Taxi fare hike the wrong fix for bad services and poor driver pays

Posted on 2019/04/12 Stand News:

Hot on the heels of the last fare hike as recent as April 2017, the Government was reported in March to be seeking Legco views on another proposed taxi fare hike – with a magnitude of an eye-popping 25%-36.8% increase for the initial flag-down fares.

The mandarins who ride in chauffer driven AM plated government cars, who probably never have to ride in a taxi like the people, probably conveyed the justifications raised by the ‘taxi trade’ (not even a formal organisation was given in the government document!) for the fare hike as: to improve the low income earned by taxi drivers and to attract new blood to the trade. This was met with widespread scepticism, with political parties doubting that fare hikes would improve service standards and remove malpractices such as overcharging and refusing rides.

Licence owner wins in fare hikes, drivers lose
Instead of finger in the air guesses, we try to quantify the economics to see if indeed the scepticism is warranted.

Comparing the financial equation shortly after the previous fare hike (pink column in Table 1) and the current market conditions (orange column), we have assumed: 1) amount of work is unchanged; 2) running costs are unchanged. However, the current market rent of taxis have seen roughly a 19% increase from two years ago, but with all else being equal, the drivers seem to be getting 11% less
(their pay being the residual balance of all other revenues and costs:

Table 1. Financial scenarios – owners ultimate winners in fare hikes:

Now assume the fare hike proposal is implemented (green column above), and assuming there being no further rent hikes from current levels, then indeed theoretically the drivers will be better off, in fact 87% better off than now!

The reality will most likely be closer to the blue column, where the drivers are offered a meagre 3% pay rise from today (in line with current levels of inflation), and the licence holding car owners pocket all the rest – the net result? a 53% windfall for the owners versus a minute 3% improvement for the drivers. The claims by the ‘taxi trade’ that drivers will be better off may literally be true, but we all know where the vast majority of the benefits of a fare hike will flow…

Taxi returns much better than property, thanks to zero supply
Further analysis of the returns on taxi ownership suggests that the 2017 fare hike has raised yields on taxi from 3.2% to 4.4% today (third line from bottom in Table 1), whereas a new fare hike with the owner-takes-all outcome above would spike the yield to a jaw dropping 6.7% based on current taxi licence prices. This compared to the 2.6% yield on property assets at large, mean a 0.6 percentage points (or ppts) premium two years ago has enlarged to 1.8ppts now, and if the new hike proposals are implemented, will further expand to a mouth-watering 4.1pts!

Taxis most complained mode of transport – time to introduce competition
As is no doubt employed as a reason for fare hike every single time, that higher fares would reduce rider complaints, new data continues to rebut this assertion: the latest government complaints statistics puts taxis firmly in the lead, with no sign of slowing in the growth momentum of complaint numbers – the taxi related complaints are up another 7% to 2,894 for the year ended March 2019:

Table 2. No change in rising trend of complaints against poor taxi services:

All this confirms our thesis that the only way we can improve the HK taxi service standards is to increase competition, and this can be achieved in two ways:

1) issue unlimited number of licences which will immediately cause the per-shift rent for taxis to drop to the level of maintenance costs, and drivers can then take all the revenues themselves, boosting their income immediately
(see our prior articles: http://yulun2012.blogspot.com/2016/12/blog-post.html);

2) allow all ride-hailing operators to compete, such as Uber, provided simple insurance requirements are complied with. There should be no entry barrier besides very simple compensation requirements in cases of accidents.
(see http://yulun2012.blogspot.com/2018/03/blog-post.html)


The author would like to thank Gary Mak Ka Ho of The Chinese University of Hong Kong for assisting in data collection, analysis, and drafting of this article.