The MTR Corporation announced late last month that it would raise its fares by another 2.3 percent when the Fare Adjustment Mechanism takes effect in June. At a time when consumer prices are soaring, the company has decided to raise MTR fares although it booked HK$10 billion in profits last year. Little wonder it seemed to become public enemy No 1 immediately.
This is pretty much expected, as the Hong Kong public today is automatically against all hikes in money matters except their personal income. The anti-price hike mentality has in fact a populist hue to it but that is quite normal here of late.
Many people, speaking from a compassionate point of view, have concluded that the MTR Corp should not raise subway fares. With a 76 percent stake, the SAR government is the largest shareholder of the MTR Corp and local residents naturally assume the government wields the decision-making power when it comes to fare hikes. By the same token, people kind of look at the MTR Corp as a "State-owned enterprise" because it is majority-owned by the government. As such it is expected to serve the people rather than hurting their interests, hence the widespread opposition to MTR's fare hikes two years in a row.
On the grounds of lawfulness and reason, however, the MTR Corp has the right to raise fares according to relevant laws and regulations. The subway operator slashed its fares by 13 percent when it merged with the Kowloon-Canton Railway Corp (KCRC) in December 2007 and has lifted fares twice since by a little over 2 percent each time. In other words, the company cannot make up for its steep fare cut three years ago even with the planned 2.3 percent rise in June. A business has to be profitable to survive and has no reason not to adjust prices/fares upward when necessary. Besides, the planned MTR fare hike is below the current inflation rate, meaning it is "reasonable" on MTR's part.
The MTR Corp's role is unusual in that many people see it as a government institution and therefore believe profitability should not be its top goal. For a listed company this is in a way a case of mistaken identity. A listed company is under constant market pressure to make profits. It would be considered dereliction of duty from a business point of view if MTR management decides against raising fares according to law. It actually was a debate over "legality", "reason" and "compassion" when the company told the public it cannot demand discounts no matter what.
When the two sides of the debate are not on the same page, it is only natural for the MTR Corp to be seen as the "bad guy", whether it goes for fare hikes or not. So, how should we deal with the planned fare hike? Some people have suggested that the government set up a fare-stability fund, while some others proposed that the government reviews and approves the business operations of the MTR Corp like it does a franchise. Some even maintained the company should be "nationalized". None of these, I'm sorry to say, is a good idea.
First, a fare-stability fund is in fact subsidizing MTR patrons with public money, because the MTR Corp pays dividends to the government every year, which is part of the government revenue. If the government puts a certain amount of money aside solely for the purpose of stabilizing MTR fares, it really is no different from subsidizing fare hikes.
As for treating the MTR Corp's operations like a franchise, that would create another problem all together, as it is assumed that proponents of this idea hope to see the subway operator's profitability will be managed the same way as the two power utilities' or bus companies', so as to avoid big fare hikes.
The profit control of the city's two electricity suppliers, or the bus companies for that matter, has an upper limit set according to a particular return on asset (ROA) rate. In the MTR Corp's case however, the ROA rate is only 6 percent for a company worth HK$187.1 billion (its property business included). The ROA rate will be even lower if only train ticket sales were counted. If a profitability ceiling similar to the utilities companies' is imposed on the MTR Corp the subway operator would be under even greater pressure to raise fares. And be prepared to hear a lot of complaints from the MTR Corp if its profit limit is lower than the utilities firms'.
"Nationalizing" the MTR is not a good idea, either, simply because that would mean a return to what the system used to be - little pressure to make profits and perform well as a government-run utility. Is that really what we want?
Likewise, if we "nationalize" the MTR Corp just because we think its fares are too high, should we do the same to the bus companies when their fares go up? And, by the same token, should the fast-food chains be "nationalized" when we are convinced they are charging too much for meals? Many people automatically expect the government to come to their rescue whenever they feel price hikes are unbearable, without considering the moral risks of government intervention on the market.
It is this writer's belief that MTR fare hikes are inevitable however one looks at the matter and so is the demonizing of the subway operator as a result. The MTR Fare Adjustment Mechanism will be reviewed next year, five years after its introduction, but whatever new terms are made to reflect consideration for public sentiment, such as required reference to average pay raises when calculating fare hikes, will be of little benefit, since the users will always hate the operator for fare hikes.
The author is professor of finance and head of the Business School of the Hang Seng Management College. The article is translated from the excerpts of his article published Wednesday in Hong Kong Economic Journal.
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