• Thu
  • Jul 31, 2014
  • Updated: 11:51pm

The taxi financing rip-off that is taking us all for a ride

PUBLISHED : Thursday, 01 April, 2010, 12:00am
UPDATED : Thursday, 01 April, 2010, 12:00am

The 50 HK cents in cab fare change most taxi drivers routinely keep without asking can add up - to millions.

SCMP, March 27

Millions, was it? Well, save your tears. I can think of another rip-off in the taxi business and this one can be tallied in the billions.

This one stings you for an average of about HK$10 every time you step into a taxi and may you pay it in ignorance forever if you begrudge your taxi driver an occasional 50-cent tip from rounding up your fare to the nearest dollar.

We shall assume, however, that you are of a more kindly disposition. To understand the rip-off, you need to appreciate some simple workings of a market. Bear with me here.

Think of a triangle. The three points are marked (1) demand, (2) supply and (3) price. We have the choice of which of these three to control and which to leave free to establish its own level.

The rules say that if you leave all three free you have a very efficient market but probably one with zero social conscience (if that matters). Fix one of the three and you still have an efficient market. If you fix supply, for instance, but leave demand and price to find their own levels, your market will still function well. If you fix two of the three you have a market in trouble. If you fix all three, you have North Korea.

The Hong Kong taxi business on this measure is a market in trouble. Supply is fixed by licence. There are just over 15,000 urban taxi licences in issue and that number has varied by less than 1 per cent over the past 10 years. Price is also strictly controlled. Fares are set by government edict. Only demand is left to find its own level.

This does not work well. The controlled fares have been set too high for the controlled supply and we know this is so because an unofficial market has sprung up in the supply of taxi licences to exploit the anomaly. The price of a licence at present is between HK$3 million and HK$4 million. So say the taxi drivers I have asked.

No one keeps this sort of money as spare change. To raise it a taxi licence buyer borrows it and probably pays prime plus one for the money. This is not like a mortgage where rates are below prime.

We are talking here of an intangible asset traded on an illiquid unofficial market. If I am wrong about this, my e-mail address is above and you can tell me directly.

So let us assume that we have financing at 6 per cent of HK$3.5 million. This comes to HK$210,000 a year or HK$575 a day. The official figures say that the average taxi does about 55 passenger trips a day, which seems too high a number to me, but so say the figures. We now have a financing cost of HK$10.46 per trip, which we shall round down to the nearest dollar.

There you have your HK$10 rip-off and it amounts, at a guess, to about a quarter of the average fare.

It's a rip-off because it has nothing to do with the cost of the car, which can be little more than HK$150,000. It also does not go to operating the car or to the taxi driver or to the public purse.

The only beneficiaries are commercial bankers who get the lending business and taxi licence speculators who have cleaned up over the years on rising prices of taxi licences. None of this has anything to do with the standard of taxi service to you, the user, or the standard of living of the service provider, your taxi driver.

It exists because bureaucrats tinkered with a market mechanism they did not understand and got it wrong, thus skewing the price of a crucial transport service to the public's disadvantage.

In fact, it is even worse than this. One of the big lenders in the business is the Hong Kong Mortgage Corp, an arm of the Hong Kong Monetary Authority. Last told, the HKMC was carrying HK$1.4 billion in taxi loans.

Just how is taxi licence financing a proper fit for a government mortgage corporation? Good question. Don't ask me. Ask Financial Secretary John Tsang Chun-wah. He's the HKMC chairman. Do please ask him. I've never had a proper answer.

There is nothing we can do now about the big rip-off. We could supposedly rid ourselves of it by deregulating taxi numbers, thus opening the supply side of the market, but the outcry from disgruntled taxi licence owners would burst Mr Tsang's eardrums and it will never happen.

I don't want to hear about 50-cent rip-offs, however, while this piece of larceny is still practised every day.

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