Uber’s arrival in Hong Kong drew fierce protests from the taxi industry.

Meanwhile, the service quality of taxis has been a widespread concern. Complaints about taxi drivers being rude, refusing hire or overcharging have been reported.

It’s not surprising that Hongkongers are disappointed with them and are turning to Uber.

The problem is the structure of the taxi licence market.

Taxi licence prices have been on the rise in the past 12 years.

There are 18,138 taxi licences in Hong Kong and more than 40,000 drivers.

The top 10 taxi owners alone held more 1,900 taxi licences in 2015, according to Taxi Exchange.

The biggest owns as many as 592 licences to operate in urban areas and 161 in the New Territories.

Most taxi drivers are self-employed, low-income people from disadvantaged households.

They rent taxis from dealers and owners and have little bargaining power.

Whenever the government approves a fare hike, taxi owners often raise their rental fees, depriving taxi drivers of any potential benefits.

After deducting rent, fuel costs and other expenses, a taxi driver often ends up with a take-home pay less than the minimum wage.

In the past 10 years, taxi divers have not seen any significant improvement in their real income, according to a study by the Polytechnic University.

By comparison, Uber enjoys certain advantages because of a regulatory vacuum.

It does not have to deal with the huge cost of acquiring a taxi licence and are able to charge higher fares.

Given a larger profit margin, it should surprise no one that Uber can afford better services.

If taxi drivers could enjoy the same privileges and worry less about their livelihood, they would be able to offer a higher standard of service.

The government is considering so-called “premium taxis” by granting franchises to companies that employ drivers, not merely rent out taxis to them, under a centralized management.

But regulators must first address certain issues.

For instance, are “premium taxis” supposed to replace all taxis？ If not, will there be “non-premium” taxis？

Given that centralized management is capital-intensive, there’s a chance big companies and dealers will dominate the premium taxi industry.

In view of public demand for such services, the government should not put up unreasonable barriers.

It should allow a certain number of taxi licences to be converted into hire car permits.

More premium vehicles should be allowed, providing more choices for commuters and promoting competition in the taxi industry.

The controversy surrounding Uber comes from the fact that regulations often lag technology.

Alan Stephany, founder of JustPark, which operates an app that matches drivers with parking spaces, said Uber and other technology companies try to “get big quickly” in order to beat regulators.

Last year, Uber was valued at more than US$50 billion.

Without a doubt, the government needs to update regulations to avoid stifling innovation but it is also important to protect public safety and interest by establishing reasonable standards.

The Hong Kong government should welcome new technology players but it has no obligation to cater to their commercial interests and help them rack up enormous profits.

Darrel West of the Brookings Institution wrote that established business models “should not be punished for complying with regulations, nor should new businesses be punished for innovating”.

The government should treat technology giants and law-abiding smaller businesses fairly to overcome the policy challenges brought about by new technologies.

Note: This article has been published on EJ Insight