There has been a public outcry arising over the decision by MTRC to raise fares while the company continues earning handsome profits. Net profit in 2009 beat expectations and rose to HK$9.64 billion from HK$8.28 billion. That's an increase of 16 percent in the year. Those who object to the fare increase say that improved profitability means the fare increase cannot be justified. They argue that MTRC provides an essential service and the company should display a better sense of social responsibility.

This logic is badly flawed and can be dangerous.

The logic is flawed not because the fare increase, at 2.05 percent, is small and therefore not burdensome. According to the latest statistics from the Census and Statistics Department, the average wage rate increased by 0.8 percent in nominal terms in December 2009 over a year earlier, representing a real wage decline. I submit that many workers do not enjoy salary increases at all though they are facing escalating prices. The 2.05 percent fare increase can make life much more difficult for them.

The logic is nevertheless flawed because helping the poor is a policy goal that should be separate from the function of MTRC. Even though MTRC will do well to offer - as it does now - the elderly, students, and the disabled fare concessions, as part of its Corporate Social Responsibility initiative, MTRC cannot identify who is poor and offer concessions to them.

Requiring a profitable company to surrender its justified profit will remove any incentive for the company to lower costs and to improve its profitability through innovation. This will run counter to the economic principle of preserving the incentives for efficiency.

There is already an established mechanism for MTR fare adjustment, and the company is abiding by this mechanism, which has the blessing of the Legislative Council. Under that mechanism, any increase should be based on a formula linked to changes in consumer prices and transport wage indexes. Under the formula, a 1.5 percent or higher increase based on the two indexes will trigger an increase. Should the increase be less than that, it may be carried over to the following year. With last year's allowable adjustment of 0.7 percent added to what is allowed this year, a rise in fares is justified.

Rules should not be changed arbitrarily after they have been drawn up and agreed upon by all the key stakeholders.

If it is judged that the poor should be helped to manage the fare increases, perhaps the government should allocate public funds for the purpose. One logical development is to extend the current travel subsidies available in designated districts for the working poor. Whether or not this should be done will depend on the benefits of such a scheme versus the benefits that alternative uses of the funds (such as healthcare, education, legal aid, housing, elderly care, etc.) can bring.

The author is director of the Centre for Public Policy Studies, Lingnan University.

(HK Edition 04/01/2010 page1)