Shenzhen subway on track
2014-06-27, Chai Hua

For the last decade, Shenzhen has been struggling to copy Hong Kong’s subway-plus-property model, but had been thwarted by various barriers, particularly the land system. Beijing has finally approved the model in principle. Chai Hua reports.

The National Development and Reform Commission (NDRC) and the Ministry of Land and Resources of China are researching and studying policies to promote the development of a public urban transportation system, according to a NF Daily’s report on May 29.

The report said the two authorities had planned to adopt Hong Kong’s subway-plus-property model, and to comprehensively allow developmment of  the land above the subway tracks, which is a big step forward from its existing strict land system. The aim is to ease the heavy financial burden of metro construction and operation on government spending, experts said.

“Although there are many detailed regulations (that are) needed to be settled, the central government has approved the model in principle,” said Felix PK Leung, head of Pearl River Delta Property at MTR Property Development (Shenzhen) Company Ltd (MTR Property Shenzhen). 

“Allowing subway companies to develop the land above subway tracks enables them to use the property development’s long-term benefits to compensate the pressure on their cash flow for the subway’s operations,” said Dong Ying, a consultant at Adfaith consulting company.

Leung said the model’s benefits are many. “Integrated development of the land above subway tracks could not only guarantee the steady passage flow of passengers, but also guide people from city centers to newly developed areas, paving the way for further prosperity.


Infrastructure projects

Besides subways, the central government is also opening up more infrastructure construction projects. The NDRC on May 21 released an official notification to encourage private capital to invest in the first 80 infrastructure projects, including Shenzhen’s next metro project — Line Six.

Traditionally, mainland metro construction relies on government spending and bank lending to meet the project’s large monetary demand.

The 2012 Annual Report of Shenzhen Metro Group Co Ltd (SZMC) showed that, excluding half-a-billion-yuan ($80 million) government subsidies, its revenue of 600 million yuan was far behind its operating expenses which was as high as 800 million yuan.

Taking the first phase of the subway’s Line One, for instance, the total passenger volume in 2012 was about 665.83 million, with an average ticket price of 2.78 yuan ($0.44) per person. The actual average cost per person works out to 4.57 yuan ($0.73).

The government paid for the ticket’s 40-percent shortfall in price by subsidies, which started in 2010. Between 2010 and 2011, local government subsidies to Shenzhen Metro were 700 million yuan and 830 million yuan, respectively. Thanks to the generous government spending, the bleeding Shenzhen metro turned into the black.

Serious traffic congestion in major mainland cities, in the ever-accelerating process of urbanization, has led to a remarkable increase in demand for subways. Shenzhen, for example, plans to build another eight lines from 2011 to 2010 as its existing five lines are crowded with a growing population.

“It’s getting more difficult to depend on government to build metros in Shenzhen, like other cities in China. Public capital can no longer meet the financial demand of metro construction,” said Dong Xiangyang, director of sales and marketing at SZMC.

The heavy burden of urban track construction has forced local authorities to find a way to cut down the public spending, and so it has turned to the Hong Kong model of subway-plus-property.


Profitable subway

MTR Corporation Ltd (MTRC) is one of the most profitable subway systems in the world with a total net profit of HK$15.03 billion ($1.94 billion). Opened in 1979, the system now includes 218.2 km of subway with 152 stations, including 84 subway stations and 68 light subway stops.

About 80 percent of its profit used to come from property development rather than selling subway tickets when its new lines and properties were in full play, but the percentage went down as land is limited. Today, only about 13 percent of its net profit before taxation in 2013 came from property development, according to its annual report.

Foreseeing the subway’s huge development in mainland cities, MTRC has been trying to copy its successful business model of subway-plus-property on the Chinese mainland by establishing the MTR Shenzhen Branch in 2004. However, the newborn company has fought a long and hard battle to get assimilated into the local market.

The first obstacle is they could not obtain the development rights of the land above the subway tracks as compensation as they did in Hong Kong.

“The core of the Hong Kong model’s advantages is the integration of development, construction and operating rights. The main barrier to copying the model on the Chinese mainland is the mainland’s land system,” Dong said.

Under Chinese law, the mainland’s land system could only be publicly sold through bids by invitation, auction or listing.

The MTR Shenzhen Branch realized this problem in 2009 when the company was negotiating with the Shenzhen government to invest in the second phase of the subway’s Line 4. It had also proposed to obtain the 80-hectare land above the line as compensation, which was agreed to by the local government. However, the central government revised land to money compensation because, according to mainland law, land can’t be assigned by any kind of agreements, though it granted MTR to develop Line 4 in the form of BOT (build-operate-transfer). 

But the local government still wanted to promote the MTR model. So, two years later, it listed 200,000 square meters of land above Long Sheng station at Line 4.

  The difference of this land listing was that applicants were narrowed down by setting up a condition that they should have at least three years’ experience in subway transit investment, construction, management and operating in Shenzhen, as well as the experience to develop properties on the land above the subway. 

Although two other subway companies in Shenzhen were also qualified, they didn’t participate. MTR Corporation (Shenzhen) Ltd and MTR Property Shenzhen jointly won the listing at a price of almost two billion yuan ($320 million). 

Investing another two billion yuan on developing the land, MTR officially started its first property project on the mainland on December 16, 2013, and the presale is expected to be held at the end of this year.


Relaxing land system

The central government is also relaxing the land system gradually. “We have been exploring (ways) to obtain land as compensation for local subway construction and operation until the State Council released guiding principles on subway investing and financing last year,” Leung said. “Now the central government’s reform direction is becoming clearer.”

One item of the guiding principles Leung mentioned supports integrated development of land around railway stations and lines. 

“But there has yet to be a comprehensive set of standard operation regulations and policies to support the model (subway-plus-property). So far, above-subway-property projects on the mainland can’t truly be planned in advance, comprehensively developed and intensively operated,” Leung added.

The company is now negotiating with the Shenzhen government over the development of the subway’s Line 6. No matter what the result is, Hong Kong’s subway-plus-property model is expected to expand under the central government’s reform spirit.


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