New Yorkers are famous for complaining about the city’s subway: despite an ever-increasing rise in fares, service never seems to get any better. And even still, ticket-sales still only fund part of the New York City subway system; the city still relies on supplementary taxes and government grants to keep trains running, as fares only cover about 45% of the day-to-day operating costs. Capital costs (system expansions, upgrades, and repairs) are an entirely different question, and require more state and federal grants as well as capital market bonds. And New York’s system is not unique: as in other cities, New York struggles to pay existing expenses and must go into debt to pay for upgrades, that is, without raising prices.
Is this problem intractable? Not exactly. Take Hong Kong for example: The Mass Transit Railway (MTR) Corporation, which manages the subway and bus systems on Hong Kong Island and, since 2006, in the northern part of Kowloon, is considered the gold standard for transit management worldwide. In 2012, the MTR produced revenue of 36 billion Hong Kong Dollars (about $5 billion)—turning a profit of $2 billion in the process. Most impressively, the farebox recovery ratio (the percentage of operational costs covered by fares) for the system was 185% (pdf), the world’s highest. Worldwide, these numbers are practically unheard of—the next highest urban ratio, Singapore, is a mere 125%.
In addition to Hong Kong, the MTR Corporation runs individual subway lines in Beijing, Hangzhou, and Shenzhen in China, two lines in the London Underground, and the entire Melbourne and Stockholm systems. And in Hong Kong, the trains provide services unseen in many other systems around the world: stations have public computers, wheelchair and stroller accessibility (and the space within the train to store them), glass doors blocking the tracks, interoperable touch-and-go fare payment (which also works as a debit card in local retail), clear and sensible signage, and, on longer-distance subways, first-class cars for people who are willing to pay extra for a little leg space.
How can Hong Kong afford all of this? The answer is deceptively simple: “Value Capture.”
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). Not to mention, all of the retail within subway stations, which themselves double as large shopping complexes, is leased from MTR.
The profits from these real estate ventures, as well as that 85% 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. And more customers means more money, even if fares are relatively cheap: most commutes fall between HK $4 and HK$20 (about 50 cents to $3), depending on distance. (In London, by comparison, a Tube journey can cost as much as $18). Fare increases in Hong Kong are limited by regulations linking fares to inflation and profits, and the territory’s government recently started giving a HK $600-per-month travel stipend to low-income households, defined as those earning less than HK $10,000 a month.
This model of transit management works partly because Hong Kong is a closed system: There are no suburbs from which people can commute by car, so there are strong incentives for everyone within the territory to use the system. This feature, combined with other regulations, has kept car ownership low: 6 of every 100 vehicles in Hong Kong are for personal use, whereas the number in the US is closer to 70. And while the NYC subway was built over a century ago and was neglected during much of the 20th century’s suburban sprawl, Hong Kong’s metro was only developed in the late 1970s. As a result, it doesn’t have to rely on signals technologies from the 1930s that are only slowly being upgraded (hence the track closures in New York).
As an independent corporation with the government serving as majority shareholder (rather than a public agency, ministry, or authority), the MTR has the freedom to develop real estate, to hire and fire who it will, and to take business-minded decisions—whereas other transit systems, including the one in New York, must deal with union contracts and legal restrictions. In Hong Kong, these value charges are often displaced onto consumers, causing real estate prices to go up a little faster than they otherwise might.
Still, value capture is a powerful idea for transit management. New York has tested the waters of this approach with its $2 billion 7-train extension to the Hudson Yards project, working with the state’s Metropolitan Transportation Authority and the project’s developers to fund the extension with property taxes from the newly served area. Dedicated taxes, too, serve a similar purpose. But fundamentally, Hong Kong’s metro succeeds because it understands that a subway system is more than just a means of transportation—it is also essential to the well-being of a city’s population and economy.
Neil Padukone Public Service Fellow at Harvard University’s Kennedy School of Government.