Fair regulation, not fare regulation

It doesn’t take an economist to work out that something is wrong with the structure of taxi markets in Australia. All you have to do is look at the taxi ranks of our major cities.

If it is a Saturday night and you want to hire a taxi in Melbourne or Sydney, chances are that you will be waiting at the taxi rank for quite a while because there simply aren’t enough taxis available. If it is a Monday afternoon, you may find there are plenty of taxis waiting at the taxi rank because there simply aren’t enough customers who want to hire them. So basically we have a situation where sometimes there are long lines of customers waiting for taxis and at other times there are long lines of taxis waiting for customers.

Could it be that the structure and regulation of taxi markets in Australia is the cause of such problems? The answer to that question is a definite "Yes".

Over the past 20 years, the Australian economy has been subject to significant structural reform and deregulation, initiated by the Hawke-Keating Labor governments. The removal of restrictive regulations and the injection of competition into Australian industry explains the unprecedented increases in productivity, flexibility and economic growth of the past 15 years. However, throughout this time taxi markets in all our major cities have managed to avoid any significant reform.

While state and territory governments have conducted reviews and studied reform options, so far the only government to deregulate their taxi market has been that of the Northern Territory. No other state or territory government has taken any significant steps to deregulate taxi markets. Even Jeff Kennett, who is often lauded as a resolute reformer of the Victorian economy, was not determined enough to properly reform the Victorian taxi market. The extent of his “reforms” was to require all taxis to be painted yellow (intitially he wanted them to be pink) and introduce dress codes for drivers.

There are three main aspects to the regulation of taxi markets in Australia, fare regulation, entry regulation and safety regulation. Fare regulation involves the government determining and mandating fare levels in the market. Entry regulation involves the government restricting the number of taxis in any given market. Safety regulation involves the government mandating rules and standards for taxis and taxi drivers relating to matters such as vehicle maintenance, security surveillance and driver education.

While some form of safety regulation is appropriate to minimise safety risks to taxi customers and taxi drivers (for example, having basic safety standards for taxi vehicles and licensing standards for taxi drivers), there is no credible justification for fare or entry regulation. Fare regulation hinders flexibility that is necessary for the taxi market to adequately respond to different market conditions. There are long lines of customers waiting for taxis at certain times and long lines of taxis waiting for customers at other times because fares cannot be adjusted to respond to different levels of demand for taxis. If they could then they would be increased when demand is high and decreased when demand is low. Entry regulation also hinders flexibility as the number of taxis in the market cannot increase as the demand for taxis increases with economic growth.

While the size of the Australian economy increased by nearly 400 per cent since 1985, the number of taxis available in Melbourne has increased by only 6 per cent. The fact that the number of taxis is effectively static explains why the price of taxi licences is so exorbitant and why their price continues to increase.

In Melbourne a licence currently costs $346,860 compared to $133,100 in 1993. Prices are at similar levels in Sydney and other major cities. Taxi industry bodies consistently lobby governments to increase taxi fares pointing to the low level of taxi driver incomes, which average between $8 and $15 per hour in Melbourne. These low incomes can be explained by the fact many taxi drivers do not own their taxi licences and must therefore rent them from the various individuals and companies that do own them. Given the cost of a taxi licence this rent is substantial and has the effect of lowering taxi driver incomes.

Given these facts, why are governments so hesitant to undertake any major reform of taxi markets? There are two main explanations for this hesitation: first, many governments have a flawed belief that deregulation would not produce a better outcome in the taxi market; second, because of anxiety about the need to pay compensation to parties that would be adversely affected by any reform.

In relation to the first point, governments and taxi industry bodies often selectively cite studies to support their claim that deregulation in not a desirable option. For example, the Victorian Government announced in 2002 that it would not undertake any significant deregulation of the Victorian taxi market. It rather opted to make available a small number of additional restricted taxi licences that can only be used during times of peak demand, such as evenings and weekends.

While such a reform is a step in the right direction, it is still a continuation of the policy of entry regulation. In support of its decision, it cited two studies which concluded that deregulation is not an advisable option. This is despite the fact the independent National Competition Policy review conducted for the Victorian Government by KPMG in 1999 recommended the removal of all entry restrictions in the taxi market. The reviews conducted for the state governments of New South Wales and Western Australia made similar recommendations.

The facts are deregulation in the form of the removal of fare and entry regulation delivers significant benefits. The review conducted in Victoria estimated that entry regulation costs taxi customers $72 million every year. While this is just an estimate based on economic modelling, there are also practical examples of the benefits that deregulation has provided for consumers.

For example, in the case of the Dublin taxi market, entry regulation was removed in 1997. Subsequently, between 1997 and 2001 the proportion of customers waiting for a taxi longer than five minutes decreased from 72 per cent to 51 per cent. In 1997 20.3 per cent of hours surveyed had waiting times of less than five minutes and by 2001 this had increased to 60.2 per cent. In 1997 the average waiting time for a taxi after midnight was over 30 minutes in 43 per cent of the hours surveyed and in 2001 this had decreased to 6.2 per cent. Significantly, just under half of taxi customers surveyed believed that taxi services had improved between 1997 and 2001, while only 6.2 per cent believed they had worsened.

Perhaps the main explanation for the reluctance of governments to deregulate their taxi markets is the issue of compensation. As taxi licences currently trade for $346,860 in Melbourne and at similar levels in other major cities, governments point out they would need to compensate taxi licence owners for the inevitable loss of value that would result from deregulation, in particular the removal of entry regulation. Given there are 3,049 licences currently available in Melbourne, even compensating taxi licence owners at half the licence value would cost over $500 million.

This is obviously a significant disincentive for governments to move towards a deregulated taxi market structure. While paying out compensation may be viewed as a necessary for political reasons, it is doubtful whether it is necessary for legal reasons. Under the Australian Constitution, the government can acquire property under just terms, which basically requires them to pay some sort of fair and equitable level of compensation in return.

However, it is debatable as to whether taxi licences are in fact property rights and even if they are, whether any change in government policy that affects their value would require compensation to taxi licence owners. There have been a number of decisions of the Irish High Court which have rejected the proposition that taxi market deregulation requires compensation for taxi licence owners.

In the decision of Hempenstall v the Minister for the Environment (1992), the High Court pointed out taxi licences are property rights created by law and are subject to the conditions created by law. One such implied condition is that the government may change the conditions under which the property rights are created. Therefore while changes to the conditions may affect the value of the taxi licence, such changes are a legitimate interference with property rights for which there is no legal requirement for compensation.

In the decision of Humphrey and Other v the Minister for Environment, for Local Government and the Attorney General (2000), the High Court followed the reasoning in Hempenstall and conclusively ruled that there is no requirement to pay compensation to taxi licence owners where a change in government policy effects the value of the taxi licence.

The most recent decision was that of Gorman, Kearns, and National Taxi Drivers Union v the Minister of State and the Attorney General (2001), a judicial review of the initial High Court decision in Humphrey. The court affirmed the decision in Humphrey and further stated that deregulation only minimally interferes with property rights because taxi licences are not expropriated by the government, taxi licence owners can still dispose of them and use them as they see fit. The court viewed this as a further argument against compensation.

In further support of the approach of the Irish courts, Irish banks do not lend against taxi licences as a primary security, because the value of licences is subject to future changes in government policy. The position is the same in Australia with major banks such as the Commonwealth Bank only lending against taxi licences if some other form of primary security is provided. Given these developments, governments cannot maintain that compensation is an impediment to reform. It is likely that they simply wouldn’t have to pay any if they didn’t want to.

There is a strong case for deregulating taxi markets in Australian cities. Of course, like any process of reform it would not be without difficulty. But reform is primarily about benefiting consumers rather than satisfying industry bodies, and with the massive costs imposed on consumers by the current industry structure, change is necessary. The Bracks Government in Victoria recently published a document discussing options for a third wave of economic reform in Australia, comprehensive reform of the taxi industry should be included as part of this third wave.