Hong Kong’s MTR (Mass Transit Railway Company) is one of the most profitable transit systems in the world. Rider fares amount to roughly 186% of its operating costs.
In comparison, Toronto recovers about 70% of its operating costs from fares and New York recovers 57%. This means that in the latter two cases, government subsidies are required to keep the systems in operation.
On top of this, Hong Kong relies on a unique “rail plus property” model, meaning that they also use the profits from real estate development activities to fund transit expansion. Here’s more on how it works:
"In a value capture scheme, MTR is granted low-cost land around its future stations [from the government]. It then develops the land and uses the profits to pay for system expansion. Through this system, MTR has managed to build subways and elevated rail lines throughout the islands that make up Hong Kong, largely paying its own way."
This morning I saw this tweet about Toronto streetcar advertising. The author has a “big problem” with public transit being fully wrapped in ads and so she decided to tweet her local Councillor to see if these could be somehow limited in size.
My first thought was: I wonder how many people would accept higher fares in exchange for fewer/no advertising. Is this something people care about? Because personally, I’ll take the lower fares in exchange for someone trying to monetize my attention. I mean, every social network I use is already selling my attention off as their product.
But then this got me thinking about what the actual numbers look like. So let’s look at some of those for not only Toronto, but also for Hong Kong, since many people view that as the gold standard as far transit authorities go.
For the year ending December 31, 2016, the Toronto Transit Commission (TTC) posted a total operating revenue of $1.204 billion. This represents about 41% of total revenue – the rest comes from subsidies.
If you drill down into operating revenue, advertising makes up $28 million or about 2.33% of total operating revenue. So a pretty small number. If you tried to shift this number over to “passenger services” revenue (transit fares), it actually wouldn’t increase fares by that much. But presumably fares are already at some profit maximizing number.
Switching to Hong Kong’s MTR Corporation, their numbers have to be unpacked a little differently because the group has a number of diverse business lines, including property development.
For the year ending December 31, 2016, total revenue from Hong Kong Transport Operations was HK$17.655 billion (almost all fare revenue). Advertising falls within the Hong Kong Station Commercial Businesses group and that company posted revenues of HK$5.544 billion for the same time period.
To try and create some sort of comparison, I’m ignoring all of the other segments within MTR.
Within Station Commercial Businesses, advertising revenue alone makes up HK$1.09 billion or about 20% of that group’s total revenue. The rest comes from station retail rent (the biggest chunk), telecom, and some miscellaneous station income.
If you add up Transport Operations and Station Commercial Businesses, total revenue was HK$23,199 billion for the year ending 2016. Advertising comprises about 4.70% of this – so more than double that of Toronto.
It’s also worth noting that MTR’s station retail rental revenue is about 3.4x that of its advertising revenue. In the case of Toronto, the TTC actually makes more money off advertising than it does from “Property Rental.” I’ve always thought this was a missed opportunity. Transit and land use go hand in hand.
In any event, I’m far less fussed about advertising on transit. But what are your thoughts? Let me know in the comment section below.
Today’s Architect This City post is being brought to you live from the mid-base lodge at Revelstoke Mountain Resort on Mount Mackenzie in British Columbia.
It’s currently foggy, rainy, and about 2 degrees celsius — which I’m told is fairly anomalous for this area. It’s unfortunate for my friends on the slopes, but it makes me feel somewhat better about hanging out all day to rest my back and shoulder.
The town of Revelstoke was founded in the 1880s when the Canadian Pacific Railway connected the area. And traditionally its economy has been closely connected to that rail. However, with amenities like the resort I’m currently sitting in, its economy now increasingly includes tourism.
One of the most interesting reminders for me on this trip through the Canadian Rockies is how instrumental rail was in unifying and then building this country. But in actuality, it wasn’t just rail. It was rail plus property.
Within the Canadian Pacific Railway was a division called Canadian Pacific Hotels, which built and operated both urban and rural hotels such as the Banff Springs Hotel and the Chateau Lake Louise (both of which I visited for the first time on this trip). And today, these railway hotels are absolutely some of Canada’s most inspiring landmarks.
The model at the time was simple.
Sir William Cornelius Van Horne — who was president of CPR in 1888 — believed: “If we can’t export the scenery, we’ll import the tourists.” He knew that it was all about moving as many people as possible. And to do that he needed to create accommodations and destinations all along the rail. In other words, rail alone wasn’t going to cut it. It had to be rail plus property.
This of course is a model that still persists today. Many public transit authorities, such as the MTR in Hong Kong, have been hugely successful by adopting a rail plus property model.
However as the case study of the Canadian Pacific Railway demonstrates this is not a novel approach. It’s actually a tried a true model. Rail, and infrastructure in general, goes really nicely with property development.
So why don’t all transit authorities adopt a rail plus property approach?
Overall, this seems to make a lot of sense. Which begs the question, could this model - specifically “rail plus property” - be exported to other cities?
NextCity asked this question with respect to New York, but came up with 3 problems: first, New York has an operating shortfall, unlike Hong Kong; second, New York doesn’t have the same amount of government owned land; and third, construction costs are way higher in NYC.
The first thing that comes to my mind is, why are Toronto and New York so bad at farebox recovery? Our infrastructure is not self sustaining; we’re reliant on government handouts.
Looking at fare pricing, there’s a big difference between the cities. Hong Kong charges based on distance traveled, whereas Toronto and New York charge a flat rate. Intuitively, dynamic pricing makes sense, since you’re then able to capture shorter rides that would otherwise be replaced by walking (or other alternatives) and you capture more value during longer rides.
The other big difference is the hyper density of Hong Kong, since we know there’s a correlation between urban density and transit ridership. I would assume that the demand for most of their rail lines is fairly high. And it’s for this exact reason that I’m opposed to the new Scarborough subway line here in Toronto. Building subways in areas of the city without the densities to support it will only exacerbate our farebox recovery problem.
As for the other two points regarding government land and high construction costs, I have to believe that there’s a way to create a “rail plus property” model that circumvents these concerns.
For one, why does it have to be government land? Could we not reward developers with additional density if they build a subway station in the basement of their new building or contribute to a transit fund? The city already allows additional density near subway stations. Why not do the same for locations where we simply want a station?
Transit is too important not to get right. I hope Toronto will soon understand that.
