Speed up Railway Network Development: Buy Back MTR Shares and Set Up Railway Authority

Danny Shek

Hong Kong has one of the busiest passenger railway systems in the world. The Mass Transit Railway Corporation Ltd. (MTRC) is a well-recognised leading railway company, providing punctual, safe, cost-effective railway services, with a clean and comfortable environment. Back in early 2000, Hong Kong Government faced fiscal deficit. The profit-making Mass Transit Railway (MTR) was partially privatised, mainly to bring over 10 billion dollars revenue to the Government. Such privatisation was different from that in the United Kingdom (1993) and Japan (1987) - they were decisions made in the face of long-term mismanagement or substantial losses. In 2004, MTR and the Kowloon-Canton Railway commenced discussions on mergers, which were finally implemented in 2007, and MTRC was formally established. Twenty years after the privatisation, there are now large differences in the political, economic and social environment. The performance of MTRC has also become more and more controversial.

Deficiencies of MTRC

(1) MTRC has become a monopoly with profit-making as the overriding objective, and the HKSAR Government (the Government) has had little control in the governance of MTRC;

(2) Unprofitable new railway development costs have always been borne by the Government;

(3) Property development projects by MTRC were mainly private residential buildings and commercial complex;

(4) Increased overseas investment projects have been drawing MTRC’ s resources;

(5) Long delays in project completion, heavily increased costs and apparent

mismanagement in construction issues; and

(6) Serious overcrowding at peak hours.

Urgent need to develop new railway lines

Among the different modes of public transport in Hong Kong, railway was the most popular one. In the years to come, railway will continue to serve its role as the backbone of the passenger transport system. The Government policy of “Railway Priority" directly reduces competitions from the other transport operators. Overcrowding during the peak hours is serious.

‘The Railway Development Strategy 2014’ of the Government suggests constructing 2 stations and 6 lines with a total length of 35 km, with an estimated cost of HK$110 billion. The target completion year is 2026. However, the Strategy does not include any new railway connecting the New Territories and urban areas, nor a new harbor crossing rail. When the planned New Development Areas (NDA) in the New Territories are completed, passengers have to continue to rely on the existing East Rail and West Rail Line (or the future Tuen Ma Line). The feasibility of new railway corridors were studied, but some of them were not pursued further due to financial feasibility. We believe the current strategy for new railway planning and implementation needs to be reviewed.

Principles in Policy Recommendations

‘Hong Kong 2030+’ provides a blueprint for the future urban development of Hong Kong, including the New Development Areas in Northwest New Territories and Northeast New Territories. With these new developments, congestion is anticipated in some railway corridors. Considering the planning of adjacent cities in the Pearl River Delta, the railway capacity of the following locations should be reviewed: a) the New Territories/ Lantau Island to and from metro areas; b) cross-harbour; and c) potential railway corridors to/from the Pearl River Delta cities via Shenzhen (the following map refers).

1. Western Hong Kong-Shenzhen, Lantau Island and Hong Kong Island Corridor;

2. Northwest New Territories to Southwest New Territories Corridor;

3. East New Territories and Cross-Harbour North-South Corridor;

4. Lantau Island, North Kowloon East-West Corridor; and

5. Central Kowloon East-West Corridor


Policy Recommendations

Recommendation 1: Integrating Land Development and Railway Construction Investment

We suggest improving the existing railway implementation mechanism to speed up construction. Upon government announcement of a tentative railway alignment, interested landowners near the proposed railway may submit proposals for changing the land use near the proposed stations. Such proposal should include proposed land use, scope of development, financial arrangements (e.g., construction cost and land price), connection to the proposed stations and so on. This approach is similar to the land readjustment method proposed in the Hong Kong Vision Project’s research report published in May 2018 -- ‘Public Private Partnership for Land Provision’, which allows landowners to readjust their land upon collection of consent of the involved landowners. We believe this will release the development potential of land, creating opportunity for property development (including public housing, first-time buyer flats and Home Ownership Scheme flats) and train depots. Subsequently, MTRC or even other contractor could construct the railway, thus providing an opportunity to diversify the market and accelerate railway development. See the following conceptual maps as an example.

Possible Tuen Mun-Tsuen Wan Line(detailed planning required)

Potential development area (detailed planning required)

Under this scheme, the Government could have less difficulties for non-profitable railway. Land premium could be used to partially fund the railway. At the same time, the Government may review some government parcels along the proposed route (such as relocating Yau Kom Tau Water Treatment Works to the cavern). This will not only release under-utilised land development potential, but also give chance to alleviating the anticipated congestion in the future West Rail Line, as well as reducing the initial Government investment. A win-win situation may be achieved among the Government, MTRC, investors and the public.

Recommendation 2: Buying Back the Shares of MTRC and Setting up the Railway Authority

As a listed company, MTRC follows “prudent commercial principles” to manage the company and to fulfil the shareholders’ interests. However, this dominant objective of a rail operator may not be in line with the interests of the citizens and the whole society. We recommend the Government to buy back the MTRC public shares, so as to resume control in MTRC’s governance. Based on the recent share price of MTRC, we estimate the total sum involved in buying back the public shares is approximately 100 billion HK dollars (including 40% premium). This is within the current Government's financial capacity, but it takes courage and determination to adopt this proposal. On the other hand, it will undoubtfully benefit Hong Kong citizens and the whole society in long term.

The new MTRC will not need to be bound by the “prudent commercial principles” required for a public listed corporation in every railway development project. The disputable Fare Adjustment Mechanism may also be modified to balance between the interests of the public and the financial situation of the new entity, taking into consideration the various factors of the political, economic and social environment. In 2017, MTR had a profit of approximately HK$18 billion (33% of revenue). Upon repurchasing the MTRC public shares, the Government will be able to ensure that railway services can maintain a reasonable profit level while balancing the needs of the community.

In conjunction with the above, we recommend that the Government set up a Railway Authority (RA). Reference can be made to the Hong Kong Airport Authority (HKAA) that did not undergo privatization. Under the current system, HKAA must comply with the instructions from the Government for the public well-being. HKAA has been successful in balancing social responsibility and public interest along with profitability. Under this HKAA model, it is believed that the new public utility organisation would be able to stay profitable and efficient even without privatisation. The setting up of RA would be safely based on the model of HKAA.

As in HKAA, relevant government representatives would serve as members of the board of directors of RA, so as to give instructions on the direction of development to align with public interest. It is then possible to strike a balance between reasonable profitseeking and society needs, and to ensure railway development and implementation policies to meetGovernment policies and public interest. The Government may , under this recommendation, rely on RA to support the planning and construction of railway projects, and to enhance the construction efficiency. RA can therefore allocate more resources in new railway projects, improve its services, and propose fare adjustment with due consideration.

Recommendation 3: Pre-Peak Travel Fare Adjustment

Because fare is one of the passenger’s major determining factor in making choice of the mode of transport, it is important to attract flexible commuters to travel in shoulder peak hours, thereby relieving the pressure of busy and overcrowding railway sections. In short term, we propose adjusting off-peak fare to attract passengers to ride during of f-peak hours. The proposals are:

1. to substantially increase the existing Early Bird Discount from 25% to 70%;

2. to provide 40% discount off the regular fare for cross-harbour passengers before or after the evening peak (during the transition before and after the discount period, say 5 to 10 minutes, a 20% discount); and

3. to modify the existing Bonus Points Scheme to encourage passengers using non-peak hours.

 Such a scheme requires the Government, business enterprises and other employers to cooperate in providing, for example, flexible work arrangements to their employees. If this is successful, we estimate that approximately 600,000 passengers could be benefited daily, or about 25,000 to 30,000 passengers could be diverted from crossharbour travel during peak hours. A pilot scheme can be implemented as a trial to draw attention and support from the society.


Jasper Tsang
Andrew Fung
Executive and Research Director
Danny Shek
Research Fellow