How Hong Kong's subway turns a $2B annual profit

http://money.cnn.com/2015/03/30/news/hong-kong-mtr-subway-property/

by kungfudoi • 11 years ago

58 50 11 years ago

money.cnn.com

calbear81• 11 years ago

This makes a lot of sense. I was living in Seattle during the big debate over how to replace the seismically unsafe viaduct (tunnel vs. roadway). The viaduct runs one block from the waterfront and is prime real estate and I don't know why they couldn't allow real estate development above the tunnel to fund the tunnel and bring additional state revenues. There's enough room in that space to build dozens of new skyscrapers.

chii2• 11 years ago

So it's really only viable because it gets rent free land from the tax payers.

It seems like it's just some magic accounting trick to not count the revenue that the tax payer would have received for the land currently being given tent free.

In other words, public transport is just not a profitable business.

craigmccaskill• 11 years ago

It's hard to count the value in having well run, on time and cheap mass public transport system.

Maybe the tax payer at some point subsidized this effort, but it doesn't have to keep doing so to get the benefit. The government was unlikely to develop and run these malls themselves, so it seems like they government would've just sold the land and then had to run the MTR itself.

Seems like a win-win to me.

mfjordvald• 11 years ago

They also have the advantage of a relatively small area to cover with a hugely dense population.

The ticket prices are low as well so almost everyone actually uses the MTR. Pretty prime conditions for a profitable public transportation system.

ZeroGravitas• 11 years ago

Yeah, I'm in favor of well run public transport, I think it's a vital part of a well functioning society. I even think that land should be developed around transport lines in a holistic manner (both to make them social hubs and to make the most effective use of real estate and construction disruption. But this is just poor accounting if the land and the right to build on it is just transferred for free.

On the other hand, the company is majority owned by the government anyway, so this is probably still the smart thing to do (depends on how that $1 Billion plus a year profit gets fed back into the government funds via their shareholding and whether social benefits are driving their construction plans rather than short term profit).

davegardner• 11 years ago

According to the article the fares cover 175% of the operating costs. So even without the additional income from real estate it's still a profitable business.

chii2• 11 years ago

ah, i missed that - i read in the article that the land development and rental was making up the majority of their profitability.

api• 11 years ago

Cars are only viable because they get roads from the tax payers.

cpursley• 11 years ago

Exactly. In the United States, most people don't realize the impact the interstate highway system had on market pricing. It effectively subsidized cheap land and road travel.

prawn• 11 years ago

I have fond memories of the MTR from the first time I visited Hong Kong in 1991 as a teenager. We stayed in a hotel that was above a shopping centre and either near or above an MTR station too and it was very convenient. I remember being amazed as a 14 year old that you could catch an elevator down from your room, down past the lobby and walk out into a supermarket, a food court, a department store, etc.

I've wondered here in Australia why suburban supermarkets don't run bus services from their doorstep (rather than the main road on the other side of the carpark) and let commuters park-and-ride from their carpark which would otherwise be somewhat empty during a weekday. Get transport back to your car, but drop in to pick up groceries before driving home.

chestnut-tree• 11 years ago

It's interesting to read this from a UK perspective. National rail services in the UK have been privatised for many years and all national rail services are run by private companies. Most of the UK rail franchises are European owned (Deutsche Bahn, Nederlandse Spoorwegen, Abellio, SNCF). MTR own 50% of of the London Overground rail franchise - one of the better run rail services.

Overall, privatisation has been a disaster for the UK rail industry (in my opinion). Despite the fact that we have some of the highest rail passenger numbers in Europe, we also have the highest fares in all of Europe and poor to mediocre services.

Our rail services are incompetently (and greedily) run and the political will to change this is depressingly weak (across all political parties).

martinald• 11 years ago

Not sure if that's a totally fair assessment. Arguably privisation may have led to the increase in numbers: http://upload.wikimedia.org/wikipedia/commons/e/e8/GBR_rail_...

m_mueller2• 11 years ago

I've had the same realisation in Japan: rail and postal services have been privatised there as well and they work supremely well. It made me think that good/bad service stems from culture more than from government vs. corporate organisation structures.

makeitsuckless• 11 years ago

There are two ways to privatise: to create a competitive market (liberalisation) or simply to outsource the execution of what is essentially still public policy (to provide quality public transport).

Japan is an example of the latter, the UK is a strongly ideologically (Thatcherite) driven attempt at the former. And those almost almost fail when it comes to infrastructure.

Not so much a matter of culture but ideology.

The whole private versus public debate is a red herring: in the end, these services depend completely on a functioning government taking full responsibility for the outcome, regardless of how the outcome is achieved.

S4M2• 11 years ago

The metro in Tokyo is really expensive though. It costs almost 1000 yens for a one way trip from the suburb of Tokyo to central Tokyo.

rhia• 11 years ago

Sooooo... government favouritism and sketchy business practices. Who would have thought?

ianlee2• 11 years ago

The goal of the government is to maximize welfare.

I would say that in this case, your so-called "government favouritism" and "sketchy business practices" benefits citizens immensely.

  "MTR trains boast a 99.9% on-time arrival rate. Fares are notoriously cheap ($.50 to $3)"

Moreover, a lot of systems that maximize public welfare are often monopolized and subsidized by the government. Do you think having myriad companies running various train tracks in a city would be beneficial? Or would one unified system make more sense? I think the evidence points to an unmistakable answer.

Duhck• 11 years ago

As a New Yorker visiting HK for the first time this week, it's hard not to walk away impressed.

The NYC Subways are so completely inferior it's no wonder they operate at a loss.

I ride the A/C trains daily and my commute varies from 30-90 minutes depending on an unknown set of variables. At least 2 days a week I find myself cursing the subway for being late, running with delays, or getting me stuck underground somewhere without any notice or announcements.

Perhaps even more inferior than the actual train experience is the wayfinding experience.

The MTR's letter/number exits (which google maps supports wonderfully) makes leaving the subway as great as riding it.

Even as a 7-year veteran NY'er I sometimes find myself trying to figure out which is the right exit to take at each station to get above ground. I usually say "ok I want to go south east, find the most south east exit I can" but as a tourist this must be so confusing.

It almost seems like a catch-22. If the MTA got their shit together and fixed up the subway lines to make them more reliable, maybe they'd be closer to breaking even, but since they are in a deficit (or are they? [1]) they can't actually fix things on time or properly at all.

I have to say the NYC subway is mostly pitiful (especially outside of Manhattan) and the MTR is nothing short of impressive.

[1] http://newyork.cbslocal.com/2013/09/28/mta-audit-reveals-una...

damon_c• 11 years ago

Well... keep in mind that the NYC subway opened 110 years ago while the MTR started in 1979. It's brand new!

But yeah, the signage is terrible. Paris's system is even older and even if you don't speak much French it's still easier to find the right exit than it is in NYC.

Why can't we have nice things?

hackerboos2• 11 years ago

French subway exits are mostly in...French.

Look for the "sortie".

smackfu• 11 years ago

Also keep in mind that the NYC subway has nearly 300 more stations than the MTR. Very hard to compare systems because of factors like that.

locopati• 11 years ago

The NYC subway also has more riders (about 25%), more lines (about 2x), more stations (about 3x), and more miles of track (2-5x depending on how you count). It's also the only system in the world that I'm aware of that runs 24-hours a day, which impacts the ability to do routine maintenance.

[1] http://en.wikipedia.org/wiki/MTR [2] http://en.wikipedia.org/wiki/New_York_City_Subway

netheril96• 11 years ago

As a mainland Chinese who frequents Hong Kong I have very bad impression of their subway. It is so expensive and with old technology. Guess that is how they make such profit.

matthewrudy2• 11 years ago

China has the benefit of building all it's metro systems in the past decade. Hong Kong's is a bit older. But if you visit London you'll be shocked by the price, and the lack of good technology.

It's a true legacy system, that will take decades to modernise.

There is no mobile coverage on the London Underground. In Hong Kong 4g is continuous and uninterrupted all the way from the Shenzhen border to Central.

Symbiote2• 11 years ago

The lack of mobile coverage on the London Underground is because the phone companies refused to pay the rent demanded. (I don't know if the demand was fair.)

Fares in London cover 91% of operating expense: http://en.wikipedia.org/wiki/Farebox_recovery_ratio

London's system is OK for it's age. Trains very in age from under 1 year to approaching 40 (with replacements on order, or planned), some lines have new signalling systems, others don't -- yet. That's not much different to Hong Kong.

phatfish2• 11 years ago

No mobile coverage is the best thing about the tube.

fnordfnordfnord• 11 years ago

I'm from the US but I have spent time in HK and in mainland China (mostly Dongguan and Beijing). I can say, as many others in this thread that nothing in the US is close to HK's MTR, or Beijing's Subway.

carsongross• 11 years ago

Reading about them makes me think of Vanderbilt, who I have heard (but cannot find the source) made some of his domestic ferry services free, in hopes that you would buy food on the trip.

As an aside, Vanderbilt was (possibly) responsible for one of the more memorable business quotes I've come across:

You have undertaken to cheat me. I won't sue you, for law is too slow. I'll ruin you.

Yours truly,

Cornelius Vanderbilt

ianlee2• 11 years ago

I love the MTR in HK. In addition to creating an awesome public transportation system, I think that MTR also has the potential to be the government's vessel in balancing the HK real estate market.

  "Some 50 major properties across Hong Kong are owned, developed or managed by MTR,including two of the city's tallest skyscrapers."

Companies like Sun Hung Kai, Cheung Kong, Henderson, New World etc are getting ridiculously rich off soaring property prices while the lower/middle classes suffer in overpriced, tiny cramped living spaces. Perhaps the government can use MTR as an opportunity to create affordable housing - maximize welfare beyond a cheap public transportation system.

cpwright• 11 years ago

This reminds me of the US where the railroads would get copious amount of land near the tracks, in relation to how many miles of tracks that they built.

http://en.wikipedia.org/wiki/Pacific_Railroad_Acts

Also, the MTA in NY has air rights in some places. Not that they are necessarily using them verify efficiently: http://en.wikipedia.org/wiki/Hudson_Yards_Redevelopment_Proj...

CaseFlatline• 11 years ago

Slightly misleading on the source of the profits. It's important to read this section of the article:

"But the company's real profits are derived from a lesser-known side of the business: property development."

and

"Here's how it works: MTR enjoys a special relationship with the Hong Kong government, which is also its majority shareholder. The government provides land -- at no cost -- for use by the train operator, and MTR is then allowed to develop the areas above and around its stations."

So the government loans out land (which is crazy expensive in hong kong) for free and the MTR gets to keep the profits for leasing out that land via malls, etc.

greggyb• 11 years ago

Fares are notoriously cheap ($.50 to $3), but cover roughly 175% of the system's operating costs.
Here's how it works: MTR enjoys a special relationship with the Hong Kong government, which is also its majority shareholder. The government provides land -- at no cost -- for use by the train operator....

So fares cover 175% of operating costs - but the firm does not face any real estate costs.

In an expensive place like Hong Kong, I would imagine that real estate dwarfs all other operating costs for most businesses. Is it realistic to not count real estate as an operating cost? It's obviously being paid for, and I'd be surprised if subway fares would cover market price for this firm's land.

nwah1• 11 years ago

Exactly. That is why public transit needs to be funded by Value Capture. https://vimeo.com/32548658

How Hong Kong's subway turns a $2B annual profit

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