This paper examines current issues with sustainable funding for grid-bounded infrastructure and proposes that in order to find a first-best solution to these problems, we have to think outside the box. Focusing on a case study of the Mass Transit Railway (MTR) in Hong Kong, the author proposes a business concept that could provide a model for the sustainable self-funding of other infrastructure projects in other contexts. The author argues that, under certain circumstances, all the fixed costs of public investments (including social infrastructure) could be covered by land rents.

Executive Summary

Grid-bounded infrastructure constitutes the arteries and veins of economic systems,channeling material flows from the cradle (resource exploitation) to use and finally to the grave (disposal sites). However, from an economic standpoint, grid-bounded infrastructure has the features of a natural monopoly. The result is a marginal cost paradox: Although marginal cost pricing of infrastructure services is welfare optimising, it cannot cover the full costs. The problem is lack of coverage of the fixed costs share, which may amount to some 70–80 percent of the full costs in many cases. In this regard, economists developed a series of second-best solutions, which all have some disadvantages and shortcomings. In order to find a first-best solution, we have to leave the beaten tracks.

Regarding railway services, a striking example of an alternative design is the Mass Transit Railway (MTR) in Hong Kong. This business model is based on two pillars: rail and development. This means the company acts not only as a railway operator, but also as a real estate company. Before a new track is constructed, the company buys the land around the future terminals under favourable conditions. In doing so, MTR benefits from value capture around the terminals. This capture of value and land rents makes it possible to cover most of the fixed costs and to gear the transport fares towards the marginal costs. As a result, unlike other railway companies, the MTR is highly profitable and is considered one of the best railways in the world. The business concept of MTR is nothing other than a microeconomic application of the Henry George principle, according to which, under certain circumstances, all the fixed costs of public investments (including social infrastructure) could be covered by land rents.

The views and opinions expressed in this publication are those of the original author(s) and do not necessarily represent or reflect the views and opinions of the Dialogue of Civilizations Research Institute, its co-founders, or its staff members.

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Dirk Löhr
Jahrgang 1964, Professor für Steuerlehre und Ökologische Ökonomik an der Hochschule Trier, Umwelt-Campus Birkenfeld. Promotion über Unternehmensbewertung, Habilitation im Bereich der Sozialökonomik, Sprecher des Center for Land Research (ehem. Zentrum für Bodenschutz und Flächenhaushaltspolitik), Vorsitzender des Aufsichtsrats der Energiegenossenschaft IfaS e.G., nebenberufliche Tätigkeit als Steuerberater in einer Heidelberger Kanzlei, mehrjährigefreiberufliche Tätigkeit als Consultant für die GTZ (nunmehr GIZ; Sicherung der Landrechte in Kambodscha), Mitglied im Gutachterausschuss für die Ermittlung von Grundstückswerten des Landkreises Birkenfeld bzw. des Bereichs Rheinhessen-Nahe (vierte Amtsperiode), Mitglied des Oberen Gutachterausschusses Rheinland-Pfalz (seit 2014), Dozent in der Sprengnetter Akademie (Immobilienbewertung), langjähriger Vorsitzender der Sozialwissenschaftlichen Gesellschaft 1950 e.V., Vizepräsident (Deutschland) der International Union for Land Value Taxation. Vor der Berufung als Professor (Ende 1997) Kaufmännischer Leiter des Regionalbereichs Mitte/ GB Fernverkehr der Deutsche Bahn AG (Frankfurt a.M.) und Aufsichtsratsmitglied in der DB Dialog GmbH (Schwerin). Zuvor (bis Ende 1995) Prokurist der IFA Hotel & Touristik AG. Leitung des Konzern-Controlling und des Konzern-Rechnungswesens, Management der Börseneinführung in den Amtlichen Handel der Wertpapierbörsen zu Frankfurt und Düsseldorf, Zuständigkeit für Investor Relations. Veröffentlichung einer Reihe von Artikeln in Fachzeitschriften u.a. zu den Themen Eigentumsrechte, Rentenökonomie, Land Use Management und Grundsteuer.