Introduction

The Transport and Housing Bureau set out its proposal on franchised taxi services in a Legislative Council Panel on Transport Discussion Paper on 17 March 2017 (the “Proposal”), and the Competition Commission (the “Commission”) was invited to advise on the competition implications on the proposal and it gave its advice in March 2019 (the “Advice”). On 16 April 2017, the Executive Council advised the Chief Executive ordered that the Franchised Taxi Services Bill (the “Bill”) should be introduced into the Legislative Council, and the Transport and Housing Bureau outlined the Bill in the Legislative Council brief dated 17 April 2017 (the “Brief”). However, the concerns raised by the Commission in its Advice did not find way to the Bill and the Government did not adopt the alternative approaches suggested by the Commission.

The idea of franchised taxis

There have been complaints about the quality of taxi services throughout the years, and at the same time, there is a growing demand of personalised and point-to-point passenger services through the use of car-hailing mobile applications. There are over 18,000 taxi licences, which are all permanent licences and were not issued with conditions relating to service quality. As a result, the Government cannot impose penalty through the current licensing system should there be complaints of unsatisfactory taxi service. In order to address the public discontent and to meet the public demand, the Government finds the introduction of franchised taxis as a new regulatory regime as a way out, because the performance of franchised taxis would be subject to government’s supervision through franchise terms.

Fare level

In the Proposal, the Government proposed to set the price that consumers were required to pay for franchised taxi services at 50% above the current price of licensed taxis. The Government was of the view that there was a demand for better quality service at higher rates. In this regard, the Commission, in its Advice, said that while everyone would expect higher quality service, it was counterintuitive to suggest that consumers would demand higher fares. The proposed fare level would leave consumers with no choice but to pay more for franchised taxi services than if the Government allowed for the price to be set freely. Franchise holders should be encouraged to compete to provide better service at a lower price. Although that might have an impact on the licenced taxis, fair competition does not require the Government to set the fare level to protect existing interests, and the Government should consider amending the licenced taxi regime to give the owners more flexibility in setting their charges in order to allow competition.

Despite the Commission’s suggestions, the Government continues to maintain the fare level of 50% above the ordinary taxi fare in the Bill. According to the current flagfall fare of urban taxi at $24, the proposed flagfall fare of franchised taxi would be $36. The Government justified this on the basis that since the operating costs of franchised taxis would be higher, the fare level should be higher in order to offset the higher operating costs so as to incentivize operators and drivers to maintain service of better quality. Further, the Government maintained that the new franchised taxi regime was in nature different from the licensed taxi regime, so if the franchised taxis were to be allowed to set their charges freely, that would alter the nature of franchised taxi service. The Government also rejected the idea that the market will be less competitive upon the introduction of franchised taxis and said that the licenced taxis would be encouraged to improve their service quality.

Number of franchised taxis

With regard to the number of franchised taxis, the Government proposed to set the limit at 600 in the Proposal. The Commission suggested that if the franchised taxis which provide higher quality service were to be allowed to set their charges freely, they would likely to be popular and the Government should reassess the total number of franchised taxis to reflect the demand. As mentioned above, the Government rejected that the franchised taxis should be allowed to set their charges freely, and the Government said, in the Brief, that a cap on the total number of franchised taxis at 600 was “necessary to provide a reasonable ground for the Government to assess the passengers’ demand for the new services, financial viability and operation efficiency of franchised taxi operators, impact on the business developing of ordinary taxis and livelihood of ordinary taxi drivers etc.” Further, the Government made reference to the taxi trade’s concerns on the impact of the business development of licenced taxi when setting the number of franchised taxis in the Proposal and the Brief. The Commission opined that the Government had not specified what that development was in the Advice, but the Government continued to make such vague reference in the Brief.

End-of-franchise competition

In the Advice, the Commission also raised concern as to the end of franchise competition and said that “after the first round of competition, the incumbent franchise providers will become entrenched…While there might be tenders every five years in practice the existing providers who own all the necessary assets and employ the drivers may be at such an advantage that the role of competition to drive ongoing innovation and higher quality service will no longer apply”. The Commission suggested that strict end-of-franchise transition provisions that would deal with the incumbent providers’ existing assets and employees could be employed to address the concern. The Government did not address this concern in the Proposal, and in the Brief, the Government only mentioned that “upon the expiry of franchise, an operator of franchised taxis must compete with other interested parties in bidding for a new franchise” through open tender, without addressing the Commission’s concern.

Conclusion

As an alternative approach, the Commission suggested providing for “the introduction of a limited number of franchised taxis with some threshold service and quality requirement but without setting the fare” and “the market could be left to decide the number of taxis each franchisee holders” while “an upper bound could be set on the total number of taxis each franchisee could operate”. While acknowledging the Commission’s concerns, the Bill seeks to implement what was proposed in the Proposal, including the set fare level, and the government did not address the concerns raised by the Commission, let alone adopting the Commission’s alternative approach.