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Appendix C Japan Case Study

C1. Licensing and legislation

Domestic Ferry Services

C1.1 The four main islands of Japan are collectively known as the mainland (Honshu, Kyushu, Shikoku and Hokkiaido). The other 6,848 islands are known as isolated or remote islands. Less than 1% of Japan's total population live on the 433 inhabited remote islands.

C1.2 There are, in total, 619 ferry routes in Japan. This includes services that carry passenger and freight, freight, and just passengers. Over half of these routes are services to remote islands.

C1.3 199 of these routes have passenger and vehicles services.

C1.4 Fast ferry services are especially attractive for remote island access.

Statistics

C1.5 110 of the routes, operated by 106 different operators, received subsidies from the central government in 1998.

C1.6 The following table summarises the ferry services and carrying statistics in Japan in 2002.

Table C1.1 Ferry Transport Summary, 2002

Source: Public Planning and Policy Studies, Inc

Operators

C1.7 Ferry operators in Japan are predominantly private. They are either joint-stock corporations or private limited companies.

C2. Legislation and Regulation

Legislation

C2.1 The Maritime Bureau, under the Ministry of Land, Infrastructure and Transport, is the central regulating body in Japan.

C2.2 There are three national laws that cover the domestic ferry services:

• "Maritime Transport Act" 1949. Last revised in 2004.
• "Domestic Shipping Act" 1952. Last revised in 2004.
• "Improvement of Sea Routes at Remote Islands Act" 1952. Last revised in 2002.

C2.3 Legislative changes took place in order to further liberalise the maritime market. The objective of the revision of the Maritime Transport Act was to "increase the convenience of the passengers in the transport areas by promoting a free competitive market" and to "abolish the supply-demand adjustments that have been the basis of it as a rule".

C2.4 The revised acts also abolished government subsidies to ferry shipments of cargo.

Safety

C2.5 The Japanese Coast Guard, an extra-ministerial bureau of the Ministry of Land, Infrastructure and Transport, is responsible for monitoring vessel safety.

Licensing

C2.6 With the revision of the Maritime Transport Act, the Licensing System for passenger ferry services was replaced by a Permission System. Under Article 3 of the Maritime Transport Act, ferry operators have to obtain permission from the Minister of Land, Infrastructure and Transport in before operating a service.

C2.7 According to article 4 of "Maritime Transport Act", a body who wishes operate ferry routes is required to meet 6 requirements in order to obtain a permission. These requirements are, namely:

• Vessels and berthing facilities are adequate for transport demand and nature of the route.
• The transport plan is adequate for securing the safety of the route.
• The plan is adequate for providing ferry services above and beyond meeting demand and safety standards.
• The body is able enough to perform the business.
• Starting the ferry route(s) will not affect safety of existing vessel traffic.
• The route will secure the daily and social lives of residents around the route (such as remote island), when a body wishes to operate a "designated sea routes".

C2.8 With respect to fares, the revised Maritime Transport Act changed the Authorisation System to the Registration System. In the past, fare changes and levels had to be authorised by the MoT. Currently, while the Minister of Land, Infrastructure and Transport will impose a price cap, operators can charge the fares they want as long as they stay within the upper limit and register with the MoT.

C3. Definition of Designated Sea Routes/ Life Routes

C3.1 A "Designated Sea Route" is a sea route where there are no other transport modes other than vessels, such as a route connecting remote islands. The objective is to maintain proper and secure ferry transport to maintain the daily and social life of residents on or around the designated routes.

C3.2 "Designated Sea Routes" are determined by the Minister of Land, Infrastructure and Transport (MoT) after consulting with related prefecture governor(s), as defined in Number 11 of Article 2 of "Maritime Transport Act". The ways "Designated Sea Routes" are defined in Number 11 of Article 2 of "Maritime Transport Act" would qualify them as lifeline services.

C3.3 Not all "Designated Sea Routes" are subsidised. In 1998, there were 335 "designated sea routes", but only 107 of which receive government subsidies. According to Article 4 of the "Improvement of Sea Routes at Remote Islands Act", the Minister of Land, Infrastructure and Transport determines which of the designated sea routes would receive subsidies. The basis for subsidies are:

• The subsidy is necessary in order to maintain and operate the route;
• The applied number of services and time schedule match a desired level of demand.

C3.4 The Remote Island Liner Services Development Law of 1952 allows for government to subsidise part of the loss incurred by remote island liner businesses, and to subsidise the cost of modernising vessels. The subsidy is known as the "Remote Islands Sea Routes Grant".

C3.5 To qualify for the "Remote Islands Sea Routes Grant", the government considers the following 6 criteria:

• The route must involve a ferry service to an isolated/ remote island;
• The service provided must be regular;
• The service incurs a financial operating loss;
• The route services island people and carries essential goods and mail;
• The prefecture government recommends the route for subsidy; and
• The Government applies an income/expenditure scale to establish expected loss and gauge the level of subsidy required.

Organisation

C3.6 In addition to the MoT, the following bodies are concerned with remote islands:

• National Land Agency: Responsible for remote islands development;
• Governor's Association for Island Development: Consisting of governors of public bodies (by prefecture);
• The National Association for the Development of Japanese Remote Islands: Consisting of governors of local public bodies, e.g. cities, towns, and villages;
• National Institute for Japanese Islands: Consisting of governors of local public bodies, e.g. cities, towns, and villages;
• Isolated Island Council ( IAC): Consisting of island towns and villages; and
• The Japan Passenger-boat Association ( JPA) represents ferry operators and is concerned with securing stable marine transport services for islanders.

Operator

C3.7 "Designated Sea Routes" are mostly operated by private companies who have received permission to operate by the Minister of Land, Infrastructure and Transport. Some are publicly operated by the relevant municipal or local authority, while others are operated by joint ventures between the public and private sectors.

C3.8 Operators of "designated sea routes" often have mail contracts with the Ministry of Postal Communications to carry mail to the remote islands.

Service Requirements

C3.9 The operation of ferry services is not on a contractual basis. Instead, it is based on a notification system.

C3.10 A minimum level of service for subsidised services is implied during the subsidy application process. When applying for a subsidy, the operator must submit to the MoT the route's starting point, ports of call, details of the passenger vessels (including reserve vessels), and service schedule. The subsidy is then granted if the MoT deems that the service frequency is at a desirable level.

C3.11 To prevent fare hikes on life route services, the Maritime Transport Act requires an authorisation on the upper limit on fares.

C3.12 Ferry services are monitored by the local branches of the MoT. Should the Minister realise that the operator is damaging consumers' convenience and welfare, Number 1 of Article 19 of the Maritime Transport Act can be invoked whereby the MoT can:

• Change the upper limit of the fare;
• Change the operating stipulation
• Change the business plan;
• Change the vessel operating plan.

Competition and Risks

C3.13 The concept of risk and return is not prevalent in the ferry business in Japan. Compared to other modes of transport, the profitability of operating ferries is low. Little competition exists in this market.

C3.14 Revisions to the Maritime Transport Act abolished subsidies for non-regular passenger ferry businesses. In addition, the operation of non-regular passenger ships are prohibited. However, plying boats and pleasure crafts are allowed to sail on the same routes as regular ferry services.

C3.15 In theory, any operator that wishes to operate a loss-making route can apply for and receive subsidies from the government. However, when an operator is currently receiving subsidies on a "designated sea route", the government would in practice deny the subsidy application by a new company. Hence, in practice, almost no competition exists on subsidised routes.

C3.16 There are currently about 100 ferry operators operating subsidised sea routes (or networks of routes). The ferry business, especially along remote island routes, does not attract many new market entrants.

C3.17 Most of these routes are served by conventional passenger ferries, with a small number of fast ferries.

C4. Financial/Commercial Support

Legislative Changes

C4.1 The revisions of the Maritime Transport Act abolished the "supply-demand adjustments" on passenger ferry services.

Types of Subsidy

C4.2 Subsidies in the Japanese ferry business are a form of top-up to meet losses of the operating companies. The government subsidies part of the loss incurred by the ferry operators, as well as the costs of modernising vessels.

C4.3 Factors such as the relative remoteness of a particular island, access, journey time, cancellation rate, availability of alternative transport, etc., are also taken into account when calculating the subsidy amounts.

C4.4 The annual subsidies cover the period from October 1 of the previous fiscal year to September 30 of the current fiscal year.

C4.5 There are two types of subsidies from the National Government to ferry operators:

• Remote Islands Sea Routes Grants; and
• Vessels of Remote Islands Modernisation Grant

C4.6 The amounts of these grants are summarised in the following table:

Table C4.1 Ferry Grant Summary (1998)

Source: Public Planning & Policy Studies, Inc

C4.6 The "Remote Islands Sea Routes Grant" gives ferry operators the amount of grant equalling the amount of deficit. This is based on the standardised wage rate and unit operating costs, etc.

C4.7 Over 100 operators have been operating the designated sea routes with the "Remote Islands Sea Routes Grant" for a long time.

C4.8 The "Vessels of Remote Islands Modernisation Grant" subsidises 50% of construction cost to make vessels "barrier free", and an additional 10% of tonnage value of the vessels.

C4.9 In addition to these national grants, each prefecture has its own means of subsidising "designated sea routes", as the national subsidies do not cover all loss-making sea routes. The types and conditions of such subsidies differ widely across prefectures.

Subsidy Application

C4.10 To apply for a subsidy, the operator has to submit the following items to the Minster of Land, Infrastructure and Transport, as defined in Article 3 of the "Improvement of Sea Routes at Remote Islands Act":

• An Operation Plan;
• Route Profit/ Loss Estimate; and
• Other documents prescribed by the Ministerial Ordinance concerning the route's starting point, ports of call, details of the passenger vessels (including reserve vessels), and service schedule.

C4.11 Once the operator is a recipient of subsidies, it is subject to the following government controls:

• The Minister can instruct the operator to improve the service;
• The Minister needs to approve modifications to the operator's operational plan;
• Ferry subsidies cannot be used for purposes other than the ones for which they were intended;
• Failure to comply with these conditions can result in the Minister ordering repayment of all subsidies.

C4.12 Ferry operators have to show operating losses in their accounts in order to receive the annual subsidy. Since subsidies only apply for a year at a time, re-applications for subsidies must be submitted on an annual basis.

Fares

C4.13 With the revision of Article 8 of the Maritime Transport Act in 2000, fare regulation was changed from an "approval basis" to a "notification basis". The regulation of fares is clearly defined in Article 8 of the Maritime Transport Act.

C4.14 Ferry operators are no longer required to receive approvals from the Minister when they change fares. They just have to notify the Minister in advance that they intend to change fares.

C4.15 Should the Minister of Land, Infrastructure and Transport recognise any inconvenience incurred as a result of the fare change, such discriminatory pricing amongst users, he can order the ferry operator to change the fare.

C5. Contracting and Tendering

C5.1 Ferry services are run on a notification basis as opposed to a contractual one. As such, there is no tendering process.

C5.2 Operations are subsidised on an annual basis.

C5.3 The current "Designated Sea Routes" system has a long history, and there is little indication that things will change in the near future.

C5.4 According to an analysis by Dr. A.J. Baird, the current set-up of state-subsidised ferry services in Japan has several drawbacks:

• First, existing subsidies offer no incentive for operators to modernise services. The 1-year concession period does not allow operators to plan future investment with any degree of assurance. A competitive tendering process could generate a degree of competition and innovation in the industry, and create best value for money.
• The many small operators operating in a fragmented industry make economies of scale hard to achieve. Bundling of routes into networks, or merging companies in each geographic area could potentially improve economies of scale.
• Subsidy decisions are made centrally, whereas prefectural governments usually have a better a understanding of the demands and operation of services.

References

Baird, A.J. 2001 . "State subsidy system for remote island liner services in Japan". Journal of International Maritime Economics. March, 2001.
Information from Public Planning and Policy Studies, Inc.

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