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The model behind HK MTR's gold standard

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The opening of Hong Kong's HK$16.9 billion (S$3.2 billion) South Island Line - the city's first new railway line in 10 years - went smoothly on Wednesday, epitomizing the network's reputation as the global gold standard in performance reliability.

Hong Kong

THE opening of Hong Kong's HK$16.9 billion (S$3.2 billion) South Island Line - the city's first new railway line in 10 years - went smoothly on Wednesday, epitomizing the network's reputation as the global gold standard in performance reliability. Or as Singapore Transport Minister Khaw Boon Wan puts it: "The best in class".

Driving Hong Kong's MTR success is a business model incorporating expanding property development and investment that helps fund rail network growth, maintenance, upgrading and operations.

Last month, Mr Khaw told Parliament that Singapore's MRT system, which had one disruption for every 158,000 train-km travelled in the first six months of this year, is "still quite far off Hong Kong MTR's performance" of having one disruption for every 360,000 train-km. The MTR has maintained a 99.9 per cent on-time performance for years, including into the first quarter of 2016, according to latest figures provided by its operator, the Hong Kong Stock Exchange-listed MTR Corp (MTRC).

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"This is not easy to achieve and is becoming more challenging as we carry more passengers and operate more train services which places an increasing strain on our infrastructure and railway assets," MTRC's managing director of operations and mainland business Jacob Kam told The Business Times.

He attributed MTR's high performance standards to a "very stringent maintenance regime", with his company investing over HK$7 billion on maintenance, renewal and upgrading of infrastructure and assets in the past year.

Whenever disruptions occur - the MTR suffered two major disruptions in the first quarter lasting more than half an hour, and seven such incidents for the whole of 2015, down from nine in 2014 - MTR's centralised Operations Control Centre (OCC) helps coordinate quick and effective responses. "The centralisation of our OCCs in a 'Super OCC' at Tsing Yi allows staff to watch over the whole integrated railway network 24 hours a day, including during overnight maintenance in non-service hours," said Dr Kam. "Bringing the controls of all the lines under one roof makes it easier for controllers to assess situations... and decide on the appropriate action to take."

Solid finances help ensure maintenance and operations are well-oiled. "MTR has a sustainable business model which is key to our long-term success," said Dr Kam.

Unique to Hong Kong is the MTR's "Rail + Property" model, under which the government gives MTRC land development rights around train stations in exchange for building new lines. This allows MTRC to further generate revenue apart from fares, such as by managing third-party residential and commercial properties, developing shopping malls and residences, and renting out real estate.

Fare revenues remain stable, said Dr Kam, on top of "significant earnings from our station commercial business" and a "strong base" from property development earnings, which are "more cyclical and vary from year to year".

As of June 30, MTRC's attributable share of investment properties in Hong Kong was 212,301 sq m of lettable retail floor area, 39,410 sq m of lettable office space, and 15,267 sq m of property for other use. Its investment properties include 13 shopping malls, among them the luxury Elements mall built atop the Kowloon MTR station catering to city metro lines and an airport express stop.

MTRC is anticipating a "significant expansion" of their investment properties portfolio in Hong Kong with the addition of 120,620 sq m in gross floor area in the next five years to increase its retail portfolio by about 40 per cent, according to the company's 2016 interim report.

As for MTRC's Hong Kong property rental and property management businesses, revenue in the first half of 2016 grew by 4.6 per cent to HK$2.36 billion, with shopping malls in Hong Kong and the company's 18 floors at Two International Finance Centre office building remaining "close to 100 per cent let".

MTRC also has nine property development packages that will provide over 16,000 housing units when completed in the coming years.

HK properties owned by MTR

"Our Rail + Property model... is financially and environmentally sustainable in the long term, and is recognised internationally as a leading model for transit-oriented development," Dr Kam said.

MTRC's model enables the company to "have free hands to focus on transportation", said transport analyst Dr Lee Der-Horng, a professor at the National University of Singapore's department of civil and environmental engineering. "They are able to spend more of their corporate revenue on repair and maintenance."

"What really strikes me is that Hong Kong seems to be more daring in spending. If not for their non-transportation income, I don't think they'd be in the position to do those things in that way."

But such a property-reliant model also comes with potential risks, added Dr Lee.

"Hong Kong is very small," he said. "The day MTR doesn't have any new playgrounds given by the government, there will be little room for further development."