Hong Kong’s Expanding Metro a Model of Development-Funded Transit

» New extensions in central Hong Kong will be mostly funded by development around future stations.



As one of the densest places on earth, it is no surprise that Hong Kong is a transit city, with over 90% of journeys made by public transportation. This concentration ensures high ridership on the city’s extensive MTR metro system. Yet it also increases the cost of line expansions, since building new projects in places that are already packed with people necessitates the creation of tunnels and requires expensive environmental and social remediation.

Hong Kong, however, is going about constructing new projects at a steady pace. At the end of last month, the MTR transit agency approved the construction of the 4.3-mile South Island Line, which will provide service to Aberdeen and other sections of the south side of Hong Kong Island. In addition, the agency will complete a 1.6-mile extension of the Kwun Tong Line to Whampoa. Both will open for operations by 2015, with ground breaking scheduled for next year. The city already has a 2-mile metro extension to the West Island under construction.

All this is being built in the context of relatively high construction prices: The Kwun Tong Line is being constructed at a total cost of HK$5.6 billion, or roughly US$450 million per mile. Though that’s less expensive than what a similar project would cost in New York City, where the Second Avenue Subway is being built for more than $2 billion a mile, it’s on par with most other Western cities building new subways, unsurprising considering Hong Kong’s wealth. So what is this city’s secret? How is it able to continue building new metro expansions — and plan for more — when other cities are being forced to postpone their transit projects due to the recession and the resulting government cutbacks?

The answer is that the MTR, in association with the local government, has become one of the city’s major property developers. It has used profits from those new housing, commercial, and retail schemes to pay for part of the cost of constructing new subway lines. Along the urban rail lines, the MTR has funded dozens of new housing projects with 300 to 7,000 apartments each. The operations of the subway are entirely unsubsidized by the local government.

This approach — called “Rail+Property” by the MTR — does not involve the city simply handing over development land to the transit agency at no costs (land in Hong Kong is all owned by the government, though it is leased out to private individuals and corporations for long-term periods). Rather, it is expected to pay the government the land costs estimated based on a no-rail scenario. Thus the MTR is not forced to deal with the problems many agencies face when they use eminent domain to take land, such as escalating values in anticipation of the new transit service. Rather, it is rewarded for the added value it will produce once its new transportation project is completed.

For the South Island Line, the government has agreed to provide MTR development rights to a site at the former Wong Chuk Hang estate. In turn, the transit agency expects the government to pay for less than half of metro construction costs. The rest of the tab will be picked up by the

MTR. This process, which directly associates transit operator with transit-oriented developer, makes the financing and construction of new underground transportation links far more simple than the typical approach, which requires governments to use public tax funds to pay for most of the cost of transit projects. The latter funding mechanism, common in the U.S. and Europe, is politically difficult and financially troublesome, especially in times of increasing budget deficits.

Of course, the MTR is not alone in using this method to assume some of the costs of construction. In Paris, the government’s grand plans for a network of 96 miles of new lines, costing more than €20 billion, would be partially paid for by the creation of development districts around each station whose own existence is only possible thanks to the creation of the transit line. This is a reasonable way to fund a transit line, as it is paid for by the benefits it produces. In a typical U.S. city, the transit agency provides a significant boost to local property values when it invests in a new rail project and yet it is able to capture very little of that extra wealth created — and when it does, only indirectly through tax revenue increases. This slows down the development of many cities.

One of the difficulties in proposing a similar finance method in the U.S. is that there is a residual fear of letting the public sector (or even the only partially public sector, in the case of MTR) engage in land development. The memories of urban renewal and public housing remain fresh enough on the minds of enough Americans to dissuade them from wanting to repeat the process today. Thus the closest we’re able to get is a financing method like that being used for New York’s 7 Subway extension. There, the city has created what is essentially a tax-increment financing district in the area to be served by the line, and it will use those tax revenues to pay back the initial costs of the project.

Yet this indirect approach, which does not allow the transit agency to reap the full benefits of the value increase it has sowed, leaves too much room for massive developer profits and too little room for actually funding new transit lines. It is worth considering whether it would be worthwhile to allow a transit agency to engage directly in the creation of new developments around the stations it has built. If properly managed, such a system could result in better transportation for all and less of a constraint on the public purse.

I should note that Hong Kong may be a unique case. At the aerial map at the top of this article shows, it is hemmed in from all sides by natural features — the ocean, mountains, and parks — that force all new development to be quite dense. Similarly, most housing and commercial activities are stuck in the relatively narrow strip of land between the ocean and the mountains. That density and linear concentration removes space for potential transportation infrastructure and limits the amount of walking necessary for anyone who lives along a transit line that follows the rough line of urban landscape; this makes transit work better here than most place. All together, you have conditions almost ideal for transit-oriented development. You can’t just transpose the Hong Kong model on any place.*

* This paragraph was added after the initial publishing of this article.