Letter To Hong Kong
MTRC announced in March that it would increase its fare by 5.4% later this year. This news was immediately greeted with outright disapproval by the public. Those sympathetic with the increase see the objection being populism because the increase is based on a formula previously agreed with the government and our MTR fare is already lower than those in other international cities. As a legislator from the accountancy sector, my question is whether such resentment by the public is a typical emotional reaction to any public transport fare increase, or a rightly justifiable objection?
I wish to explore this issue with some facts and figures.
By way of background, it should be noted that the fare of MTRC is reviewed annually basically by reference to a Fare Adjustment Mechanism (FAM), which was introduced in 2007 as part of the deal to implement the merger of the two railway companies, MTRC & KCRC. Before that, the MTRC as a listed company had autonomy in setting its own fare. The intention then was to makefare adjustments more objective and transparent by tying them to a formula that links fare adjustments to changes in the Composite Consumer Price Index (CCPI) and the Nominal Transportation Wage Index during the period under review. A productivity factor, which was meant to capture the synergy brought about by the merger, is also included in the formula.
The original intention of the FAM was a good one. The reference indices compiled by the Census and Statistics Department are objective and free from manipulation. It was designed to allow downward fare adjustments to happen automatically in times of deflation. However, if we examine the formula in the context of the business model of MTRC and how the railway infrastructure construction has been funded, this fare adjustment mechanism is faulty and the resentment among the public about the fare increase is justified. Let me explain why.
Fundamentally, the formula fails to recognize the business model of MTRC and how it derives its revenue from various sources. From MTRC’s annual reports, one will see that its businesses are classified into five segments: (1) Hong Kong Transport Operations; (2) Hong Kong Station Commercial Business; (3) Property Rental and Management; (4) Property Development; and (5) Railway Subsidiaries outside of Hong Kong.
What is the core business of MTRC then? How does the HK travelling public contribute to its revenue? Have there been additional public resources put into the hands of MTRC to make it so successful? If so, has the travelling public been able to rightfully share the fruit brought about by the deployment of such public resources?
It seems to me the business that HK people give MTRC is not just HK transport operations, but also its station commercial business, its property rental and management business and property development business. In 2011, for example, MTRC’s operating profit before interest & tax from HK Transport Operations was HK$2.7 B, but the profit from HK Station Commercial business was $2.8 B, from Property Rental and Management businesses $2.5B, and from Property Development $4.9B. In other words, MTRC’s operating profit from HK Transport Operation accounted for only about 21% of its total profit from HK. That means, in considering a fare adjustment, about 79% of MTRC’s profit from HK has been ignored! Is this just and equitable? The profit figures and the proportionality quoted above are not unique for the year 2011. The average operating profit before interest and tax of MTRC in the past four years, i.e. since the completion of the merger in 2008, followed more or less the same pattern.
In my opinion, when considering whether to increase its fare, MTRC needs to take into consideration also the profits from these three HK business segments. Why?
First, the success of the HK Station Commercial Business today owes much to the immense traffic brought about by the railway operations. To me, Station Commercial Business is part and parcel of the railway business. If advertising income from space inside the carriage is regarded as income from the transport business, income from station commercial should also be viewed in the same way. In fact, MTRC is the beneficiary of a long standing government policy which states unequivocally that railway is the backbone of our transport system for environmental and cost effectiveness reasons. As a matter of fact, MTRC’s share of HK’s franchised public transport market has grown from 41.6% in 2007 to 45.4% in 2011.
Second, the property development profit of MTRC is again enabled by public resources. The government has adopted a Rail-plus-Property model to provide funding support to MTRC when a planned rail extension is projected to be financially not viable in its own right. A recent example is the granting of property development rights of the site in Homantin as a form of financial assistance to implement the Kwun Tong Line Extension project. For this kind of development right grant, the land premium payable by MTRC is assessed based on Greenfield principle by which the full market value of the site ignores the presence of the railway. There is no provision requiring the MTRC to share its development profits with the government or the travelling public when the eventual development profits turns out to be much higher than the projection when the premium is paid. Thanks to the vibrant property market in recent years, MTRC made an average of $5.1B a year on property development and there are more to come because of the developments in Tseung Kwan O and the development rights on the West Rail acquired at a very low cost from KCRC. Separately, for the West Island Line, MTRC has been given a $6B subsidy from the government. At the moment, the government is also seeking LegCo’s approval for funding support in the order of $57.3B for the Shatin-Central Link. Is it fair to HK people that none of these public resources given to assist MTRC will contribute to lower the fare payable by the travelling public when MTRC is making a handsome profit?
Thirdly, the property rental & management profit comes from properties previously developed by MTRC that are still now owned and managed by it.
It is therefore unacceptable that all these profits are not taken into account in considering adjustment to the fare that HK people is asked to pay. In fact, the profit margin of railway business of MTRC outside of HK is lower than that of its HK railway business. The success of MTRC owes much to the support of HK people and resources of the HK public, the public is rightly justified in expecting MTRC to take care of its best interests in considering any fare increase.
As a matter of fact, the Return on Average Equity, Earnings per Share, Dividend per Share of MTRC in the past four years have all been on the rise. At the same time, its net debt-to-equity ratio has been reduced from 42.1% to 11.9%. It is ironic to note that, for the 11 years from 1997 to 2008, i.e. before the merger, when MTRC made less profit and had a higher debt burden, it had not asked for any fare increase. What contributes to this change in attitude to start raising fare from 2010??
It is time to critically re-examine the fare adjustment model of the MTRC to do justice to the HK people. The government is duty bound to find a solution to keep the cost of public transport reasonable and affordable.