(This essay was published in South China Morning Post on 7 September 2016.)


The taxi industry is in decline. Over the past decade, daily trips have fallen from 1.3 million to 1 million while the number of taxi licences has remained steady at 18,138. The industry, with few exceptions, delivers a low quality commoditized service and passenger complaints are large and rising.


Most taxi drivers earn H$15,000 each month – less than lorry or bus drivers – and rent their vehicles from taxi companies on a shift basis. One reason why their incomes are so low is that taxi drivers with permits far outnumber licensed taxis – currently there are 40,000 taxi drivers.


But there is another reason: most taxi license owners are not interested in managing their fleet of cars to deliver quality service.


Taxi companies rent out cars on demand to any licensed driver that walks into their offices. Without active management, there is no incentive for taxi drivers to perform.


This sorry state of affairs is completely a result of government regulatory failure. So what is to be done when passenger complaints mount, taxi rides decline, and competition from ride sharing companies enters the market?


Last June the government announced an experimental scheme under which 600 premium taxis will be introduced to the city. These taxis will be distributed among three operating franchises and operate under the same old regulatory framework that fixes both the number of cars and their tariffs, except that better service quality will be mandated through licensing requirements.


This scheme is a positive signal that government has finally responded to rising market demand at the high-end, but it has shortcomings. It does not try to tackle passenger complaints about bad service and it has infuriated drivers who see premium taxis as a threat at a time when the industry is trying to improve.


To ensure compliance with the new requirements, the service performance of the new class of premium taxis will have to be vigilantly monitored through the collection of detailed passenger trip information. But if that is possible now, why was it not done before? Surely widespread passenger complaints should have been sufficient reason for government to act.


The current system has its roots in the 1960s, when licensing and fixed fares were introduced to combat price gouging by unscrupulous taxi drivers.


The resulting high tariffs led to a proliferation of pak pais (illegal taxis) that competed against licensed taxis. In a bid to eliminate these, the government required all taxis from 1974 to be painted with easily identifiable common red and silver colors.


As a result, all taxis also became indistinguishable from each other, which made it impossible for taxi companies to compete on service quality through visual signals of their brand.


Later, as Hong Kong’s growing prosperity made taxi rides more affordable in the 1980s and early 1990s, taxis became a major user of road space and the most important cause of traffic congestion. In 1994, the government decided to stop issuing new taxi licences to constrain supply, but this had the effect of turning taxi licenses into income-generating financial assets. Speculators and investors bought up the licenses with no interest in managing their fleets. Service quality declined progressively.


In response to concerns about service, some taxi drivers have formed private taxi clubs that have loyal customers but are illegal.


Ride-sharing technology could open up competition in the industry even more and be a game-changer if government allows a partial price decontrol of taxi tariffs.


For that potential to be realized, all the government has to do is to allow price deregulation for online contracting activities (and call-centers too), but retain the controlled price for taxi rides hailed down on the streets. The latter would provide drivers and passengers with a good signal to minimize price gouging and search costs under circumstances where prior price negotiation is absent or difficult.


Since taxis already have a history of forming clubs on their own, the industry should not find it difficult to reorganize under this regime. Competition would flourish. Uber too could become part of the competition. Consumers already can choose from more than 10 taxi apps that allow them to search online for a taxi and connect more easily with drivers, including one recently introduced by the industry itself.


The new regime would provide a better regulatory framework for reflecting the fluctuations in demand and supply by time of year, time of day, location and other market conditions. Service quality will have an opportunity to improve across the entire industry. Cruising on the streets would also fall thus lowering emissions and reducing congestion.


The present regulatory framework has served its purpose. It is time for a change.


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