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On Tuesday, the government and the MTR Corporation (MTRC) announced an agreement on a new Fare Adjustment Mechanism (FAM) which allows a 2.7 percent raise in fares this year, down from the 3.2 percent based on the old FAM. Apart from this lower increase in fare, its future adjustment will be kept in line with the increase in median salaries of the people. Further, there are penalty charges on poor MTR performance. This new FAM already takes into account some of the people's major concerns, and clearly this is an improvement.

There have been many criticisms of the MTR and FAM. The most commonly cited one is that the MTR always increases its fare despite earning handsome profits year after year. This behavior is often described as showing a lack of corporate social responsibility by many of the city's opinion leaders. There is no doubt the MTR is a profitable company. However, saying the MTR has excess profits is not without controversy. When we consider the amount of investment made by the MTR, the profit figures reported by the company are not particularly attractive. In terms of return, the MTR is comparable to other major companies in Hong Kong.

Nevertheless, it is true that in terms of absolute magnitude, the profit made by the MTR is huge. Clearly people do not view the MTR as a normal company. If they did, they will evaluate it according to its profitability and not just look at the absolute figure. To many people, the MTR is a public company. Because of this perception, it is expected to do more than a listed company.

One of the expectations is the provision of high quality yet lower train fares. MTR fares are low by international standards, however. Even though the original FAM is legally binding, and the government and the MTR have to accept the fare adjustment according to the FAM, people still criticize the MTR for being a greedy organization. In short, the MTR will be accused of lacking corporate social responsibility no matter what it does. Clearly this is unfair to the company. The problem is the original FAM does not take the affordability of people into account. When people's salary increases are below the rate of inflation, the original FAM allowed train fares to be increased higher than the general salary increase. This is the fundamental problem with the FAM.

According to the new FAM, the MTR still allows a direct drive approach in its fare adjustment. Now the adjustment percentage - or increase in fare - cannot be higher than the percentage of median income increase of the people. This is a smart move. We all understand that we now live in a period of rising prices. If we ask the MTR to keep prices intact or even to reduce its fares, it is not reasonable. However, installing a cap on the increase, and making this cap smaller than the rise of people's salary, will win support from many people. The outcome is simple: if the general public does not get a salary increase, the FAM will prohibit the MTR from increasing its fare. People will be more likely to accept this fare adjustment approach.

To the MTR, the new FAM is a victory. The general public has criticized the MTR for years over its profitability and corporate social responsibility. The MTR fully understands that it cannot keep the FAM intact. Some concessions are inevitable. The worst nightmare for the MTR is that any fare adjustment needs approval from lawmakers. With a modified direct drive approach to fare adjustment, the MTR is guaranteed a stable fare adjustment for another five years. Although the new FAM makes the MTR earn less than the original one, the new one is a better outcome for the MTR. If we judge from the perspective of the MTR being a listed company, the new FAM can help reduce future uncertainties in its fare adjustment. Also, concessions given by the MTR are not big ones. By giving up small concessions in exchange for a more stable operating environment, the MTR is indeed getting a positive outcome in negotiations.

Although the new FAM seems acceptable, it has not touched the fundamental issue of the positioning of the MTR. The MTR will continue to earn huge profits. The MTR will continue to increase its fare, but the increase will be lower. People will still complain about a profitable company trying to squeeze every cent out of people's pockets. In short, the old problem still exists. It is only a matter of time before this problem surfaces again in the headlines of newspapers.

The author is dean of the School of Business at Hang Seng Management College.

(HK Edition 04/18/2013 page9)