Jake's View

How Hong Kong taxis became a HK$108b betting market

PUBLISHED : Wednesday, 25 May, 2016, 2:29pm
UPDATED : Wednesday, 25 May, 2016, 2:29pm

The number of taxi licences has remained at 18,138 since the government stopped issuing them in 1994. Because licences can be transferred and traded, their prices rose rapidly. But in recent years this has also been on a slide: urban taxi licences now trade for less than HK$6 million compared to HK$7.2 million last year...

SCMP, May 25

Seems to me there is still a lot of sliding to go. Haul out your calculator and enter 18,138 times 6,000,000. The answer tells you that the current market capitalisation of taxi licences is HK$108.8 billion.

That’s a lot of money and it poses some questions. For instance, who owns all these valuable taxi licences?

Your answer is that they are mostly held by speculators who do not themselves drive taxis and who bought them because they seemed like a good bet on making money, which they have indeed proved to be over time.

This leads immediately to another question. What do these speculators contribute to the operation of the taxi fleet?

Answer: Nothing.

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Let me repeat. They are useless parasites on the operation of taxis. The car itself costs only about HK$220,000. The difference from the HK$6 million is purely speculative excess. The burden of that difference, mostly in the form of interest charges on borrowings, is carried by the hired drivers who must pay between HK$300 and HK$400 a shift for their cars.

The value of these licences then resembles the valuation of a bond. When interest rates fall, the value of the bond goes up. When they rise, the bond goes down. This one has fallen from HK$7.2 million to HK$6 million over the last year because of general expectations in the market that interest rates will rise.

Next question: How did all this happen?

Answer: Because government bureaucrats were messing about in things they did not understand. They mandated taxi fares at too high a level. The result would have been to give taxi drivers an income of somewhere between HK$20,000 and HK$25,000 a month if they owned their cars outright.

But taxi drivers are not supposed to make that much money, don’t you know. Thus a speculative market evolved to ensure that these incomes were reduced to nearer the HK$10,000 average income of the social standing of taxi drivers and the difference was taken by speculators.

Question: Does this cost me any money?

Answer: You bet it does. About half of what you pay in a taxi fare goes straight down this speculative gurgler, which is one reason that ride-hailing apps for unlicenced taxis have been such a success, leave alone the pluses of better cars, quicker response and not having to bite off your fingernails about whether the geriatric at the wheel really knows what he’s doing.

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Question: How do we get out of this mess?

Answer: We don’t.

Put the question to yourself. Do you really think the government is in a position to change things when the taxi trade controls the transport seat in the Legislative Council with an unassailable 35 votes while the Mass Transit Railway and Kowloon Motor Bus each only have one vote?

I wouldn’t know how to sweep the speculators aside anyway. Issue thousands more taxi licences and the only immediate result is more empty taxis. Taxi usage is trending steadily down and not only because of cost and service complaints. The MTR is a real competitor in these times of clogged roads.

Mandate lower fares and the taxi driver protest will make Occupy look like a convention of tamed rabbits. The drivers would be the immediate losers even if their shift charges would eventually go down. It just won’t happen.

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But the speculative interest would never step meekly aside anyway. You cannot just wipe out HK$108 billion of investment value and expect no trouble from the taxi licence holders. This kind of wipeout could bring a danger of real violence. I would certainly not want to be the politician held responsible.

So what we will do is just muddle along and cross our fingers in hope that unlicensed ride-hailing apps can eventually be legitimised in some way that won’t have the licensed taxi trade up in arms.

Vain hope. Monsters don’t vanish just because you look the other way. We still have plenty of trouble to come here.