mtr int land use & planning core2008

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Conference On Railway EngineeringPerth 7-10 September 2008

INTEGRATED LAND USE AND TRANSPORT PLANNING – A SUCCESS STORY

Andrew McCusker

BSc, CEng, MIMechE, FCMI, MCIPD

MTR Corporation Limited

SUMMARY

This paper describes the success of MTR Corporation in funding and financing a commercially-orientated railway in Hong Kong with growth through an integrated rail-property model. The MTR network covers a total route length of 211 km, and provides metro, suburban railway service, light rail, feeder buses and intercity through-trains to Mainland China. The integrated rail-property model translates land development rights from the Government for railway construction into property profits to help bridge funding gaps for new railway construction and future asset renewal and upgrade. The Corporation is responsible for both the railway and property development. This provides a unique opportunity to optimise integration of land use and transport facilities, as well as provide socio-economic benefits. In the past years, MTR Corporation has generated over HK$177 Billion (A$23.8 Billion) of value accretion for the Government.

INTRODUCTION

Land scarcity and high population density in Hong Kong has shaped the requirement for effective land use and capital resources through integrated land use and transport planning. MTR Corporation adopts a rail-property model by undertaking residential and commercial developments along its railway lines to create the required integration. The model is highly successful and contributes to business sustainability of the railway and generates major socio-economic benefits. More recently, MTR Corporation has entered into overseas agreements on a variety of models including PPP concession as well as with the Hong Kong Government on future rail lines using a range of financing models.

CREATING THE DESIRED OUTCOME

Many city governments have ambitious plans to revitalize city centres, rehabilitate old areas and build new suburban hubs. There is a revival of interest in maintaining better integration of land use planning and public transport. The reality is that many cities find it difficult to create the desired outcome of increasing market share of public transport.

Car ownership is generally associated with wealth. Australian / New Zealand (ANZ) and North American cities are leaders in car ownership with over 500 cars per 1000 people. On the metric of cars per US$1000 GDP, ANZ and Canadian cities have 25 to 30 cars per US$1000 GDP, US cities are less at 19, Western European cities at 13 and Chinese cities at 11. [1]

However, even in countries such as the United States, city planners and politicians are now seriously proposing increased rail city transport. But how can public transport achieve competitiveness over private cars in cities where there is already high car ownership?

Among high income cities worldwide, Hong Kong has the most intensive supply of public transport service. Hong Kong’s public transport service intensity measured by annual vehicle km per square km is 7 times that of Western Europe, 54 times of Australia, and 81 times of United States. [2] This has been possible for Hong Kong through its high population density, high employment density and a compact urban area.

The Hong Kong mass transit rail systems were built in compact urban areas. The suburban network was built well before urban development, supported by a large feeder bus network to provide a dense service that is highly competitive to private cars. Private cars provide the convenience of point-to-point travel, therefore for the public mass transit system to be competitive, the public transport system has to provide large numbers of origin-destination trip pairs for commuters to choose this mode of transport. Hong Kong has been able to do just that, although this has taken almost three decades. Public transport service levels in Australia, for example, would need to be 300 times as high to equal Hong Kong’s public transport competitiveness [2].

To understand why Hong Kong has been so successful, it is worth looking at the extent of supply and ease of travel:

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Andrew McCusker Integrated Land Use and Transport Planning MTR Corporation Limited – A Success Story

All public transport services are provided at affordable prices – ferry, franchised bus, rail and metro.

Personal security is assumed and crime on transport is almost non-existent.

Public transport capacity and ratings result in a very high percentage of the population having access to public transport within 200 metres of their home and workplace.

Discount for park-and-ride and intermodal public transport trips is provided.

These attributes of a high intensity, well utilized pubic transport service are as a result of a city planning policy that favours public transport and seeks integrated residential, commercial and retail within development plans.

This process has ensured an environment which discourages car use for the CBD due to very high parking costs, facilitating public transport interchange facilities making it easy for the public to travel in the long term within developer proposals. The Government contributes to developer plans in the provision of traffic interchange planning and facilities, and other developer incentives.

Similarly, having created something of a virtuous cycle, property on the main arteries to the city and at interchange hubs within the city trades at a premium, thus encourages clustering around transport hubs and spokes. This mixed use development increases real utility to the public at large as well as enhancing rail patronage.

AFFORDABLE TRANSPORT

City governments will note that the construction costs of railway are high and need to cover stations, tunnels, tracks, signalling, rolling stock, etc. Where land may be freely granted by the city government, uptake of land by the railway actually constitutes an opportunity cost and can deprive society of alternative land use. This is not always appreciated.

City governments need certainty about recurrent transport costs. However, most railways depend on Government grants and subsidies to continue operation and fund necessary asset renewals and upgrade.

The extent to which fare and non-fare revenues can cover railway or metro operating costs is not well understood by those who benefit from usage. Figure 1 is based on a CoMET benchmarking study which ranks 20 typical metros by their ability to recover operating cost. According to revenue-operating cost ratios, about 70% of these metros could not support their operating expenditure by farebox and commercial revenues alone. MTR Corporation is among the few metros operated on high revenue-operating costs ratio.

Figure 1 Relation of Fare Structure and Operating Costs Recovery from Revenue (source: CoMET)

Railways have an exceptionally long economic life. Apart from recurrent operation and maintenance needs, asset replacement and enhancement is another area requiring funding. Ageing assets will need to be reviewed to deliver necessary performance. There is a continual need to enhance assets to keep up with public demand, improving regulatory requirements, and increased standards as demanded by societal development.

Therefore, before city governments embark on major plans for rail transport development, they need to assess the affordability of the railway to society and ensure that the railway is sustainable while meeting the economic development and land use planning needs.

The UITP has compiled a database of 100 of the world’s major cities to make available to the transport industry a set of metrics for benchmarking or measuring industry performance. Figure 2 compares transportation costs measured as a percentage of GDP against population density. Hong Kong benefits from a high population density, and is more efficient than developed cities such as New York and Paris, with about five percent GDP expenditure to serve an average 320 inhabitants per square hectare.

Figure 2 Urban Transportation Cost v. Population Density (Source: Sustainability Report 2007, MTR)

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Figure 3 shows transport expenditure as a percentage of household expenditure in developed major countries or cities. When compared to developed cities like Tokyo, London and New York, Hong Kong transport costs are the lowest, and are considered most affordable by the general population.

Figure 3 Transport Expenditure as Percentage of Household Expenditure

Therefore, what kind of city would you want to be? The obvious choice is one with sustainable economic growth backed by an affordable and financially sustainable public transport system, at a minimum burden to the city government and inhabitants. Hong Kong has been able to achieve this position. Best practices that underpin meeting these aspirations and insights are as follows.

UPDATE ON THE MTR NETWORK

After the merger between MTR Corporation and Kowloon-Canton Railway Corporation which took place on 2 December 2007, the network has expanded to cover a total route length of 211 km, with a daily patronage of 4 Million. Apart from the metro, the Corporation now operates a suburban railway service, distributor service e.g. light rail and feeder buses, intercity through-trains and freight trains to Mainland China. Additionally, a number of important public transport interchanges have been provided to enable efficient integration between the railway system and adjacent land use and the Corporation has the right to lease land by paying an annual fee to the Government.

Plans for constructing new line extensions in Hong Kong are also advanced. By 2019, the MTR network route-km will have grown from 211 km in 2008 to 273 km with the number of stations increasing from 85 to 103.

In April 2008, the Government approved HK$39.5 Billion (A$5.3 Billion) for an Express Rail Link to connect Hong Kong to the important cities of

Guangzhou and Shenzhen in Mainland China. The high speed rail link is scheduled for completion by 2014/15. MTR Corporation will operate the line for 50 years through the payment of annual concession fees under a build-operate-transfer contract, and with profit sharing arrangements.

With the existing cross-boundary services and the planned Express Rail Link, the Corporation is set to play an influential and important role in facilitating integrated land use and transport planning in Hong Kong and in the broader Pearl River Delta region.

In 2007, the Corporation achieved a net profit of HK$15.2 Billion (A$2.1 Billion). Profit generated from property development was HK$8.3 Billion (A$1.1 Billion) and property rental and management income was HK$1.8 Billion (A$0.3 Billion).

On a standalone basis, the Hong Kong based recurrent business operates at a 59% EBITDA margin. The Corporation is one of the most successful railway operators in the world. The integrated rail-property business model is the main reason for these financial achievements.

GOVERNMENT URBAN PLANNING

The Hong Kong Government has the role of formulating sustainable development strategies and plans, guiding the use and development of land, facilitating suitable development and redevelopment, and encouraging community participation. In 2007, the Government completed the “Hong Kong 2030 Study” which sets the preferred spatial development pattern for the city.

According to the 2030 Study, core urban areas will remain as the focal point of development and urban activities. For other newly developed areas, there should be lower level development. The Government advocates mixed land use planning to cover housing, commercial, industrial and educational uses with convenient access to mass transit systems. [3]

The 2030 Study affirms the Government’s transport policy to focus on better integrated transport and land use planning, with the aim of providing a transport infrastructure in a timely and cost-effective manner.

The Government recognizes the importance of providing new systems, and improving existing infrastructure, with priority given to railway development and upgrade of the public transport system. This will involve rationalizing and improving public transport services to better match demand and minimizing wasteful competition. Convenient and comfortable interchange facilities at transport hubs, e.g. railway stations, will be in plans for new and major land-use or transport

0 5 10 15 20

Portugal (1)

France (1)

New York (2)

United Kingdom (1)

Germany (1)

Spain (1)

London (3)

Italy (1)

Tokyo (4)

Hong Kong (5)

Percentage

17.4%

15.5%

15.1%

14.7%

14.5%

13.0%

12.8%

12.5%

10.0%

9.0%

(1) Source: Eurostat; UK National Statistics

(2) Source: US Bureau of Labour Office

(3) Source: UK National Statistics

(4) Source: Japanese Statistics Bureau

(5) Source: HK Census & Statistics Department

Transport expenditure as % of household expenditure

0 5 10 15 20

Portugal (1)

France (1)

New York (2)

United Kingdom (1)

Germany (1)

Spain (1)

London (3)

Italy (1)

Tokyo (4)

Hong Kong (5)

Percentage

17.4%

15.5%

15.1%

14.7%

14.5%

13.0%

12.8%

12.5%

10.0%

9.0%

(1) Source: Eurostat; UK National Statistics

(2) Source: US Bureau of Labour Office

(3) Source: UK National Statistics

(4) Source: Japanese Statistics Bureau

(5) Source: HK Census & Statistics Department



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developments to minimize unnecessary duplication generated by point-to-point services.

The whole Government urban planning framework is conducive to the viability of a commercially driven rail-property business model.

RAILWAY AND CITY VITALITY

The economic vitality of modern cities is heavily underpinned by effective and efficient transport systems, and for people movement, railway systems are the transport of choice. However, railways are low return-on-asset businesses which are expensive to build and operate and where all investments must be evaluated over many decades if a sustainable business and financial model is to be achieved.

With rising energy costs, commodity and food prices, and growing concern for carbon emissions, cities increasingly turn to rail transport to provide the major infrastructure backbone for economic growth. Many cities wish to establish a long term vision for sustainable development. The vision is not just about the physical environment, but also about the economy and society. The city has to balance these different areas to arrive at an optimum outcome for the future community and its people.

MTR Corporation has over 41 percent market share of all franchised modes of public transport in Hong Kong. Efficient and cost-effective transport facilities have been an important support for sustaining the Hong Kong economy. Hong Kong recognizes that the best way to support the economy is through integrated land use and transport planning that can lead to reduced dependence on the private car, improve accessibility to public transport and encourage public transport use while at the same time reducing greenhouse gas emissions.

MTR Corporation aims to be recognized as a leading company that helps connect and contribute to the growth of local communities without additional cost to taxpayers, thus supporting the Hong Kong economy.

CHOICE OF FUNDING MODELS

The Government regulates rail fares by a Fare Adjustment Mechanism which determines future fare adjustments based on the Government Composite Consumer Price Index and changes in Nominal Wage Index.

MTR Corporation is obliged to enable the railway to operate safely, reliably and efficiently so that committed service standards are achieved. Railway assets have exceptionally long economic life. Asset replacement and upgrade is a major area requiring funds and there is a continual need to enhance assets to keep up with public demand,

to improve regulatory requirements, and increase standards.

Various funding and financing models have therefore been considered by the Corporation to suit the type of investments. The choice depends on both immediate capital requirements and future funding needs to ensure business sustainability. Governments and railway operators need to develop a model each time that best suits the situation. The important issue is to develop a 50 year view encompassing the long term role of the railway with a vision for the land use priorities, then to construct a sustainable business model which can work in the particular environment.

The high density of population in Hong Kong and high employment complemented by the high value of land suggest significant funds can be available from an integrated rail-property model to build new railway extensions and to undertake asset renewal and enhancements.

MTR Corporation has applied the rail-property model since the 1970s which has worked well. The merger with Kowloon-Canton Railway Corporation has given an extra 1.2 million square metres GFA into the Corporation’s land bank for property development. However, as future railway extensions will be in developed areas, land is less readily available for property development. The granting of land development rights even at fair market value is always politically sensitive. For future railway extensions, the rail-property model will have to allow for possible Government subsidies, other commercial ventures or special concessions for these railways to become commercially viable and more importantly, sustainable standalone entities.

RAIL-PROPERTY MODEL

How does the rail-property model work? The Government grants MTR Corporation the development rights for land above or adjacent to the railway stations to help finance the construction work, in lieu of injecting cash or providing direct subsidies. The Government receives proceeds at full market value (land premium) for the land grants evaluated on a “greenfield” basis, i.e. before any value added.

The Corporation invites developers through tender to develop the land, and shares the profit with the developers. Property development spins off initial capital supporting the building of new extensions. Profits brought in over the years help to fund future asset renewal and enhancement needs of the railway.

The developers are responsible for the construction cost and land premium for property while the Corporation is responsible for all costs of the railway provision. Risks borne by the Corporation are low in these property development

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arrangements as the only risk associated with this business model is the cost of advance foundation works [4]. The foundations for property development above a railway station need to be constructed before a site is put out to tender. The cost of these works is borne upfront by the Corporation and later recovered from the property development. Dependent on the Corporation’s appetite for risk, it can consider advancing an interest-free loan to the developer in return for an increased sharing in kind of the development.

The rail-property model creates a “win-win” situation for the developers, the Government, MTR Corporation and the travelling public. Developers can access premium sites for property development with acceptable risks and cost in infrastructure planning and construction. The Government does not need to use public funds for the railway construction but only grants the land use to the Corporation and receives the full value of land in return and lease payments from the operating company on an annual basis. This also maximises land revenue to the Government as new towns are developed along the constructed railways, and the Corporation has a proud record in building communities.

In the past years, MTR Corporation has generated over HK$177 Billion (A$23.8 Billion) of value accretion for the Government through this business model.

The typical MTR rail-property model is illustrated by Figure 4. District centre functions with high value private housing will normally be above the railway station. The catchment within 400 m walk-in zone to station will be characterised by traffic free high density mixed housing. Further extension of the catchment will connect to the railway station via feeder services e.g. buses, mini-buses or light rail.

Figure 4 : Rail-Based Integrated Community

Using the Tseung Kwan O extension as an example, the project was completed in 2002 at a project cost of HK$15.4 Billion (A$2.1 Billion). MTR Corporation self-financed the construction through retained profits and debts. The new line comprises five stations and a depot, providing gross floor area of 2.3 million square metres.

INSTITUTIONAL APPROACH

The rail-property model of MTR Corporation adopts an institutional approach [5]. The Corporation is at the centre stage in planning and coordinating both the railway and the property development. This approach does not remove the need for statutory plans, land lease documents and government regulations, but allows the Corporation to undertake comprehensive master-planning.

The success factor is that MTR Corporation is able to have a vision for a long-term conceptual planning of the integration of land use and the railway. The Corporation has the flexibility to work out site development details together with developers and the Government. This way, MTR Corporation is able to maximise the value of the whole development project and external benefits generated from the integrated railway and property development within government zoning land use plans. The Corporation is able to react responsively and flexibly to the market needs without constraints from long prepared Government land use plans which may have become unsuitable or redundant.

Being able to manage joint development of the railway and property by the same business entity allows more comprehensive planning. Different possible development options can be explored and evaluated at the planning stage. MTR Corporation can also assist in resolving conflicting interests of different parties with an optimum outcome for the overall development.

Success for the railway system and the community relies on good integration with other transport modes and feeder services through efficient transport interchange facilities. This requires appropriate planning from a very early stage. Appropriate planning leads to cost-effective transport solutions.

The sites of MTR property developments are attractive. People enjoy working, living and shopping in properties near the railway stations as they are value adding, convenient and efficient. Their places of work, home or leisure directly situated above are fully integrated with the railway station below, and people can travel free from unpleasant weather conditions. The planning extends to landscaped open spaces for the public and other recreational facilities.

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MTR property developments include residential and commercial premises and shopping centres, all integrated with the railway infrastructure. The theme, quality and provision of the property developments become the focal point of the local community.

MTR Corporation also promotes seamless integration between the railway station and property to maximise convenience to the residents, local businesses, passengers, visitors and shoppers.

Over the years, pedestrian links have been retrofitted to connect the railway stations to adjacent properties (Figure 5). This move improves accessibility and convenience, but may only provide a second-best option. Retrospective development of these pedestrian links is unlikely to have exploited the best opportunities, including cost, timing, resources and design. The cost of negotiation between the Corporation and the property developers can be high, thereby resulting in project delay or termination.

Figure 5 : Connection to Shatin Station

Property owners and transport operators may have different considerations and priorities. Shopping centres may want to retain the shoppers longer, whereas the transport operator aims to provide efficient people movement.[5] If the owners of the railway and the adjacent property are separate organizations, our experience is that it can be costly to resolve their conflicts in pedestrian links arrangement to allow maximisation of benefits.

To date, MTR Corporation has successfully instituted reform to local communities. It has developed new commercial centres integrated with high quality hotel and premium residential developments e.g. Kowloon Station. The Corporation has made the existing central business district more efficient, with fully integrated premium offices, retail and hotel facilities, extensive public space for the local community and

public transport interchange for park-and-ride e.g. Hong Kong Station. An old industrial area has been revitalized to become a modernised residential area with seamless connection between public transport, shopping and community e.g. Tsing Yi Station. MTR Corporation has built new towns, and connected the local communities to other business areas through efficient rail services, and contributed to local economic activities e.g. Tung Chung (Figure 6) and Tseung Kwan O areas.

Figure 6 : Tung Chung Integrated Community

One latest property development “LOHAS Park” on top of the Tseung Kwan O depot builds on the LOHAS concept. LOHAS stands for Lifestyle of Health and Sustainability and is a worldwide trend of an emerging customer group concerned about residents’ health and fitness, environment and sustainable living. LOHAS aims to build a local community with self-sustaining educational and recreational amenities and promote environmentally-friendly, efficient rail as the means of connection to other parts of the Hong Kong territory. The project echoes the Corporation’s vision to grow community with caring services and enhance quality of life – 30 minutes to CBD with trains every 3 minutes but located in the country.

PROMOTING THE HONG KONG APPROACH

Through an international growth strategy, MTR Corporation has active involvement in public transport projects outside of Hong Kong. While MTR Corporation continues to look for opportunities for rail-property model applications, it hopes to help other cities to deliver the Hong Kong magic - customer oriented focus and integration with other transport modes and local communities.

In China, the Corporation is building Phase 2 of Shenzhen Line 4 and will operate Phase 1 and Phase 2 under a 30-year concession. Beijing Line 4 is being built and will be operated through a Public-Private-Partnership (PPP) arrangement.

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In Europe, MTR Corporation has just embarked on a 7-year concession with effect from November 2007 to operate the London Overground service through a joint venture with Laing Rail Limited. London Overground is a semi-orbital route of five rail lines serving West, North and East London and will act as a crucial link for the 2012 Olympic Games. The Corporation will aim for consistent high service performance. The vision is to provide safe, friendly, accessible and secure transport for Londoners, a service that will make passengers, the local community and Londoners feel proud.

In addition, MTR Corporation is actively bidding or negotiating for three other lines in China and two internationally.

CONCLUSION

The integrated land use and transport planning model adopted by MTR Corporation ensures business sustainability of the railway by translating land development rights from the Government for railway construction into property profits to help bridge the funding gap for new railway construction and future asset renewals and upgrade. The Corporation is at the centre stage of both the railway and property development and provides a unique opportunity to optimise cost and socio-economic benefits. The model is well recognised throughout the world and is considered a success story by many railway operators. Of course, it has to be backed up by provision of a high frequency, no problems and affordable cost railway service which is MTR.

REFERENCES

[1] Kenworth JR – Transport Energy Use and Greenhouse Gases in Urban Passenger Transport Systems: A Study of 84 Global Cities – International 3

rd Conference of the

Regional Government Network for Sustainable Development, Notre Dame University, Fremantle, Western Australia, 2003.

[2] Cox Wendell - Performance Indicators in Urban Transport Planning – 8

th International

Conference on Competition and Ownership in Land Passenger Transport (Thredbo 8), Rio de Janeiro, 2003.

[3] Hong Kong Special Administrative Region Government – Hong Kong 2030 Planning Vision and Strategy. 2007 October.

[4] Ho T. Interview - Property as a Means of Financing Railway Infrastructure. PTI Journal. 2003 June: 32-34.

[5] Tang BS, Chiang YH, Baldwin AN, Yeung CW. Integration of Property and Railway Development: An Institutional Economic Analysis. Hong Kong Surveyor. 2005 June 23, 16(1).

mtr int land use & planning core2008

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