SAPPORO -- The government has decided on an assistance scheme of more than 40 billion yen over the two-year period of fiscal 2019-20 for Hokkaido Railway Co. (JR Hokkaido), which is saddled with extensive loss-making railway lines. The contents of the assistance scheme are highly unusual, as it imposes supervisory orders (see below) with penalties for violations and urges local authorities along the railway lines to shoulder part of the financial burden.
Preventing dependency
"We will work with unwavering resolve to achieve financial independence," said JR Hokkaido President Osamu Shimada with a stiff expression after receiving the supervisory orders at the Land, Infrastructure, Transportation and Tourism Ministry.
He had been counting on assistance for a 12-year period until the extension of the Hokkaido Shinkansen route to Sapporo is completed in fiscal 2030. However, the amount of time granted by the central government was a mere one-sixth of this.
JR Hokkaido's operating loss in the fiscal year ending March 2018 rose to 41.6 billion yen, growing from the previous year. Thirteen sections of track, totaling 1,237 kilometers, which the railway company said in November 2016 it planned to reassess with the possibility of closures in mind, are predicted to run at a loss totaling about 16 billion yen this fiscal year as well. The Shinkansen line, which commenced its service to Shin-Hakodate-Hokuto in March that year, is also producing an annual loss on the scale of 10 billion yen.
Based on current circumstances, it set a target to "transition to making a net profit overall in fiscal 2031 when the extension of the Shinkansen line to Sapporo bears fruit," and intended to continue to receive assistance as it worked to bolster its financial foundation and reorganize its management by closing the loss-making lines. That was JR Hokkaido's plan.
However, the central government would not allow this level of dependency on its financial assistance.
"First, it's important for you to produce visible results," said Keiichi Ishii, the land, infrastructure, transportation and tourism minister, when he announced the assistance measures.
The ministry's decision to shorten the assistance period to two years was spurred by the fact that relevant laws would have to be revised in order to continue assistance beyond fiscal 2021. There was also a risk that the transport ministry would face harsh criticism if it were to extend long-term support to JR Hokkaido in its current state. A senior ministry official said, "They need to achieve results within two years."
At the limit of cost-cutting
After the 1987 privatization of Japanese National Railways, JR Hokkaido depended completely on the returns of a business stability fund totaling 682.2 billion yen, which was established by the central government as part of its support measures. When it became unable to cover the losses of its railway operations due to declining returns from the funds, it turned its hand to makeshift efforts to settle its accounts by scaling back facility repairs and renewals, according to a former JR Hokkaido executive.
In response to a series of accidents and scandals that surfaced in the 2010s, the railway company returned to a safety-first stance, but massive investments in facilities and equipment sapped the strength it needed to carry on with the loss-making lines.
Were the central government not to agree to provide assistance at this current juncture, it is highly likely that JR Hokkaido would have faced a capital shortfall and plunged into the worst case scenario, causing trouble for many of its passengers.
However, there is a risk that if the central government were to provide unconditional assistance even just for two years, JR Hokkaido might remain unable to establish a management structure that enables it to guarantee stable profits on its own. Due to this sense of urgency, the transport ministry decided to place JR Hokkaido under its de facto oversight via supervisory orders.
At the same time, its personnel cuts and cost cutting have already reached their limits. It is unclear whether JR Hokkaido will be able to demonstrate tangible results in the short span of two years.
Criticism over burden
During the two-year period of assistance as a stopgap measure, JR Hokkaido will face even greater pressure to come to a quick decision regarding whether to close 13 sections of track. Currently, the railway company is engaged in talks with the Hokkaido prefectural government and the municipalities along the lines about closing five sections with an extremely small number of passengers and replacing them with route buses, while retaining the remaining eight sections.
In the central government's assistance plan, local authorities were called on to assume a portion of the financial burden on the condition that the eight sections be retained.
A senior ministry official said the aim is to "raise local residents' awareness of having to support the railway themselves."
However, there has been an outpouring of criticism from local authorities, who had sought full assistance from the central government. The message is that "the central government in charge of supervising JR Hokkaido -- and JR Hokkaido, which failed in its management -- are to blame, and it is not right to place the burden on us."
If local authorities along the railway lines do not take on the burden, it is possible that there will be a succession of line closures on an unprecedented scale. Now that the central government's assistance policy has been revealed, local authorities' readiness to deal with loss-making railway lines will be put to the test.
JR Kyushu's success
Even when Japanese National Railways was privatized, it was predicted that JR Hokkaido, Shikoku Railway Co. (JR Shikoku) and Kyushu Railway Co. (JR Kyushu) would face difficult financial circumstances. The central government established business stability funds totaling 1.28 trillion yen for the three companies, which covered their business losses with the returns from the funds. However, this model readily collapsed with the burst of the bubble economy and the start of an era of low interest rates.
Unprofitable train lines with dwindling passenger numbers due to population decline and depopulation have become a burden on railway company management. At the end of March, West Japan Railway Co. (JR West)'s Sanko Line (Shimane and Hiroshima prefectures) was shut down.
Even the highly profitable East Japan Railway Co. (JR East) and Central Japan Railway Co. (JR Tokai) are struggling with rural lines. Especially for JR Hokkaido, JR Shikoku and JR Kyushu with their weak financial foundations, reassessment that includes considering the closure of unprofitable lines is an urgent issue.
Of these three companies, only JR Kyushu has achieved success in diversifying its business. It expanded beyond railway operations and built a system in which the group as a whole earns revenue through its restaurant and real estate businesses. It listed its stock in 2016, achieving full privatization.
Seeking to do likewise, JR Hokkaido is diversifying into hotel management and real estate. The operating loss for its railway operations was 52.5 billion yen in the fiscal year ending March 2018, but robust performance from its businesses such as hotels reduced the consolidated loss to 41.6 billion yen.
Alongside reassessing the 13 sections, the key to the survival of JR Hokkaido's railways is whether the company will be able to establish a model like that of JR Kyushu, which a senior ministry official described as "earning profits from related businesses to support loss-making railway operations."
(From The Yomiuri Shimbun, Aug. 3, 2018)
--Supervisory orders
Based on the law governing Japan Railways group firms, these orders are issued when necessary by the transport minister. An up to 1 million yen fine is imposed on executives in the event the orders are violated. This is the second such set of orders imposed on JR Hokkaido, and there have been no instances of orders being imposed on any other company.
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