Bacon's Rebellion

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MTR, Would You Take over Metro, Please?

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by

James A. Bacon
in

MTR, the Hong Kong commuter rail system, is arguably the world's most efficient.
MTR, the Hong Kong commuter rail system, is arguably the world’s most efficient.

Here’s an idea for readers to chew on while the Big Bacon is on vacation: How about privatizing the Washington Metro system? Honk Kong privatized its subway system in 2000, and it has worked out pretty well.

Writing on the Cato Institute blog, Chris Edwards quotes a report by McKinsey:

Hong Kong’s MTR Corporation has defied the odds and delivered significant financial and social benefits: excellent transit, new and vibrant neighborhoods, opportunities for real-estate developers and small businesses, and the conservation of open space. The whole system operates on a self-sustaining basis, without the need for direct taxpayer subsidies.

MTR’s railway system covers 221 kilometers and is used by more than five million people each weekday. It not only performs well—trains run on schedule 99.9 percent of the time—but actually makes a profit: $1.5 billion in 2014. MTR fares are also relatively low compared with those of metro systems in other developed cities. The average fare for an MTR trip in 2014 was less than $1.00, well under base fares in Tokyo (about $1.50), New York ($2.75), and Stockholm (about $4.00).

The ratio of passenger fares to operating costs is a high 185 percent, which means that fares cover not only operating costs but a share of capital costs. MTR raises other funds for capital from real estate deals under which it gains from land value increases near stations — a concept known as “value capture” that we have touted on this blog. MTR is so highly regarded in the mass transit world that it has contracted to run commuter rail systems in cities China, the United Kingdom Sweden and Australia. Why not Washington? (Hat tip: Tim Wise.)

Bacon’s bottom line: It would be unrealistic to expect Hong Kong results in in the Washington Metro. For one reason, Hong Kong is far more densely populated and rail is a more attractive option compared to driving. For another, it’s not clear whether Washington Metro could extract the same economic benefit from putting real estate deals together that MTR could. Zoning controls and land use planning may work very differently in the U.S. than in Honk Kong.  But the idea certainly appears to be worth pursuing. If MTR could do no more than bring operational efficiencies to Metro, Virginians would benefit from better service and lower subsidies.

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12 responses to “MTR, Would You Take over Metro, Please?”

  1. LarrytheG Avatar
    LarrytheG

    The trouble with this is that, like a lot of things that Libertarian groups like CATO do – is not report the whole story and as a result don’t provide an accurate rendition of the whole story…

    So Here’s CATO’s “take”:
    ” The whole system operates on a self-sustaining basis, without the need for direct taxpayer subsidies.” and ” MTR raises other funds for capital from real estate deals under which it gains from land value increases near stations — a concept known as “value capture” that we have touted on this blog.”

    well what exactly is this ? well it works like this – and this is the part of the story that is not really well reported – and should be:

    ” Like no other system in the world, the MTR understands the monetary value of urban density—in other words, what economists call “agglomeration.” Hong Kong is one of the world’s densest cities, and businesses depend on the metro to ferry customers from one side of the territory to another. As a result, the MTR strikes a bargain with shop owners: In exchange for transporting customers, the transit agency receives a cut of the mall’s profit, signs a co-ownership agreement, or accepts a percentage of property development fees. In many cases, the MTR owns the entire mall itself. The Hong Kong metro essentially functions as part of a vertically integrated business that, through a “rail plus property” model, controls both the means of transit and the places passengers visit upon departure. Two of the tallest skyscrapers in Hong Kong are MTR properties, as are many of the offices, malls, and residences next to every transit station (some of which even have direct underground connections to the train).”

    ” The profits from these real estate ventures, as well as that 85 percent farebox surplus, subsidize transit development: proceeds pay for capital expansion as well as upgrades. The MTR’s financial largesse means that the transit system requires less maintenance and service interruptions, which in turn reduces operating costs, streamlines capital investments, and encourages more people to use transit to get around. ”

    https://www.theatlantic.com/china/archive/2013/09/the-unique-genius-of-hong-kongs-public-transportation-system/279528/

    Is that what CATO and like-minded LIbertarians are really advocating for METRO?

    Do we want the govt to use eminent domain to help METRO acquire property around their stations so they can own and operate them to subsidize their operations?

    See – the problem I have is that we hammer METRO and say it should be more like Hong Kong but we don’t tell the whole story about how Hong Kong works.

    The most important aspect is either left out or glossed over.

    so how about it? Do we want METRO to own development property and use it to subsidize their operations?

  2. LarrytheG Avatar
    LarrytheG

    MTR is not just Hong Kong – ” It also invests in railways in different parts in the world, and has obtained contracts to operate rapid transit systems in London, Stockholm, Beijing, Shenzhen, Hangzhou, Melbourne, and Sydney.”

    and here is more about their key and critical business model called “Rail plus Property” (R+P):

    ” One important reason the system has been able to perform so well is that the government of Hong Kong has enabled MTR to make money from the property-value increases that typically follow the construction of rail lines. The key is a business model called “Rail plus Property” (R+P). For new rail lines, the government provides MTR with land “development rights” at stations or depots along the route. To convert these development rights to land, MTR pays the government a land premium based on the land’s market value without the railway.

    MTR then builds the new rail line and partners with private developers to build properties. The choice of private developer is made through a competitive tender process. MTR receives a share of the profits that developers make from these properties; this share could be a percentage of total development profits, a fixed lump sum, or a portion of commercial properties built on the site. By capturing part of the value of the land and property around railway lines, MTR generates funds for new projects as well as for operations and maintenance. That is why it does not need government subsidies or loans. Revenues from R+P developments above stations along MTR’s Tseung Kwan O line, for example, financed the extension of that line to serve a new town, which has since grown to a population of 380,000.”

    http://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/the-rail-plus-property-model

    The irony of libertarian/free market groups like CATO singing the praises of a govt-enabled business that is funded from taxes on property as well as land condemned and provided to them to own – and develop and use the profits to operate the transit is rich indeed.

    CATO focuses on the “success” of the Hong Kong system – and touts it as an example of how the free market can work so much better than the way the US does transit ….

    They do acknowledge the “value capture” concept but they treat it as if it were a feature or characteristic rather than the fundamental key reason that MTR runs “at a profit without a government subsidy”.

    PART II below

  3. LarrytheG Avatar
    LarrytheG

    PART II

    MTR, in fact, is very similar to US PPTAs where a private corporation builds and operates a road by charging tolls – except in MTRs case – it would be like the govt letting MTR obtain the land around the interchanges and build, own and operate the businesses and use the profits to pay for the operation and maintenance of the road.

    That same model could be used for METRO – where each station would have transit-oriented businesses that METRO would operate to generate profits it would use to operate METRO rather than seeking govt subsidies.

    That’s clearly not a “free market”, libertarian type enterprise yet Libertarian type groups like CATO will essentially promote the “concept” while not acknowledging the heavy involvement of the govt – beyond zoning and other “regulation” – but to include the acquisition of the properties around the stations to be provided to the Transit entity as their revenue source.

    The bigger difference in my view is why is MTR such a well-run enterprise with excellently maintained infrastructure, rolling stock and businesses and METRO not?

    And at least part of the answer is that without an assured and reliable source of funding – METRO lacks the means to keep them system properly maintained and has to put off needed maintenance and even with new construction – has to do it on the cheap.

    So – here’s the question – Would the admirers of CATO and MTR like to turn METRO over to Transurban or Cintra or MTR corp .. and also obtain the properties around the METRO stations and turn them over to these corporations to run and use the profits to operate METRO?

    because if that’s not something they’d support then touting what CATO is writing about is just chasing a free market myth… and misleading casual readers who might think if you do a good job of operating transit – you can operate it without subsidies… just from fares… and promoting that concept as if it were what MTR was doing is a disservice to any discussion about why MTR seems to be able to do what METRO cannot and the reason has more to do with METROs failures to emulate MTR rather than MTR benefiting from a business model that METRO would likely also if it was given the same opportunity.

    so why do we have these articles from CATO in the first place if the subsequent discussions really never get to the nub of the issue?

    It just seems counter-productive for CATO to essentially ignore the core concept and instead focus on the parts they like that by itself would not work any better for MTR than METRO. If you take away the properties that MTR depends on for their operating revenues – they’d end up the same way as METRO – chronically short of funds and having to put off needed maintenance and suffer breakdowns and delays as the result of failures of equipment that has been starved of adequate funds for maintenance.

    If we REALLY want REAL solutions – we have to be willing to recognize and accept that it is the govt that enables good transit – not the unassisted private sector “free market”. Are there ANY true free market transit operations on the planet? If there are -those are the models we should be discussing on the merits… right?

  4. Acbar Avatar
    Acbar

    Thanks LG, you do identify something that’s very different about MTR’ s operating environment. The whole point of thinking about outside-the-box solutions is to see how others “do it.”

    But let’s acknowledge that apart from the low fares, which may result from this collateral cash flow from the land, they also run a system with a phenomenal on-time functionality. Asian cultural differences? We could learn lessons from that too. Unquestionably a big problem at Metro today is cultural.

    That said, they sure did rise to the challenge yesterday! 600,000 people attended that Womens March and most of them got there — and home — by Metro.

  5. TooManyTaxes Avatar
    TooManyTaxes

    WMATA has been hijacked by a number of groups/entities over the years. One of which has been landowners near the rail stations. Clearly, it makes good economic and policy sense to allow for high density at the rail stations, unless there are other key factors (e.g., a stream valley near the McLean Station that is being protected).

    And we are seeing a lot of high density rezoning and construction at those sites. But, at least with the Silver Line, WMATA has failed to capture the fair value of heavy rail access that, in turn, allows for the density and high profits from such density. At most, the Phase 1 tax district’s obligation is capped at $400 million over its life. Yet, last year alone, assessed valuation for Tysons jumped by more than $1 billion – which is likely less than market value change.

  6. LarrytheG Avatar
    LarrytheG

    re: “cultural” – well sure – but as evidenced – METRO successfully moved more than half a million people yesterday…

    but it should be recognized that when METRO is chronically under-funded and worse – unpredictably – then maintenance and operation themselves are affected in bad ways… then we blame them for bad management and labor.

    And as TMT points out – the private sector has essentially leeched parasitically on the value that METRO has brought to the stations . In essence, taxpayers are subsidizing the private sector development as well as METRO.

    Then the ultimate insult – to have a free-market libertarian outfit like CATO comparing METRO to MTR like it was an apple to apple comparison that proved that Hong Kong run a better system and that misinformation leads some of us to speculate that the difference must be “cultural” instead of what it really is – a stark difference in the way that WE – choose to fund METRO different than MTR.

    So we have as a result of misinformation promoted by some – like CATO – a popular misconception as to how METRO does a “bad” job compared to Hong Kong and other systems in the world.

    How can “we” actually seek real reforms for METRO if we suffer from a lack of facts and information about how systems like MTR benefit from explicit govt policies designed to give MTR a permanent and reliable source of funding?

    So METRO continues to twist in the wind with critics sniping away at them with few if any actually supporting a permanent and reliable funding regime.

    this is how our problems do not get resolved today -on many of our thorny dilemmas .. transit, education, health care.. we have one group blathering about the “free market” and holding up other countries “better” approaches as “free market” when, in fact, they are the farthest thing one can imagine and, in fact, are total creations of govt-enabled solutions – real solutions – not some ideological myth…

    If we want METRO to be as good as MTR – we need to do the same things for METRO that the Govt in Hong Kong has done for MTR and stop pretending that it is “free market”.

  7. Acbar Avatar
    Acbar

    “Free market”?? Nobody’s pretending that; who are you kidding? Metro has a government- conferred monopoly on public transit in most of the DC Metro area; it was built and is run by a government agency pursuant to an interstate compact formed by three States and the Feds and is subsidized massively by State and federal and local tax dollars and remains the victim of the most predictable petty interjurisdictional bickering among government appointees and outrageous lobbying by private real estate interests. It’s a miracle that it ever got built, or that it runs at all — although yesterday was a triumph over all those obstacles. And all that government leverage goes to waste unless two things happen: (1) Metro actually runs: predictably, safely and on time; and (2) its Board actually comes up with the leaders and raises the money to keep it on track. Imagine all that sunk cost with all those potential riders back on the DC roads, all that development around Metro stations collapsing, all those businesses and commuters and tax revenues locating elsewhere. Of course, big government has a big stake, I think unquestionably the largest stake, in Metro’s success.

    Yet you are railing about “misinformation promoted by some – like CATO – a popular misconception as to how METRO does a “bad” job compared to Hong Kong and other systems in the world.” I’m sorry to inform you, Metro does a TERRIBLE job, and commuters are abandoning it accordingly; ridership is ‘way down. I don’t know what package of subsidies and leadership reform it will require to change things but Metro today costs too much and doesn’t deliver reliable transportation. And an obvious place to start looking for answers is, how do the systems with high ridership satisfaction do it?

  8. LarrytheG Avatar
    LarrytheG

    @Acbar – here’s what I’m reading from CATO:

    “Hong Kong’s MTR Corporation has defied the odds and delivered significant financial and social benefits: excellent transit, new and vibrant neighborhoods, opportunities for real-estate developers and small businesses, and the conservation of open space. The whole system operates on a self-sustaining basis, without the need for direct taxpayer subsidies.”
    …
    ” Can we get MTR Corporation to expand into Washington? Metro Board Chairman Jack Evans wants a federal takeover of Metro, but how about a private takeover?”

    The “privatized” MTR in Hong Kong is not “privatized” at all – unless you consider the land the govt gave it as “privatized”.

    from a more objective source:

    ” One important reason the system has been able to perform so well is that the government of Hong Kong has enabled MTR to make money from the property-value increases that typically follow the construction of rail lines. The key is a business model called “Rail plus Property” (R+P). For new rail lines,…………

    the government provides MTR with land “development rights” at stations or depots along the route. To convert these development rights to land, MTR pays the government a land premium based on the land’s market value without the railway.

    MTR then builds the new rail line and partners with private developers to build properties. The choice of private developer is made through a competitive tender process. MTR receives a share of the profits that developers make from these properties; this share could be a percentage of total development profits, a fixed lump sum, or a portion of commercial properties built on the site. By capturing part of the value of the land and property around railway lines, MTR generates funds for new projects as well as for operations and maintenance. That is why it does not need government subsidies or loans. Revenues from R+P developments above stations along MTR’s Tseung Kwan O line, for example, financed the extension of that line to serve a new town, which has since grown to a population of 380,000.”

    so here’s the question – do you want the Federal govt in the DC area to do the same and like the govt did in Hong Kong? –

    ” provide METRO with land “development rights” at stations or depots along the route. To convert these development rights to land, METRO pays the government a land premium based on the land’s market value without the railway.”

    so three questions:

    1. – do you want METRO to operate this way with the govt condemning land to sell to METRO at the pre-development value?

    2. – where would METRO, as a govt agency get the money to buy that land and then develop it?

    3. – do you think such an arrangement is “privatization” and the free market that CATO, as an organization says they want – over govt-run transit operations?

    I don’t see MTR in Honk Kong as “privatized” model at all.. as it is the direct recipient of government-acquired property.

    so you want to do that in the DC area ? have the Federal govt take the land around the metro stations, compensate those property owners , and give the property to METRO so it can use that land to generate revenues to operate and maintain METRO?

  9. TooManyTaxes Avatar
    TooManyTaxes

    WMATA needs to get its labor costs in line with reality. Wage increases have outpaced both inflation and gains in income in the D.C. Region. The defined benefits plan is $2 billion underfunded. Ridership is down. Reliability is down.

    Larry, some of the land around rail stations is owned by WMATA. But much is not and has benefited from density without paying a fair share for that density that generates the profits. Crony capitalism at its best (worst?).

  10. Acbar Avatar
    Acbar

    I guess LG was referring to “value capture” taxation rather than ownership. No way we’d ever get “value capture” funding for WMATA in the region covered by the Compact, let alone in Congress. Agree with you about labor costs.

  11. LarrytheG Avatar
    LarrytheG

    Well I was referring to “value capture” as the way it is described in the CATO article and in other articles describes how MTR works in Hong Kong.

    The key to MTR is having enough funding to keep their infrastructure in tip top condition so that they don’t have breakdowns or other problems that affect the quality of their service.

    that, in turn , leads to cheaper fares – because unforseen breakdowns add tremendously to costs…

    so my question was related to CATOs proposal to let MTR take over METRO and I was asking would you want MTR to take over METRO on the same “value added” basis they are allowed to operate in Hong Kong.

    and yes – get rid of the unions when you turn it over to MTR.. but again – are you going to have the govt buy properties to give to MTR was sources of continuing revenues… to operate and maintain instead of the current way that METRO gets funding?

    it’s not a complicated question.. it’s pretty simple…

    If we’re not willing to do what govt does for MTR in Hong Kong – in the DC area – I doubt seriously that you’d see similar results to MTR in Hong Kong and in fact more like the revenue-starved system we have now.

    we blame that on unions – I’ve yet to see an apple-to-apple comparison of labor costs between METRO and other transit systems so I’m not yet convinced that that’s the sole reason why they do not have enough O&M money and their system is in terrible shape which in turn leads to breakdowns… bad service, increased costs – it feeds on itself.

    Are we REALLY interested in reform or do we just want to blame METRO an walk away and not really do anything to resolve the problems?

    that’s the question. too many folks today just want to abandon what is not working.. whether it be METRO or other thorny problems of our time.

    Oh – and remember who CATO is – they’re the ones that support free market and less govt… and the idea that govt is going to obtain private property and give it to a transit operation is not exactly “less govt”..

  12. LarrytheG Avatar
    LarrytheG

    MTR has been hired to run other systems – in Australia, Sweden, the UK, etc but I have my doubts that they’d agree to run METRO under the current funding circumstances which is both starved and unreliable.

    that’s a recipe for disaster and I’m still not buying the “it’s the unions fault” because a lot, perhaps most transit systems are unionized. I see the “it’s the union” talk as coming from people who oppose unions no matter what condition the transit system is in. They just use problems as the pretext to blame the unions and if you fixed the unions and still had problems, those same folks would not have other suggestions – once the unions are gone – they’d move on to other ideological targets content to leave METRO the way it was.

    so – what is broke and how do we REALLY fix it? I think the lack of sustainable and reliable funding is corrosive .. it forces bad decisions and encourages crisis mode decision-making – that has it’s own bad “rob Peter to pay Paul” consequences.

    I’m more than willing to see an honest apples-to-apples analysis comparing METRO to other systems including the ones that MTR runs – to see if things like labor costs or administrative costs are out of whack.. but I also want to see their funding and whether or not it is sustainable, reliable and assured.

    There is too much “starve the beast” ideology these days and when the target of what is to be starved – fails – it becomes the “proof” that it deserved to fail.

    the problem is you can’t do that with things like crime, highway congestion, the military, entitlements, education and health care – none of which are zero sum games..and none of which will ever be without flaws and failings.

    but just because you spend trillions on traffic congestion or crime and hou still have both – does not mean the idea of funding transportation or police is a “failure” NOR does it mean if you turn it over to the private sector that they will do it better and without their own shortcomings and failures.

    too many folks are looking for simplistic answers and if they are not forthcoming – they’re willing to trash whatever it is they see as “failing”.

    This is akin to getting rid of your fridge or your furnace if they have to be repaired .. more than you like..

    it’s dumb reasoning at home and it’s dumb reasoning for government.

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