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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