Rent distortion in container truck game
8th June 2009

Marxist Legislator Leung Kwok Hung (known locally as "Long Hair") asked a question in the Council last week, which makes a welcome change from the usual banana-throwing tactics of his party, "fruitful" though they were in terms of old age allowance.

In its budget in February, the Government said it would cut rents on short-term tenancies of Government premises and land by 20% for 3 months, foregoing revenue of about HK$83m, a measure which was repeated in the pre-Tiananmen/1st July handouts announced on 26-May-09, taking the cost to $166m. Among the beneficiaries are operators of open-air car parks, often used by container trucks. According to Mr Leung's reading of reports, four operators account for more than 50% of such car parks - which sounds like it has the potential to be one of HK's famous cartels if it isn't already.

He also referred back to a Council question on 11-Dec-02, which gives further information on the container truck parking game - some tenants had been winning tenders and then leaving sites empty to restrict supply - a classic signal of market-rigging. It was claimed then that nearly 80% of the parking spaces near Kwai Chung Container Terminals were operated by two related companies. The Government subsequently changed the lease terms to a "use it or lose it" approach.

Mr Leung wanted to know what the Government was doing to require the tenants to pass on their rent reduction in the form of lower parking fees. This really misses the point. These tenancies are supposedly let by open tender, and bidders should take into account the risk of economic downturn when they bid for the tenancies. If a subsequent downturn makes the tenancy unviable, and the tenant defaults on the rent, then the Government can take back the land and let it out again, at the current market rate determined by tender, and meanwhile sue the tenant for liquidated damages (if the tenant is not already insolvent) representing the amount of lost rent.

By cutting rents, the Government has moved the goalposts on these tenders. Would potential operators have bid higher if they knew that they could expect rent cuts in a downturn? Will they bid higher in future, now that such intervention has taken place, and complain louder if the rent cuts are not forthcoming? It makes the market value of a tenancy subject to the whims of future Government handouts, and that is never a good thing. Whatever next? Perhaps mobile phone operators will ask for rent reductions on their radio spectrum rental, which again was awarded by tender.

The Secretary for Development and Car Parks, Mrs Carrie Lam, said the Lands Department would "write again to all the relevant tenants, reiterating that we hope they would, as far as possible, share the benefits they have gained from the rental concession with their customers". Ah, ain't that sweet? Hopeful, but hopeless. Tenants will charge their customers whatever the market will bear, and keep the difference. And if there is a price-fixing cartel, then of course the pricing and margins will be higher. Ironically, the Government has delayed tabling a draft competition law citing "technical, legal and policy issues".

The Government has fallen foul of the law of unintended consequences. It says:

"As one of the relief measures introduced by the Government in response to the current economic environment, rental concessions will not have the effect of intervention in the operation of the market"

What a leap of logic - to say that if something is a "relief measure" then it cannot be interventionist! It serves them right for cutting rents in the first place - the taxpayer loses HK$166m, and the Government gets complaints from container truck operators in return.

Copyright Webb-site.com, 2009