Friday, April 14, 2006

One Loser SOE + Another Loser SOE = World Class Enterprise

A plan to merge two government-owned entities, MTR (an underground rail corporation) and KCRC (a railway company), has finally got the green light to go ahead. Read the government press release here.

Funny thing is, commenting on the merger, our head of the government said that "The merger will create a world class Hong Kong railway company and consolidate Hong Kong's status as Asia's World City." Read all of his comments here.

Without any plan for full privatization down the road, how the merged entity (which continued to be a state-owned enterprise albeit a giant one) could be transformed into a "world class concern" is a mystery that even Sherlock Holmes would find it tough to figure out.

And if HK really needs to depend on a giant SOE to consolidate HK's status as Asia's World City, we better call Beijing up and tell them: Beijing, Beijing, we have a serious problem!

Problem down the road as I see it. To placate populists in the legislature, the government will try VERY HARD to lower the prices for both the MTR and KCRC. To avoid losses, the government will further distort the local transportation market through additional restrictions on other modes of transport to compete with the new entity.

If you cannot charge a market price to recoup your fixed costs, you have to increase the number of customers by forcing those people who would not ride on the rail if given another option to become new customers. This is so because the railway business has relatively high fixed costs compared with the marginal costs of serving another passenger.

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