Taxi industry inquiry
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- Facilitating reform
- Conclusion on additional policy measures
- Implementing reform
- Table 8
Equity and fairness Consideration of additional measures often arises from concerns about the ‘equitable’ or ‘fair’ treatment of people affected by policy changes. Central to this argument is the notion that if the community as a whole benefits from reform, but some groups are made worse off, then some of the benefits should be transferred to those who experience some detriment. Equity and fairness are inherently subjective and value-laden concepts. Perceptions about what is equitable or fair also vary across different sections of a community, between communities and over time. ‘Equity’ is usually raised as a concern if a particular reform will have a regressive distributional effect, such as a policy initiative that delivers significant gains to ‘better-off’ individuals and imposes large adjustment costs on less well-off people. Regulatory reforms often do not have wealth or income redistribution objectives, being more concerned with addressing market failures and efficiency issues. The overall distributional impacts arising from the proposed reforms to taxi licensing are likely to be relatively small in magnitude, if any, given the small numbers of people involved relative to the total Victorian community. The impacts of reform are also unlikely to be regressive, given that the substantial cost of buying a taxi licence means that many Victorians could not afford to own a taxi licence, let alone several licences. Some indication that licence owners are unlikely to be among the community’s less well-off members is given by a comparison of the value of a recently acquired metropolitan Melbourne taxi relative to the average net wealth position of Victorian households. The average value of such licences in 2009-10 was around $470,000. Australian Bureau of Statistics survey data for 2009-10250 indicates that 50 per cent of Victorian households had a net worth (total assets including owner-occupied houses less total liabilities) of less than $435,000.251 Thus, the outlay to purchase a single taxi licence a few years ago was equivalent to more than the average household net wealth of over half of all Victorian households. The notion that if the community as a whole benefits from reform, but some groups are made worse off, then some of the benefits should be transferred to those who experience some detriment, becomes more problematic where the reform in question involves the removal or modification of policy-based ‘privileges’ to those groups. As set out in section 5.4 of the Draft Report, the values stemming from restricting entry to the taxi industry through licences (the policy-based privilege) are captured by licence owners. This is evident in the high returns (capital gain in the licence value and returns from assigning or operating licences) from owning licences, particularly licences acquired by current owners prior to 2000. The overall magnitude of the value appropriated can be assessed roughly by multiplying the number of perpetual and tradeable metropolitan Melbourne taxi licences (3,084) by the average market value of licences transferred (approximately $490,000 at the end of 2011). This ‘lifetime’ amount in the sense that it represents the net present value of the potential stream of income from licences of $1.511 billion is captured by 2,174 licence owners. Licence owners include natural persons, corporations, partnerships and incorporated associations. Thus, is it not clear how many people are the direct financial beneficiaries of perpetual and tradeable licence ownership possibly it is in the order of 3,000 people. This number represents approximately 0.07 per cent of the Victorian population aged 20 years and over (0.07 per cent of approximately 4.2 million persons).252 There is an argument that additional measures such as compensation should not be adopted when policy changes terminate privileges previously created by regulation: given that government created the privilege (of a restricted number of taxi licences) and the artificially created returns of capital gains and assignment income, the government should not pay compensation for their removal. For example, the National Competition Council has argued that: … in some cases, the ‘adverse effects’ some people incur from reform are, in effect, simply a removal of the privileges they have previously enjoyed at the expense of other members of the community. This reduces the strength of any equity arguments for providing special adjustment assistance in those cases.253 Another aspect of the notion that some of the benefits of reform should be shared with the group disadvantaged by reform is to consider whether those licences holders who gained the high returns from ownership were subject to any particular taxes or other imposts on those returns, either income or capital gains. This is the other side of the ‘compensation-for-diminished-value’ argument. Licence holders have been free to take the rising value in licences and assignment income without facing any impost specific to the ownership of licences, other than being subject only to general income and capital gains tax arrangements. ‘Fairness’ is a more flexible concept and more dependent upon the values of those assessing the fairness or otherwise of a particular policy decision. One approach to ‘fairness’ is to consider factors such as whether the policy change:
These factors relate to the opportunities available to affected parties to anticipate the policy change and therefore adjust their circumstances to minimise any potential adverse consequences and to alert decision-makers to the potential detrimental impacts and have those taken into account in the balance of considerations to arrive at the policy decision. As the inquiry notes in section 16.3.4, the long history of reviews of taxi regulations and the statements by successive Victorian Governments around the release of additional taxi licences since 2000 mean that industry participants could hardly be surprised that the recommendations of this inquiry would be broadly in the direction of a less restrictive approach to taxi licensing. In addition, implementation of the inquiry’s recommendations would follow a public process that has involved substantial stakeholder engagement over more than 16 months, including two separate submission processes, a comprehensive Draft Report containing detailed reform proposals and public hearings. In discussing fairness under the reforms, a broader perspective is provided by extending the discussion beyond what is fair for industry participants. Governments also have an obligation to the ‘losers’ of the current restrictive licensing: the taxi-using public. The Victorian public pays around $120 million per year to maintain the value of taxi licence plates. Over time, this amounts to about $1.5 billion or more. The Victorian public (notably taxi users and bailee drivers) has paid substantially and will continue to pay, even under the inquiry’s proposed reforms. Under the inquiry’s licensing proposal, this payment is conservatively of the order of $80 million annually and of the order of an estimated $1 billion over time. Compensation or some other form of assistance that is funded by the public will ultimately add to the ‘bill’ for taxi users.
The final potential ground for additional policy measures in the form of adjustment assistance or compensation is the public interest aspect of providing such assistance in order to facilitate delivering the benefits of reform to the wider community. A significant difficulty in achieving support for worthwhile industry reforms is that the costs, although smaller than the benefits, tend to be incurred up-front and are concentrated on a relatively small group. This is certainly the case in relation to taxi licences where licence ownership is concentrated in the hands of a relatively small group of people. In contrast, the benefits tend to be dissipated throughout the community and may take time to accrue. Again, this is the case with taxi regulation reform. This means that the provision of additional assistance can be viewed as an ‘investment’ to secure the benefits from reform. In principle, so long as the amount of assistance expended to address opposition is smaller than the benefits from the reform, the community can still be better off than not proceeding with the reform. Another potential benefit of assistance measures (such as schemes that address economic hardship experienced by those most affected), is that future reforms may face less opposition if the community generally is confident that reforms will take into account the adverse consequences that can arise from reforms. On the other hand, providing assistance to placate opposition to reform can yield perverse outcomes, one of which is that it may actually strengthen resistance to reform. Providing compensation for one set of reforms is likely to encourage lobbying by others affected by reform proposals in different ways. This can make it increasingly difficult for governments to obtain support for reforms without compensating ‘everybody for everything’ or making modifications that ultimately reduce their effectiveness. Reflecting on this argument in relation to tax-funded compensation, Kasper observed: Sometimes one hears the pragmatic or opportunistic political argument that compensation payments to affected groups or regions serve to eliminate political resistance to reform. This argument is short-sighted and reeks of political expediency…biddable governments invite noisy political resistance to adjustment…The lesson of history is that policy makers must never promote political ‘hold up risks’…254 Whether it is in the public interest to add some compensation or assistance measure to a particular microeconomic reform is ultimately a judgment call for government, based on a balance of the benefits and costs of doing so and considering all of the circumstances.
The following key points emerge from the inquiry’s consideration of whether the effect of its reform package warrants additional measures: There appears to be no legal obligation to compensate those licence owners who would be adversely affected by the implementation of the inquiry’s recommendations. There are no economic grounds for compensating those adversely affected. There is an arguable equity/fairness basis for additional measures if it can be established that owners may suffer difficult financial circumstances due to the reforms: for example, owners who are entirely dependent upon the licence income (either assignment or operation). This may include some owners who are now in retirement and were previously long-term owner-drivers and some owner-operators who have debt servicing obligations on loans to finance the purchase of their licences. Providing assistance may facilitate acceptance of the reforms, but there is also a risk of creating rent-seeking with this and future reforms that may, in the long run, make microeconomic reforms even more difficult than experience indicates they already are. While beyond the scope of the inquiry in its implications, an additional observation based on some submissions to the inquiry by owners is that some appear to have made uninformed or ill-advised investment decisions involving taxi licences or invested on a very highly-geared basis. The inquiry concludes that there may be grounds for the Victorian Government to consider providing closely targeted assistance to licence owners who experience significant financial difficulties due to the implementation of the licensing reform package.
There are two licence-related financial consequences of the proposed change in taxi licensing policy:
The inquiry reiterates that the effect of removing the quantitative restriction on taxi licences on the capital value of licences is alleviated for all owners by the recommendation to set a substantial new licence price ($20,000 per annum), rather than recommending a price be set to cover only the administrative cost of issuing new licences. The question then arises whether there is a need to consider some additional adjustment assistance beyond this mitigation through the new price. The inquiry suggests that if the Government is attracted to this idea, it may wish to consider an approach that centres on closely targeted assistance directed to those licence owners placed in exceptional circumstances as a direct consequence of the reduction in income obtainable from a taxi licence. An additional reason for focusing on the effect on income is that there are differing characteristics of the ‘income effect’ compared to the ‘capital value effect’. The income reduction is much more likely to have an immediate adverse effect on some owners through reducing funds for household living expenses (potentially including debt servicing). Although a capital value reduction happens at the same time as the reduction in income, realisation of the reduced value is not necessarily contemporaneous with the policy change causing it. The change in the market value of a licence may be realised immediately or sometime in the future, possibly even in the distant future depending upon the timing of the owner’s decision to sell the licence. Furthermore, the sale of a licence will not necessarily result in a capital loss: the result may be a lesser gain compared to the gain obtainable if the licence had been sold at some earlier time. The main likely effect of an unrealised reduction in capital value will be on an owner’s potential access to, and cost of, debt because of a reduced net wealth associated with the reduction (other things being equal). While favouring a closely targeted approach to assistance relating to the effect of the reduction in licence values, the inquiry is not making specific recommendations to the Victorian Government on this issue. Any additional policy measure(s) will depend upon the exact reforms actually implemented. The inquiry strongly suggests that if the Government determined to provide some additional assistance to licence owners, assistance should relate to the income reduction effect, rather than capital value reduction effect. This is due to the more likely immediate consequences for owners from the former and the provision of some alleviation of the latter through the inquiry’s proposed pricing of new licences. The inquiry further suggests that assistance relate to circumstances where a reduction in the income from a licence demonstrably jeopardises an owner’s ability to fund his or her household living expenses. In some cases, this may include servicing debt incurred to purchase a taxi licence. The inquiry considers that, as a general principle, the provision of targeted assistance should depend upon the existence of financial difficulty directly attributable to the reduction in income from a licence. This circumstance would not be just any monetary loss related to a reduction in the income obtainable from licences; it would require the quality of something more burdensome than an appreciable detriment. The inquiry is also not making recommendations on the detail of the eligibility for assistance to mitigate such circumstances. This is a complex task requiring further time and resources beyond the scope of the inquiry. Rather than canvass the potential criteria for eligibility in a cursory manner in this report, the inquiry suggests that if the Government is disposed to some form of targeted assistance to industry participants, it could consider establishing an expert committee to advise on and recommend eligibility criteria. For example, such a body could consist of three members with strong credibility as ‘wise counsel’, supported by an appropriate small secretariat, and operating within a set of guiding principles to:
A key guiding principle could be that demonstrable financial effects on owners from the reduction in income from licences are the central consideration in determining eligibility for assistance. There is very limited data available to the inquiry about how such criteria may apply to Victorian owners. For example, the inquiry is not able to readily establish how many licence owners actually drive taxis. The licence data available to the inquiry, with attendant qualifications, relates to only:
A further aspect in considering policies intended to assist industry participants is how to fund any such measure. The four main sources of funding appear to the inquiry to be:
Each option has its own set of relative advantages and disadvantages. As a general proposition, funding by a levy on the consumers of taxi services appears to be inappropriate, given consumers already have funded the very high returns to licence owners. In addition, there are likely to be administrative difficulties in ensuring the collection of the increase in fares for that purpose. Recommendation on this matter is beyond the scope of the inquiry and the decision as to which funding approach is most appropriate is likely to be influenced in part by the particular reforms actually implemented.
The inquiry’s Terms of Reference include a requirement to make recommendations on ‘transitional arrangements from the current regulatory and service arrangements to the recommended model’. Several previous reviews have proposed reforms, but a substantial overhaul of the regulatory regime for the taxi and hire car industry in Victoria has never eventuated. This chapter discusses the sequence of implementation of the major recommendations and some observations on what will be required to initiate and most importantly sustain the momentum of reform. The inquiry emphasises that implementation of its reform package, because it aims for fundamental reform with long term benefits to the community, unavoidably involves a three to five year program of work. It cannot be implemented overnight and the benefits will not be observed overnight. This represents a major challenge to those tasked with implementing the reform. It is unfortunately common for reforms to fail once the initial momentum or ‘policy push’ is complete and the new system is in place.255 It should be noted that the inquiry’s suggested sequencing of reforms makes no explicit provision for the amount, timing or method of providing compensation or assistance to licence holders. The inquiry’s analysis of this issue is set out in chapter 16. As noted in that chapter, the inquiry is not making any specific recommendations to the Victorian Government on this matter. Accordingly, it is beyond the scope of the inquiry to make provision for the timing of any action related to providing compensation or assistance by the Government into its timing and sequencing proposals.
Timing and sequencing of reforms are crucial to the success of the proposed recommendations. Successful implementation will require that the integrity of the reform package is maintained as it is implemented. Omitting key components will undermine the effectiveness of the reforms as a whole and may have consequences that are counter-productive to the objectives of reform. Implementation of some reforms will require legislative change in the form of amendments to existing Acts, new legalisation or changes to existing regulations: for example, moving from regulated fares to maximum fares, establishing the Public Register of industry participants and implementing the licensing reforms. Legislative changes will need to go through Cabinet and Parliamentary approval processes. Other measures do not require change to Acts or regulations. These measures can be implemented through the decisions and operational actions of the regulator (the VTD, followed by the TSC), the Department of Transport or another agency such as the Essential Services Commission. The inquiry emphasises the integrated nature of the reforms. These reforms should be seen as a package of measures in which several initiatives are dependent upon the prior implementation of others in order to achieve the desired outcomes. For example, the dissemination of information on the performance of taxi services to enable greater customer choice requires in-vehicle data collection mechanisms to be in place. In other words, the sequence of implementation of the inquiry’s recommendations is fundamentally important to realising reform objectives. Accordingly, the inquiry proposes a particular sequence of implementation, set out in Table 8, together with an indicative timing, assuming an early response to the inquiry’s report from the Victorian Government. As Table 8 indicates, the inquiry envisages implementation occurring in several ‘tranches’ sequenced over time (on the assumption that the Government adopts the inquiry’s recommendations). The components and timing of each tranche will be determined by:
Table 8 Sequence and timing of implementation of recommendations 1st Tranche - Preliminary to key reforms Indicative timing – late 2012 1 TSC commences development work & consultations with stakeholders on reforms:
2 TSC develops and plans education programs for consumers and taxi/hire car industry 3 Reference to ESC to commence, in consultation with TSC, reviews of:
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