The fare adjustment mechanism is a system that regulates the fare increments of public utilities, including the Mass Transit Railway Corporation Limited (MTRC). Under this mechanism, the MTR fare no longer requires approval from the Legislative Council or the Executive Council. However, this has limited the MTR's autonomy in fare setting, as the fare must be determined according to a fixed formula. Initially, the mechanism was designed to curb the rapid fare increases of the MTR through a transparent and formulaic approach. Nevertheless, Hong Kong experienced continuous inflation from 2010 to 2020, with only 2017 being exempt from a fare increase. Consequently, the annual fare hikes were widely criticized by the general public. Since 2020, there have been three years without a fare increase (2020, 2022, and 2025), and a fare reduction occurred in 2021 for the first time. This was due to the sluggish economy caused by the COVID-19 pandemic.
Background
MTR KCR merger The discussion of the merger started early in 2004, after Kowloon-Canton Railway Corporation (KCR) won MTR over the Sha Tin to Central Link deal. After two-year negotiations, the government signed a non-binding Memorandum of Understanding (MOU) with MTR on 11 April 2006, listing the changes with respect to the merger: (only some of them were listed here).Environment, Transport and Works Bureau, ‘KEY TERMS OF MTRCL’S FINAL PROPOSAL FOR THE RAIL MERGER’, accessed Nov 27 2016, MTR would get the KCR system Service Concession for 50 years, and KCR would get one-time payment of $4.25 billion, and $750 million plus variable profits from KCR system operation each year Fare Reduction on first day of merger, benefiting 2.8 million passengers; at least 10% reduction on trips cost at least $12 No price markup until 30 June 2009 (for 2 years after merger) An ‘objective and transparent' fare adjustment mechanism (FAM) will be introduced The merger package, however, still required the approval of Legislative Council on the changes of the MTR and KCR ordinance (the Rail Merger Ordinance), and also the agreement of minority shareholders of MTRC (the Government did not vote as it has conflict of interest in this issue) to finalize the merger. Those processes and then the merger completed in 2007.
Negotiation of the mechanism The 'Objective and transparent' fare adjustment mechanism mentioned above was one of the five aims of the Government on the merger. This was stated clearly in 2004 that the government invited both railway companies to discuss the possible package.Environment, Transport and Works Bureau Financial Services and the Treasury Bureau,‘Merger of MTR and Kowloon-Canton Railway Systems - Proposed Way Forward’, accessed Nov 27 2016, MTR and KCR gave a Joint report in September that they agreed on the possibility of having a package that could fulfil the five objectives.
Previously, the right for adjustment of fares held on both companies. The fare autonomy, however, would be replaced by system that could reflect the economic situation. General public expressed their concern towards the unclear mechanism behind both companies. Worries also came from the companies that pressure from public would cause fare rise after dropping to be difficult. Agreement was reached that an equation consisted of data accessible to public (to be mentioned below) was adopted to be ‘objective and transparent’.
The whole negotiation of the merger package, including the fare adjustment system, between the Government and MTR began after the submission of joint report. However the negotiation details were in secret as negotiation ‘involves commercially sensitive information relating to the operation of the two railway corporations, including MTRCL which is a listed company’Environment, Transport and Works Bureau Financial Services and the Treasury Bureau,‘Progress of the discussions on possible rail merger’, accessed Nov 27 2016, as claimed in government documents to LegCo. The news is only leaked by some media in advance.「承包形式接管 行會 12 月拍板 兩鐵合併後將全面減價」, Apple Daily, Oct 28, 2005. accessed Nov 27 2016, Nevertheless, the Government did mention that the merger terms should ‘strike a balance between the interests of different stakeholders, including the travelling public, staff, taxpayers and MTRCL’s minority shareholders’.
Timeline TimeEventJune 2002The Government announced examination on merger possibility「兩鐵合併事件簿」, on.cc, accessed Nov 27 2016, 24 February 2004The Government invited MTR and KCR to discuss details of possible merger based on 5 objectivesSeptember 2004MTR and KCR submitted joint proposal on merger package fitting 5 objectives11 April 2006Executive Council approved the merger, Memorandum of Understanding (MOU) signed between the Government with MTR MTR Corporation, ‘MTR Corporation Signs
Memorandum of Understanding with The Government on Terms of Proposed Rail Merger’, accessed Nov 27 2016, 8 June 2007Rail Merger Ordinance passed by LegCoLegislative Council, ‘Council Meeting (Voting Result) 6 June 2007’, accessed Nov 27 2016, 9 October 2007Merger Package passed with 82.3% agreement by minority shareholders of MTRC MTRCL, ‘POLL RESULT OF THE EXTRAORDINARY GENERAL MEETING HELD ON 9 OCTOBER 2007 AND RESUMPTION OF TRADING’, accessed Nov 27 2016, 2 December 2007Merger completed, KCR no longer operated railway; Immediate price reductionTransport and Housing Bureau, ‘Implementation Date for Rail Merger Confirmed’,
accessed Nov 27 2016, 30 June 2009End of ‘non-adjusting price’ period, fare adjustment started depending on the mechanismEnvironment, Transport and Works Bureau, ‘Rail Merger Bill passed in Legco’, accessed Nov 27 2016, 13 June 2010First fare adjustment based on the mechanism came on effect (+2.05%) Transport and Housing Bureau, "Public Consultation on the Review of the MTR Fare Adjustment Mechanism", May 2016, accessed December 03, 2016,
Details The fare adjustment mechanism is a direct-drive formula that takes changes in the Composite Consumer Price Index (CCPI), the Nominal Wage Index (NWI), and a predetermined productivity factor into account. And, the formula is as follows:
Overall Fare Adjustment Rate = 0.5 x Change in CCPI + 0.5 x Change in NWI – Productivity Factor
The government claimed that the adoption of CCPI and NWI tries to align fare adjustments with economic conditions and transportation sectors’ wage levels. As the CCPI reflects the macroeconomic environment and public affordability; whereas the NWI reflects MTR's non- managerial staff cost.
While, the productivity factor is set at zero percent before 2013, and will have a value of 0.1% starting from the 6th years took into consideration of the general reduction of MTR fares on the day of the merger in 2007. In other words, the MTR was returning the initial productivity. The 0.1% productivity factor has been so determined taking into account of the fact that the scope for productivity gain would be limited due to heavy investment by the merging of the MTR, especially when the railway network is expanding.
The mechanism is applicable to all the Controlled Fares including:
(a) Adult, Elder, Student and Child fares for one way journeys on all MTR lines, excluding the Airport Express but including Airport Workers’ fares;
(b) East Rail Line First Class Premium fares; and
(c) all Light Rail and MTR Bus fares.
According to the Operating Agreement between the Government and MTR, MTR is required to provide two independent third party certificates proving that the fare adjustments are in compliance with the mechanism. MTR is also required to formally inform the Panel on the Legislative Council and the Transport Advisory Committee three weeks before the implementation of the new fares in June every year. If the outcome of the calculations on the overall adjustment under the formula is within the range of ±1.5%, there shall be no overall fare adjustment of the MTR.
Result of the mechanism The mechanism has been successfully implemented in 2009 and proposed a 0.7% increase in the fare according to the calculation of the formula. However, the MTR fare remained unchanged in 2009 since the outcome stayed within the range of ±1.5%. The effect shall be carried over to the next year and subjected to annual review.
On 25 March 2010, According to the mechanism, the adjustments in MTR fare will be decided by the Composite Consumer Price index as of December 2009 and the nominal wage indices of the transportation sectors. The Census and Statistics Department has announced the former indicator was 1.3% while the latter was 1.4%, combined the effect from last year, the overall increase in MTR fare will be (1.35% + 0.7%) = 2.05%. The first adjustment was in effect on 13 June 2010.
On 24 March 2011, According to the Census and Statistics Department, the Composite Consumer Price Index in 2010 has increased by 3.1% compared with the same quarter/ month in 2009. The data was later reduced to 2.9% due to the modification of the component of the Composite Consumer Price Index.MTR, ‘Overall Fare Adjustment Rate for MTR Fares in 2011 Lowered to +2.2%’, accessed Nov 27 2016, The percentage change of the nominal wage indices of the transportation sector in 2010 is +1.5% compared to December 2009. The percentage increase in MTR fare in 2011 will be 2.2% and was effective since 19 June 2011.
On 26 March 2012, with reference to the data issued by the Census and Statistics Department, the proposed increase in the fare shall be 5.4% and effective since 17 June 2012
On 26 March 2013, a new term called ‘Productivity Factor’ has been added to the formula of the adjustment mechanism, the value of the factor was set to be -0.1% according to the MTR KCR merger Bill. The value of the factor was then revised up to -0.6% in April 2013 during the review of the MTR fare mechanism in order to further alleviate the financial burden of the passengers. Overall, the CCPI was +3.7% and NWI is +2.9% in 2012 and the proposed increase in MTR fare shall be 2.7% and effective since 30 June 2013.
On 27 March 2014, with reference to the data issued by the Census and Statistics Department, after deducting 0.6% from the productivity factor, the proposed increase in the fare shall be 3.6% and effective since 29 June 2014.
On 27 March 2015, with reference to the data issued by the Census and Statistics Department, after deducting 0.6% from the productivity factor, the proposed increase in the fare shall be 4.3% and effective since 21 June 2015.
On 21 January 2016, according to the Census and Statistics Department, the CCPI in 2015 has increased by 2.5% and then revised to 2.4% due to the modification of the component of the CCPI. The percentage change of the NWI of the transportation sector in 2010 is +4.1% compared to December 2015. The percentage increase in MTR fare in 2016 will be 2.65% and was effective since 26 June 2016.Transport and Housing Bureau, ‘Public Consultation on the Review of the MTR fare adjustment mechanism’, May 2016, accessed December 03, 2016,