Beginning April 1, cab fares as regulated by the government will increase from RM0.10 per 115 m to RM0.25 per 200 m. That’s about 43.8% fare increase. The flagfall cost remains at MYR3.00 for the first kilometer. There are other hikes but I want to focus on this particular case.
Nobody likes a fare hike. Whatever sense it makes, paying for something extra for the same thing is not something I enjoy. But cab fares have not been hiked for six years and I think, it is only fair to the drivers to hike it, especially when their real wages have definitely come down.
I do take cabs from time to time and I do talk to them, asking them about when do they wake up, when do they finish, how much do they make, how much rent do they pay for the car, do they own the car, etc. It is not an easy job. So, I will not complain too much about it and I do not think I have the right to say anything bad because as a consumer, I have benefited from the six years of no hike.
But Institut Rakyat thinks otherwise and they failed to notice the effect of compounded rate. From The Malaysian Insider:
“Having failed to conduct a fare review for the last six years, SPAD has now opted for a sharp and sudden increase,” Yin said in a statement.
He said this steep increase represented a regulatory failure on SPAD’s part, as the agency was supposed to conduct fare reviews every two years with focus on small and manageable increments of 10%.
Yin said SPAD should have considered a gradual increase in fares to balance both consumer and business interests, which would help promote the use of public transport in the country.
He said a gradual phase-in of the overdue fare increase, at 10% at regular intervals over a period of one to two years, would be fairer than making up for six years in one fell swoop.
He reckons it would be fairer for the consumers if the authority does a small hike at regular intervals instead of what will be done now. [The Malaysian Insider. Fare hike too sudden, steep, says think tank]
He thinks it is better for the consumers if the authority “does a small hike at regular intervals instead of what will be done now.”
I think his analysis is wrong. Here is why.
If you look at the mathematics, for passengers, it is quite clear a frequent rate increase of 10% every one or two years is actually a worse hike-mechanism versus a 44% increase after six years. Worse in the sense that total fare paid in the former case is larger than the those paid in the latter one. There is a compounded effect here that makes the seemingly small 10% increase more expensive than the 43% hike.
Here is a graph where I demonstrate just that:
The light blue line indicates how much total cab fare you would have paid if the rate had increased by 10% every second year.
The red line is the current scenario, explaining the total cab fare you have paid.
The assumption here is that you travel 5,000 km per year. The flagfall cost is ignored for ease of calculation. Having flagfall cost included does not change the analysis by much; remember, the flagfall cost does not change and only the rate changes. Also, just one person passenger with no other charge like baggage, toll, whatever.
As you can see, the blue line is consistently above the red line. That means you would have paid more if the rate was raised 10% every two years instead 44% once in the sixth year. In fact, the dark blue bars show exactly how much extra you would have paid in total.
For instance, in Y6 which is 2015, under the 10% increase every 2 year regime, you would have paid MYR3,976 fare in total over the six years. Under the 44%-hike-done-after-6-years regime, your total would be MYR3,715 in the same period, MYR261 lesser than the 10% case. You can see that in the chart.
So, the right conclusion here is that the 2-year-hike regime would be fairer to cab drivers but the riders would not like it by one bit. The 6-year-hike regime would be unfair to the cab drivers but it saves riders money.
The 44% figure is of course huge compared to a mere 10%, and superficially, it is easy to say we prefer 10% to 44% rise. But that is falling into a psychological trap prepared by the gods of compounded rate. Our job is to resist that psychological temptation.
p/s — if you are interested, I have posted the simple model here
(updated. Please read the second postscript). There are at least one or two more dynamics I have left unexplained. You can figure that one yourself. I want to go home.
pp/s — And it is the day after. I ran further modelling (see tab Model 2 in the spreadsheet) and I have to say the conclusion is specifically true for the last six years. If we put the two 10%-2 -year and the 44%-6-year series head to head and run it up long enough (unlikely to happen because the authority’s plan is to hike it once every two years), the compounded effect of 44% eventually catches up with the more frequent 10%: to be exact, 12 years later in 2027. But the 44% hike seems like a one-off event, and so, the failure to hike it once every two years is a boon for riders. Thus, as a passenger, on the balance over the past six years, I would not complain too much. And just to satisfy the cat, I also added a yearly increase in the model: a yearly increase at 10% makes the total fare paid zooms away, if I may exaggerate, exponentially, and never to look back. Clearly, a yearly hike is the worst option here and if it is to work to riders’ liking, the yearly increase has to be much, much lower for it to make sense.