In previous chapters it has been demonstrated that the future volumes and patterns of movement in Hong Kong will require an extensive rapid-transit system, in addition to expanded surface transport, to properly serve travel needs. The major corridors have been identified, and an operationally feasible rapid-transit system has been described to serve them. The capital cost of constructing and equipping this system has been estimated. Required levels of service have been determined and annual operating expenses have been assessed.
It now remains to estimate the revenues which will be produced by a fare structure appropriate to the basic objectives of the system and practicable to apply having regard to present fares. These revenues must be related to operating expenses and to capital investments to establish financial feasibility. In addition to direct financial feasibility, the economic merits of the rapid-transit system should be considered, taking into account benefits accruing to the whole community and the effect on total transport costs.
Like the capital and operating costs, the revenue estimates are based on 1967 values. It has been assumed that if costs increase in the future, public transport fares will be raised proportionately so that the net revenues will not be affected.
Cost and revenue estimates are conservative; the costs are considered to be on the high side and the revenue estimates some what low. Two sets of travel projections were used in the financial analysis. The rolling stock and operating costs were based on the higher traffic estimates and the revenue was based on a lower estimate. In addition the computer method used to produce the "low" traffic estimate was such as to yield the lowest value that can be regarded as realistic.
The total cost (at 1967 monetary levels) of building and equipping the proposed rapid-transit system is $3,404 million.[1] Of this amount, 58 per cent is for line and station construction, 36 per cent for equipment and furnishings and 6 per cent for land. The total capital expenditures by major items are shown in Table 74. More detailed estimates have been included in Chapters 8, 9 and 10.
Excluding rolling stock and right of way, two items that vary drastically from system to system, the cost per route mile is $61.1 million. To the extent that comparisons can be made, this cost is within the range of costs for other recently constructed systems.
Cost by Stages — Stage 1 accounts for 28 per cent of the total capital cost of the system. It is the most expensive of the six stages for the following reasons:
It includes the entire 4-track tunnel under the harbour, which is considerably cheaper to build than two 2-track tunnels built in separate stages, and also, partly for construction reasons and partly for economy, some of the tunnelling and other civil engineering work for the Tsuen Wan and Island Lines. The alternative of constructing only those works essential for operation in Stages 1 and 2, was investigated. But, although reducing the capital requirements in Stage I by $52 million, and in Stage 2 by $133 million, this alternative would increase the total system capital cost by $84 million; and even on a 10 per cent net present value basis it shows an extra cost of $10 million.
Although the maintenance and administrative centre at Kowloon Bay will ultimately serve the whole system, much of it must be built in Stage 1.
All of the pre-operating expenses are included in Stage 1.
The proportion of rolling stock to passengers is higher in early stages than it is later, when better capacity utilization can be achieved.
The result of these conditions is that the cost of Stage 1 is $122 million per route mile compared with an overall system cost of $84.9 million per route mile, as shown in Table 75. The construction stages in this table are listed by year of completion. Construction on each stage begins before completion of the previous stage.
Table 76 shows the anticipated capital expenditures by years from the commencement of design in 1968 until 1984 when the entire system should be completed. Expenditure of $1,243 million, or about 36 per cent of the total, will be required before the first line goes into operation in 1974, 77 per cent on Stage 1 and 23 per cent on later stages.
The costs shown for land in Table 76 are net figures, allowing for resale, so negative values result in several years. The total outlay for land and claims is $415 million, while estimated recoveries from resale reduce the net cost to $190 million.
After 1984, further capital, estimated to average $14 million per year, will be required, primarily for additional rolling stock to accommodate expected increases in traffic. As this sum represents only a small fraction of the expected revenues from 1984 onwards, it can be met from revenue without further borrowing.
OPERATING EXPENSES
| The estimated operating expenses by major categories for the first year of operation (1974) and for the design year (1986), are shown in Table 77. Additional details are in Chapter 10.
| Table 78 shows the amount of annual operating expenses, and the expenses per car mile, per passenger mile, and per passenger, by years from 1974 to 2004. The unit costs per mile and per passenger decrease gradually through the 1974-1984 construction period, as each new segment of line is brought into operation. During the 18-year period from the design year, 1986 to 2004, for which quantitative projections have not been attempted, it has been assumed that passengers carried will increase uniformly to a figure that is considered to be the absolute maximum capacity of the system as designed (about 36 per cent above the estimated 1986 traffic); and car-miles and total operating expenses have been assumed to rise in the same proportion.
Archive:Hong Kong Mass Transport Study/Table 77Archive:Hong Kong Mass Transport Study/Table 78
FARES
In order to assess the overall financial results of any proposed rapid-transit system, assumptions must be made as to the fares to be adopted. Ideally the form and the level of fares should be such that the total revenue will suffice to meet all the working expenses, and annual capital charges, and to yield a re[a]sonable surplus to build up a reserve for capital development, as a safeguard against premature obsolescence and for other contingencies. But in practice it is unlikely that the fares can be fixed primarily by reference to the costs. They will mainly be governed by what the traffic will bear. There is always a level of fares at which net revenue will be maximised, because any appreciable increase would result in such a loss of traffic that revenue would be reduced. Commercially, this might be called the optimum level. As a policy decision, a lower level of fares might be chosen in order to attract more traffic (though less revenue) in order to relieve congestion on the streets; but charges above this optimum level would never make sense. The optimum level in any given circumstances cannot be scientifically or precisely determined. It has to be approximately assessed as an exercise of judgement by reference to experience elsewhere and knowledge of the economic status of the community concerned and of what they have been accustomed to pay in the past. Too dramatic an increase of fares is likely to arouse serious consumer resistance. What people can afford to pay and what they are willing to pay are not the same thing. In Hong Kong the existing fares on buses, trams and ferries, and the extent to which these can be altered in the next few years, will mainly determine the optimum fare level for the rapid-transit system.
Apart from the question of fare levels there is the separate but related matter of fare structure to be considered. In practice this has to be established first and cannot be readily altered, except in detail; whereas the levels of fares within the established structure can be varied, subject to the limitations of the coinage. The main different types of fare structure are the flat fare system, in which a uniform charge is made for all journeys whatever their length, and the zone fare and milage fare systems which with differing degrees of refinement provide for charges varying with distance travelled. The term fare structure also embraces special types of charge other than ordinary fares for single journeys—e.g. return fares at less than twice the single fare, season tickets for unlimited journeys between specified points, commuter tickets for specified numbers of journeys, and special fares applicable to particular categories of passengers or to particular periods of the day.
Flat Fares — For a variety of historical reasons, the flat fare system has long been applied to the great majority of urban transport systems in North America and in Europe, except in Britain. It was generally first adopted when the cities concerned were relatively small and the maximum distances which could be travelled on the transport systems were fairly short. The system always had, and still has, the merit of being cheap and simple to operate, requiring the minimum of staff and equipment.
On the other hand, as cities and their transport systems have grown in size the flat fare has proved to be a major commercial disadvantage. To maximise revenue the flat fare has to be fixed at a level which both discourages short-distance riders (of whom there are large numbers in Hong Kong) and at the same time involves charging the long-distance riders much less than the cost of the service they enjoy. The loss of revenue from both these causes outweighs the administrative savings obtained.
Zone Fares — In this system, the transit route or network of routes is divided into zones. At any point a rider can purchase a ticket either for travel within the zone in which he starts his journey or, at higher prices, for travel to one or more other zones. This has the advantage over a flat fare that the cost of short journeys can be kept low provided the starting point and destination lie within the same fare zone. In its cruder forms, however, an anomaly arises at the fare zone boundary, where a short trip which crosses a boundary may cost twice as much as a longer trip which does not.
Mileage Fare — The mileage fare, as applied in British cities, is a system by which the minimum fare applies, broadly speaking, for distances up to approximately one mile, determined by fixed fare-stage points on road services and by stations on rail rapid transit, with an increased fare for each additional mile (or part of a mile) travelled in any direction. The mile is not essential as the unit of distance—it could, for example, be 1.5 or 2 miles. Moreover the rate per mile need not be constant. There is in fact a good case both from the point of view of relating charges to costs, and from the point of view of maximising revenue (taking account of the "market") for tapering the rate per mile, so that the fare for a 10-mile journey would be less than 10 times the fare for a 1-mile journey or 5 times the fare for a 2-mile journey. A fare structure devised on these lines will produce not only a more equitable and intelligible system of fares than the cruder zone type, but also a better commercial return than any other, provided the level is fixed with good judgment.
Existing Public Transport Fares — The public transport fares in Hong Kong, when considered together, resemble a mileage or zone fare system since, in general, the greater the distance travelled the greater the cost. The bus fares increase from 10 to 20 cents at section stops and they are generally higher for long trips in the suburban areas than they are for the shorter trips within the urban area. The Hongkong and Yaumati Ferry Company charges higher fares to the outer islands than for the shorter cross-harbour trips. The Kowloon-Canton Railway fares are established on a mileage basis with a few minor exceptions. Also, because the transport companies do not issue transfer tickets for interchange between routes, there is in effect a zone fare structure even on the systems which theoretically operate aflat fare. For example, a person riding the tram from Shau Kei Wan to Kennedy Town has to pay twice the standard flat fare because the method of operation requires him to change trams. Additional fares are also charged whenever a trip requires more than one mode such as a bus-ferry-bus trip across the harbour.
File:MTS Fig75.pngFigure 75 — Existing Public Transport FaresFigure 75 shows the existing public transport fares plotted on a mileage basis. The bus and tram fares are represented by horizontal lines since it is possible to get on or off at any stop. The railway and ferry services are indicated with dots in this figure as they are point to point fares and all travel is necessarily between stations or ferry piers. The area between the maximum and minimum fares has been shaded. This figure does not include special fares for children, students or monthly ticket holders. It also does not include the fares that would have to be paid on journeys involving transfers.
There is great variation between public transport fares in Hong Kong on a mileage basis. It is possible to ride 6.6 miles on the Hong Kong Tramway for as little as 1.5 cents per mile, but fares generally range between 3 cents and 50 cents per mile, depending on the distance travelled and the mode, route and class. (An extreme case is the fare on the Peak Tram which, for a journey of a tenth of a mile, is equivalent to a rate of $4.00 per mile.) Figure 75 shows that the cost per mile of trips ranging from I to 6 miles ranges from as little as 10 cents to as much as 60 cents, while trips of 14 to 16 miles range from 50 cents to $2.00.
Although there are practical justifications in some instances for different fares for trips of equal distance, the range is very broad in Hong Kong. Consideration should be given to a fare basically related to distance travelled, but without precluding variations based on different speed, comfort and convenience. If one mode of transport is measurably faster or more comfortable than another for the same length of trip, it may be reasonable for the fare to be higher for the superior services; but it must be remembered that, where two modes of transport exist between the same pair of points, some riders wishing to travel between them will use the cheaper mode with little regard to journey time or other quality aspects.
It can be argued that the fares should be established in relation to the cost of providing the service. This is true when speaking of fares and services in general; but for any particular mode or route the fares should be set consistent with the service provided, and not necessarily with the cost of providing it. Inequities are introduced when a passenger has to pay three or four times more for a trip of the same length at the same level of service as another passenger who may be travelling on a different route. Figure 75 shows that such a situation is at present not unusual in Hong Kong.
Equal or Unequal Fares — Having concluded that a fare structure varying with distance is most suitable for Hong Kong conditions, and indeed essential to secure the best commercial result, it is then necessary to decide whether the rapid-transit fares should be broadly the same as, or higher than, surface transport fares. There are arguments on both sides of this issue. The principal arguments for a higher rapid-transit fare are:
For those people who have close access to the rapid-transit system and also for longer distance riders the journey will be much faster than surface transport. Since this represents a higher standard of service it justifies a higher fare.
Dissociating rapid-transit fares from surface fares (which in many cases are very low in Hong Kong) allows more latitude in establishing fare rates. It also makes it possible to adjust the fare-mileage increments on rapid transit without also having to adjust the fare stages on the surface transport lines.
Offering a choice of fares for the same journey could be considered an advantage to people in low income groups who can only afford to travel if the fare is very low.
However, equal fares on road and rail transport are in the overall interests of the community and the arguments for this approach are very powerful. When the rapid-transit system comes into operation the function of the road services will be considerably altered. Their main role will then be (a) to provide services to, from and within areas not directly served by rail, including feeder services to rapid-transit stations, and (b) to cater for some short-distance passengers even along the main corridors served by the rapid-transit system, especially those whose journeys start or end midway between stations.
While the pattern of bus routes should be considerably altered as each new section of the rapid-transit system is opened, some bus services will inevitably continue to run parallel to the rapid transit, and thus afford alternatives to it. If in these circumstances the bus fares were generally lower than the rail fares a substantial proportion of passengers, however difficult to quantify, would continue to use the buses although their journeys could be made more quickly and reliably by rail. In the long term this would be to nobody's advantage. Hong Kong must have a rapid-transit system; otherwise, having regard to the expected increase in travel and the limitations imposed by its topography on the expansion of its street capacity, it could quickly become one of the most congested, immobilised and inefficient cities in the world. The two main complementary objectives of the large investment in a rapid-transit system are (a) to increase the mobility and reduce the travelling time of its inhabitants and (b) to induce the maximum transfer of traffic from the streets and so relieve congestion to the benefit of all categories of street traffic. Moreover, once the investment in the rapid-transit system has been made its operating costs (as distinct from capital debt charges) per passenger-capacity-mile will be appreciably lower than those of buses. Thus the total cost to the community of its passenger transport, whether ultimately met wholly out of fares or partly from public funds, will be at its lowest if the largest possible use is made of the rapid-transit services. All these objectives would be to some extent frustrated or defeated if the rapid-transit system were to price itself out of part of its natural market by having fares on a higher level than the bus fares. Moreover, the total revenue of the rapid-transit system could be decreased if its fares are higher than the bus fares for the shorter journeys.
Once the rapid-transit system has been built, it will be in the public interest to ensure the use of its full potential for relieving street congestion. Even from the standpoint of the bus companies, considered as separate commercial entities, the future carriage of the maximum practicable traffic on the rapid-transit system in preference to buses ought to be welcomed, if the complex economics of transport in a growing and congested city are properly understood. Nothing more rapidly increases the cost of bus operations than reductions in average speed. If, for example, on a bus system operating at an average speed of 1 1 miles per hour, the average speed were reduced by traffic congestion only to 10 miles per hour, at least 80 per cent of the operating costs would be increased by roundly 10 per cent to provide the same volume or frequency of service. If Hong Kong's population and traffic grow at the expected rate and street congestion is not relieved, as it can only be, by the provision of rapid transit, reductions in average speed of much more than one mile per hour on many bus routes can be safely predicted. In addition the scheduled regularity of the services would be subject to even worse disruption than at present. Not only would this greatly increase the operating costs of the bus companies, it would result in serious losses of valuable short-distance traffic, simply because it would so much more often be quicker to walk. Looking to the future, the commercial prospects of the bus companies will therefore be much brighter if a rapid-transit system relieves them of the burden of increased traffic in the main congested corridors. At the predicted rate of growth, they need have no fear of having idle vehicles on their hands. Even if fewer buses should be required in some corridors because of the transfer of traffic to the rapid-transit system, there will be ample new employment for the vehicles to serve new communities and growing populations elsewhere in the Colony.
The total cost per passenger mile of public transport in any growing city must inevitably rise substantially when the stage is reached at which a costly rapid-transit system has to be built. The rapid-transit system does not benefit only the passengers who use it, but all those who elect, or are compelled, to use the streets. Thus some part of the cost should be borne by all street users. Bus passengers can most appropriately contribute through higher bus fares. Freight traffic on the streets and private motorists can conveniently pay through some form of taxation. If, as a matter of accountancy, the whole of the capital debt charges arising from the large investment in the rapid-transit system are attributed to the undertaking which owns it, the process by which some part of these costs is passed on to bus passengers may be described as a form of cross-subsidisation—but that is not to condemn it. Internal cross-subsidisation, as between different routes or periods of the day, is a characteristic feature of all large urban public transport systems. In the recommended system for Hong Kong the rapid transit and bus services, whether separately owned or not, must be regarded as essentially complementary—relieving and feeding each other—and not as competitive rivals.
Recommended Fares — After considering all of the above, it was concluded that the best fare schedule would be one that would be broadly equal, on both rapid transit and surface transport, for the short trips, and with a graduated increase on rapid-transit fares relative to road fares for longer trips. This will encourage the greatest practicable use of the rapid transit by the large volume of short-distance riders, while recognising its substantial speed advantage for long trips.
Many trial calculations were made to determine the best fare levels and the best maximum distance for equality of fares. The effects on the number of passengers, the average trip length and the anticipated revenue were included in these calculations. It was concluded that the fares should be equal for all trips of up to five miles. Table 79 shows the recommended fares, and Figure 76 illustrates that they are well within the range of fares being charged today.
For trips of less than 1.25 miles these fares are equal to the second-class tram and ferry fares. They represent a slight reduction for some bus passengers in the urban area since many of the existing section stops are closer together than 1.25 miles. Between 1.25 and
2.50 miles they are equal to the first-class tram fares, and equal to or less than the first-class ferry fares and the urban bus fares. Below
3.75 miles they are equal to or less than the urban bus fares on the Island. There are many existing suburban fares that exceed the recommended fares for both surface and rapid transit. However, the recommended fare schedule does represent an increase for many urban passengers who travel between 2.5 and 7 miles.
If, because of the increase required to some fares that are at present very cheap, the road fares cannot all be adjusted to conform to a commercially suitable scale such as that recommended above by the time the rapid transit comes into service, priority should be given to achieving conformity on those routes which parallel or short-circuit, and therefore compete with, the rapid transit. For example, road fares along the north shore of the Island need not be fully adjusted to the chosen basis until 1979, when the first stage of the Island Line is due to open; indeed it may well be wiser and more intelligible to the public, to defer the full increases of the low existing road fares in this case, until the improvement in all services brought about by the rapid-transit line is already a reality or near at hand. Nevertheless an early start should be made by modestly increasing some of the most generous fares.
Fare stage points on road services should wherever practicable coincide with major traffic objectives and the length of particular fare stages will thus sometimes be a little less and sometimes a little more, than the average or standard; it is therefore not practicable to apply any standard scale inflexibly in practice. Moreover, the objective of broad equality of short-distance fares between common pairs of points will sometimes require departures from the standard scale, for instance where one route is more circuitous than the other. Two conspicuous examples of this on the recommended system are (a) from the Tsim Sha Tsui area to the Kowloon Bay area where the distance by buses along Chatham, Ma Tau Wei and Prince Edward Roads is less than by the faster rapid-transit route through Mong Kok and Kowloon Tong; and (b) when the Sha Tin Line is built, the distance from Tsim Sha Tsui to Diamond Hill by that line will be less than the distance by the Kwun Tong Line through Kowloon Tong. In such cases the fares by the two routes should be equalised.
Concessional Fares — The recommended fares only deal with ordinary fares for single journeys. The question remains whether any concessional fares should be provided. There will be a demand on the rapid-transit system for some form of period or season ticket for regular travellers. Such tickets are both a convenience to passengers, saving the time otherwise spent in purchasing separate tickets for individual journeys; and a source of economy in operation, reducing the number of ticket-vending machines or booking clerks required, or both. To avoid adversely affecting the net revenue, the discount allowed in pricing these season tickets, compared with the corresponding ordinary fares, should be fixed so as not to exceed the estimated value of the economies they produce. The exact form and availability of such tickets should not be decided until more is known of the possibilities and technical requirements of automatic fare collection.
Concessional fares to particular categories of passengers are not favoured, partly because they reduce revenue and partly because the use of special tickets at special fares seriously increases the cost of ticket issue and control and impairs the efficiency of fare collection—both on rail and on road services. An exception, however, may well be unavoidable in the case of children's fares. There is seldom, if ever, commercial justification for carrying children at less than normal fares, but the practice is so long established in most cities, including Hong Kong, that all revenue estimates have been based on the assumption that children will travel at half fare.
On some systems there is limited scope for increasing net revenue by issuing special cheap tickets, available to all passengers on particular days or at particular times of day, either generally or between selected points. With the present and predicted pattern of travel in Hong Kong, involving considerable movement throughout the day and on all days of the week, cheap fares of this sort are not likely to prove commercially advantageous. They would not induce sufficient additional travel to offset the loss of revenue from passengers already paying full fares. If the pattern of travel changes, there may be a case in the future for introducing such fares, but none have been allowed for in the revenue estimates. If ordinary day return tickets are introduced as a convenience to save booking twice, they should be sold at twice the single fare.
=== REVENUE ===
The revenue from the rapid-transit system has been computed from estimates of passengers and average fare levels. Allowances have been made for passenger diversion due to fare differentials, variation in average trip length as the system is developed, decreasing days of full operation each year as social conditions change, children riding at half fare and miscellaneous revenue.
Passenger Estimates — The method used to estimate the daily volume of passengers each year with equal fares is described in Chapter 7. With unequal fares the problem is to estimate what proportion of passengers, who would use the rapid transit at equal fares (to save time), would divert to buses at lower fares (to save money); or in other words to estimate how people value their time. Unfortunately there is a serious lack of reliable research into this question. Evidence that even small differences in fare significantly affect the choice of route comes from experience in London. There, over the last 40 years, there have been several extensive examples of differing fares in a particular corridor, by alternative modes of transport or between two alternative rail routes, subsequently being equalised. In all these cases substantial numbers of passengers switched from the slower, less convenient route, when it ceased to be cheaper, even by as little as one penny a journey, or for regular travellers a shilling a week. This showed in general terms that a significant proportion of the London public was more concerned with price than time. But no statistical equation emerges from the London experience; and if it did, it would not necessarily be valid for Hong Kong. Generally the results of changes in established fares are distorted by emotional considerations so statistics relating to shifts in patronage brought about by such changes are not necessarily applicable to a situation where a new mode of travel with a different fare is introduced. A survey of travel time and patronage on New Territories "taxis" (which are actually small buses) and conventional buses operating on the same routes revealed that many people were willing to pay six to seven cents for each minute saved on the faster mode. However, it was concluded that the information obtained from the survey was not usable since unmeasurable amounts of comfort, convenience and status were also involved.
As described in Chapter 5, a "fare differential" traffic assignment was made to the System-2 network to test the effect of a higher rapid-transit fare. A $2.00 per hour value of time and a fare differential that increases with distance were assumed. This resulted in a 25.7 per cent reduction in rapid-transit passengers. Most of the reduction was due to short-distance trips shifting from rail to surface transport. It has been concluded from an analysis of the results that—whereas any practicable scale of higher fares on rapid transit for journeys up to five miles could shift so much traffic to the surface transport as to reduce the rapid-transit revenue—only six per cent will shift due to the proposed unequal fares for trips over five miles. This reduction is smaller in the early years when less than the total length of the system is in service, as is shown in the following table of the reductions which were applied to the passenger estimates given by the equal fare assignment to allow for the higher rapid-transit fares for trips over five miles:
STAGE
PER CENT REDUCTION IN PASSENGERS DUE TO UNEQUAL FARES
1
0
2
0
3
2
4
3
5
5
6
6
To convert daily passenger figures to annual, it was assumed that changes in social conditions will cause a gradual decline in the number of days each year on which a full or normal working day's traffic will be carried. The equivalent number of normal days representing the full years traffic at each stage is shown below. One less day each year was used for each year of operation in all calcula tions extending beyond 1986, the number assumed for the year 2004 being 322.
STAGE
NUMBER OF DAYS ASSUMED FOR CONVERTING FROM DAILY TO ANNUAL TRAVEL
1
356
2
353
3
350
4
347
5
345
6
340
Average Trip Length — The average trip length produced by the computer assignments for all public transport, road and rail, in the design year was 4.88 miles. This includes travel in the urban area and in the New Territories. The average trip length on rapid transit as calculated from the results of various computer assignments is between 4.84 and 6.06 miles. (The assignment methods do not produce a specific trip length for any individual mode of travel.) To be conservative it has been assumed that the average trip length for all public transport will be only 4.1 miles, and 5.1 miles on rapid transit. Equating these to the relevant numbers of rapid and surface trips produces a 3.6 mile average trip length for surface transport.
The average trip length on rapid transit will of course be shorter in earlier years when parts of the system will not be in operation. The following average trip length have been assumed for each stage.
STAGE
ASSUMED AVERAGE RAPID-TRANSIT TRIP LENGTH
1
3.0
2
3.4
3
3.8
4
4.2
5
4.6
6
5.1
Distribution of Passengers by Distance — The analysis of trip distribution in the base year (1965) produces some indication of the numbers of public transport riders that travel various distances. However, conditions will be somewhat different in the design year when more people will be living in suburban areas and a rapid-transit system will be in operation, and it has therefore been necessary to develop an assumed distribution of trips based on experience from other cities. Table 80 shows the assumed percentage distributions for the design year.
Average Fare — The above distributions have been developed in such a manner as to produce average trip lengths of 5.1 miles on rapid transit and 3.6 miles on surface transport. Applying these distributions to the recommended fares results in average fares of 28.9 cents on surface transport and 45.4 cents on rapid transit. These are gross fares and must be reduced to allow for children travelling at half fare. For this purpose it has been assumed, based on travel projections and experience in other cities, that 10 per cent of the rapid transit and 16 per cent of the surface transport passengers will be children. Taking all of the above into consideration the average fare on rapid transit for each stage has been computed and is shown in Table 81.
Rapid-transit Revenues — To make a financial evaluation of the transit system, it is necessary to compute revenues by individual years. Accordingly, the number of passengers expected to use the system was calculated by stages for each year from 1974 to 1986, and assumed to increase at a uniform rate of 2 per cent per year from then to 2004. The proposed schedule of rapid-transit fares was then applied, with the adjustments already discussed during the construction period, to determine the gross fare revenues which the system may be expected to earn. Two and a half per cent was added for other revenues (advertising and miscellaneous rentals) to determine total gross revenues. These are shown in Table 82.
In 1974 when the first section of the rapid-transit system is expected to be opened, the gross revenue will be about $36 million. By the design year, 1986, it will have risen to $350 million; while 18 years later, it should be at least $468 million.
Net Revenues — The operating expenses have been deducted from the gross revenues, and the resulting net revenues from the rapid-transit system are shown in Table 83.
Operating expenses including depreciation, maintenance and all running and other operating costs, increase from $22 million in 1974 to more than $142 million in 2004. After completion of construction in 1984, the net operating revenues range from 66 to 70 per cent of the gross revenue.
Revenues Available for Debt Service — After the system is completed in 1984, additional capital expenditures will be required, especially for additional rolling stock, amounting on average to $14 million per year. Since by that time the net revenues will be substantial, it has been assumed that these small annual capital additions will be met from revenue. To determine the net funds available for debt service, therefore, it is necessary to subtract the additional capital requirements from 1985 onward from the net operating revenues. The results are shown in Table 84.
Capital expenditures for the construction of the rapid-transit system must be made before it is in full revenue-producing operation; $1,243 million in a 6-year period (1968-1973) before the first line is in operation, and the remaining $2,161 million in an 11-year period (1974-1984) while new lines are being opened to traffic and revenues are gradually increasing. From 1985 onward, with the completed system in full operation, net operating revenues are expected to be adequate to (a) provide for subsequent capital additions to accommodate anticipated increases in traffic, and (b) leave substantial sums to service the debt incurred in building the basic system, as has been shown in Table 84. Because of the extended period of construction before appreciable revenues are realized, it is unlikely that an undertaking of this magnitude can be financed as a private venture, paying commercial rates of interest and expected to earn customary returns on equity capital.
While it is necessary for Government to undertake the work as a public function in order to achieve the public or social objectives, the transport system has the revenue-expense characteristics of a private enterprise. Before discussing possible financing methods, the proposed investment should be appraised under standards and criteria relevant to both public and private sector investment. Accordingly tables have been prepared showing the Discounted Cash Flow (DCF) Rate of Return[2] of the recommended rapid-transit system on two bases. Table 85 shows that if the only source of funds for both operating expenses and capital charges is the revenue of the rapid-transit system, the DCF rate of return will be 4.2 per cent. Table 86 is based on the assumption that a contribution from public funds would provide one-half of the capital costs up to 1984 free to the rapid-transit undertaking. The justification in principle for an arrangement of this kind is explained later. The DCF rate of return on this assumption is 9.2 per cent.
These DCF rates of return are conservative for two reasons. First, they are based in effect on the assumption that operation of the rapid-transit system continues until 2004 and then ceases, as no residual value for the system has been taken into account. All of the capital assets, including rolling stock bought out of current earnings after 1984, are fully paid for by the year 2004. On the other hand no allowance has been made for expenditure on the renewal of capital assets that have to be replaced before that year. Strictly such expenditures should be included as negative items in the cash flow. These additional negative items are, however, likely to be small in relation to the residual value of the system in 2004. If the residual value were estimated for 2004, to represent the discounted value of earnings after that year, and additional capital replacement costs incurred before 2004 were included in the cash flow, it is, however unlikely that the overall rate of return would be raised by more than about I per cent. Secondly, it should not be overlooked that, since both costs and revenues were calculated at 1967 values, the DCF rates of return of 4.2 and 9.2 per cent both represent a real return not inflated by expected rises in the price level. Thus these rates of return should be compared with the real rate of interest that would have to be paid for the capital required for the project; that is, the money rate of interest deflated by the expected rate of inflation.
=== METHODS OF FINANCING ===
Earlier in this chapter, the basic information on costs, both capital and operating, and on revenues, both gross and net, has been given to permit the comparison of alternative financing plans. Several of these will now be described. In all of them, capitalisation of interest, i.e. the additional capital funds required to make up the deficiency of net revenue for this purpose, is fully provided for. Because of the high expenditure before any revenue can be earned, interest capitalisation represents a heavy but inescapable burden, calling for external financial aid in early years.
Twenty-year Amortisation Approach — One possible approach to financing the system would be to amortise principal on a 20-year basis at a 7 per cent interest rate. In testing this combination of debt retirement and interest, which was suggested by Government, it has been assumed that funds would be borrowed each year, as needed; each year's borrowing being treated as a separate 20-year loan and retired at a uniform rate over its life. In Table 87, the total debt service charges on this basis are compared with the annual revenues available for debt retirement.
It can be seen that in each year up to 1990 there is a deficiency, the revenue available for debt service being less than the total to be serviced. This deficiency reaches its peak before 1980 and thereafter rapidly declines changing into an ever-increasing surplus after 1990. However, if no outside financial assistance is applied in the earlier years, by 1990 the accumulated interest on the annual deficiencies will have become so great that it will be increasing at a faster rate than the surpluses available. Hence, without some form of financial assistance the system would fall steadily further and further into debt.
Perpetual Debt Approach — This scheme involves the issue of undated or very long term fixed interest bonds. In this case the financial objective would be that net revenue should cover a fixed interest obligation on the total capital sum borrowed. No provision would be made for eventual repayment of the debt, although any extra surplus could be used for this purpose.
Owing, however, to the time lag between the initial capital expenditure and the consequent increasing stream of net revenue, any scheme based on an irredeemable fixed interest loan cannot be in balance in the early years before any substantial operating surplus has arisen. Assuming for illustration purposes, that the year 2004, 20 years after the completion of the transit system, is taken as the date by which revenue and interest payments must be in balance, trial computations show that this objective would only be achieved with an interest rate of less than six per cent. At five per cent the operating surplus begins to cover the interest costs in 1985, at 5.5 per cent it does so in 1993; while at six per cent the balance or cover point is not reached until after 2004. It seems clear that financing on this basis would not attract private investors without a government guarantee.
Combination Approach — In this alternative, annual interest only would be paid on the funds necessary to cover the construction costs of the fixed or permanent assets, amounting to $2,173 million. In the programme period, 1968-2004, interest payments would total about $4,600 million. The rolling stock and other depreciable assets amount to $1,231 million. These would be paid for with the proceeds of a series of 7 per cent 20-year bond issues, to be uniformly retired by 2004. Total debt service on this issue would be about $2,200 million and, when combined with the cost of servicing the long-term debt for fixed assets, would total about $6,800 million over the programme period, reaching a maximum of $272 million in 1985. Like the first alternatives, this programme would call for substantial subsidy in the earlier years to look after interest payments during the construction period and make up revenue shortfall after the start of operation, otherwise interest costs would still exceed surpluses beyond 2004. Table 88 illustrates this.
Long-term Bonds — Table 89 illustrates the amounts involved in issuing 40-year serial bonds at four per cent interest. This pro gramme would cost a total of about $6,300 million over the period, 1968-2024. Similar to other alternatives, interest would still have to be capitalised in the early years. With this approach all debt including capitalised interest can be retired during the programme period. In fact a surplus begins to occur in 2003, and by 2024, when all loans have been retired, the cumulative surplus amounts to $7,585[3] million, assuming constant net revenue of $312 million per year after 2004. Because the surplus revenues are of such magnitude after 1986 retirement schedules could be greatly accelerated, and the entire debt could then be retired by 2007. In other words, with this programme, a serial bond issue at 4 per cent with callable provisions would appear to be a satisfactory approach.
Over the 56-year period 1968-2024, average annual revenues would approximate $229 million, while annual debt service would average $113 million. This is a coverage (ratio of average annual net income to average annual debt service) of slightly over 2 which is the usual minimum revenue bond requirement in the U.S.A. It may not be practicable to obtain 40-year financing at 4 per cent interest in Hong Kong. But this exercise does demonstrate that the system would pay for itself without external support with these criteria, and that 4 to 4.5 per cent interest on a fairly long term is about the upper limit for conventional financial viability.
Contribution From Public Funds — If financial assistance is to be provided in the early years, it seems improbable that it would be forthcoming on the scale required except from public funds. Such aid would offer a more attractive proposition to investors and would no doubt have an important bearing on the favourability of the terms of borrowing the main capital requirements, but it would still be essential for interest in the early years to be covered by Government guarantee.
There are several ways in which Government could contribute to the financing in order to reduce or eliminate the raising of further capital to pay interest in the early years, and ensure the timely retirement of reasonably short-term capital bonds and the earning of substantial surpluses in later years. For example, enough funds could be granted each year to cover the loan interest payments until the revenue had grown sufficiently to do so. Alternatively a predetermined fixed annual grant might be made, and placed in an interest bearing fund to be drawn on as needed to meet loan payments.
Table 90 illustrates another scheme of financial aid, based on 20-year main financing and 7 per cent interest, and designed to derive maximum value from the contributions yet keeping them low enough to avoid serious strain on the Colony's annual budget. As only $9 million and $25 million would be needed in the first two years it has been assumed that these sums would be granted outright. After 1969 the grants would be about $125 million a year, except between 1975 and 1982 when they would have to be greater, and they would be used partly for direct payments of cost and partly to meet debt service. By 2004, when all loans would have been retired, the system would have produced annual surpluses totalling $2,790 million, which exceeds the total contribution by $670 million.
The need for external financial support is not difficult to justify. Mainly for the relief of street congestion, over 20 large cities in the world have embarked, in the last two decades, or are about to embark, on the construction of new or additional underground railways, and so far as is known not one of them have thought it proper or practicable to recover the whole capital costs and interest charges from the fares of the passengers that use them.
The methods by which public transport authorities operating rapid-transit systems receive financial assistance vary widely. Some in effect have "open-ended" subsidies, the annual deficits being automatically borne by local or central government. Methods which relieve the transport authority of specific costs and leave it a practicable goal to achieve, without incurring deficits each year, provide better incentives to efficiency, and are to be preferred. In this connection the method adopted in Toronto, in particular, can be commended. There, the capital cost of underground railway construction is shared on a basis whereby the municipality meets those categories of cost which are not incurred by road passenger operators, i.e. right-of-way including land acquisition, construction of tunnels and structures, basic station equipment, and track base; while the transit commission meets only the costs of operating equipment—track, current supply, signalling, depots and workshops, fare collection equipment and rolling stock. In Hong Kong on a 7 per cent basis, revenues would cover all costs of these latter items, including capitalisation of interest, by the year 1988.
On the new regional express railway network in Paris the capital expenditure on the basic structure, including the equipment of the tunnels and stations, is being shared between the state and the local authorities. In London, where the problem is relatively new—London Transport having remained generally solvent, without any subsidy at all, till very recently—much the same kind of basic assistance has been proposed by the British government.
It is also pertinent to note that although the fares on the new rail rapid-transit system now under construction in the San Francisco Bay Area (at a cost of approximately HK$5,700 million) will be very high by Hong Kong standards, they are only expected to produce sufficient revenue to pay operating costs. The total funds to build and equip the system are being provided by special local property taxation supplemented with state and federal funds.
As a final comment on finance, it must be remembered that the revenue estimates throughout are based on a level of fares broadly speaking in line with the existing low levels. There might well be, however, a good economic case for increasing fares on all forms of transport in the future, not only in step with rising costs, but so that they are higher in real terms.
File:MTS Fig77.pngFigure 77 — Rate of Return and Gross Revenue RelationshipDiscounted cash flow (DCF) rates of return have been computed for various percentage increases of the annual gross revenues yielded by the recommended fare scale. The results are shown in Figure 77, from which the DCF rate of return can be read off directly for any percentage increase of gross revenue from 0 to 100. For instance, to obtain a 7 per cent rate of return would require a 33 per cent increase of gross revenue, while a 78 per cent increase of revenue would give a 10 per cent rate of return. In considering what increase of fare scale would be needed to produce a given increase of gross revenue, several factors must be borne in mind; retention of equality of fares on surface transport and rapid transit up to 5 miles and maintenance of differentials for longer journeys; the limitations of the coinage; the distribution of trips by distance travelled; and the loss of revenue due to general "discouragement" of travel following a fare increase. A calculation based on a 10 cent increase in fare for each mile travelled (rather than for each 1.25 miles as recommended) produces a rate of return of about 6 per cent if no loss of revenue is assumed for discouragement of travel.
File:MTS Fig78.pngFigure 78 — Relationship between Rate of Return and Contribution from Public FundsSimilarly, to enable the financial effect of a contribution from public funds to be assessed, Figure 78 shows the relationship between DCF rate of return and amount of capital provided free. For this computation it was assumed that the "free" contribution would be in the form of a subsidy, requiring neither interest payments nor repayment of principal, reducing each year's capital demand by a uniform percentage (e.g., if the subsidy were 25 per cent, each year's serviceable capital requirement would be 75 per cent of the estimated figure). The diagram shows that to obtain a 7 per cent rate of return by this method would need an annual free capital contribution of 32 per cent. Finally, if the one mile increment fare schedule mentioned in the previous paragraph is combined with a 15 per cent contribution, a rate of return of slightly over 7 per cent will be produced.
UNIFIED PUBLIC TRANSPORT ORGANISATION
There is much to be said for consolidating all public transport services into one organisation similar to London Transport or to the large metropolitan transportation authorities that have been formed in America. This would not only promote better co-ordination of services but could result in a healthier financial situation. There has not been much need for such consolidation in the past since patronage has been increasing very rapidly on all modes. In the future, such a move may be desirable, not only to secure better co-ordination and more efficiency, but also on wider economic grounds. No specific recommendation is made on this matter but it is submitted for serious consideration.
The financial consequences of this proposal have not been worked out, because the determination of a fair price to be paid for the acquisition of the existing companies would require not only consideration of their rights under their respective franchises, but a detailed investigation of their accounts and financial position and an estimate of their maintainable profits, all of which fall outside the scope of this study. In assessing the maintainability of profits of the companies, account should be taken of the rise in bus operating costs which would occur, owing to slower speeds caused by increased road congestion, if the rapid transit were not built. To the extent that this deterioration of speeds and operating costs is prevented or reduced by the existence of the rapid transit, the benefits should accrue not to the companies' shareholders but to the rapid-transit undertaking. Merging would be an effective way to ensure that this would happen.
If the buses and the rapid-transit system are separately owned, their financial interests will often conflict. Co-ordination of fares, necessary to prevent under-utilisation of the more efficient means of transport, could presumably be enforced by Government even if separate ownerships persisted. But it is hardly practicable for Government efficiently to control the detailed planning of services in the hands of different companies. Two examples will illustrate the benefit of unified control. A separate bus company may well find that the provision of a particular service feeding the rapid-transit system is not remunerative in itself, or even that it pays better deliberately to avoid connection with a rapid-transit station and link the service with other routes of Its own. In contrast, a unified organisation might find it profitable to run the feeder service, to the greater convenience of the public, because of its contributory value to the railway. Again, a separate bus company might be tempted to provide along a profitable route more service than necessary having regard to available capacity on a parallel rail route. A unified undertaking would adjust the volume of bus service to avoid this wasteful duplication and unnecessary increase of street congestion.
As already pointed out in another context, the total operating costs of the rapid-transit system should be well below those of buses per passenger-capacity-mile; and the lowest total cost of passenger transport will therefore be secured by the largest possible use of the rapid-transit services in preference to buses. A financially separate bus company has no interest in this point. Apart from these important economic considerations, substantial savings in administrative, maintenance and other costs should be effected by unification.
For all these reasons most of the larger cities in the world, which already have or are planning rapid-transit systems, have established some form of unified control of all their public transport or are in process of doing so. The means by which this has been done and the resulting form of organisation have often been complicated by two considerations which do not arise in Hong Kong: first, the fact that in many large conurbations a substantial element in the transport system is provided by local services on main line railways, which cannot be transferred to the metropolitan transport authority because of their long distance functions involving the same tracks; and secondly, the fact that the logical transport area often extends into the territory of more than one local authority, and that both national and local financial interests are involved. In Hong Kong the situation appears to be relatively simple.
BENEFITS
It has been shown that on capacity considerations Hong Kong must have some form of grade-separated mass transport facility. Extensive investigation has also shown that the design, construction and equipping of a rapid-transit system commensurate with the anticipated travel needs is physically feasible. The foregoing economic analysis indicates that the revenues from such a system will easily cover operating costs and could even pay off all capital costs if favourable means of financing can be found. For a number of reasons, it was concluded that a thorough cost-benefit analysis would not be practicable. However, there are a number of benefits that should be considered.
As with most proposals for public works projects, many of the benefits or arguments for the recommendations come from an analysis of what will happen if they are not carried out. There is little doubt that increasing population, expanding urban area, in creasing public transport rides per person, increasing standard of living, increasing motor vehicle registration, extremely limited road mileage, and limited space for new and improved roads, will ultimately lead to stagnation of transport, with far-reaching detriment to the Colony's economy, unless positive steps are taken to avoid it. Road congestion causes slower travel speeds for all vehicles, public and private. In regard to public transport this results in the need for more vehicles, drivers and conductors to serve the same volume of passengers. Not only are operating costs increased; the additional vehicles contribute to the congestion and create a need for still more vehicles. To add to this, people in the higher income brackets will be discouraged from using public transport because of the slow speeds and will turn more to the use of taxis and private cars which are less efficient from the standpoint of street capacity and contribute even more to congestion.
The economic drawbacks of road congestion are not limited to passenger transport. The movement of goods and all commercial activities are affected in the same way. Transportation accounts for a sizeable proportion of the cost of producing and marketing goods and any increase in this item above its absolute minimum is economic waste.
Time Saving by Rapid Transit — On the positive side the main benefits of rapid transit are in the form of time savings. The average travel time by rapid transit will be much less than it is today by public transport for similar journeys. To illustrate this, travel time surveys, including walking and waiting time, were conducted between 13 points in the area to be served. All of these points are accessible to proposed rapid-transit station sites but not necessarily adjacent to them. The time to make the same trip by rapid transit including walking and waiting time was then estimated, and the two results were compared. Table 91 shows estimated time savings between all the pairs of points for travel by the proposed rapid-transit system as compared with travel by existing public transport services.
The anticipated time savings by rapid transit range up to 40 minutes on long trips and the average saving for the representative trips will be about 14 minutes. Related to existing travel times the savings range up to 59 per cent, the average being 34 per cent.
Cross-harbour trips account for the biggest time savings. In most cases the overall time for cross-harbour travel will be greatly reduced by the elimination of time-consuming changes of mode. For example, a saving of 12 minutes would be made by the rapid transit on a journey of slightly under 1.5 miles from Queen's Road and Pedder Street in Central District to Nathan Road and Haiphong Road in Tsim Sha Tsui. Again, the 5.5-mile trip from Central District to Kai Tak Airport, which now requires 47 minutes by ferry and bus, would be reduced by 20 minutes on the rapid-transit route.
With completion of the vehicular tunnel, travel time by bus will be reduced but not nearly to the extent of the reductions from rapid transit. The trains will travel faster than the buses and will follow a more direct routing for most of the traffic.
The results of the computer assignments show that over 270,000 hours will be saved each day in the design year by public transport users if the rapid-transit system is built. This calculation is based on the total travel time by all public transport patrons and includes walking and waiting time.
As with the costs of delay, the monetary benefits of time savings are difficult to evaluate. There is disagreement among economists as to the proper value that should be used for time. To apply such a value properly it would be necessary to identify each trip by its origin, destination and purpose. Then values of time could be assumed for each purpose and the savings could be computed. Account would have to be taken of such factors as average wage rates, induced trips, diverted trips, and the travel speeds if no rapid-transit system were in existence. All of these calculations would need to be made for each year and a comparison of the cumulative total with the cost of the system would show if it were feasible from this standpoint. No such comparison has been made here but it has been shown in studies for other cities that major transportation improvements can be justified by this method alone. For example, if the average rapid-transit rider saves seven minutes per trip (only half of the representative average mentioned above) and time is valued at only $1.20 per hour, then the total savings in the design year will be $111 million. This amount exceeds the whole of the estimated operating expenses for that year.
THE ALTERNATIVES
If a rapid-transit system is not built, then the cost of constructing an adequate road system must be considered. Projections made as part of this study show that many improvements would be needed to serve the volume of public transport alone. Without any consideration for the needs of taxis, lorries, private cars and other miscellaneous vehicles, it has been shown that many surface streets would not have adequate capacity by the design year unless they were converted to limited access motorways. If the needs of other vehicles are also allowed for, it could be concluded that the additional road improvements would exceed the cost of the rapid-transit system due to the cost of right-of-way for roads. It is conceivable that a system of multi-lane elevated roadways would be needed, along with a second or possibly a third cross-harbour tunnel. The cost then, of not constructing a rapid-transit system is the much greater cost of constructing a roadway system designed to maintain at least the present level of service and journey speed. By 1986 this roadway system would have to accommodate a million persontrips per day by private transport and 1.5 million by surface public transport over and above those that would be expected if the rapid-transit system were constructed, plus additional parking spaces and necessary expansion and improvement to other facilities.
If neither a rapid-transit system nor an adequate road system is built then the community must be prepared to accept responsibility for the cost to the public, commerce, industry and Government resulting from drastically slower movement of people and goods. This would include the extra capital costs for more vehicles, the extra operating costs for more manpower, petrol, etc. and the extra operating costs of doing business due to a multitude of delays in every enterprise. While these costs are difficult to identify as specific out-of-pocket expenses at any given time, their effect on the economy of Hong Kong could be devastating.
↑Throughout this report, all monetary values are in Hong Kong dollars. Prices derived from overseas sources have been converted at the rate of 16 Hong Kong dollars to the Pound sterling and 5.7 Hong Kong dollars to the United States dollar.
↑Investment Appraisal. National Economic Development Council, HMSO, London. 1967. DCF is sometimes referred to as "Internal Rate of Return".
