Railroading Hong Kong's Development

While furious debate continues in Hong Kong over urban renewal, prodigious tracts of railway land and precious urban sites are being quietly redeveloped through semi-public statutory bodies under government control, dramatically reshaping the city’s face without public participation.

These bodies—the MTRC, which operates the subway system; the Kowloon Canton Railway Corporation and the Urban Renewal Authority—have been anything but shy about playing conflicting (pro-public vs. anti-public) roles in their day-to-day operations. Together, they are shaping the way Hong Kong will look in much the same way that the legendary titan Robert Moses shaped New York City in the 1960s, without any public consultation.

Getting at exact figures on how much land the public agencies redevelop themselves, without public scrutiny, is difficult. But in the last fiscal year, the government sold 2.8 hectares through public tenders and auctions, while in the same period, away from public view, the MTRC and KCRC awarded tenders for about four times that much—12.5 hectares that included two Tseung Kwan O sites to Li Ka Shing's property arm, Cheung Kong Holdings, by the MTRC and a 3.4- hectare site awarded by KCRC to Sino Land for the Wu Kai Sha station.

However, not only do their conflicting roles arouse serious questions, they give the impression that the government hungers for a chance to share in the property development spoils in any way it can. Itself Hong Kong’s largest land supplier, the government has always walked a fine line between serving the public interest and exploiting land in an anti-public manner.

Even in the face of rising public concern surrounding such controversial projects as the HK$5.1 billion Tamar government headquarters that Chief Executive Donald Tsang bulldozed through the Legislative Council, there has never been any serious attempt at public participation in land decisions. If the MTRC wishes to build a rail line to Tung Chung on the back side of Lantau Island, as it did, a new city will sprout there, as Tung Chung did, without any public input despite the destruction of an important estuary in the area.

Government nonchalance is further amplified by its property profiteering under the guise of operating for the public benefit, leaving Hong Kongers bereft of amenities enjoyed by other major cities. In fact, according to an activist group called HK Alternatives, “The urban areas of Hong Kong and Kowloon currently have an extremely small ratio of per capita urban parkland. Other world cities such as New York or London have over 10 times the amount of per capita urban parkland that Hong Kong has.”

Just how little public space Hong Kong residents have is illustrated by the open space enjoyed by Singaporeans, an island nation constricted, as Hong Kong is, by boundaries beyond which it cannot grow. Singapore’s Urban Redevelopment Authority laments on its website that the island republic has only two-thirds of a hectare of parkland for 1,000 persons. By contrast, Hong Kong’s ratio per 1,000 persons is a minuscule fifteenth of a hectare.

The many roles of the URA

The URA is simultaneously land reacquisition authority, planner and property developer. While the agency could perhaps be trusted to carry out its first two roles in the public interest, there are concerns that its third role, as a developer, compromises its overall integrity.

The Urban Renewal Strategy officially states that the financial objective is to “encourage private sector participation and a self-financing urban renewal program in the long run.” In other words, the URA is expected to generate income for its own pocket from joint ventures with private developers. This is hardly a recipe for green space and parks.

Thus, on the one hand the URA has the authority to buy out or reacquire dilapidated but land-rich urban properties and offer their residents whatever compensation it deems fit, while on the other it tries to churn out a profit, either alone or in joint ventures with private developers. That raises the question of how the URA can serve the public interest in terms of environmental aesthetics and urban sustainability when its focus is on squeezing every cent out of redevelopment projects.

The URA has come under fire for what reformers consider to be the reckless replacement of old urban buildings with monotonous, high-density residential blocks and monstrous, tasteless commercial buildings at odds with its stated vision of “creating quality and vibrant living in Hong Kong.” The Li Chit Street and Wedding Card (Tai Yuen) Street residential projects in Wanchai and Langham Place in Mongkok, speak for themselves. These are vibrant and vital local neighborhoods which the government is determined to homogenize at a time when many cities around the world are seeking to preserve and enhance local character.

The irony is that URA’s existence is dependent on government loans—taxpayers’ money—but it has the right to use that money and other government assistance (which may include land premium waivers) to engage in what amounts to private development.

The Rail Combine

The MTRC and KCRC function under largely the same scenario as the URA except that their roles are even more complex and the lands involved are more mammoth in size. The MTRC since October 2000 has been publicly listed although the government still owns 76 percent of it and it is independently managed on what are described as “commercial principles.” It is “financially independent and does not rely on any subsidy from government,” according to its corporate website.

First and foremost, it is a public railway operator, simple enough. But its land-related roles are mind-boggling. MTRC is at once developer, landowner, land development rights supplier and land premium negotiator.

To say MTRC is a privileged developer is an understatement. “In property developments, the company will enter into partnerships with reputable developers, whereby the developers will bear all development costs, including land premium and construction costs, and therefore all development risks,’’ according to its website. ‘’The company will supervise construction of the projects and share part of the profits upon completion and sale.”

The MTRC’s prospectus for its entitlement to development profit/floor space from the Airport Railway (Tung Chung Line) Station projects is an example although it isn’t stated in precise figures. For example, for the three Tung Chung Station packages—Seaview Crescent, Coastal Skyline and Caribbean Coast, consisting of a whopping 11 million square feet of residential, office, retail and hotel floor area—the MTR’s share of the profits ranges from 20 percent to 50 percent of surplus proceeds.

In other words, MTRC shares development profit without financial risk. Its worst-case scenario is zero profit. In a good year, MTRC’s profit from property development runs to billions of Hong Kong dollars. In 2005, it raked in HK$6.15 billion from property development, representing 55 percent of its total operating profit.

In order for it to carry on business as a risk-free, statutory real estate developer, MTRC is granted government land (inclusive of development rights) via private treaty grants for the construction of railway networks. As such, it is a landowner (legally speaking, a land lease grantee).

In the process of tendering out development sites adjacent to or above railway stations, MTRC conveys the development right of a particular site to the winning bidder (a property developer or developer consortium), while retaining the land lease grantee status. From this perspective, it is a land development rights supplier to private developers.

After or shortly before awarding the development rights of a station site to the winning developer or developer consortium, MTRC is responsible for negotiating the land premium involved on behalf of the winning bidder. Thus it is a land premium negotiator. It then goes into a joint venture with the winning developer, from which both MTRC and the winner profit profusely, especially if it manages to “negotiate with government” a low-enough land premium.

It is hard enough to figure out the intricacies of the operations of MTRC, let alone understand the abstruse inter-relationships of these four different roles and the implications for the government. To illustrate, the SAR government grants precious land at traffic nodes to a private developer via its 76 percent-owned-MTRC joint venture partnership after a tendering process, giving the winning bidder development rights to share in the development profit. During the process, MTRC negotiates the land premium for the site with its “parent,” the SAR government.

All development costs, including the land premium, are to be borne by the private developer. On completion, MTRC and the developer share the profit according to a previously agreed ratio. Naturally, 76 percent of MTRC’s share of profit goes into the SAR government’s pocket. For 2005, this meant a cool HK$4.67 billion. Where and how that money was subsequently spent is anybody’s guess.

And let us not forget that the construction cost of the relevant railway line is already or should be well covered by hefty land premiums paid by private developers. It is certainly a win-win-win situation for government, MTRC and the chosen private developer. But one thing amiss is the justification for government, via the MTRC, to take unearned profit out of land, a valuable public resource, through such an incestuous set-up. Also, one might wonder if the land premium negotiation process is considered to be an arm’s length transaction.

Hong Kong prides itself on rule of law, but in playing out its many roles, MTRC, the SAR government’s land agent, seems to have forgotten the concept of conflict of interest. If 55 percent of its total operating profit comes from property development, more or less the same percentage of its management time and resources are likely devoted to that business, leaving less than half for its other main business—railway operation. Can the public interest be properly served when a semi-public semi-private body has to serve so many other interests at the same time?

KCRC

The setup at KCRC is no different from that at MTRC, except that KCRC is 100 percent government owned. Once the pending merger of the two railway companies goes through, a lot of KCRC’s land assets will have been absorbed by MTRC, but this would only reinforce the statutory real estate developer status of the merged body. But even now, KCRC still owns vast tracts of land along the West Rail and is no less a statutory developer.

Perhaps it all comes down to one ultimate question: does the SAR government's addiction to land exploitation harm social interest? And if it so, who can apply checks and balances? Under Hong Kong’s Basic Law, its mini-constitution, the Chief Executive together with the Secretary of Planning, Lands and Housing have uncontested authority over land use and land disposition. So much for oversight.

The two railway bodies and the URA have the authority to choose privately their joint venture partners (in most cases the leading developer conglomerates) for railway land development projects and urban redevelopment projects respectively. These three statutory developers and their joint venture partners appear to have unchecked accessibility to land.

As much as this institutional setting is a legacy of British rule, with painful lessons learned from the property bubble and the high cost of living and working in Hong Kong, it may well be time for all stakeholders concerned to contemplate their social responsibility and the possibility of reform to the land system in the interests of social progress.

Alice Poon is the author of "Land and the Ruling Class in Hong Kong."