Hong Kong's MTR: Some Caveats

In the comments section of my recent article in The Atlantic, a Hong Konger had some personal gripes about the MTR, and wound up making some interesting points in the process. I responded to her there, but I figure I'd share my response here too. In this response I discuss some of the caveats of the Hong Kong transit system that I couldn't explore in that piece

 
Hi Lina,

Thanks so much for these excellent comments! I wrote this upon returning from a research trip to China and Hong Kong and heard a lot of stories like yours first-hand as well. I absolutely agree that there have been many caveats to MTR's approach, which I unfortunately wasn't able to detail in this piece. So thank you for raising some of them here!

One of those is unquestionably the affect of Value Capture on real estate prices. Though I couldn't go into specifics, I wrote that "value charges are often displaced onto consumers, causing real estate prices to go up a little faster than they otherwise might." This is one of the effects you're seeing and rightly decrying in your neighborhood. That said, MTR has been practicing VC since its inception in 1979, but this real estate hyperinflation in Hong Kong has been more recent. So it's not owed exclusively to transit value capture, but to the huge influx of Chinese money into the Hong Kong economy, particularly the real estate sector, since the 1997 handover. You can probably tell us more about the broader inflationary effects of that, Lina, and I think the colorlessness of retail (especially in the malls) you mention is correlated with that bigger economic change rather than the MTR's specific malfeasance. I'm not sure which neighborhood you're referring to regarding new stations that are "not necessary", but given the time for construction, those kinds of capital investments are usually made in anticipation of future demand, not what's needed today. When the station is completed, people probably will be using it, maybe even inducing more demand. And with VC, those beneficiaries will be paying for those assets; riders won't. (Of course, it would be ridiculous for me to deny that decisions for transit planning are influenced by politics and power! Just look at this great Atlantic piece: http://bit.ly/18PPEoQ)

Second, you rightly flag the linkages between MTR and the government. An important detail I wasn't able to mention here, particularly to contrast private property-loving America, is that the government is the sole proprietor of land in Hong Kong and only leases it (and air rights) for extended periods. But more often than just giving land to MTR, it SELLS /leases that land and air rights to the MTR at "pre-rail" prices (say $1 billion). The MTR then "sub-leases" that property to other developers or renters at "post-rail" prices (the value of the land plus the monetary contribution of new transit that makes that land accessible, say $1.8 billion total), and then gets to keep the difference ($800m), which it invests in actually building the new transit infrastructure.

Despite this "market" orientation of the MTR, you're right about government involvement---before 2000, MTR was a public company; since then, the Government's been a 74% shareholder of the MTR Corporation. I'm admittedly not as personally familiar with Abraham Razack. But his presence on the Hong Kong Legislative Council, and as non-executive director of MTRC, is explicitly to represent real estate interests. But the composition of the LC as a democratic-corporatist hybrid representing different interest groups is a broader issue related to Hong Kong's model of democratic governance---not to the MTR and transit management specifically. (See this great FP piece by Adam Rose on how that democracy is managed and its relationship with Beijing, post-handover: http://atfp.co/18c6GRV).

And frankly, because mass transit is a PUBLIC good, I think that, though one can take issue with the make-up of any government, public sector influence in transport is vital; it not only helps steer economic development in ways that the market might neglect (such as the Fare Adjustment Mechanism), but ensures that its contributions remain fundamentally public and integrate land-use planning with access, even if its management is profit-driven. The fact that PUBLIC transit provides a tangible benefit to private interests---which should thus re-invest in the public good---lies at the heart of this model.

I wrote this primarily for those unfamiliar with Hong Kong, and specifically those interested in new models of transit financing. And on that measure, despite the challenges you highlight (and again, thank you for doing so!), the MTR deserves acknowledgement for those innovations.

Best,

Neil

Funding Mass Transit - The Case of Hong Kong

I wrote in my last post that "running good transit systems...comes with large financial costs," and promised to have a forthcoming explanation of how Hong Kong, one of the best run transit systems in the world, keeps fares cheap and quality high, while still turning a huge profit.


Below is the unedited version of a piece on the subject that I wrote in The Atlantic. 
There are some details (like government involvement, land grants, and real estate pricing) that are important caveats to this model's adoption elsewhere, but I unfortunately wasn't able to discuss them in depth in this piece. I did, however, make a presentation at the NYS Metropolitan Transportation Authority on this subject, which included lessons as well as cautions from Hong Kong and China. Please get in touch if you'd like to see that presentation live!
 

The Unique Genius of Hong Kong's Public Transportation System

Most subway systems around the world struggle to operate their services. In NYC, riders complain about the unreliable, squalid service they get for ever-increasing fares. And yet, the New York City system has one of the most subsidized systems, relying on supplementary taxes and state government subsidies just to keep trains running. Money collected from fares only covers about 41% of the day-to-day operating costs of the system. Capital costs (system expansions, upgrades, and repairs) are an entirely different question, and require more state and federal grants and borrowing (bonds) from capital markets. This is the situation most subway systems around the world deal with: struggling to pay for what they already operate and, if needed, going into lots of debt to pay for upgrades and expansions. 

Hong Kong seems to have figured out a pretty winning formula. Their Mass Transit Railway (MTR) Corporation is considered the gold standard of transit management throughout the world. Within Hong Kong, the MTRC manages the subway and bus systems on Hong Kong Island and, since 2006, the northern sections of Kowloon Bay, as well as Harbor Ferries and bus systems throughout the city. In 2012, they produced a revenue of 36 billion Hong Kong Dollars (HK$), which is about 5 billion USD. After considering expenditures, they still brought in a total profit of HK$ 10 billion---about 2 billion USD. And most impressively, their farebox recovery ratio (the percentage of operational costs that are covered by just the fares people pay) for Hong Kong was 180%, the world's highest---compare that with NY's 41%---which means they made a 80% surplus just from operating their trains! If you're unfamiliar with most transit budgets, suffice it to say these numbers are unheard of anywhere. (The next highest FBR, Singapore is about 120%).

In addition to Hong Kong, the MTR Corporation runs individual subway lines in Beijing, Huangzhou, and Shenzhen in China, two lines in the London Underground, and the entire Melbourne, Australia, and Stockholm, Sweden, systems. In Hong Kong, they've got a pretty gleaming system that operates impeccably and has a number of different amenities that sweeten service: from public computers in stations, to wheelchair and stroller accessibility to the platform and spaces within the train to store them, to impeccably communicated signs for spatial orientation when you're in and when you exit the system (including "numbered exits" with landmarks), and even (on longer-distance subways) first-class cars so people can stretch out if they want to pay a little more.

 

So how do they pay for all this fancy stuff? Through a nifty concept called "Value Capture."

The MTR understands the monetary value of urban density---what economists call "agglomeration." When people live close to one another, it's easier and cheaper for them to trade, communicate, and share ideas to innovate. ("Transaction costs" are lowered). Plus, when located around a lot of people, one small business has a much larger potential market and clientele---a store would do much better if it opened on a busy street than in the middle of a barren field. ("Returns to scale increase," and dense cities produce "economies of scale".)

Of course, mass transit enables this kind of density and agglomeration. Lots of people can travel together in a relatively small box (subway car) that travels underground. But if each of those people had cars, they'd need space for ALL of those 15 foot by 8 foot boxes (cars), space to drive them on (roads), and space to store those cars when they're not using them (parking lots, garages). All of this car infrastructure takes up land and space, decreasing density and increasing sprawl. Mass transit, on the other hand, uses economies of scale (lots of people benefit from a little change) to take up less space and increase density. Take a look at this visual of how much space the same number of people take up if they use different modes of transport:

So, we know that density increases economic growth and opportunity, and that mass transit enables that density. The MTR, then, understands that transit access actually has a calculable monetary value---that access, and proximity to transit, increases property values. If the only way to get to a mall is by a train, then that mall would have no customers and make absolutely no revenue or profits if it weren't for that train. The MTR reminds the mall owners this and asks for a cut of the mall's profits. Sometimes the MTR corporation actually owns the mall so it can take that cut itself!

In fact, that's the secret behind MTR's success: a RAIL + PROPERTY (R+P) Model in which it is the developer and manager of transit as well as of properties that lie adjacent to that transit. Two of the tallest skyscrapers in Hong Kong are MTR properties, as are many of the offices, malls, and residences adjacent to every transit station (some of which have direct underground connections to the train), and all of the retail within subway stations (which are essentially large shopping complexes) is leased from MTR. 

The View from the MTR office of 2-International Financial Center , HK's largest tower and one of the MTR's properties

The proceeds from these real estate ventures go into the MTR's revenues and cross-subsidize transit development: most transit capital expansion and upgrade projects are paid for by these real estate profits, as well as that 80% operating surplus I spoke of earlier. So because the MTR is never struggling to pay for important capital upgrades, the Hong Kong system itself requires less stop-gap maintenance---and service interruptions---than other transit systems might. This reliable technology and service lowers operating costs, streamlines capital investments, and encourages more and more people to rely on transit to get around. With all these customers using this excellent service, there's more total revenue from fare payment---even though fares aren't that expensive.

Of prices, the longest distance subway, i.e. from the city of Shenzhen in China to downtown, was about HK$ 50-60, about $8-10, while a special train to the airport is about 25 USD. More normal commutes, though, are between HK$4 and HK$20, about $0.50 to $3, depending on the distance traveled. (Compare that to London, where a fare can get as high as $18). Any fare increases in Hong Kong are limited by regulations linking fares to inflation and profits. Still, the HK government  recently started giving a HK$600-per-month travel stipend to low-income households, i.e. those that earn less than HK$10,000 a month.

This R+P model of Value Capture and transit management works partly because Hong Kong is a closed island: there are no suburbs from which people can commute by car, so everyone is essentially forced to use transit if they want to be in the city. Plus, given that it's a public yet independent corporation (and not an agency, ministry, or authority), it has the freedom to develop real estate, to hire and fire who it will, and to take business-minded decisions---whereas many other transit systems are hemmed by union contracts and legal regulations.

Still, the idea of value capture is a very powerful one for transit management. Understanding---and quantifying and even just communicating---the important contribution that mass transit makes is the first step to making it a well-funded priority.