5. Hong Kong, Friday, 6 July 2018

Outline of the day

The delegation met with Dr Raymond So, Undersecretary for the Transport and Housing Bureau in the Hong Kong Government, before meeting with representatives of the Energising Kowloon East Office (EKEO) and the Hong Kong Smart Cities Consortium in East Kowloon. This was followed by a roundtable discussion and lunch with representatives of AustCham Hong Kong and Macau. In the afternoon, the delegation met with MTR before departing for home ports.

Transport and Housing Bureau

The delegation met with Dr Raymond So, Under Secretary for Transport and Housing, and Mr Mark Fu, Political Assistant to the Secretary for Transport and Housing.
The discussion highlighted the importance of infrastructure investment, the importance of integrated planning and the role of government in economic development. It also highlighted the importance of technological innovation and the challenges of retrofitting new technology in developed urban environments.
Dr So advised the delegation that Hong Kong was facing a number of challenges in the provision of infrastructure. The cost of infrastructure was rising rapidly and there were problems with cost overruns. Project exceeding HK$100 billion were increasingly common. Nonetheless, the Hong Kong Government has sufficient capital available to directly fund projects without borrowing. The high speed rail lines connecting Hong Kong with the mainland were wholly government funded. On the other hand, the Hong Kong metro (MTR) was financed wholly out of commercial returns on property rights connected to the metro system. MTR, while largely still government owned, operates as a private company and requires a commercial return on investment.
Mr Fu explained that in Hong Kong up to ninety percent of commuters use public transport, with fifty percent travelling on the metro and forty percent using buses. He noted that there were plenty of options, including taxis and minibuses, and that the government actively encouraged the use of public transport. Timetables were tightly controlled and there was a high level of consultation with public transport users. The metro was the backbone of the public transport system. Dr So explained that there was a transport hierarchy in Hong Kong. The metro comes first and everything else conforms to that.
Mr Fu advised the delegation that the new Hong Kong airport was a wholly government-owned operation, but that the investment in the expansion of the airport (HK$140 billion) was being funded by a mixture of commercial dividends, private sector investment and surcharges, which was a new model of investment for Hong Kong.
Dr So advised that there was considerable new investment in technology to capture transport related data and develop integrated transport applications. He noted, however, that the development of new applications was time consuming and retrofitting technology to infrastructure was difficult and expensive—it had taken three years to develop a single pedestrian access app. Mr Fu also advised that there were difficulties around access to data owned by private companies. Dr So observed that Hong Kong is actively investigating smart city technology, including integrating apps and developing smart lampposts, but these were still in the pilot stage and that the rollout would take time.
Mr Fu noted that there were different apps for different users and that the system was quite complicated. There were more sensors on roads facilitating route selection. Another initiative was smart traffic lights, with the capacity to sense pedestrians. Dr So explained that the aim was to achieve more walkability, so infrastructure, such as footbridges, was being developed to enhance walkability.
In discussion, Dr So highlighted the importance to Hong Kong of the Greater Bay Area development, and the transport links that were being developed between Hong Kong, Macau and the mainland. These included the HSR connection and express road link with the mainland and the Hong Kong-Zhuhai-Macau bridge, which will facilitate commercial traffic between Honk Kong and cities on the other side of the Pearl River Delta.
Dr So and Mr Fu also explained the value capture system used by MTR. The land used by MTR for the metro network is government owned. The government draws revenue from the sale of the development rights in the first instance and, as the major shareholder in MTR, from dividends from MTR’s revenue thereafter. Mr Fu explained that changing land use in Hong Kong requires the payment of a premium—that ‘land premium’ constituted value capture. The delegation notes that other aspects of the value capture system used in the development of the Hong Kong metro were discussed later with MTR (see below).
At the conclusion of the meeting Mr Alexander thanked Dr So and Mr Fu for their time, highlighting the complementarity between Australia and Hong Kong.

Kowloon East Smart City Pilot Area

The delegation visited Kowloon East Smart City Pilot Area and met with representatives of the Energising Kowloon East Office and the Hong Kong Smart Cities Consortium, led by Ms Brenda Au, Head of EKEO.
The Kowloon East Smart City Pilot Area is a redevelopment of the old international airport site and surrounding area, focused on creating a second core business district for Hong Kong—CBD2—incorporating commercial, residential, cultural and green space into a revitalised precinct. The purpose of the redevelopment is to create a connected, sustainable, liveable and diverse precinct with five main focuses:
walkability and mobility
a green CBD
a smart city
socio-economic vibrancy
a spirit of creation.
A range of proof of concept trials for the precinct is underway or planned, including:
Smart crowd management systems (including use of CCTV, video analytics, real time information to command centre, and real time information to apps and on-site signage)
Walkability trial (including apps that provide information on sheltered routes, barrier free routes, easy walking, personalised tours, and using government map data on apps)
Energy efficiency (including obtaining real-time household energy data in an 80 household pilot, and developing behavioural change solutions and energy savings programs)
Traffic management (including monitoring kerbside loading using visual analytics, reducing illegal parking and dumping of goods)
Developing multi-purpose lampposts (including IoT capabilities, universal power connections and modular design. Features include lighting, weather sensors, air quality sensors, CCTV, solar panels, electric vehicle charging, Wi-Fi, information displays and spare sensor slots.) 400 smart lampposts are being installed by the Hong Kong Government.
Smart waste bin systems (using fill sensors on forty bins)
Real time roadworks information
Other issues such as double parking and footpath parking.
Ms Au noted that we need smart technology to create smarter solutions, making cities greener, more liveable and sustainable.

AustCham Roundtable

The delegation met representatives of the with Australian Chamber of Commerce Hong Kong and Macau (AustCham Hong Kong and Macau) for a lunchtime roundtable discussing issues relevant to relations between China, Hong Kong and Australia.
Much of the discussion centred on the evolution of the relationship between Hong Kong and mainland China—the opportunities and obstacles in the way of Hong Kong using its unique position in relation to the Chinese mainland. There was concern about cultural obstacles to Hong Kong effectively exploiting its proximity to the mainland—that Hong Kong was struggling to comes to terms with the transition from British to Chinese rule both politically and economically—and that Hong Kong was falling behind the mainland in terms of technological innovation. The lack of alignment in systems was highlighted as a serious and growing problem.
It was observed that the Central Government in Beijing created ‘decisiveness’—that ‘build it and they will come’ actually worked in China. The significance of the Greater Bay Area concept and massive planned investment in Shenzhen was highlighted.
The success of MTR in developing the Hong Kong metro was also noted—as was MTR’s potential to contribute to the development of public transport in Australia.
It was suggested that as an advanced and sophisticated country, Australia should seize the opportunity to become involved in the Belt and Road Initiative.

Figure 5.1:  Victoria Peak, Hong Hong

Delegation members with Ms Wendy Hayden, Trade Commissioner Investment, at the Peak


In the afternoon, the delegation met with representatives of MTR for a discussion about how MTR operates and the lessons from that for Australia. Present at the meeting were, Mr Lincoln Leong (MTR’s CEO), Dr Jacob Kam (Managing Director, Operations and Mainland Business), Mr David Tang, (Property Director), Ms Margaret Chu, (General Manager, Station Retail) and Mr David Yam, (General Manager, Business Development).
MTR is important to Australia on several levels. It has experience of successfully operating mass transit systems internationally, including in Australia. In its home market it has developed an operating model which allows it to make a commercial return on investments without government subsidies (it actually provides a return on investment to government). It has developed the ‘rail and property’ model of investment that employs value capture to fund the development and operation of the Hong Kong metro network.
MTR began life as a department of the Hong Kong Government. In 2000, an initial public offering saw 23% of MTR become privately owned, and in 2007, MTR took over operation of the Kowloon-Canton Railway Corporation network, establishing control of the entire railway network in Hong Kong. The network caters for 5.76 million passenger journeys per day. MTR has a high level of profitability (HK$8.6 billion in 2017; underlying profit of 82%; net profit HK$500 million after depreciation). Earnings are derived from property and assets (32%), property development (18%), station commercial earnings (37%), international business (9%), and transport operations (4%). This is a key element of the MTR model—operation of the network is only a small part of revenue; most is derived from property development and management and related commercial sources.
The MTR system is an example of transit orientated development (TOD). The ‘rail and property’ model focusses on high density development around commutable distances—a 500m radius from stations. The rail and property model originated as a funding model focused on the need for capital investment throughout the life of the project. It is a model in which recurrent income pays for ongoing capital expenditure. This enables low fares without resort to government subsidies. It optimises use of valuable land through the use of airspace.
Under the rail and property model, rail projects are assessed in terms of their capital and operating costs over the life of the line. Revenue is estimated and the gap between the two identified. An assessment of development right is then used to fill the funding gap, with a land premium going to the government to pay for this development right. In conjunction with private developers, MTR invests in property development in and above the station precinct, creating an ongoing profit stream. The benefits to government include a free transport service, the land premium from lease of land, and an ongoing dividend from MTR’s profit (HK$4 billion per annum).
The rail and property projects are implemented together in a coordinated way creating multiple uses of the same land, with station areas including offices, shopping and residential within the airspace covering the station footprint. This model has generated 13 million square meters of commercial and residential space in about half of MTR’s 90 metro stations. MTR has HK$77 billion of property on its books. MTR derives HK$6 billion in revenue from commercial assets—property rental and management.
The commercial return on the station and rail infrastructure is significant. It includes revenue from rent of commercial space within station precincts; telecommunications access through rail infrastructure, including tunnels; and advertising—over 46 000 units, including interactive advertising.
In discussions with the delegation, MTR noted that the purpose of their model is revenue, but it is also about the customer experience. The customer base is their most important asset. Communicating with the customer base is also important. They use digital technology to communicate with passengers about optimal timings, routes and interactions with retail assets, including through mobile apps providing real time information.
MTR also emphasised that its operations were not just about railways—MTR builds cities. An example is the rail connections to the new airport, which includes an express line to the airport, and a metro line to the new residential and commercial development at Tung Chung (near the airport). This had allowed for extensive urban redevelopment along the line, including the extension of the CBD, creating new uses for old areas. It is regarded as critical that the airport line has multiple uses. MTR observed that their model is not just about high rise development, but emphasised that some form of development needs to take place in conjunction with transport infrastructure.
MTR noted that it also operates buses, the cable car, intercity rail and heavy rail in addition to the metro network, and is building the HSR link to mainland China. MTR’s capabilities includes fully integrated planning, design and build; financing; and operations and maintenance of infrastructure.
MTR outlined its international operations, which includes using the PPP model for the development and operation of the Sydney metro north-west and the line to mainland China; and operations and maintenance contracts for metro operations in London (the Cross Rail and the Elizabeth Line), Melbourne and Sweden (Stockholm metro). It also manages lines in four major Chinese mainland cities, including employing value capture methods in Shenzhen (just over the border in mainland China).
In conclusion, Mr Leong stressed the importance of the relationship with Australia, of value capture in its various forms, and Australia as a market for MTR.
Mr John Alexander OAM, MP
Delegation Leader
13 September 2018

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