Taxi industry inquiry
Adjustment policies in microeconomic reforms
Download 1.67 Mb.
|
- Navigate this page:
- Legal measures
- Property rights in taxi licences
- Right to compensation
- Economic measures
- Risk in taxi licence investment
Adjustment policies in microeconomic reforms The Australian and Victorian economies have undergone significant policy-induced reforms affecting a wide range of industries over the past three decades. As noted in a 2001 Productivity Commission research paper, Structural Adjustment — Key Policy Issues: Since the early 1980s, such [microeconomic] reforms have extended beyond trade liberalisation and improvements in statutory marketing arrangements to encompass improvements in financial markets, the regulatory framework for government business enterprises, Australia’s tax system, the funding and delivery of education, health and community services, regulatory arrangements for businesses, natural resources and the environment, labour market and industrial relations regulations, and the development and … implementation of National Competition Policy (NCP) reforms… The debate about the future direction of economic policy and reform in Australia highlights ... the development of implementation strategies to give effect to policy changes, namely: the circumstances in which there is a role for additional measures, beyond the social security and tax systems and other generally available adjustment measures, to support the implementation of policy changes, and the relative merits of each of the additional measures as aids to the implementation of policy changes.238 Proposed changes to the regulation of the taxi industry by this inquiry and several preceding reviews (particularly the National Competition Policy review of legislative restrictions on competition)239 ― fall into the category of reform the Productivity Commission referred to over a decade ago. The question facing the Victorian Government in implementing the inquiry’s reforms is: are there significant public policy issues involved in the likely pre-reform to post-reform adjustments in the taxi industry and, if so, what are the potential policy responses to address those issues? This is a complex question to which there is no clear-cut answer.240 An examination of the history of past government decisions on adjustments forced by policy decisions in other industry contexts reveals there is no definitive precedent. Governments have adopted various measures over time, including:
Governments have acted on a case-by-case basis, reflecting the particular circumstances of the industry concerned. This has resulted in inconsistency on adjustment issues across Australian governments. For example, when the egg industry was deregulated in New South Wales, compensation for the loss of value of egg quota holdings was paid to egg producers. The Commonwealth Government compensated dairy farmers as part of a deregulation package that, among other things, devalued market milk quotas. On the other hand, removal of licences held by importers for a range of quota protected manufacturing goods has generally not been accompanied by compensation. Indeed, many other activities subject to reforms that have devalued or removed rights have not been compensated: for example, the loss of income for members of the legal profession when some governments removed their exclusive right to engage in property conveyancing. Regarding adjustment issues in taxi industry reforms, there has also been inconsistency in past reforms undertaken by Australian and overseas governments. Different jurisdictions have taken different approaches as illustrated below.
The potential grounds on which additional policy measures may be taken to compensate or assist adversely affected industry participants fall into four categories:
Many submissions received from taxi licence owners essentially argued that the proposed policy change in relation to licensing breaches the ‘property rights’ in their licences and, therefore, they are entitled to compensation for the diminished market value of tradeable licences and the stream of income from leasing their licences. A number of submissions compared the effect of the taxi licensing proposals with the government compulsorily acquiring houses at a price below the market value. This argument for compensation assumes that there are clear property rights in taxi licences and rights at law to compensation where there is diminution of licence value. However, the inquiry considers the nature of the ‘property right’ in taxi licences is problematic and that the assertion by licence owners of an existing legal right to compensation for reductions in licence market values is erroneous. Property rights in taxi licences? In some circumstances, the existence of a property right and therefore a right to some form of compensation is clear-cut. For example, under the Australian Constitution, landowners have a constitutional right to ‘just compensation’ should their land be compulsorily acquired by the Commonwealth Government under Commonwealth legislation. Also, where governments have entered into contracts for the supply of goods and services, financial compensation is sometimes expressly provided for in the event of specifically-defined events occurring. In Victoria, for example, the State Government contracted to compensate the private developers of the CityLink toll road should the Government make transport investments that reduce the demand for the toll road.243 These two examples provide illustrations of ‘explicit’ property rights where certain events entitle their owners to compensation for the loss of a property right or a diminution of its value. In other circumstances, government policies that influence the value of assets, such as water entitlements and statutory marketing arrangements, are viewed by some as giving rise to ‘implicit’ property rights. Compensation is not necessarily provided if policy changes result in the value of such assets declining. Taxi licences may be considered by some to have the characteristics of ‘property’: for example, they are either of permanent or reasonably long-term fixed duration, are capable of being transferred and/or assigned for value and cannot typically be revoked or cancelled other than for cause. However, the inquiry considers that whatever property rights may exist in taxi licences, they are nevertheless subject to the right and practice of governments to make changes to the conditions of their existence. This view is expressed persuasively in the decision of Costello J in a 1992 Irish High Court case, Hempenstall v the Minister for the Environment, where taxi licence holders opposed extra hackney (private hire vehicles not permitted to take rank and hail customers) licences because these would reduce the value of taxi licences: …property rights arising in licences created by law (enacted or delegated) are subject to the conditions created by law and an implied condition that the law may change those conditions. Changes brought about by law may enhance the value of those property rights (as the Regulations of 1978 enhanced the value of taxi plates by limiting the numbers to be issued and permitting their transfer), or they may diminish them … But an amendment of the law which by changing the conditions under which a licence is held, reduces the commercial value of the licence cannot be regarded as an attack on the property right in the licence it is the consequence of the implied condition which is an inherent part of the property right in the licence.244 The inquiry considers the conditionality inherent in government licensing policies and laws is highlighted in the history of taxi regulation in Victoria. As the Draft Report noted, over the last 25 years, successive Victorian Governments have made attempts at industry reform in response to various reviews and inquiries and to meet Victoria’s obligations under National Competition Policy agreements.245 More detail of the reviews foreshadowing changes in the regulation of the Victorian taxi industry and highlighting the conditionality of licences is set out in the discussion of information asymmetry as a possible ground for additional adjustment policy measures in section 16.3.4 below. In addition to the conditional nature of any property rights in taxi licences, the inquiry makes a further observation regarding the nature of the asserted right and the interference with that right that is claimed to justify compensation. Under the inquiry’s proposals, an owner of a perpetual and transferable taxi licence will still be:
The inquiry considers that it is not obvious that its licensing proposals will produce any change in the nature of the property right in the ownership of taxi licences. The current entitlements attaching to perpetual and transferable taxi licences would remain unchanged. What can be done with these licences will not change or be terminated; nor will licences be acquired by the Victorian Government. Rather, what is likely to change under the inquiry’s recommendations is the amount of monetary consideration owners may receive for the sale or lease of licences. Right to compensation? It is not clear on what ground a diminution in licence values necessarily creates a right to compensation. The inquiry considers that such a ground is highly unlikely to exist; indeed, there is good reason to conclude that no such right exists. The legislation regulating the taxi industry, the Transport (Compliance and Miscellaneous) Act 1983, has contained an express provision since 1983 that compensation is not payable to an existing licence owner as a consequence of decisions to issue any other licence under the Act or vary any conditions or terms attaching to licences. Approximately 85 per cent of perpetual transferable and assignable metropolitan Melbourne licences were purchased after 1983. Section 90 of the Act states: No compensation shall be payable to any person in respect of or as a consequence of any decision or determination made pursuant to this Part – (a) to grant, issue, renew, reject, cancel, suspend or revoke any licence, certificate, permit, consent, assignment or other authority under this Part; (b) to add, alter or vary any condition or term of or attached to any licence, certificate, permit, consent, assignment or other authority under this Part … Governments generally do not provide guarantees that regulation will remain unchanged or that asset values will be protected from policy changes or that asset values will never fall below a certain amount. Governments in Australia have reformed the regulation of a wide variety of markets over the past three decades and, in the process, affected the values of a variety of private assets (not just those created by regulatory schemes) without making compensation payments to adversely affected parties or seeking to recover windfall gains from those that benefit. Examples include many statutory marketing arrangements for agricultural products, aviation, energy, transport, postal services and telecommunications. In relation to an analogy with government compulsory acquisition of land made in some submissions, the inquiry is not proposing that licences will be compulsorily acquired; nor is what owners can do with their licences being changed: they will still be able to lease, operate or sell their licences. Accordingly, calls for compensation in submissions must rest on a diminution in the value of licences. The inquiry notes that in the United States jurisdiction, with its concept of regulatory ‘takings’ (where regulation does not seize private property, but has the effect of reducing the value of private property), the diminution of value required before courts will rule that government compensation is appropriate is very stringent. In Palazzalo v. Rhode Island (2001) the US Supreme Court ruled that a developer who experienced a 94 per cent diminution in the value of his land following a legislative restriction on development on environmental grounds did not qualify for compensation.246 This issue in the context of taxi licences arose, though not centrally, in a recent New York State Supreme Court case involving the taxi industry in New York.247 The State legislature legislated to allow the Mayor of New York to issue 2,000 additional wheelchair accessible taxi ‘medallions’ and the Taxi and Limousine Commission to issue 18,000 additional street hail taxi licences with certain geographic operational limitations. Taxi industry associations argued, amongst several other points, that issuing the additional taxi medallions and licences would so diminish the value of current medallions as to constitute a regulatory taking. The Court rejected the argument that the issuing of additional licences constituted a taking in principle, as no rights were being removed: it was ‘just a sharing of a right with a larger pool of drivers’. As to the degree of a reduction in value required to constitute a taking, the Court held, based on what it described as a ‘legion’ of cases, that a taking must be more than a mere diminution in value and that a drop of 54 per cent (the high end of the plaintiffs’ claims) would not qualify. Even if legislation to enable the issue of the proposed new licences was regarded as somehow acquiring or confiscating the existing perpetual and tradeable licences (a conclusion the inquiry does not share), the inquiry notes that the Victorian Constitution does not provide a right to compensation for compulsory acquisition of property by the State. In summary, the inquiry is not aware of any rights to compensation that would apply if the recommendations regarding taxi licensing are implemented. Given the legislation creating the licences also expressly rules out compensation relating to the consequences of issuing new licences, the inquiry can find no basis to conclude that there is a legal obligation on the Victorian Government to compensate existing licence owners following implementation of its recommendations. There may be other grounds for offering some adjustment assistance to affected parties.
An economic rationale for adjustment assistance may exist where there is a market failure produced by a regulatory reform and assistance or compensation addresses the market failure. However, this seems unlikely given that a common rationale for regulation is to address market failures: it would be a poorly designed regulatory reform that itself created a further market failure. While there are instances of market failure in the taxi industry (for example the information problem consumers face regarding knowing in advance the quality of service provided by a hailed taxi), the inquiry cannot identify any that relate to reductions in the value of licences attributable to regulatory reform. One argument that may be put forward is that licence holders were unaware that the regulatory changes would affect the value of their licences in the future. This could be regarded as a form of ‘information asymmetry’ in that the Government (so the hypothesis would go) had information about the market (policy change) that licence holders did not. This proposition requires accepting that, over time, licence owners could not reasonably have been aware that either policy changes to taxi licensing were contemplated from time-to-time by the Government or that the Government had implemented changes to licensing resulting in additional licences already being issued. The inquiry considers that such an argument is not sustainable given the long history of publicly available information about possible and actual policy changes relating to taxi licensing:
In 1986, the Foletta inquiry recommended removing the controls on entry to the taxi industry. Following the inquiry, 150 new metropolitan taxi licences and 10 outer suburban licences were issued. In 1995, Australian governments adopted the National Competition Policy (NCP), including identification of the areas that were to be reviewed with a view to removing restrictions on competition unless the benefits to the community of retaining them exceeded the costs. These areas included taxi regulation. In 1999 as part of each State and Territory government agreeing through the NCP to review its taxi regulation, the Victorian Government commissioned a review that recommended the removal of entry restrictions (the KPMG review). In 1999, the Productivity Commission recommended the deregulation of taxi licence number restrictions. In 2000, the National Competition Council staff discussion paper, Reforming the Taxi Industry in Australia, recommended partial deregulation by removing restrictions on licence numbers. In 2001, a report by the Chairman of the Victorian Government Steering Committee that had overseen the KPMG review recommended phasing out investor ownership of taxi licences over two years (the McQuillen Report).
The inquiry considers that there is no information asymmetry relating to government policy in the taxi licence market. The recommendations of reviews commissioned by Victorian and Australian governments and public statements by governments have all been in one direction: less restrictive policy approaches to issuing taxi licences. Given this history, it is a reasonable expectation that persons electing to purchase or hold on to (and not sell) a taxi licence beyond 2002 (after the NCP review and the licence release program) were aware of the probable direction of policy change and the Victorian Government’s intentions or could readily have informed themselves of these developments. Another possible economic argument for adjustment assistance is that efficiency requires the maintenance of a framework for exchange and transactions though trust that the ‘players’ will not change the rules. Economic behaviour presumes the longevity of pre-existing rules and individuals must hold this presumption with a reasonable degree of confidence. If there are unanticipated changes in rules, that trust is compromised, transaction costs rise and the efficiency of exchange declines. One manifestation of this argument is that changes in government policy can cause ‘sovereign risk’. However, this seems more of an argument about the processes for changing the rules and the frequency of change, not that a specific rule (or policy) can never change or, if it does, that there must be compensation for those adversely affected. In the case of taxi licences, if the restriction on licence numbers were eased in the way the inquiry proposes, it would be as the result of a very public process lasting approximately two years (assuming legislative change in early 2013) and following several reviews and policy announcements over the 26 years since the Foletta report proposed less restrictive licensing. The inquiry does not consider there is an economic efficiency case for compensating industry participants adversely affected by the proposed reforms. Indeed, there is an efficiency-related argument for not providing compensation as to do so may encourage rent-seeking activity by the industry to gain compensation. Such activity is wasteful of resources and unproductive from the broader community’s perspective and may encourage similar behaviour in relation to other microeconomic reforms, thereby hindering those reforms and reducing their efficiency gains. Risk in taxi licence investment The capacity of licence owners to be aware of potential licensing policy change is not only relevant to the information asymmetry argument discussed above; it also raises the question of licence owners’ perceptions of the risk in their investments at the time of purchase. A number of submissions from licence owners stressed the magnitude of the investment they had made in acquiring a licence or licences, particularly where licences were purchased in recent years at prices in excess of $450,000. Some of these investments were claimed to be very highly geared, up to 100 per cent, with family homes as security in some cases. Other submissions claimed that all of a licence owner’s wealth was invested in a taxi licence or licences. This raises a number of questions: what independent financial and legal advice did purchasers obtain prior to making their investments in one or more licences? What was the extent of awareness and understanding of the industry held by persons purchasing and holding licences over time? What did prospective purchasers make of the relatively high capital gain and income yield from licences, in the context of the fundamental investment principle that return is related to the degree of risk? Did they properly consider that high returns are associated, generally, with high risk investments? It appears from submissions provided to the inquiry that some taxi licence owners may have made uninformed or ill-advised investments in several respects, such as underestimating the inherent riskiness of the investment or not investing in a diversified portfolio to spread risk or being very highly geared. This question about the prudency of apparent approaches to risk is particularly relevant to those licence owners who are ‘investor’-owners (some of whom lease multiple licences), rather than owner-operators/drivers. It is reasonable to ask whether these investors should have been expected to better understand the risks associated with the asset and to have a stronger financial capacity to bear the potential ‘downside’ of what is, for this category of owner, a speculative investment. It would also appear from some submissions that some licence owners may have had little understanding of the industry they invested in at historically very high prices and on highly-geared bases. If this perception is correct, it seems incongruous for licence owners who emphasise the size of their investment in the industry to also be uniformed about the nature of the regulatory scheme and prospects for policy-induced change in the industry. Again, this raises questions about the proportion of current licence owners who sought independent financial and legal advice about the licence asset before making their investment. For example, what proportion obtained advice that referred explicitly to section 90 of the Transport (Compliance and Miscellaneous) Act and the history of government consideration of licensing changes?
|