Busting HK's road transport cartels
14 December 2015
Today, 14-Dec-2015, Hong Kong's Competition Ordinance finally takes full effect, the culmination of some 20 years of campaigning, starting with a report by the Consumer Council in 1996. Webb-site was a part of that campaign, including a Financial Times debate back in Jul-2001, when we wrote the case for a law, and then Financial Secretary Antony Leung Kam Chung wrote against it. Leung worked for HK's first Chief Executive, Tung Chee Hwa, a shipping tycoon whose firm was in the container cartel and was also in business with Li Ka Shing. Leung wrote that a competition law was unnecessary and "would adversely affect the business sector". If he was referring to the fortunes of any abusive incumbent players, then he was right.
One of the few things for which we can thank Tung's successor Donald Tsang Yam Kuen is tabling a law which would reduce the dominance of the tycoons who elected them both - but then he didn't like answering to anybody. The third and current Chief Executive, Leung Chun Ying, has been much more hesitant about biting the hand that feeds him.
So today Hong Kong at last has a law against anti-competitive practices such as price-fixing and bid-rigging. Although the ordinance has numerous defects, such as lacking a merger-control regime except for telecommunications, lacking criminal sanctions against individuals, and exempting statutory bodies (with exceptions), it's a start and, like the Government itself, better than nothing.
But anyone who believes the economic freedom awards HK receives from foreign organisations, only needs to understand our transport sector to know that the domestic economy is far from free. HK retains numerous pieces of anti-competitive legislation and policies that will continue to inhibit competition in various sectors because the Competition Ordinance does not override them.
Today we'll look at road transport, specifically the taxi, hire car, public light bus, non-franchised bus and franchised bus sectors. Pour yourself a competitive cup of coffee and we shall begin.
In HK, if you want to drive a taxi for a living, then you have to pay someone else not to, by buying or renting their licence. Every taxi licence in HK is in one sense a colonial licence, as the HKSAR Government has never issued a new tax licence. HK has 18,138 registered taxis, comprising 15,250 red urban taxis, 2,838 green New Territories taxis, and the lesser-spotted 50 blue Lantau taxis. That compares with over 28,000 in Singapore, a smaller place with a smaller population where there are no quantity limits and prices are set by competition.
The last new HK licences were 10 for Blue Taxis on Lantau Island tendered in early 1997, just before the Handover, and prior to that, 300 red and 100 green licences in 1994. Meanwhile there has been a 20.9% increase in HK's population from 6.035m in mid-1994 to 7.299m in mid-2015 and a 26.4% increase in the length of public roads from 1,661km at the end of 1994 to 2,099km at the end of 2014. Newer roads tend to have more lanes than the old urban roads, so the unpublished increase in lane-kilometres must be significantly higher.
The number of licensed private cars has increased 77.2% from 279,420 at the end of 1994 to 495,038 at the end of 2014. As more marginal owners come into the system, the average private car is driven less - an average of 30.4km per day in 2014, compared with 37.1km per day in 1994, down 18.0%. By comparison, the average taxi did about 360km per day in 2014. Motor vehicle ownership in HK remains low with only about 96 per 1,000 people, of which 68 are private cars. This compares with 809 motor vehicles in the USA, 519 in the UK and 149 in Singapore, per 1,000 people.
In an unrestricted market, the value of a taxi would be no more than its depreciated cost, including any registration taxes. A new Toyota Crown LPG Taxi costs HK$230k at list price. But in HK's restricted market, taxis change hands at vast premiums, with a red taxi trading around HK$6.7m and a green taxi around HK$5.5m. This values the entire fleet at about HK$118bn. Even allowing about HK$2bn for the vehicle values (half-used), that leaves a premium of HK$116bn (US$15.0bn), or about HK$16k per HK resident. Assuming that this is a fair market price, it represents the net present value of all the future excess payments or "economic rents" that customers in HK are expected to make for taxi journeys, above what they would pay in an open market. That's how much the cartel is worth.
An Inland Revenue case shows (p10) that in Feb-1993 taxi licences were fetching about HK$1.1m each, so they are up over 500% since then.
Of course, if you can afford nearly HK$7m for a licence (or even the deposit for a loan) then you probably don't need to drive a taxi for a living, and most drivers rent their vehicles for a 12-hour shift from owners. Not being a highly-skilled profession, the driver takes home (after fuel costs) just above the minimum wage, and anything else goes in rent to the owners, who pay for maintenance, insurance, and occasionally a new vehicle. So when you see protestors demanding higher taxi fares, most of them represent owners who collect that rent. The driver knows that as soon as the fare revenue goes up (either due to a fare increase or to higher demand) then so will the rent, because if he won't pay it, then another low-skilled person will. Basic economics.
We've even got to the stage where owners are using their taxis to store distinctive number plates that they have purchased:
The Government, whenever it talks about taxi licences, talks about balancing supply and demand - but if it had done that, then premiums would be zero, because you could just get a licence for a nominal administrative fee. Fares would be set by competing taxi operators using market forces and there would be as many taxis at any time as the market can support, taking into account the cost of fuel, drivers, insurance, maintenance, depreciation, tax, congestion pricing (see below) and so on. The fact that there is a premium at all shows that there is unmet demand for licences from those who want to operate taxis.
When the Government purports to measure demand, it looks at statistics such as waiting times, but this rather ignores the fact that when queues grow beyond a certain length, and are known to do so, the propensity of people not to join them and to find alternatives, including buying private cars or using "illegal" hire cars, increases.
If we had no cap on licences and competing operators were allowed to set their own fares, there would no longer be any sense in restricting taxis to geographic territories. The RGB (Red/Green/Blue) distinction would end, and taxi operators would be free to paint their fleets in any distinctive colour scheme they like. This is not really a question of "the knowledge" of the territory, given that any driver can find any place using a GPS system.
Besides the taxi market, HK also has a very restricted hire car market. The main distinction is that you can hail a taxi in the street (if it is available), but not a hire car. There is a statutory cap on the number of hire cars, called the Hire Care Permits (Limitation on Numbers) Notice. Under the Road Traffic (Public Service Vehicle) Regulations, there are 5 categories of permit, but two of these, for schools and airport, are extinct and no longer granted. That leaves Private Service permits (maximum 1500), Hotel Service permits (maximum 400) and Tour Service permits (maximum 400). The conditions adopted by the Commissioner for Transport are strict:
- Except for Hotel Service cars, hire cars shall "not be fitted with any equipment permitting the driver to transmit and receive messages by radio", - clearly a policy written before non-fitted cellphones, which use radio waves, were invented, but it is designed to stop trips being booked without prior arrangements.
- Private Service permits shall only be issued "for the carriage of residents in an area where there is no or inadequate public transport" (prove that if you can), but there are two sub-categories: Private Service (Limousine) for "guests or clients of a contracted company, and for special occasions where personalised up-end transportation are required" - such as weddings; and "Limousine (Cross-boundary)" which are only for getting to and from Mainland China. According to the application form, limousines must have a pre-tax value of at least HK$300k, to stop you using mass-market cars.
- Hotel Service hire cars can only be used for guests of the hotel and persons bona fide accompanying such guests. The Transport Commissioner even takes into account the room rates and number of bedrooms of hotels - it only wants up-market hotels to operate limousines.
- Tour Service hire cars can only be used by a designated travel agent for tourists and persons bona fide accompanying them, and the journey must start and end at the same point (such as a sight-seeing tour).
All permits must be approved by a secretive body called the "Contract Hire Car Permits Selection Board", which comprises representatives from the Transport Department, the Transport and Housing Bureau, and the Transport Advisory Committee in unknown proportions. We cannot find the board's membership anywhere online, nor any reports of its activities.
Webb-site Reports obtained the following data on request from the Transport Department, and as you can see, allowing for the occasional vehicle being off-road pending replacement, there was very little change in the last 3 years, with all the figures kept well under the statutory limits. A net 2 permits were issued in 2013 and just 1 in 2014, taking the total to 885.
Some data are hidden to fit your display. Rotate?
|Type of Service||2007||2008||2009||2010||2011||2012||2013||2014||Aug-2015||Limit|
It is clear that the Government sets the bar on applications so high that in practice the permits, which are reissued annually, are only given to existing holders. Even if they dropped all the criteria and issued licences to any applicant who wants to take the commercial risk of running a hire car service, we would quickly hit the statutory limit of 2300, and then priority would presumably be given to existing holders for renewals, and a licence premium would develop if it hasn't already.
Uber et al
Now that brings us on to the recent surge in private hire car booking services, including Uber and its local competitors. If there is unmet demand, then the black market tends to fill it. On 11-Aug-2015, the police raided Uber's HK office, seizing computers, and arrested 5 (self-employed) drivers on suspicion of carrying passengers for hire or reward without a permit, which they probably were, prompting the withdrawal of the Uber "success story" on the web site of the Government investment promotion agency InvestHK (archived here). Awkward.
Ironically, HK's senior officials and civil servants, who make transport policy, are chauffeured around in Government limousines, so they never have to deal with the difficulty of getting a taxi (or a minibus seat) in the rush hour or when it is pouring with rain (or both). Many of the wealthier members of society have private drivers for their private cars, so they don't need to think about this either. That leaves the middle classes who can afford to pay for occasional on-demand hire car rides, but are currently inhibited from doing so.
To be clear, this is not really an insurance issue, despite government scaremongering to that effect. Insurers are more than happy to sell insurance for private hire cars to anyone who legally carries on such a business. Even under existing private car insurance, which usually excludes cover when the vehicle is driven for hire or reward, insurers are still required by section 10 of the Motor Vehicles Insurance (Third Party Risks) Ordinance to satisfy judgments for third party liability, but can then claim the money back from the insured person. If the insured person doesn't reimburse the insurer then that does not affect the third party.
As passengers, the general public should have no qualms about using services like Uber to help break the taxi and hire car cartel. If you haven't tried it yet, click here to get a HK$50 discount on your first Uber ride, and we'll get one too. The driver may be breaking the anti-competitive law (if he doesn't have one of those rare hire car permits), but you aren't.
The Government's limp response to all this has been to suggest organising a "premium" taxi service, in which the Government would award franchises and decide how many franchises there should be, how many taxis each of them should have, and what the fare structure should be. The paper submitted to Legco for 6-Nov-2015 says that "we will have to carefully study the number of premium taxis to be introduced" and "take into account the operating situation of the taxi trade" - in other words, more anti-competitive protectionist policy-making, not a market-based approach.
Public light buses
The caps on taxis and hire cars are just one aspect of our anti-competitive road-transport sector. Another is in Public Light Buses (PLBs) - the green and red-top minibuses. Since May-1976 there has been a fixed number of 4,350 PLBs, now covered by the Public Light Buses (Limitation on Number) Notice. HK's population in mid-1976 was 4.518m, and is now 61.5% higher. They did add 2 seats (14.3%) to each minibus starting in 1988, taking them up to 16 seats. Again, the quantity constraint has resulted in huge premiums for the right to operate them. The latest valuation is the interim results of AMS Public Transport Holdings Ltd (AMS, 0077), valuing each of their 56 licences at HK$5.18m at 30-Sep-2015. That values the PLB cartel at HK$22.53bn, or about HK$3,087 for each HK resident.
The green PLBs, of which there were 3,196 in Oct-2015, are franchised, operating on fixed routes with fixed fares approved by the Government. The remaining 1,154 red PLBs are free to set their fares and routes, but are restricted from certain roads. Over the years, the number of red minibuses has dwindled as the Government awarded green minibus franchises for which the licences were converted.
Of course, if you restrict one kind of bus, then you get growth in alternatives. However, since 2005, there has also been a de facto cap on the number of non-franchised public buses (NFBs), of any size. A public bus is one that you can hire, for example, for tours, estate residents' service or regular school service. At the end of 2014, there were 7,053 registered NFBs, including 11 single and 116 double-deckers operated by the MTR (formerly by the KCRC). The policy, since 2005, is not to grant new NFB licences unless you can prove that you cannot buy an existing bus for 6 months after the application.
Although passenger service licences are not actually transferable, the Government will grant you one if you buy an existing bus and, as the Government web site puts it "the existing owner of the bus concerned agrees not to purchase replacement vehicle" and thereby surrenders his licence.
Of course, at some price, it is always possible to buy an existing licensed bus, so the inability to buy one is almost impossible to prove. The result is that the number of NFBs peaked in 2004 at 7,212 (up from 1,609 in 1979) and after that declined slightly to 7,067 in 2007. It has practically flat-lined since then, constrained by policy. Even existing licence holders have to justify licence renewal when their hire contracts expire.
This shameful paper presented by the HK Government to LegCo in Jan-2005, outlining the policy, is riddled with 21 references to the "NFB trade" - for which, you should read "NFB cartel" - the existing owners of licences. There are also two references to "unhealthy competition" (an oxymoron) and a detailed explanation of the complicated "8 endorsements" system which restricts the use of specific NFBs to certain purposes.
Unsurprisingly, the cap has resulted in substantial premiums for the bus licences. An example can be found in a purchase in 2011 by Kwoon Chung Bus Holdings Ltd (0306) from AMS, when the consideration for an 80% interest in a company which owned Public Service Licences was subject to adjustment based on HK$1.5m per licence ($1.2m for 80%) eventually acquired.
Another purchase by AMS in the 6-months to Sep-2014 of 2 public bus licences for HK$3.8m (interim report here) indicates a market price of $1.9m per bus licence, on top of the $0.5m typical bus price (including First Registration Tax of 3.7%). So the licences are already worth about 4 times the bus cost. That values the fleet of 7,053 NFB licences at HK$13.4bn, or about HK$1,835 per HK resident.
Demand for NFBs has undoubtedly increased in the last few years due to inbound tourism as well as the opening of schools in more remote locations and a gradual increase in population. This has manifested itself in a rapid escalation of rentals charged to schools or parents for the use of NFBs as school buses. The result is that more parents opt out of the school bus system and instead get their children to and from school by other means, often involving private cars and thereby increasing road congestion at peak times, since taxis and seats on PLBs are hard to get in the morning rush hour due to the caps on those too.
Apart from PLBs and Public NFBs, there are also Private Buses, but the use of these is highly restricted. You can buy a bus and operate it for your own private purposes without charging anyone (not for hire or reward) or you can use it exclusively (for hire or reward) for the students, teachers and employees of an educational institution, or for disabled persons and their assistants. This is hugely wasteful though, because for school buses you only need them twice a day, and the rest of the time, including weekends and school holidays, they have to be parked idle.
The result of these restrictions is of course that rentals of School Private Buses (if the school does not own them) are high because the owner only gets a return during narrow periods of operation.
School buses must be painted yellow with a purple stripe, the "nanny van" or "jam sandwich" bus, to deter them from "illegally" carrying out other services. For this colour scheme you can thank the Road Traffic (Construction and Maintenance of Vehicles) Regulations, which requires that the purple stripe shall be at least 200mm high and even specifies the exact colours to be used.
There were 2,995 licensed private light buses (including school ones) at the end of 2014, along with 522 single-decker private buses (with more than 16 seats) and 60 double-deckers.
Unlike share registers, there are no public registers of taxi, PLB or NFB ownership. There should be. Many licences are held by companies, and many of those companies have common shareholders. It makes sense, at least for taxis, to put each vehicle in a separate company so that you can easily transfer the company rather than the licence when selling it, and if you hold it through a BVI company then there won't even be stamp duty and the HK Government won't know that you have sold it. So when you read the Government claim that there are 9000 taxi "licence holders", keep in mind that there are probably far fewer owners behind the corporate holders.
There is also no requirement for legislators or government officials to register their interests in taxi, NFB or PLB licences. It is a fair bet that at least one legislator has a personal or family interest in taxi licences (directly or via companies), but as far as we know, no legislator has declared any. At best, this will only come to light if they declare it in a relevant debate.
Finally we must mention franchised buses, because they are part of the same road transport system, and passengers make choices between them, as well as the MTR. HK operates an archaic system of (mostly exclusive) franchises, where the Government decides who should operate the routes, what routes they should operate, and how much they should charge. This has to end.
If there are no franchises, if there are no caps on bus licences, and if there is market demand for a bus route, then one or more operators will step forward with appropriate offerings of equipment, schedules and prices.
All that should be required of operators is that they pay their way in terms of road usage (see below) and air pollution (diesel duty has been zero for years, and there is no duty on LPG), that they publish their schedules and prices, and that their vehicles and drivers are roadworthy. They should have no exclusive right to operate a route, and their schedule can be as frequent or as rare as the market justifies.
If this means that a few marginal places cannot even attract a minibus operator, let alone a bus operator, even at peak times, then so be it, although we suspect these would be literally few and far between.
Licences should not be investments
By its actions or inaction for 40 years (the last red taxi licence was issued in 1994, the last PLB licence in 1976), the Government has encouraged the misbelief that licences are a form of investment rather than a permission to operate a vehicle, and premiums have soared. Holders are betting that the policy will remain unchanged, but that bet should not itself be a factor in Government policy. When the Government talks about the "healthy development of the trade", what it really means is "sustaining the value of licences". The tail is wagging the dog.
The Competition Ordinance has been in the pipeline as a government policy for several years, and that in itself should have been a signal that the anti-competitive practices of capping licence numbers, centrally setting fares and restricting the services a bus-operator can provide would end. The ordinance contains no provision that would prevent the Government continuing with anti-competitive policies, but now that the ordinance has come into effect, this is the time to deal with the cartels that riddle our economy.
Electronic Road pricing
The two often-stated reasons for restricting the number of licences of taxis and PLBs have been to limit "unhealthy competition" within or between the taxi, PLB and NFB sectors, which of course is an anti-competitive objective, but also to limit road congestion. However, imposing caps does not reduce congestion when there is no cap on the number of private cars or other vehicles.
The correct free-market solution to road congestion, caused by excessive demand for a fixed amount of road space at certain times of day, is to increase the cost of road space through electronic road pricing, an issue which the Government has at last returned to with a public engagement exercise that started on Friday, 11-Dec-2015. We support this and will write more about that another day. In the meantime, we would just note that HK has been talking about this for 30 years. Here is a clip from the Government's 1985 Yearbook:
Given that a taxi occupies the same road space as a car, the road pricing should be the same for both, each time they enter the designated congestion zone while pricing is in effect. Pricing should be dynamic, so that at off-peak times, when the road has spare capacity, the pricing would be lower or even zero, and during peak hours, it should rise high enough to maintain a targeted traffic speed. There should also be a ban on loading and unloading vehicles in the lanes of public roads during peak hours, as a single vehicle blocking one lane has an enormous impact on throughput. ERP charges would be added to taxi fares and baked into bus fares, as tunnel tolls already are.
The road pricing for a full-sized bus or heavy goods vehicle, using about twice the length of road, should be 2x that for a car or taxi. For medium goods vehicles and minibuses, about 1.5x a car, and for fire, ambulance and police, zero. There should be no other concessions. Costs per passenger on buses and minibuses would still be far lower than for private cars, and if the transport sector is liberalised as we advocate, then increased passenger capacity will incentivise people to leave their cars at home.
As a side-benefit, the introduction of ERP would allow every vehicle to carry a tag, and that would break the monopoly of Autopass in the tunnels and toll roads. The same tag could also be used to trigger parking meters, stopping chauffeurs and others from hogging them without paying, and avoiding the need to select the amount of meter time in advance. There would be no meter expiry, it would just stop charging when you drive away from the meter.
What the Government should do
The Government should completely overhaul its road transport policy to be consistent with the spirit of the Competition Ordinance, by removing anti-competitive legislation and policies. Statutory and de facto caps on the numbers of taxis, private hire cars and buses of all kinds should be removed. Restrictions on the territory of taxis, the routes of buses and the type of service a bus can provide should be removed, and all operators should be free to set routes, schedules and prices by open competition, not have them determined by Government. Bus franchises should be abolished altogether and the market opened to competition.
At the same time, congestion pricing should be introduced, and existing pricing on Government-owned tunnels and roads should be changed to dynamically increase during peak demand. Duty on diesel should be reinstated and raised to at least the level of petrol duty. Appropriate duty on LPG should also be imposed - it is not as dirty as diesel and has a lower energy density than petrol, but it does still produce emissions and contributes to both air pollution and greenhouse gas emissions.
If caps are removed then there will of course be howls of protest from a small number of people who thought they had a sure-thing bet on licences, but that is always the case when a government breaks a cartel, and the greater public good is served by opening the market. Let the competition begin.
© Webb-site.com, 2015