Allow commuters the benefit of competition

PUBLISHED : Tuesday, 03 June, 1997, 12:00am
UPDATED : Tuesday, 03 June, 1997, 12:00am

However you get to work, chances are the Government will have a big say in your journey. Whether it's down the escalator, on the buses or in a hard-to-find morning taxi you're sure to run into state regulation.

Few other transport systems in major world cities are as efficient, reasonably priced and, oddly, for this free market paragon, as tightly controlled by the Government.

The Mass Transit Railway might seem a natural monopoly and taxi tariffs, fixed for all, may seem sensible for an international business centre full of visitors on a short fuse, but what of the long-cosseted bus sector? Every aspect of the three-operators franchise is regulated by civil servants. From timetable changes to fare increases to profit controls they have learned to live within the cosy, albeit restrictive, embrace of Government.

This apparent anachronism is defended in the name of service quality and industry stability. Ever since the 1920s the need to subsidise commuters to outlying areas has seen firm control kept on inner city services. Let the reins of control go and chaos will result, say defenders of the status quo.

Yet, increasingly such closed arrangements - justified by wider social welfare aims - are being thrown open to competition with recognition of the unacceptable costs from deeply protected industries. Witness the pressure to scrap Hongkong Telecom's international monopoly and likely change to the contract allowing the power generators a guaranteed return on assets. Three operators now have the market wrapped up. Recent times have seen the first steps to deregulation. The latest franchises to Citybus and China Motor Bus are non-exclusive and fall outside the profit control scheme, allowing a maximum return on capital.

This change is about due, as firms subject to rate-of-return regulation have an in-built tendency to spend wastefully on capital goods. Cap an operator's profit and the temptation to buy new equipment or enter non-core businesses is overwhelming.

Surely the natural Hong Kong solution would be to introduce unfettered competition, allow bus companies to go head-to-head until the market dictates survivors. After all, the likes of Britain have had open bus markets for the best part of a decade.

Not according to the Government, which warns of increased congestion on our already chock-a-block streets. Britain's experience saw multiple operators scrabbling for cream commuter routes while less frequently travelled services suffered. When the dust had settled little had changed with the same cabal of operators seemingly charging higher fares.

What is the lesson for Hong Kong? While the cross subsidisation of rural and outlying services seems a worthy enough goal, there appears no good reason for a government sponsored cartel. As Louis Chan of the University of Hong Kong shows in a recent paper the bus business hardly counts as a 'natural' monopoly. Buses can be bought one by one, ruining the heavy fixed cost defence - a staple of monopolists everywhere - while claims of big economies of scale are a non-starter.

Instead, politics - and bureaucratic inertia - seem more powerful forces hindering industry deregulation. Just like rent controls, price subsidies and wage agreements, the political imperative is to maintain harmony between social groups.

Should Tuen Mun commuters to Central suddenly have to pay the full cost of their ride while Peak toffs saw theirs cut, the transport secretary would have a tough time justifying the move.

And yet there is plenty that can be done to make the system work better. First and foremost, argues Mr Chan, is the introduction of competitive tendering for franchises rather than backroom brokered deals with the firms.

Money-losing routes could be balanced with those earning above market returns. By introducing even basic competition commuters would at least get the operators working a little harder for them. Who knows? Prices might even come down.