MORE CHOICES BETTER SERVICE A Study of the Competition in the Personalised Point-to-point Car Transport Service Market 更多選擇 更佳服務 個人化點對點 交通服務市場競爭研究 Abbreviations HCP hire car permit HKTC Hong Kong Taxi Council ICT information and communications technology LegCo Legislative Council PTC Private Transportation Company PTSS Public Transport Strategy Study RTO Road Traffic Ordinance TCU Transport Complaints Unit TfL Transport for London Table of Contents Executive Summary (摘要 ) . i-xiv - English version . i-viii - Chinese version (中文版 ) . ix-xiv Chapter 1: Market Overview, Issues and Recent Developments . 1 1.1 Introduction . 1 1.2 History of Personalised Point-to-point Car Transport Services in Hong Kong . 3 1.3 Current Market Environment . 9 1.4 Recent Developments . 12 1.5 Consumers Opt for More Choices . 16 Chapter 2: Market Analysis . 20 2.1 Usage of Taxi Services in Hong Kong .20 2.2 Analysing Economy-wide Demand .22 2.3 Substitution by Other Transport Modes .25 2.4 Three Service Market Segments . 27 2.5 Matchmaker Economics in a Pre-Booked Market .29 2.6 Competition between Personalised Point-to-Point Car Transport Services . 31 Chapter 3: Global Developments . 35 3.1 Ways of Dealing with E-hailing Services .35 3.2 Creating a Level Playing Field for E-hailing Service and Taxi Service .36 3.3 Minimal Regulatory Disruption in Personalised Point-to-Point Car Transport Markets . 41 3.4 Protectionist Measures for Incumbent Taxi Service Providers . 43 3.5 How E-hailing Services Enter the Market . 45 Chapter 4: Towards Market Reform . 47 4.1 Regulating Transport Services in a Digital Age . 48 4.2 International Experience and Government Initiatives . 51 4.3 Searching for the Right Model .52 4.4 Measures to Improve Taxi Services.58 4.5 Conclusion .60 Annex 1: Regulatory Requirements of Taxi Service and E-hailing/Hire Car Service in Some Jurisdictions . A1-A15 i Executive Summary Introduction One of the major disruptive forces to economies around the world has been the acceleration in scope, scale, and economic impact of information technologies using the Internet. New business models have emerged finding new ways of providing services to consumers that are overturning the status quo of existing trade practices in different market places through utilising new technologies. The Hong Kong taxi industry is one of many facing this challenge. E-hailing services are a global phenomenon where service providers make use of communications technology to provide more personalised and efficient services to those consumers who are seeking personalised point-to-point car transport. This is usually marketed as a “ride-sharing business” in the context of a sharing economy. The E-hailing service providers typically call themselves transportation “network” companies because their services are based on the network they create as “matchmakers” that brings passengers and drivers together. However, the rapid growth of these network companies has raised concerns due to the market disruption caused to incumbent taxi operators, and the implications on the long standing regulatory regimes that have been introduced to address legitimate concerns on passenger safety and welfare. In Hong Kong, the Governments position is clear that these ride-sharing businesses fall outside the current regulatory regime and are illegal. As such there is not as yet any specific regulatory framework to govern their operation. Consumer Expectations The Consumer Councils experience through its role in conciliating consumer disputes indicates that the quality of taxi services has been a matter of consumer concern.1Complaints and suggestions on taxi services have continuously increased. In 2016, 10,357 complaints and suggestions for improvement were recorded by the Transport Complaints Unit (TCU) of the Transport Advisory Committee, representing 46.4% of the total complaints and suggestions made about public transport services, despite the fact that taxis only contribute 7.4% (0.93 million passenger trips per day) of public transport patronage per day in Hong Kong. The overwhelming majority of these related to malpractice of taxi drivers, such as failure to take the most direct and practicable route, improper driving, drivers behaving other than in a civil and orderly manner, overcharging and refusing hire or refusing to drive to a destination. Close government regulation of the taxi industry has extensive historical origins. These have arisen due to concerns for consumer safety and welfare, in addition to recognition that maintaining efficient personalised point-to-point car transport can bring substantial benefits to the economy as an adjunct to other forms of public transport such as buses, trains and trams. 1The Council received 28 complaints on taxi services from 2015 to September 2017. ii Recent consumer surveys on taxi services reflect concerns for improvement in terms of service quality and a desire for more choices. In 2016, the Government commissioned a telephone survey to gauge public views on a proposal it has put forward for the introduction of a franchised taxi service in Hong Kong (as an answer to the threat posed by E-hailing) to operate in competition with the current taxi industry, by offering higher standards of service albeit it at higher price than the standard fare by common taxis. This survey indicated there is support for a more personalised service at premium. The E-hailing firm Uber also commissioned a telephone survey in June 2017 to collect public views on how to improve Hong Kongs personalised point-to-point car transport service. It claimed that a majority expressed a view that there should be more choices for point-to-point car transport services; and that the Government is not doing enough to support innovation and should provide a legal framework to regulate E-hailing. Recently a taxi industry commissioned survey has indicated that the most highly ranked items of concern for consumers were in relation to driver's professional attitude; the use of the most efficient or passenger-specified route; compliance with taxi regulations; familiarity with the passenger destination and traffic conditions; and hospitality. Moreover, it is to be expected that many tourists who come to Hong Kong will assume, because of Hong Kongs reputation as a “world city” and the common usage of E-hailing worldwide that they can also use E-hailing services concurrently with traditional taxi services. It is reasonable to assume that some of these tourists will attempt to use that type of service, particularly if the traditional taxi service is not available or meeting their demands; and those entrepreneurs will also continually attempt to provide the service regardless of questions as to illegality. Projected Demand Demographic research indicates that Hong Kong can expect that demand for personalised point-to-point car transport services will increase in the future, given not only general population growth, but an increase in the number of seniors and disabled persons who rely to a large extent on these services. Nevertheless, current figures on taxi usage indicate that demand for taxi services is actually stagnating. This is despite the increasing population and numbers of seniors and disabled persons, in addition to the overall benefits found in this mode of transport, such as efficient transit ridership and moderate fares for taxi services; as well as increasing demand for transport services to the airport. iii An argument arises therefore that the market may not be operating at an optimal level to satisfy consumer demand. Given the concerns expressed through consumer surveys, and the complaints and suggestions recorded by the TCU, it can be reasonably assumed that without addressing issues such as availability, quality of service, and price competition, the development of the personalised point-to-point car transport service will not be able to meet market demand and there is an expectation that there will be a shortfall between demand and supply, leading to general loss in consumers economic welfare. Lack of Competition in Personalised Point-to-Point Car Transport Services The market for personalised point-to-point car transport services can be classified into three broad market categories: the stand market segment, the hail market segment, and the pre-booked market segment. These three categories of personalised point-to-point car transport services are close substitutes, and their demands are interrelated. More supply in the stand and hailing segments will lower the time costs for consumers, resulting in a higher turnover. On the other hand, better services in the pre-booked market segment, that mirror benefits not found in the other segments, will attract more consumers to shift to this segment. In Hong Kong, only taxis are allowed to operate in the stand market segment and the hail segment. Because consumers are served on a first-in-first-out basis at taxi stands or by randomly catching taxis on the street, consumers can only seldom exercise choices, and no effective competition existed between taxi operators in these segments. In addition, consumers view taxi services as one homogeneous good of supply because all taxis look alike. They form their expectations about the taxi service based on the taxi market, rather than on the individual taxi they are going to use. Under such a market environment, taxi drivers have no motivation to improve their services to build customer loyalty, and neither is there any market mechanism that allows consumers to avoid substandard taxi drivers. Hire cars only serve the pre-booked segment and compete with those taxis serving in the segment. Call-centres provide matchmaking services for hire car and taxis in the pre-booked segment by coordinating orders between vehicles/drivers and passengers. However, their scale of operations are usually small and hardly match E-hailing platform in terms of the range of information they can provide on vehicle choice and driver, customer feedback and the route involved. Although hire cars can adjust the price and quality of their services, the supply of hire car services is too small to create competition in the wider market. Moreover, taxi fares are regulated and there is no price competition between taxis. iv The Rise of E-hailing Services It is important to note that an E-hailing service is a “matchmaker” business and not a direct provider of taxi services. In this context, E-hailing service providers deliver many features that are attractive to consumers, such as reduction of search costs, more direct control on supply to meet demand, better choice leading to possible increased quality of services; and inducing more price competition in the market; all of which bring economic benefits to consumers. Although there are some allegations that E-hailing service providers derive their competitive advantage from exploiting loopholes in regulatory requirements and that they lower standards of consumer safety/privacy, E-hailing services provide passengers with an effective mechanism to provideimmediate customer feedback. The resulting competition from this feedback is likelyto drive up standards, not only amongst other E-hailing service providers, but also forthe rest of the market that competes with E-hailing service providers. As such, thereis an argument that governments should support and encourage an innovative andcustomer-centric evolution of the personalised point-to-point car transport industry.Nevertheless, from a public policy standpoint, it must be recognised that theincumbent business interests that have also evolved over many years due to pastgovernment management of the industry, and that could restrain the development ofbenefits for the wider society, also have to be taken into account.Opening up the market to free competition or constructing a level-playing field and regulatory environment for both taxis and E-hailing services to compete have been adopted by different overseas governments. The Government has put forward a proposal to create a limited number of franchised taxis that will focus on improved choices and quality of service. While it is also an