A heavy toll

PUBLISHED : Saturday, 16 October, 2010, 12:00am
UPDATED : Saturday, 16 October, 2010, 12:00am

Abedrock principle of this government has been its affirmation of a free market. That applies to the ownership and operation of public utilities, including transport. But the recent spat over the proposed sharp increases in cross-harbour tunnel tolls has called the soundness of this principle into question.

Outraged politicians and the public are demanding that the government shell out its unused billions to repurchase the eastern and western harbour tunnels from their franchised operators. The shocking 40 per cent increase in toll charges sought by the Eastern Harbour Tunnel operator far outstrips the minuscule rises in average personal income, and comes at a time when the operator is already raking in substantial profits. This move is aggravating the increasingly virulent anti-business sentiments in the community.

The government, for its part, once again shows how powerless it is. All it can muster is feeble attempts at moral suasion, pleading with the operators to 'consider the level of public acceptability'. Those words invariably fall on deaf ears in corporations; their primary duty is to exact the highest return for their shareholders. Their demand for higher returns may not appear reasonable, but it is entirely legal. It leaves our government looking weak and clueless.

The root of the problem goes back to the 1970s and 1980s, when the government adopted an approach applauded as unique in the world, the so-called BOT, or 'build, operate, transfer', model which is an outgrowth of its 'small government, big market' philosophy. At a time when money was tight, making use of private financial muscle to build massive infrastructure made good fiscal sense. At that time, as an inducement, the government dangled before big business the so-called 'reasonable returns' of as high as 15 to 17 per cent. In the late 1980s, the median wage was increasing at nearly 10 per cent a year and inflation was running at between 7.4 and 9.6 per cent.

That return appeared reasonable, but locked into a 30-year franchise, it becomes exorbitant in today's low-inflation and zero-interest situation, especially when the average wage or income hasn't kept pace with economic growth. It hardly moved between 2001 and 2006, inching up slightly only in the years that followed. When 'reasonable returns' for the franchise holder is the sole basis for setting the toll, and 'increase in household income' is not in the equation, then the situation becomes socially explosive.

To be fair, the government did not have a crystal ball on the future economy. But in retrospect, the blind faith in 'small government, big market' and in a one-dimensional formula now seems dangerously simplistic and misplaced.

In sealing deals on bus franchises and road and power station construction, the government invokes only this requirement: guaranteeing a fair return to the investor. It does not factor in an inflation-adjusted affordability index. That's why, when the investors raise the toll or charges to claim their reasonable returns, they are at odds with public sentiment. The system, in other words, is fundamentally flawed. The government is unintentionally fanning anti-business sentiments.

One may ask why the MTR Corporation can manage its fare increases without antagonising the public while taking care of shareholder interest. That is partly because it has in place a fare-increase mechanism that tracks passenger acceptability. More importantly, it has received massive government subsidies in terms of land use rights. Any privatisation of infrastructural projects, it now appears, must involve some form of government subsidy, in cash or kind, to stave off user revolt.

Against this stalemate, what are the options open to the government? The demand for it to repurchase the eastern and western cross-harbour tunnels grows louder by the day. But this is workable only if the operators are willing to sell. Even so, they may hold out for a price that a suspicious public may consider too steep. I am not bullish on the repurchase option.

If the franchisees cannot be bought out, one option is for the government to compensate the operators for any shortfall in expected 'reasonable return', thus keeping the franchisees happy and the public uncomplaining.

This is a necessary evil to make up for the government's previous short-sightedness. But it takes political courage to admit that its original agreement is fundamentally flawed.

Do you see the government admitting that the present predicament is no fault of the franchisees, while using public money to keep the operators happy? Don't bet your money on it.

The most viable option may be a variation on the compensation approach. The government can increase its toll at the Hung Hom Tunnel at rush hour and use the additional revenue generated and the diverted traffic to subsidise the other two tunnels, in return for keeping their toll increases to a minimum until the franchises run out. This option has the advantage of not having to splash out extra public funds.

Hong Kong has lived with gridlock for nearly three decades. The Eastern Harbour Tunnel has another six years to run, while the Western Harbour Tunnel franchise doesn't expire until 2023. Until then, the government must try to find ways to relieve our traffic headaches without costing us an arm and a leg.

This conundrum should teach the government a lesson. It must take its medicine and not blindly pursue a 'small government, big market' philosophy. In today's global economy, aided and abetted by the internet, the strong are getting stronger, while the weak are getting weaker. This outmoded philosophy ill-serves us in the new age.

Besides, why can't the government build its own infrastructure when it is flush with cash? If it continues to chant the same silly slogan, a small government may end up being inadvertently sideswiped by big business.

Michael Tien Puk-sun is a Hong Kong deputy of the National People's Congress and a former chairman of the then Kowloon-Canton Railway Corporation