The
recent steady stream of reports on problems related to the Hong Kong taxi
industry, from drivers’ refusal to accept rides to overcharging, from sky high taxi
licence prices (record high of HK$7.2m back in June
2015) to the Government’s persecuting innovative hailing businesses such as
Uber – all point to the worrying trend of an ever worsening business
environment in whose excellence Hong Kong has traditionally prided itself.
This
article analyses the deteriorating transport ecosystem in Hong Kong by looking
from a supply and demand perspective, hoping
that more appropriate policies can be adopted to put the increasingly
suffocating travelling experience HK citizens face back on its former flexible,
high-quality, and affordable track.
Govt limits on licence supply leads to sky high prices
The
Hong Kong business environment of recent years has been characterised by
worsening service standards, astronomical asset prices, and purging of new entrants
or small players, resulting in a overwhelming domination by the establishment
(aka big corporations) while the consuming public suffers. In the taxi
industry, this started back in 1998 when, under the pretext of considerations
for the common good of the taxi profession, the government completely ceased
issuing further taxi operating licences. This move sowed the seeds of a major
bull market in license prices, which has massively outstripped the increase in
the income of the riding public (Chart 1).
Chart
1: starting at 100, income rose a mere 34% vs taxi prices up 286%
The
fact that prices of a right to drive a means of public transport can soar to
the value of a private home is nothing short of incredible, even though this phenomenon
can be explained by the simple rules of supply and demand. It is clear from Chart 2 that from the 1970s to the
mid-1980s, due to the rate of increase in taxi licences being higher than that
of housing supply, the ratio of taxi licence price to home price index fell
significantly to within a range of 0.5 to 0.8 (see red highlight in Chart 2). This is ample proof that when
supply is abundant, a utility item will not turn into a commodity of
speculation.
Chart
2: lower licence supply resulted in licence prices rising more against home
prices
The
situation reversed from late 80s and persisted throughout the 90s, when the
increase in taxi licence numbers fell behind housing supply. As a result, the ratio
between taxi and home prices surged back to the 1.1-1.5 region (see yellow
highlight in Chart 2). This would
have been the best time for the Government to increase the supply of taxi licences,
but sadly, it unwisely ended new supply of licences from 1998 onwards,
resulting in a total windfall for licence holders/speculators, when the licence
price to home price ratio more than doubled to a high of 2.8 in 2005; although
the ratio fell back after the global finance crisis, it still trades at an
elevated range between 1.4 and 2.0 (see green highlight in Chart 2) – this is a level triple the norm back in the 70s and 80s,
and formally sealing the licence’s status as an instrument of speculation instead
of a document to authorise provision a service to the public.
Bureaucratic forever behind the curve
The
role of government is best limited to providing a fair environment of exchange,
so that the citizens can freely supply and consume products or services in an
open market. Looking at demand for transport services, it is not difficult to conclude,
from looking at the changes in population, housing supply, and private car numbers
since the handover, that the city’s demand for taxi services remains severely
unsatisfied.
Since
the government stopped issuing taxi licences in
1998, Hong Kong’s population has risen by 12%, its housing stock by 29%, and
private cars on the roads by 60% (Chart
3)! If these are taken as the manifestations of underlying demand, then
should there not have been extra taxi licences of 2,176 (i.e. 18136 x 12%), 5,259
and 10,882 respectively, according to the three demand proxies? To take a more extreme
example – the number of visitor arrivals which has surged 459% in the same time
– the number of taxi license should have risen an even more astronomical
magnitude. The negligence that has led to this level of disconnect between
demand and supply is simply unforgivable.
Chart 3: taxi provision is severely lagging all
demand indicators
The
classical supply-demand curve explanation to the phenomenon is simple – when
supply is arbitrarily fixed (see orange line in Chart 4), continued rises in demand (blue lines) will push prices up
(P0 to P1). The natural and appropriate way to adjust to
changing demand situation is to allow the market to adjust supply levels such
that both the numbers and
the prices of taxi licences are determined by the free interaction between the buyers
and suppliers, not by
remote mandarin officers sitting behind closed doors.
Chart
4: inflexible supply pushes up licence prices, putting up barriers to entry
Govt policies promote rent seeking
Since
Hong Kong’s handover, we have witnessed more and more reports of corporatist
policies favouring monopolistic behaviour while penalising new and small market
players. In the context of the taxi industry, the abrupt and continued
suspension of licence issuance has resulted in supply shortage and surge in
licence traded value – and the increased barrier of entry (due to higher
capital requirements) means that more and more licences are now held in the
hands of hoarders and speculators.
Under
normal circumstances, owner-operators should possess one licence, while those holding
three or more taxi licenses can be safely classified under corporate owners or
investors. Since 2011, when statistics have become available, the proportion of
corporate ownership – that is, holding more than 3 licenses – has gone from 18.4%
to 22.7% in just 5 years. That is a cumulative growth of 4.3 percentage points (Chart 5). In contrast, the proportion
of single licence holders fell by an even larger 5.4 percentage points. This
suggests that taxi licences are being concentrated from the drivers (which make
up a maximum of 52.6% of total now) to the well capitalised investors.
Chart
5: taxi licence ownership increasingly concentrated
Drivers are forced to take risks
When
a humble licence to drive a means of public transport has morphed into a tool of
investment for wealthy, we know that policy making in this area has become
abused. Sadly, the Government has ignored the issues for many years, leaving taxi drivers and passengers to pay over-inflated rents
and fares.
The
shortage of taxi licenses results in
increases in taxi rentals for drivers. In order to breakeven, the drivers developed
revenue maximisation tactics such as hire refusal, taking longer routes, and
overcharging. This is only one of the outcomes out of the problem of imbalance
between supply and demand. This sad symptom of the policy error is clearly
visible from the prosecution figures where the number of drivers charged for ride
refusals rose nearly sixfold in the past five years (Chart 6) – the deterioration of service standards has become
systemic.
Chart
6: prosecution for refusing hire were hugely increasing
If
on the other hand, the number of taxi licences is allowed to fluctuate freely
in response to market demand, then the licences will lose their investment
value, and the rent charged on the drivers would decrease at the same time as
it now merely needs to cover the operating costs of the vehicle. Just a one-third
drop in taxi rents will allow the driver to earn the same level of income while
passing on a 10% saving on fares to consumers (Table 1). If, however, the
driver chooses to reduce his working hours by 10%, the riders can still save 2%
on their fares compared to the status quo, is this not a win-win situation for
all?
Table 1: Scenario showing how low
licence fees lead to better economics for drivers and riders
Planned economy approach deprives our freedom of choice
Under the
suffocating atmosphere of over-regulation, more and more people are turning to taking
the MTR, as
shown in Chart 7, gaining the
dubious pleasure of daily sardine-packing and labyrinth walking in the tunnel
system of our underground system. On top of that, the increasing failure rates
at the railways leave the population with next to no choice when taxis become
such a hostile form of public transport.
Chart 7:
The
dysfunctional state of affairs caused by artificially restricted supply of taxis
on our roads has led to the market share of taxi rides falling precipitously
despite major surges in the length of roads, population, and tourist visitors. This
trend is particularly pronounced since the government ended issuing new
licences from 1998 onwards (Red arrow in Chart
7), is it any surprise that complaints about taxi services go sky high and
new technologies such as ride hailing apps become all the rage?
When
public criticism mounted after the bureaucrats tried to kill off Uber, their
only bright idea was to placate us with a "luxury taxi", this clearly
shows how the illogical mind-set still persists in the power corridors where
policies tend only lead to duplicating, fragmenting, barrier-erecting, and
oligopolistic market behaviour. This self deceiving mentality completely
disregards the most common sense approach of giving the power of supply back to
the market and lowering entry barriers.
In
the meantime, current policy continues to condone the explosion of private cars
on the roads, increasing congestion exponentially, when taxis are the most
natural substitution to private car journeys. Such short sighted policy making
is just another piece of evidence that the government has lost the plot.
With special thanks to Mr Chi Chung Kelvin Ng and Kwok Yan Chiu for their contribution to this article.
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