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November 15, 2004

Could the Proposed Two-tier Structure for Postal Reform Promote Efficiency?

Kazuhito IKEO (Professor, Keio University)

It is a commonly observed tendency that one's own belongings are treated with care while borrowed or rented articles are handled rather ruthlessly. Even if the lease agreement stipulates in detail the proper handling of the object, more often than not a satisfactory outcome is not achieved.

Accordingly, not everything is suited for lease or rent. An example often cited is rental furniture, which is made durably and painted so that small scratches and dirt do not show up. Fragile and fancily designed furniture is not available in the rental market. This is because if such furniture were damaged, it would be difficult to distinguish whether the cause was an act of God or negligence by the lessee, often resulting in a dispute. In addition, furniture rent rates could become very high if set to include risk premiums to cover such incidents, to the extent that it would be less expensive to purchase the furniture than to rent it.

In the theory on "incomplete contract," the essence of ownership exists in the right to decide upon matters unspecified in contracts. In economics, this is called the "residual right of control." If one purchases and owns something, the method of disposal of the thing can be freely decided by the owner, to the extent allowed by specific laws and contracts. This is not so in the case of rented objects. As explained above, the existence of the "residual right of control" has a significant effect on the behaviors of those concerned.

Thus, similar results should not be expected when a business is run with its own facilities and when facilities are leased. Especially not to be ignored is the likelihood of the latter case becoming less efficient than the former. For example, when a white carpet is deemed appropriate for the business but it can easily be spoiled by a stain, the rent for the carpet could become impractically high. Conversely, a carpet available at a reasonable rent would likely not satisfy the business objective.

When the Japan National Railways was divided and privatized, a special entity named Shinkansen Holding Corporation was set up to own the tracks and related facilities, on which operating companies would run trains and pay rent to the corporation. But soon it was recognized that such a two-tier structure only imposes inefficiencies, and the corporation was scrapped in a relatively short period of time to be absorbed by the operating companies.

Yoshiyuki Kasai, then the President of JR-Tokai (Central Japan Railway), which operates the Tokaido Shinkansen, once told me that in order to operate such fast-running trains at the frequency of five trains every hour, the trains and tracks must be designed and maintained in unison, recognizing it as one of the most delicate interface segments in the whole gigantic system where safety is of utmost importance. His point was that the two-tier management structure was not functioning, that it was only an illusion.

Turning to the issue of postal reform, the fundamental policy currently adopted by the Koizumi government calls for privatizing and dividing the postal services into four companies consisting of two tiers. They are companies to manage mail delivery, postal savings, and postal insurance, and then a company to take care of over-the-counter services for all of the operations, thus effectively creating a two-tier structure. But in formulating the government policy there is grave doubt as to whether considerations have been given to intricate elements similar to the one mentioned above. The idea of splitting the services among four companies may be ostentatious and could help promote reform as a political accomplishment, but the effect on increasing the real efficiency of the operations is questionable.

A number of awkward situations can be envisaged if the government's proposal goes through. Designing a layout for each post office would require sorting out the requirements of the (other three) operating companies. But can that be effectively and efficiently coped with? The needs for the post offices' sizes and locations could differ very much between the mail delivery company and the postal savings company, but how would the over-the-counter services company be able to prioritize needs?

The two-tier structure as proposed by the government is an impractical illusion, based on assumptions that are inconsistent with how the real world operates.

(The original Japanese article appeared in the November 13, 2004 issue of Weekly Toyo Keizai)

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