Could Hong Kong's subway provide sequestration inspiration?

Hong Kong's subway system makes money through a business strategy that might apply to other government activities. Steve Kelman explains.

MTR car

Hong Kong's public rail system is rare in that it's a money-maker. Steve Kelman explains how. (Wikimedia photo)

While visiting Hong Kong for a conference, I had a chance to have lunch with a former colleague, Jay Walder, who is now the CEO of the Hong Kong subway system MTR. To my surprise, he told me about a unique business model for the Hong Kong subway that might – like the idea of “social impact bonds” I discussed in my last blog post – have some implications in terms of creative ways to fund government activities in tight times.

Everybody knows that mass transit systems lose money, often a lot of money.Indeed, at the federal level, the Urban Mass Transit Administration has traditionally financed some of these losses. However, mass transit typically raises property values, especially in areas near stations, because having mass transit nearby is attractive to some people, and can also be a good location for retail outlets. (When the subway was extended in Cambridge a number of years ago, neighborhoods near new stations experienced a renaissance.)

Government gets some benefit from rising property values through increased real estate taxes, but subway systems themselves have not participated in these rising values.

That’s where the Hong Kong model is unique. MTR – which is now a privatized, stock market-listed, profitable company in Hong Kong – is also in the property business, especially in areas where new stations are being built, often on reclaimed land. Typically, MTR develops both residential and commercial property around stations. It gains revenues from rising property values.

That means the business model of the Hong Kong subway company is to engage in its core activity – running a mass transit system – while also benefiting from some of the wealth that activity creates. And thus the Hong MTR is not a money-losing enterprise that needs to be supported by public funds, but makes a profit.

I bring this up not necessarily to suggest that we should repeat this specific model in the United States – I don’t know enough to have an opinion on that. My point is that government activities often create substantial private benefits, and that government should perhaps consider participating in those benefits more directly, especially in tough economic times.

Consider how often government-supported research leads to patents. (I say this at the risk of wading into a very controversial area, but I tried out this idea on one of the country’s leading experts on intellectual property, I was told that it might have merit.)Federally funded research produces patents with enormous economic benefits to the parties that received government money. Why shouldn’t the government receive some modest percentage of royalty revenues such patents generate? I am guessing that if we put our minds to it, other examples will come to mind.

Again, tight budget times demand some creativity. Thoughts?

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