University of Western

Ontario

ES 9185: Risk Assessment and Management in Engineering Systems

Group Project

CONSTRUCTION OF NEW RAILWAY IN JAPAN FOR THE 2020 SUMMER OLYMPICS

Group No. 5

Tanweer Malik (250258102)

Names ( Student no)

Veerappan Sundaresan (250936308)

Names ( Student no)

Names ( Student no)

Date
Contents

Introduction: 1

Objective: 2

Budget and financial Characteristics: 2

Technical Information: 3

Economic Analysis: 4

NPV Calculation: 5

Technical Analysis: 8

1.Hypothesis Testing 8

2. Comparison of maintenance cost and life expectancy of other components 10

3. Conclusion 11

Identifying and managing risks to the railway: 11

References: 15

List of Tables 16

List of Figures 16
Introduction:

The 2020 Summer Olympics, officially known as the Games of the XXXII Olympiad is

an international multi-event set to take place in Tokyo, Japan, from July 24th to August 9th of

2020. The Olympic games are considered the world’s foremost sports competition with more

than 200 participating nations and thousands of athletes competing in a multitude of different

events. For the host city and country, the Olympics are an opportunity to showcase themselves to

the rest of the world. To accommodate for the massive expected influx of visitors to the country

Japan has plans to greatly increase the capabilities of their transportation sector. The Japanese

government plans on accomplishing this goal by constructing a new railway line that would link

both the Heneda Airport and the Narita International Airports, Tokyo’s major two airports. This

railway would cut travel time from Tokyo station and Heneda from 30 minutes to 18 minutes and

Tokyo station to Narita.

The East Japan Railway Company would be tasked with organizing this massive project

and an estimate 400 Billion Japanese Yen would be required to fund it. Because of growing

concerns of rapid population increase, the country has developed several programs to promote

infrastructure upgrades to public transit. In collaboration with the Japanese National Bank, the

country is offering up to 65% of the capital cost at lower interest rates, ranging from 10% to 17%

per year. The remaining funding would come from private investors. With such a dense

population, public transport is extremely important in Tokyo. Tokyo boasts one of the most

extensive urban rail networks in the world with over 158 lines, 4714.5km of operational tracks,
48 operators and 279 stations. As such, this new railway line would be a welcome addition to

Tokyo’s already extensive network and would see plenty of use after the completion of the 2020

summer games.

Objective:
The objective of this case study is to evaluate the feasibility of the construction of a new railway

line linking both of Tokyo’s major airports in preparation for the 2020 summer Olympic games.

Both economic feasibility and risk management and assessment will be taken into consideration

for the final decision.

Budget and financial Characteristics:

The project is set to be completed by June of 2020, in time for the start of the 2020 summer

Olympics. As stated above, the required funding for the construction of the new railway is 400

Billion Japanese Yen. The project will be 70% funded by the National Bank of Japan with an

agreed upon 13% annual interest rate with a duration of 7 years. This loan will be of 280 Billion

Yen. The remaining 120 Billion yen will be funded by the East Japan Railway company directly.

The East Japan Railway will only agree to manage the project if it has a rate of return of at least

14%.
The Japanese economy has been reasonably stable over the past decade with an average yearly

inflation rate of only 0.5%. The figure bellow shows that the inflation rate increased by its

highest in 2014 but even then, it was only a 2.4% increase and the rate has since returned to

being closer to what it has been inFigure SEQ Figure \* ARABIC 1

the past.

Source: http://www.inflation.eu/inflation-rates/japan/historic-inflation/cpi-inflation-japan.aspx

To accommodate for inflation, a 2% inflation rate will be used. With the current price of

electricity in Japan being 29 Yen per kW-hrs, the train is expected to cost 900 Yen per train mile

to run. This is a conservative estimate to account for any rises in the cost of electricity in the

near future.

Technical Information:
The proposed railway expansion is expected to span 56 miles, connecting both of Tokyo’s major

airports. With nearly 300 stations, Tokyo boasts one of the world’s busiest railway networks in

the world and is notorious for its rush hours. The evening traffic lasts until 10pm and the number

of passengers is projected to greatly interest during the Olympics. Annual train ridership is

estimated to be a staggering 13 billion people, twice the population of the entire world. Based on

data collected by Tokyo metro public relations, it is expected that 400 000 new passengers will

ride the train line daily that would not have normally taken the subway. This figure also takes
into consideration the additional commuters due to the Olympic games. The average cost to ride

the Tokyo subway is 800 Yen. Based on the current operating costs of similar lines in Tokyo it is

expected that the annual maintenance cost for line will be 290 Million Yen. All other operational

costs including labor have been projected to be 150 million Yen per year.

The East Japan Railway Company’s R&D team has come up with a new more efficient

high-speed rail system that is projected to be able to increase the expected number of passengers

to 480 000 per day. And the new more efficient system is expected to cut annual operation costs

to 110 Million Yen per year. The downside is that the high-speed system is expected to cost 25%

more to construct in the same time frame in order to be completed for the 2020 summer

Olympics. This would raise the total funds required to 500 Billion Yen with the same percentage

being funded by the Japanese bank and private investors. Maintenance costs are not expected to

change.

Let Case A be the alternative where the East Japan Railway company constructs the regular line

and let Case B be the alternative where they construct the high-speed line.

Economic Analysis:

I. Bank Loan

As stated above the bank loan will be 70% of the total cost the total required funding for

the project. 280 Billion Yen in Case A and 350 Billion Yen in case B. The interest rate

will be 13%. In both cases the loan will be paid off in 7 years

¥280𝐴
𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴 = ∗ 1.13 = ¥45.2𝐴
7
¥350𝐴
𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴 = ∗ 1.13 = ¥56.5𝐴
7
 II. Investment

The remaining 30% of the required funds will be paid by East Japan Railway Company’s

private investor at the beginning of the project. This amount will be ¥120B in Case A and

¥150B in Case B.

III. Operation cost

Operation costs start in 2020 when the railway is expected to be completed. Projected

operation costs in Case A are ¥150M annually and ¥110M annually in Case B. Assume a

2% inflation rate for analysis.

For future value of operation costs:

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴 = ¥150𝐴 ∗ (1 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴)𝐴 = ¥150𝐴 ∗ (1.02)𝐴

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴 = ¥110𝐴 ∗ (1 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴)𝐴 = ¥110𝐴 ∗ (1.02)𝐴

IV. Maintenance

Maintenance in both cases is ¥290M

𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 = ¥290𝐴 ∗ (1 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴)𝐴

= ¥290𝐴 ∗ (1.02)𝐴

Expected annual revenue from proposed railway

Assuming expected 400 000 additional daily commuters in Case A and 480 000

additional commuters in Case B and an average fare of ¥800.

𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴 = 400 000 ∗ ¥800 ∗ 365 = ¥116.8𝐴 𝐴𝐴𝐴 𝐴𝐴𝐴𝐴
𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴 = 480 000 ∗ ¥800 ∗ 365 = 140.16𝐴 𝐴𝐴𝐴 𝐴𝐴𝐴𝐴
Every cash flow at the end of each year will be taken to the net present value at year 0 in order to

evaluate the project’s profitability.

𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴

𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴(𝐴𝐴𝐴 𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴) =
(1 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 + 𝐴𝐴𝐴)𝐴
𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴𝐴 𝐴𝐴𝐴𝐴𝐴
=
(1.16)𝐴

Given the data above and any other factors that would affect the success of the project, should

the East Japan Railway Company proceed with Case A or Case B?

NPV Calculation:

Cash flows during the first 15 years of the project were estimated for net present value analysis.

These cash flows were taken to year 0 and finally cumulative NPVs were calculated for both

projects for consideration when picking which case to proceed with. Note: revenue is only

positive cash flow.

Case A
NPV= ¥245,627.30 Table SEQ Table \* ARABIC 1

Case B
 Table SEQTable
Table1.2
\* ARABIC 2

NPV= ¥280,310.16
 Figure 2

Cumulative NPV for both cases during the first 15 years of the project

Based on net present value analysis, both projects will be profitable during the first 15

years of its inception. With proper maintenance, it can be expected that the project will continue

to be profitable during its entire life span. Both cases will start to produce positive net present

value around year 6, the same time that case B becomes more profitable than case A. In both

cases, the project is profitable when taking into consideration the required rate of return. By the

15th year, Case B has a higher NPV of 35 Billion Yen. When taking the NPV analysis into
consideration, it is a better option to implement the high-speed trains. However other risk factors

should be analyzed before making a final decision.

Technical Analysis:

The financial analysis concluding the execution of high speed rail lines, leads to performing a

technical analysis among the proposals of three a Japanese rail companies namely

1) Keiku corp

2) Seibu corp

3) Hankyu corporation

The analysis considers all the prominent rail components including, rail lines, rail vehicle, signal

control and interlocking systems e.tc. However, the East Japan rail company lays more focus on

subcontracting its project to the company which provides the efficient rail vehicle for the project.

The technical analysis for selecting the suitable subcontractor service involves

a) Calculating the vehicle efficiency of individual manufacturers and performing hypothesis

testing

b) Comparing the cost and life expectancy of the other rail components manufactured from the

companies

1. Hypothesis Testing

The hypothesis testing was used on the parameter of the vehicle efficiency which was derived

from an empirical relation relating to vehicle energy consumption and vehicle load. The

efficiency was calculated on varying vehicle loads (weight of the vehicle simulating passenger

capacity)

Vehicle efficiency (η)= W / E

W - Weight of the vehicle in tonnes

E - Energy consumption in KW-hrs,

The average vehicle efficiency is considered as 0.75 (tonne/KW-hrs) for the railway project.

Assumed confidence interval is 95%. A trial run of the individual company’s vehicles was

tested under varying loads resulting in the following results (from hypothesis testing) as

shown in table 2.1, table 2.2, table 2.3. T table is used as the number of samples is less than

30.

● Null Hypothesis (H0) = 0.75

● Alternate hypothesis (Ha) < 0.75

● Confidence interval = 95%

● Alpha (α) = 0.05

● From t table Tα = 1.860 (where degree of freedom = 8)

Table SEQ Table \* ARABIC 3: Result of Hypothesis Testing

2. Comparison of maintenance cost and life expectancy of other components

The Hypothesis testing has lead to filtering Keiku Corp’s proposal prioritising vehicle efficiency

in the rail project. However, the proposal submitted by the other companies have similar vehicle

parameters which requires comparison of the other components of the rail technology which

includes; rail lines, tracking equipment, Signal control systems and other miscellaneous

components like doors, motion sensors etc. The figure 3 depicts the operation cost and life

expectancy of these individual components as quoted in the company’s proposal. It is seen that

Seibu corporation can deliver the optimal service. This can be observed from its low operation

cost and high life expectancy, when comparing with its rival Hankyu corporation

Figure SEQ Figure \* ARABIC 3

3. Conclusion

Hence the above technical analysis arrives to the following conclusions:

a) The services which might be delivered by Keiku Corporation is screened as it’s high

speed rail vehicle manufactured has low possibility (less than 95 % confidence) of

meeting the vehicle efficiency standards as framed by East Japan railway company for

the project.

b) Comparing the operation cost and life expectancy of the other project components proves

that Seibu Corp has developed the optimal project design which makes them to be

recommended project contractor.

Identifying and managing risks to the railway:

Risks to this project can result from either human actions or natural causes. Table 4 below shows

the potential risks along with their importance estimated by RPN and Criticality formulas. Since

Japan is a peaceful and stable country, the risks of war is low. However, there is a moderate risk

of labour unrest, as labour unions often try to put pressure on the government prior to mega

events like Olympics or World Cup Soccer tournaments.

Table SEQ Table \* ARABIC 4: RPN and Criticality of potential risks

Table 3.1:
Figure 4 shows the Ishikawa (Cause and Effect) Diagram of labour unrest, adapted from Sharma

(2016). As it is typical anywhere in the world, the two major causes of labour unrest are

unsatisfactory monetary compensation and hazardous work condition. In addition, political

instability and insufficient legal protection for workers may also result in labour dispute. Migrant

workers from less developed countries may have to be employed due to shortage of manual

labourers; this presents additional challenges to project management.

 Figure 4: Ishikawa Diagram of labor unrest

In Table 5 below, actions to minimize the risk of labour unrest is presented.

Cause of risk Action taken

Monetary Wages 5% more than typical construction worker, 5% bonus if project

completed ahead of time, Free tickets to Olympic sports events

Work Employment guaranteed till project finishes, Work condition exceeds

condition standards of Ministry of Labor and International Labor Organization (ILO),

Hours not over 8 hours per day or overtime at 1.5 times regular pay

Political Profit sharing with labor union, Agreement between ruling and opposition

parties for stability of the government till the Olympics.

Legal Equal treatment of migrant workers, Strict laws to protect labour right

Table 5: Actions taken to manage labor unrest risk

Table 4 also listed three natural disasters. Earthquakes are catastrophic and are un-forecastable

even in this era of technological advancement. Japan is one of the most seismically active

regions on earth. The largest earthquake Japan ever experienced was 9.1 on Richter scale which
struck the east coast of Japan in 2011 (USGS, 2017). Rail tracks are structurally vulnerable to

even moderate tremors, let alone a quake of that magnitude. In this project, therefore, it is

acknowledged that in case of an earthquake, the damage to the rail track is inevitable. So, the

focus is mostly shifted to designing train carriages that are resilient enough to minimize death

and injuries.

Tsunamis are more detectable than earthquakes, due to aerial and marine observations. But their

severity is just as high. It has been, therefore, decided that the railway will be laid out at least 20

km away from any coastline to minimize the risk.

Flood is relatively easily forecastable. There is sufficient hydrographic data available for peak

flood level of the rivers that intersect the railway. Statistically, the 100-year-return flood level

has been calculated, and the embankment of the rail track is designed to stand higher than this

value. With respect to the above-mentioned strategies, some additional precautions were

incorporated to mitigate the effect in case of extreme natural events.

Natural Disaster Action taken

Earthquake Seismometers are installed to detect the possibility of earthquake and

signals out to cut the power supply of train.

Tsunami Geo-synthetic materials are reinforced in the embankment and protective

slope to resist the erosion caused by tsunami.

Flood Pumping stations are installed at areas prone to flooding, in this way

dewatering is done immediately. Flood defence systems are also

 deployed.

Table 6: Actions taken to manage Natural disaster.

References:

● "20 Largest Earthquakes in the World." U.S. Geological Survey. Accessed July 30, 2017.
https://earthquake.usgs.gov/earthquakes/browse/largest-world.php.

● "Average electricity prices around the world: $/kWh." Average electricity prices around the
world: $/kWh | OVO Energy. Accessed July 30,
2017.https://www.ovoenergy.com/guides/energy-guides/average-electricity-prices-kwh.html.

● Druce, Paul. "Reason & Rail." How much does it cost to run a train? January 01, 1970.
Accessed July 30, 2017. http://reasonrail.blogspot.ca/2013/03/how-much-does-it-cost-to-run-
train.html.

● R.C Sharma. "INDUSTRIAL RELATIONS AND LABOUR LEGISLATION." Google

Books. Accessed July 30, 2017.
https://books.google.ca/books/about/INDUSTRIAL_RELATIONS_AND_LABOUR_LEGISLAT.ht
ml?id=ns2ADAAAQBAJ&redir_esc=y.

● "Tokyo 2020." International Olympic Committee. July 28, 2017. Accessed July 30, 2017.
https://www.olympic.org/tokyo-2020.
● Tokyo's rush hour by the numbers | ELSI. Accessed July 30, 2017.
http://www.elsi.jp/en/blog/2015/11/blog1126.html.

● "Ubiquitous Tokyo subways moving the daily masses | The ..." Accessed July 30, 2017.
http://www.bing.com/cr?IG=A73D2C9ED0034E05A846E0D7BB08DDCC&CID=34AC9F8
F7A626CAD2BE695407B646DE0&rd=1&h=vUf0MkJ1UNR9VQkbE24NewnguaD4tC-
7jdP_rj3APQE&v=1&r=http%3a%2f%2fwww.japantimes.co.jp%2fnews%2f2010%2f08%2f
03%2freference%2fubiquitous-tokyo-subways-moving-the-daily-
masses%2f&p=DevEx,5065.1.

List of Tables

Table 1: NPV Case A Error! Bookmark not defined.

Table 2 : NPV Case B Error! Bookmark not defined.

Table 3: Result of Hypothesis Testing Error! Bookmark not defined.

Table 4: RPN and Criticality of potential risks Error! Bookmark not defined.

Table 5: Actions taken to manage labor unrest risk 13

Table 6: Actions taken to manage Natural disaster. 14

List of Figures

Figure 1: Japanese Inflation rate by year Error! Bookmark not defined.

Figure 2: Cumulative NPV for both the cases during first 15 years of the project 7

Figure 3: Comparison chart for operation cost versus life expectancy Error! Bookmark not defined.

Figure 4: Ishikawa Diagram of labor unrest 12