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.
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.
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