Fare plan far from fair for small investors in MTR shotgun marriage
OKAY, I ADMIT that minority shareholders of the MTR Corp never asked me to go on the warpath for
them about the forced marriage of our two rail systems. In fact, they are not minded to war at all. On the
whole, they seem happy with the deal. They mostly took one look at the property angle and decided
any property injection to the MTR was good.
They then scratched their heads over all the other financial arrangements, came to the view that it was
really all too complicated to make any judgment and decided the deal probably balanced out at neutral
for them on these major terms. Me? I look at it the other way round. I think the deal is roughly property
neutral and the major financial terms are against their interests.
But rather than go again into all the reasons why I think so, I shall restrict myself today to the new fare-
setting formula that will take the place of the extremely valuable guarantee of fare autonomy, which the
MTR is to give up for no consideration at all under the terms of the deal.
This one says that fare levels will be limited in the future to an average of the annual change in the
consumer price index and in the nominal wage index for transport workers, less a factor for
The basic idea is sound. If you want to ensure that a public service, operating as a monopoly, makes
neither bloated profits by gouging the public nor goes bust because it can no longer cover its costs,
then link its charges to its costs. If the costs go up, the charges go up and vice-versa. Everything
should be in balance. But the good idea breaks down in practice. The problem is that the formula you
devise to make this work must be a close match for that monopoly's costs, or else there is no balance
And, unfortunately, a combination of the consumer price index and transport workers' wages is not a
close match. It is very far from being one. The table shows you the scale of the mismatch by comparing
percentage weightings for the MTR's 2004 pretax costs, excluding property costs with the weightings
of the new formula.
We start with depreciation, the biggest single item for the MTR, accounting for 33.2 per cent of pretax
costs. The closest comparison to be made with this in the formula is durable goods costs in the CPI
and here you get a figure of only 3.1 per cent.
Even this is not close, of course. Changes in the price of a stove are not likely to bear much relation to
changes in the costs of building a railway tunnel. But at least it is not a cost item that will go up or down
very much for the MTR.
Then we get staff costs. This comes to 20.4 per cent of total costs for the MTR but 50 per cent for the
formula. If wages less a productivity factor rise faster than inflation, then the MTR is in luck. If not, well,
bad luck for the earnings.
The two should rise roughly in tandem over time but it all depends very much on whether the
productivity factor is the right one. My guess is that mostly it will be determined by a flip of the coin. I
see no mechanism for establishing it in the formula.
Next, we get the MTR's interest charges. There is nothing comparable in the formula. The MTR also
has a big electricity bill, 7.2 per cent of costs. The total for all utility charges in the formula - water, gas
and others - is 1.5 per cent. Repairs and maintenance account for 6.8 per cent of total MTR costs. The
closest the formula can come to this is a fractional percentage for car repairs.
Now, look near the bottom of the table. Housing rents determine 15 per cent of the formula, far more
than anything comparable for the MTR.
Food is also a big item in the formula. We shall call it zero for the MTR. How many lunchboxes does it
buy for its staff? For that matter, how much does the MTR pay its staff to take public transport to work?
How many shoes does it buy for its staff?
This mismatch is not just a theoretical difficulty. My calculations (Monitor, April 17) show that the MTR
would have taken in $3 billion less in revenues over the past 10 years if its fares had been governed
by the formula rather than fare autonomy and all of it would have come straight off earnings.
As all the proponents of this forced marriage are quick to point out, I recognise that it would be nigh
impossible to devise a fare-setting formula that is a direct match for the MTR's costs.
But, rather than have the best of a bad lot (and it is far from even the best), why have a bad lot at all? If
the government was happy with fare autonomy when listing the MTR seven years ago, why does fare
autonomy no longer suffice? Why imprison the MTR for the next 50 years to a fare mechanism that is
certain to go askew at some point over the period, probably at an early stage.
I think MTR minority shareholders will be badly short-changed by this new scheme. They will do
themselves a favour by rejecting it.