Hong Kong: How Uber Is Doing What Hong Kong Government Failed

Although the price of a Toyota Crown Comfort taxi is only HK$230,000, the cost of buying a licence to operate one is at present about HK$7 million.

Taxi drivers and owners criticised transport authorities in the legislature yesterday for failing to curb the practice of private car drivers offering cheap rides through car-hailing mobile apps.Licence speculators may scream murder as taxi-hailing app using private cars shows how market forces can work for the community

Have you ever tried to draw a straight line on a piece of paper? I mean straight as in no curve or wobble, almost as if done with a ruler. It's not easy but I think I come pretty close in the chart.

It shows you the number of urban, New Territories and Lantau taxi licences in existence over the last 20 years. The numbers are not absolutely changeless. Total taxi registrations are frozen but some taxi owners do not renew their licences every year. There are thus some very slight wobbles in the chart.

Now turn to basic economics. Three forces interact closely with each other in the market for any commodity, gadget or service. They are supply, demand and price.

The market works best when all three are left to find their own level. Control one of them and the market will still work reasonably well by making adjustments to the other two. Control two of them and your market will break down if these two are not adjusted exactly to the third. Control all three and you have no market.

What we have done with the taxi market in Hong Kong is control two of the three, supply and price, and we have guessed wrong at what these should be relative to demand. We have limited taxi registrations to 18,138 and then set taxi fares too high.

Although the price of a Toyota Crown Comfort taxi is only HK$230,000, the cost of buying a licence to operate one is at present about HK$7 million.

The cold-hearted fact in all this is that the personal income level at which enough taxi drivers can be found to keep 18,138 taxis on the road is about HK$10,000 a month.

But the amount of money they would take home with present taxi fares and a vehicle cost of HK$230,000 is more than double this HK$10,000. I'm guessing here but I'm sure I'm not far off.

And so another market has arisen to intermediate the official taxi market. This second taxi market capitalises taxi driver incomes above HK$10,000 a month. It sets a lump sum value of HK$7 million on this stream of supposedly surplus income. Low interest rates have pushed this figure steadily up over the years. This second market then takes the money away from taxi drivers and gives it to the speculators who own taxi licences, which very few taxi drivers can now afford.

It does so when these speculators charge drivers a shift fee of between HK$350 and HK$400 for the use of a car, which is multiples more than the financing cost of acquiring a Crown Comfort.

At my guess, but I can't be far wrong, about half of what you pay for a taxi ride actually goes to paying off taxi licence speculators who do nothing for you.

Wouldn't it feel good to knock them out of the way, to pay half of what you do for a taxi ride, and still have as good a car and a driver paid as much as before?

I'm not sure our government has the willpower to undo the mess it has created here, to make the required adjustments to the supply of taxis and the fares they charge. The speculators would scream murder.

But I do know who is doing it right under government's nose.

Thank you, Uber Taxi.