Hong Kong metro system operators MTR spread 'value capture' message to Australia

Have you heard the one about the coins getting stuck in train doors in Hong Kong? It is the tale doing the rounds at the headquarters of MTR Corporation, the operators of one of the world's most efficient and envied rail systems.

It goes like this. Small objects, like rings or coins dropped by passengers, would occasionally cause the doors of trains to jam so they had to be re-opened and re-closed. Because peak hour trains run every two minutes on Hong Kong's busiest lines, even seconds of delays can throw out the timetable for the day and send commuters into a fury.

MTR's first international development project, in Shenzhen, China. Called Tiara, the project is built around a train depot and will include about 1700 resident apartments.Credit: MTR

MTR's operation's director Jacob Kam Chak-pui jokes that if trains are delayed by only a few minutes he is hauled before parliament to explain himself. (In the company's NASA-like command centre, there is a giant red clock known as the "incident box" that dramatically flashes how long it takes for delays to be resolved).

So, the story goes, the company's engineers redesigned the train doors and more than 5000 were modified over some 18 months to ensure they no longer had to re-open and re-close. There have been no problems since. During a recent visit to Hong Kong, the story was repeatedly held up as an illustration of what MTR calls a "culture of continuous improvement" that makes sure trains run on time 99.9 per cent of the time for their more than 5 million daily passengers.

MTR's high-tech operation command centre in Hong Kong.Credit: MTR

But building a rail line is expensive, let alone continuously improving one. MTR, which is 76 per cent owned by the Hong Kong government, has a unique business model that it calls "rail plus property" which allows it to turns a multibillion-dollar profit. The company funds the construction and maintenance of its rail lines by developing and managing high rise apartment blocks, malls and offices around or on top of train stations and depots.

This rail-plus-property model has only migrated to China so far, but MTR chief executive officer Lincoln Leong is keen to bring it to Australia. MTR currently runs the Melbourne Metro and will run the Sydney Metro Northwest, but the company wants to expand its foothold on the rail network in both cities and is seeking opportunities to build, run and operate new lines.

"We have a very focused strategy and that focus is on areas where we can add value, and the areas where we can add value would be predominantly in metro and commuter train and rail transportation," Leong says. "The rail property model may or may not work in all jurisdictions. It is a model that we believe works very well for us here in Hong Kong. We've seen a number of cities, countries, governments getting more interested in this model."

MTR has probably picked the right time to pronounce its interest in Australia's rail network, which already delivers a greater profit to the company than any other of its international projects. There is an increasing political appetite for "value capture" – the broad term for finance models that try to capture the windfall gain in land value that property owners experience when public infrastructure happens to be built nearby. There are many forms of "value capture" ranging from property taxes, parking levies and voluntary planning agreements to MTR's model where a private company builds the station and rail line is given the right to develop in the surrounding area.

MTR chief executive Lincoln Leong said the company wants to strengthen its foothold in Australia.Credit: MTR

Prime Minister Malcolm Turnbull, Cities Minister Jamie Briggs and NSW Transport Minister Andrew Constance have all stressed the need to explore "value capture" as a way of funding major infrastructure projects in the future. The House of Representatives standing committee on infrastructure, transport and cities this month launched an inquiry into transport connectivity and economic activity, with a particular focus on how value capture mechanisms can be used to deliver transport projects.

The topic was again thrown into the spotlight this week with the announcement that a Special Infrastructure Contribution, which is essentially a levy on developers, would be used to partially fund the construction of 10,000 new homes and a railway station at Waterloo in inner Sydney. A week earlier, it was announced that similar levy of about $200 a square metre on new residential developments would be used to fund a light rail route from Parramatta to Strathfield via Sydney Olympic Park. The potential catch of the Special Infrastructure Contribution is that it is a one-off payment so, unlike MTR's property developments, would not provide an ongoing revenue stream to maintain the rail ways.

Thousands of homes, a shopping centre and hotel were built around or near Tung Chung Station in Hong Kong as part of MTR's rail plus property model. Credit: MTR

AECOM's infrastructure advisory technical director Joe Langley said cash-strapped governments had realised they needed to find more innovative ways to pay for public transport because they were running out of options. Mr Langley calculated that $6 billion could be saved if "value capture" methods were used on the $60 billion projects which the state government is funding through the leasing of the poles and wires.

"Value capture" methods have and are currently used to fund public infrastructure but there is now more than ever a focus on making sure consideration is given to it in the early stages of planning for major infrastructure projects. It is not a matter of selecting a single method to apply to all projects. Different "value capture" models, and sometimes more than one, are suited to different road and rail works. Under MTR's model, the company buys the land off the Hong Kong government for a pre-railway price, then adds a rail line, and develops the land, which has an increased value as a result of the railway.

An artist's impression of the planned train station at Waterloo.

Leong is aware the skyscraper towers his company builds in Hong Kong may not be as welcomed in suburban Sydney.

While the company says it has a focus on "creating communities", MTR's developments are incredibly dense by Australian standards and have been criticised for being "fortress like". The company's development around the Tung Chung Station, which is close to the Hong Kong airport, has 38 high rise towers with more than 12,000 flats, 97 houses and a hotel and big shopping centre.

So, could the MTR approach be migrating to Sydney?

In Hong Kong, MTR generates revenue from on-selling land around and above stations for shopping malls and apartments.Credit: Leungchopan

MTR's only Sydney project currently is the Sydney Metro Northwest, the high speed rail line that will run between Rouse Hill and Chatswood, and that contract does not include any property development rights. But the company is hoping to win, and likely will, contracts for the extension of the line, which will run under the Sydney Harbour and through the CBD to Bankstown. The major contracts will be awarded next year and will include a separate contract for development above the stations. The federal government is also looking at ways to use to "value capture" to fund a rail link to the proposed Western Sydney Airport, including giving developers rights to build a station and the surrounding commercial and residential properties.

Leong is aware the skyscraper towers his company builds in Hong Kong may not be as welcomed in suburban Sydney and he is quick to say that the rail plus property model would be used differently in Australia.

The next contract MTR wants to sign is for the extension to the Sydney Metro Northwest.

"The issue for Hong Kong is we have a relatively large population packed into a relatively small area and therefore inevitably one of the options for us would be to go up, but that need not be the case in other cities and that really is dictated by the city planning," Leong says.

MTR executives and directors say the company would be interested in considering any opportunity to build a railway to the Badgerys Creek airport, but Mr Leong holds back on criticising original plans to open the airport without a rail connection.

Peter Newman, professor of sustainability at Curtin University in Perth, said just putting levies on developers was a "cop out" and a more radical MTR-style development-focused approach to public transport was needed.

"If you want to get money for the private sector you have to run it as a redevelopment project rather than as a transport project," Professor Newman says.

Under Professor's Newman funding model, private sector consortiums would be invited to bid for rights to develop a rail system and the surrounding residential or commercial sites at the lowest expense to the government.

"It's not the only way forward because we can muddle along and get limited public transport built at a time when there is dramatically increasing demand for it," he says. "We will get 20 light rail projects started this way, where as we might only get two if we stick to traditional funding ways."

But not everyone is quite as enamoured by "value capture". Chris Johnson, the chief executive of developer lobby group Urban Taskforce and a former NSW government architect, said he was concerned it was a "dangerous buzz word". Johnson's main worry is that residential property developers will pass on any levies or costs to their buyers by boosting house prices by tens of thousands of dollars.

"This is very similar to the federal government's move to bring in the mining tax," he says. "I think the previous federal government saw the mining industry as a booming industry, with a lot of money floating and thought we need to grab some part of it and the state government is now looking at the property industry thinking the same thing."

Melanie Kembrey travelled to Hong Kong courtesy of MTR