Privatization is not the Only Path to Public Highway Corp. Reform

Toru NAKAKITA (Professor, Toyo University)

The definition of the term "privatization" has never been fully examined since Prime Minister Koizumi advocated "structural reform" and placed "privatization" of public companies at its core. Since then, policies were to be evaluated by the degree of conformity to Mr Koizumi's reform agenda, which is natural, but it included the notion of "privatization" as an undefined term. The word has become a part of the Prime Minister's banner blessed by citizens.

"Privatization" is not a panacea

A group of people set up upon Mr Koizumi's instruction (bearing a lengthy name "Promotion Committee for the Privatization of the Four Highway-related Public Corporations") issued a paper bearing the simple title "Comments" in December of 2002. It advocates, in essence, that the Public Highway Corporation--along with other related public companies--should be restructured so as to seek "repayment of debt by privatizing the corporation."

Needless to say, the word "privatization" simply describes the process of a public company becoming privately owned, and does not imply that debts would be cleared by the phenomenon. If an objective of the newly formed private company is to "repay debts", it could only mean that it will inherit the debts of the public company, i.e. the government, and to begin repaying the creditors. This is a different setup to what Mr Koizumi often points to as a successful precedent--the privatization of Japan National Railroad--where previous debts were separated and succeeded by a special purpose entity while running of the railroad was handed over to privatized companies free from ponderous debt burden.

It is envisaged in the presently proposed plan that the Public Highway Corp. will be split into an operating company and an entity to own highways and repay debts. But is there any value in privatizing an entity whose main function is to repay debts?

There are certain conditions that need to be met for a privatized company to succeed. One is the existence of competitors, and the other is ongoing technical innovation in the field for new products to emerge. The transformation of Japan National Railroad to regional Japan Railroad Companies (JR) is often referred to as a case of success. But railroads have competitors in the form of air, sea, and other land carriers, and the progress of technology in this field is brisk. In such an environment, natural monopolies disappear quickly and competition becomes intense. In turn, inefficiencies in large companies involved would be wiped away, leaving inexpensive and good quality service for the users. As it also relieves any other annoying burdens formerly levied on the government, the public strongly supports privatization in general.

Then how would this apply to highways? And to begin, are there distinct competitors to a "highway operator?" If the service of the company were to be considered as a means of transportation utilizing automobiles, there are obvious competitors such as railroad and air and sea carriers, but they are not intended to reach every corner of the land and do not support door-to-door transportation. Also, technical innovation of automobiles is swift, but that is a different story from technological advancement with regard to highways themselves, either in terms of building or maintaining them. This in fact means that there are no competitors to the highways themselves on which automobiles, now commonly used by every segment of society, are utilized. What happens if the Highway Corporation is privatized in such a setting? As there is no competition in maintaining highways themselves, it would only create a monopoly. Tolls will be set by the privatized company naturally to maximize its earnings, which at least means there is no assurance of lower tolls upon privatization.

Also, the scheme currently proposes the new private operating company to pay rent to the special entity owning the highways, which provides no leverage for lower tolls. Also, as the main purpose of setting up new companies is to repay former debts, new highway construction would inevitably be suppressed. But would that serve the needs of the public and create new bases for Japan's growth?

An Italian challenge could provide a good example. Italy's "Autostrade", the highway operating company, was privatized in 1999, and Benetton, an apparel company, now owns 84% of the shares. It was when foreign capital was planning to purchase the shares upon privatization that Benetton, as an Italian entity--perhaps out of patriotism--purchased majority of the shares through public tender. But the privatization has not led to lower tolls, and criticisms regarding greediness of management abound.

A more serious problem with Italy's case is that even though the company is making profits and retained earnings are building up, less than 30% of the government's highway development plan has been realized. As highways take a long time for an investment to be recovered, and extrinsic risks overshadow every move, there is little incentive for private capital to invest in new highway construction projects. In fact, Benetton, utilizing its earnings, has recently invested in an international mobile communication business, which is a good example for private capital to be guided by investment efficiencies.

A simple lesson to be extracted from all this is that there are good and bad sides to privatization.

Highways should be toll-free

Highway administration exists in any civilized country to provide effective basis for transportation, as it is considered a market mechanism unable to provide the level of service the public needs, where an example might be the Italian exercise. And there is a theory supported by various sectors, including some scholars, that people should be allowed to move around freely on roads and highways. Those who recognize this idea as valuable call it "the right of mobility."

Then what is the problem with the current "public" highway corporation structure? The problems can be sorted into two issues: high tolls and overinvestment induced by vested interests.

Until 1972, when pooling of funds for construction and maintenance of all the highways became effective, Japan acceded to the notion that highways should ideally be free to use and that collecting tolls was a temporary measure to recover a part of construction cost--a practice that eventually should cease. In fact, now is a good time to reconsider this concept.

It is apparent that both the government and resistance forces see the policy of collecting tolls indefinitely into the future as unalterable. It seems the real picture is blurred for policymakers because of the existence of an entity (currently the Public Highway Corporation) to manage highways, as it tends to lead the discussion in the direction of what to do with the entity instead of how highways should be managed in the first place. It might be better, then, to simply abolish tolls and pull the entity out of the flow of income and expense altogether, so that highway administration would be enacted directly out of the general budget where more transparency of cash flow could be expected.

Investment in roads and highway could be executed more efficiently if the general public could supervise the system with consciousness of it being public property. Automobiles are now an essential means of transportation, and the automobile industry is constantly leading technical innovation while attempts are being made to lessen the burden on the environment. By reducing and eventually abolishing tolls, domestic distribution costs could be decreased, inducing vitalization of the economy.

Indeed, privatization is not the only prescription to reach a solution.

(The original Japanese article appeared in the December 6, 2003 issue of Weekly Toyo Keizai)