1623 1643Ita/ 7959 3399 2872 … … 1959 1883 … … — — —Itoda/ 1805 1561 1489 … … 1049 907 … … — — —Tagawa / 4621 2594 2132 … … 1362 1230 … … — — —

Heisei Chikuho — — — — — — — — — 1543 1601 1585Amagi / Amagi 2002 868 653 389 397 397 1238 1498 1892 1917 1993 2293Matsuura / Matsuura 3383 2235 1741 1303 1266 1228 1170 … 1166 1145 1181 1405Yunomae / Kumagawa 3998 3475 3292 … … 2310 2129 … … 2190 2196 1984Takachiho / Takachiho 1958 1593 1350 934 1042 939 846 727 … 785 750 820Takamori / Minami Aso 1687 1280 1093 748 692 715 780 694 700 699 682 765

JNR lines / Third-sector railways— No data… Not available

Sources: Ministry of Transport Surveys and Statistics


dents in local areas often referred to as‘lonely islands on land’ and the ratio ofstudents going to high school rose as aresult. The company bought new dieselrailcars to serve the local people and tomeet their expectations. But the futurewas not bright. As in the case of manythird-sector railway companies, the singleimportant problem was the persistent de-cline in the medium-to-long range trafficforecast. The number of private passen-ger cars in Japan began increasing towardthe late 1960s. Many families evenowned several cars in the 1980s. Ashousewives began driving their childrento school in small cars, the railway grewless popular with commuters. “We can-not beat the convenience.” was the im-pression about cars felt by those operat-ing local railways. Another problem wasthe decrease in the number of high-schoolstudents due to the falling birth rate.Third-sector railways also faced a crisisafter the 50% government subsidy fordeficits ended in the sixth year of busi-ness.Some third-sector railway companies in-creased their traffic volume temporarilyby increasing the number of trains during

the first years in business. However, forthe majority, traffic volume was destinedto decline. They resorted to frequent fareincreases but faced limitations as fare in-creases usually result in decreased pas-sengers. Deficits arising after the 5-yeargovernment 50% deficit subsidy, or futuredeficits, must be met by the local govern-ment. There are government subsidies fordeficits of local private railways but theyare small and getting smaller year-by-year.For this reason, third-sector railways stand

Last Train to Run on Akatani Line in Niigata Prefecture (Shibata Tourist Association)

only a slim chance of receiving subsidies.Government subsidy for deficits arisingfrom substitute bus operation is stoppedafter 5 years, but the deficits from bus op-erations are far lower than from railwayoperations, making it relatively easier forlocal governments to bear the cost.Strangely, the number of passengers de-creases rapidly when railways are re-placed by buses. Many passengers seemto switch from railways to cars and mo-torbikes, not to buses.Although third-sector railways face a se-vere financial environment, none haveceased operations to date. Since they arebasically operated by the local govern-ment, it is not easy to close them becausethe governors and local parliament mem-bers tend to respect the will of voters. Athorough cost reduction programme is in-troduced from the very beginning when athird-sector railway company is estab-lished. They often hire JR retirees andpersonnel costs are minimized by count-ing pension as part of wages. This meansthe balance is not likely to be improvedby further rationalization. Since third-sec-tor companies are often undercapitalizedand cannot depreciate assets, they mustrely on local government for subsidies toreplace railcars and facilities.One third-sector railway experienced aNew Rolling Stock of Third-Sector Sanriku Railway Co. (T. Iizuka)


severe accident resulting in death and in-jury of many passengers. In this case, thelocal government bore the repair costs.

Future Challenges

With central government facing a wors-ening financial crisis, there are moves to-wards reducing government subsidies forlocal bus operations. This means the bur-den on local government is likely to in-crease for bus operations as well as forrailways. In other words, the last meansof public transport in rural areas main-tained by small companies created bybreaking up large deficit-ridden busi-nesses may eventually disappear. The JNRRehabilitation Act of 1980 selected linesfor closure on the basis of their commer-cial performance between 1977 and1979. However, there are now some pro-vincial lines operating with traffic volumesbelow the closure criteria meaning thatthey will have to be maintained by cross-subsidization using the profits from trunklines.At the time of JNR privatization, the gov-ernment created the Management Stabil-ity Fund to support the new JRs inHokkaido, Shikoku and Kyushu whereprofitable operation is difficult.The Fund was created to avoid excesscross-subsidization but it actually relieson the profitability of three main-islandJRs, although detailed explanation is notwithin the scope of this article.Therefore, if the profits of the railwaysnetworks as a whole decline, closure ofprovincial lines both on the main islandand three smaller islands may becomeunavoidable. For example, since theprivatization of JNR, small portions of pro-vincial lines in Honshu and Hokkaidohave been closed.Rapid economic growth in postwar Japanstimulated people in rural areas to moveto cities creating both regional depopula-tion and overpopulation. The decline of

Mitsuhide Imashiro

Professor Mitsuhide Imashiro graduated from the post-graduate school of Seikei University in 1978.

He lectures at Daito Bunka University, and has been visiting professor at Stirling University in Scot-

land. In 1991, he published Outcome of the Privatisation of the Japanese National Railways.

public transport in local areas was causedby depopulation and motorization begin-ning in the mid-1960s. Countermeasuresmainly consisted of cost reduction, com-pany breakup and establishment of third-sector companies, and provision of sub-sidies. The same measures were also ap-plied to sea routes in remote islands andlocal air routes. However, over the last10 years, the government’s budget crisishas worsened, while motorization hasprogressed to such a degree that mostadults own a car and the number of stu-dents using public transport has decreasedsubstantially. These demographicchanges are likely to make conventionalcountermeasures obsolete. The newtransport environment will place a greaterburden on localities and local people informs such as joint club-type ownershipof buses, two-part tariff systems, and shar-ing of private passenger cars.

Rural Railways

Inaugural Train of Third-Sector Watarase Keikoku Railway Co. (Railway Pictorial)

maintaining public transport in japan’s countryside ... · a passenger density of 5 to 15. it...

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