Public transport fares are on the rise. They are arresting, because public transport is considered a public utility. The impending fare raise by the MTR has attracted much criticism. Critics say the MTR is already making money, with its 2010 profit at HK$12.172 billion, much higher than that of 2009. Critics say the proposed fare increase is not justified, and that it will prompt other companies to raise prices too.
The proposed increase is based on a fare adjustment mechanism that makes reference to the consumer price index and the wage cost index in the transport sector. The proposed rate of increase of 2.3 percent is smaller than the headline inflation of 3.6 percent and the inflation rate applicable to the lower 50 percent of the Hong Kong population, which was 3.9 percent in February.
Just as the critics predicted, other public transport fare increases were announced shortly after the announcement of the MTR fare increases. Six outlying island ferry routes will rise an average of 10 percent from April. Various light buses are applying for fare increases too.
As much as we do not like inflation, however, to argue that a company should not raise fares because it is making profits is not right. I would argue that a profitable company should have the right to raise fares in step with inflation. To argue otherwise would completely destroy any incentive to improve efficiency, and that will not be good for society, because inefficiency is wasteful and does no one any good.
Still, I have in this column argued in the past, that we should reduce fares for long trips, which often cost more than HK$20 one way, and which are harmful, in particular, to low income people who tend to live farther away from the city, leading to their becoming segregated. But this should not be at the expense of the shareholders who own the companies. If there is a public policy justification for a reduction in fares, the public should bear the cost, not the private companies.
Some political parties propose that the government use the dividends drawn from the shares it owns to subsidize fares, so that fares need not rise. A spokesperson from the Transport Department warns against possible inefficiency arising from such subsidies. Professor So Wai-man from the Hang Seng Management College thinks the subsidies could lead to a vicious circle of fare increases, averted through subsidies, with the result that taxpayers lose out over the long run.
Actually, the "subsidies" need not have any adverse consequences on efficiency at all, if they are carefully designed.
In particular, if subsidies are in the form of a lump sum payment that is not related to earnings performance at all, and if such lump sum payments are based on revenue forgone due to a specific policy-driven fare arrangement, there will be zero adverse consequences on efficiency.
I am, in particular, concerned about the effects of the proposed round of fare increases on already very onerous fares for long trips, such as between Tin Shui Wai and Central. The one-way fare on an Octopus card is HK$22.4, which will be raised to HK$22.9. This will only worsen the segregation problem. Rather than raising such fares even more, we should reduce them. The revenue implications of this can be worked out and a yearly lump-sum payment can be made to offset the projected revenue losses from the fare reduction. Whether this subsidy comes from the dividend payout to the government or from the general revenue is immaterial.
Some people are concerned about government "subsidizing a private company". This thinking sidetracks the issue. The important point is that the proposed subsidy is not a subsidy to make the operations of a private company more profitable than it is now. It is a price to pay to change the fare structure of a private company, in order to achieve clearly identified social objectives. There is no "transfusion of benefits" to a private company.
It is important, in matters related to public policy, not to be bogged down by dogma or by entrenched beliefs. The single most important consideration is whether a proposed arrangement will further the public interest. Reducing fares on long trips will enhance social inclusion, will truly make more jobs within the reach of people who live far away, and will promote more efficient land use. As I have argued before, public fares typically exceed true marginal social costs by a wide margin, and the deviation is greatest for the longer trips. Given that the West Rail is already up and running, we want it to be better utilized. Lower fares will certainly improve the utilization rate, and with higher utilization rates, the MTR may actually be able to collect more advertising and leasing revenues from the shop spaces along the railway line. I do hope the MTR and the SAR government will consider this proposal seriously.
The author is director of the Centre for Public Policy Studies, Lingnan University.
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