Leveraging Government-owned land as catalyst for private investment

RETHINKING how local governments manage public assets is as much a moral imperative as it is an economic and financial one.

- By Dag Datter

It involves recognising that a local government is, in fact, the largest wealth manager in town.

At the local government level, real estate is by far the most significant asset segment and includes transport-related assets such as railways, airports, and ports, as well as former industrial areas located in or near city centres.

And the evidence is clear: commercial management of these public assets can yield substantial gains.

MTR Corporation Ltd., (MTR), the Hong Kong railway company, is one of the most prominent examples. It was set up to build and operate a mass transit railway system to meet the city's growing public transport needs. The Hong Kong Government holding company was inspired by railways in Japan, among other places, where the cost of providing public infrastructure was met through the development of properties adjacent to its railway stations.

This inspired the Government of Hong Kong, through its holding company MTR, to construct an entire railway system the size of New York City without using taxes. Instead, it funded the railway construction through a 'rail plus property model'.

Originally, revenue from property development was not intended to finance the railway's capital cost. Rather, it was meant to serve as a contingency reserve and enhance MTR's cash flow. However, the property development income became increasingly significant, with property revenue constituting 40% of MTR's total revenue each year since the late 1990s.