nd Tranche - Initial reforms

4 TSC commences as new regulator

5 Public Register of taxis and customer in-cab access to information commences

6 Taxi fares set as maxima and flat fares (shared ride fares) permitted

7 TSC conducts interim information collection from networks and taxi operators

3rd Tranche - Central reforms

Indicative timing – July to September 2013

Deferred start from initial legislation; second tranche of major legislation for taxi reform

8 The Knowledge requirement commences for taxi drivers

9 New driver accreditation scheme commences

10 New regime for issue of taxi licences on demand for set annual price commences

11 New taxi licence zones commence

12 Mandatory Driver Agreement requirement commences

13 New fares structure commences

14 Taxi Permit Holder system commences (industry accreditation abolished)

3rd Tranche - Central reforms

Indicative timing – 2014

15 ATO standards and Australian Consumer Law requirements commence

16 Fare notification commences in new Regional and Country zones

17 Industry performance reporting commences

18 TSC commences development work & consultations with key stakeholders on:

• 
  Driver safety improvements
  
• 
  ‘Safe ranks’
  
• 
  Melbourne Airport
  
• 
  MPTP eligibility review
  

20 WAT Central Booking Service established

21 New vehicle standards and safety standards commence

22 DOT commences review of role of taxis in public transport delivery procurement

22 In-vehicle data collection commences

24 Voluntary network affiliation commences

The first tranche could commence on the announcement of the Government’s response to the inquiry’s Final Report and could comprise the commencement of preparatory work for implementing major proposals such as the Knowledge exam, the Driver Agreement and the licensing reforms. There would need to be early amendments to legislation to enable a number of proposed reforms to come into effect. The first tranche period would conclude in the first quarter of 2013 (assuming a prompt response by the Government to the report).

The second tranche could commence mid-2013 and mainly comprise the passage of the initial legislative amendments to enable subsequent reforms. Some of the legislated changes could come into effect immediately (such as the Public Register of industry participants); some would come into effect later in 2013 to allow the completion of the development of operational arrangements and consultation processes (for example the commencement of the new licensing arrangements).

The third tranche could commence in the second half of 2013 and incorporate the implementation of the central licensing reforms, including introduction of the Knowledge exam requirement and commencement of the mandatory Driver Agreement. The enabling legislation for some of these would have been introduced in the initial amendments; some could be based on legislation introduced in the second half of 2013. Some components would be administratively implemented after a substantial period of development and consultation with stakeholders. This tranche could run well into the 2014 calendar year.

The fourth tranche includes several components of the reforms that require longer lead times due either to their dependency on preceding reform components (such as in-vehicle data collection which depends on the installation of suitable technology) or where there is substantial development work and consultations to be completed before a reform can become fully operational  such as the establishment of the Central Booking Service for WATs. This tranche could commence in late 2014 and extend well into 2015.

A further consideration in practice, one the inquiry is not able to anticipate, is the resource capacity available to the regulator and the Department of Transport. The recommendations require a significant program of legislative change with the associated development of detailed legislative proposals. This is time and resource-intensive work for the regulator and the department and would require the commitment of substantial resources to legislative drafting.

Considerable developmental work and stakeholder engagement would also be needed to get to the point of implementation of a number of the inquiry’s proposals. This is also time-intensive work and would require particular skills on the part of the regulator.

3. 
   Staying the course on reform
   

The inquiry’s vision for the future of the taxi industry is one where the industry operates in an environment of competition, where less regulation is favoured over more regulation and where the industry resolves problems through constant improvement measures (driven by competition) and not through government-imposed regulation. As stated in the Draft Report, the inquiry found that the current taxi industry has no established means or culture of ‘self-regulation’ and could demonstrate little in the way of improvement practices or innovation. The inquiry considers that this is due, in part, to the industry’s antiquated and restrictive structure. By contrast, the inquiry noted that the hire car industry is significantly more ‘in tune’ with its customers  reflected in higher customer satisfaction ratings. The inquiry’s view is that new entrants with a fresh outlook  one that focuses on customer service and continuous improvement practices  are needed to embrace change and competition, and raise service standards.

The industry regulator, long used to dealing exclusively with the supply side of taxi services, may also struggle to embrace the new system.

Over the course of the inquiry, it became evident that the taxi industry relies heavily on the current regulator, the Victorian Taxi Directorate, to ‘fix’ industry problems such as poor driver and vehicle quality. The culture of the taxi industry is to rely on the government (through the VTD) to impose stricter regulations when problems emerge and then rely on the regulator for a greater enforcement effort.

One clear example of this is in relation to driver quality. Currently, two primary Network Service Providers are also Registered Training Organisations (RTOs). These RTOs deliver driver training courses and must bear some responsibility for the industry’s problems with driver quality, as it is their role to ensure that drivers who ‘pass’ the course are of an acceptable standard. In essence, as noted in the Draft Report and this Final Report, the taxi industry created a problem of excessive numbers of drivers who were inexperienced or new and who were prepared to accept very low levels of remuneration, took no responsibility for improving driver standards and then exacerbated the problem through ineffective self-regulation  which, in turn, has had a severe impact on the industry’s sustainability. As driver standards fell and customer satisfaction dropped, the taxi industry ‘blamed’ the VTD for not effectively regulating drivers, despite the industry facilitating the problem in the first instance. The VTD responded with targeted and time consuming enforcement, which failed to raise driver standards.

The inquiry found that the taxi industry and regulator have been overly dependent upon each other to solve problems and that this close relationship is not always to the benefit of consumers. Indeed, the inquiry found little meaningful engagement instigated by the industry or the regulator with the Victorian community. The VTD has several stakeholder groups with representation from drivers, taxi operators and Network Service Providers, but no representative groups or regular engagement activities with taxi or hire car users or stakeholders, such as local councils or business associations  although the inquiry notes that the VTD has made significant progress in recent years to engage with taxi users with a disability through the establishment of a consultative group that now meets regularly. The inquiry found examples of the regulator benchmarking its performance against taxi industry expectations and perceptions, but could find no examples of benchmarking its performance against community standards or customer expectations. The inquiry considers that, for reform to be sustained over the longer term, the TSC will need to focus on community and consumer engagement as a priority, as well as focusing on more effective industry engagement.

The inquiry considers that the future Victorian taxi industry should be responsible and accountable for its own service standards and failings. The inquiry’s recommendations will facilitate this change through service standards for Authorised Taxi Organisations (ATOs), complaints reporting, an easy to access Public Register of industry participants along with regularly reported ‘league tables’ of performance. Taxi users, and competitors, will be able to monitor the service standards of taxi companies and make informed choices. Removing the quantitative restriction on taxi licence numbers and reducing the barriers for PBOs means that, over time, new enterprises and services will emerge in response to customer demand. Future enforcement by the TSC should be intelligence-driven, with greater emphasis on safety related risks and serious non-compliance (such as illegal PBOs or non-roadworthy vehicles) and not on solving problems that the taxi industry should fix itself.

The TSC will also need to work closely with the industry to educate industry participants on the reforms, making it clear that these measures will not be overturned and that the industry must move to a more competitive footing. The TSC will need to put early measures and triggers in place to ensure ‘old habits’ do not continue into the new system, establish effective engagement with taxi users and the community as a priority and ensure that its future responses and actions promote a culture of appropriate industry self-regulation and are in line with the intent behind the reforms. In particular, the TSC should actively encourage responsible new entry, facilitate innovation in the delivery of services and the opening up of new markets, and remove unforeseen barriers or regulatory ‘red tape’ as they emerge. Essential to this new approach will be improving the evidence base for better informed regulatory policies and decision-making.

The inquiry does not underestimate the task of the new regulator in developing and implementing these reforms. This task should not be viewed lightly or seen as a ‘minor’ regulatory project. Staying the course of reform over the next three to five years will involve considerable challenges and require the regulator to be resilient, persistent and consistent in its dealings with the industry. Strong and skilled leadership from the TSC will also be critical to staying the course and assisting the industry make the transition to being responsible for maintaining and improving service and standards. Resources capable of meeting this task should be available to the TSC  otherwise the benefits of reform to the Victorian community will be at risk and the pattern of failed public interest reforms in the taxi industry will be even further entrenched.

.

Modelling of proposed reforms and alternatives

A key task for the Taxi Industry Inquiry has been to understand the likely implications of policy changes on prices and quantities of taxis services consumed, and then to understand the effects on existing industry participants. This includes the effects of policies that allow for more licences and for changes in driver remuneration.

To inform this analysis of the effects of reform, the inquiry has undertaken some economic and financial modelling that captures key features of the taxi industry. This annex describes the foundations of the model, the data sources relied upon and how the inquiry has used the model.

Model background and description

All models of markets are simplifications of how things actually work. Good models are those that are able to take into account the key features of the market and provide explicit linkages between how changes in certain variables (such as the number of taxi licences) affect other variables (such as the cost of supplying taxi services). However, any models should not be unduly complex as this complicates understanding, as well as introducing further requirements for data and opportunities for specification error.

There are a number of models of the taxi industry that capture key market features and that could, at least potentially, be useful for practical analysis. The inquiry’s assessment is that better models are able to take into account important factors that are specific to the taxi industry. The foremost of these is the inter-relationship between demand and supply of taxis due to the effect of waiting time on demand: a greater supply of taxis can increase the demand for taxi services by increasing availability and decreasing waiting times. This makes the conventional price-quantity relationship difficult to model and represent, as the price for taxi services might be associated with more than one quantity (with the difference represented by difference in waiting time or ‘quality’ of the service).

A model that is relatively straightforward to implement, but still takes into account the inter-relationships between supply and demand, is the model of Rouwendal et al (1998).²⁵⁶ This model, which draws on the work of Beesley and Glaister (1983)²⁵⁷, adopts some relatively simple functional forms for cost, demand and waiting times. The inquiry has developed and used this model to assist in developing and evaluating policy options for the Melbourne metropolitan taxi market. The key elements of the model are:

Market demand (Q  the quantity of passenger kilometres driven) is a linear function of price and waiting time.

Q = β₀ + β₁P + β₂W

Profit (measured per taxi) is a residual item, from which payments to licence holders are derived. It is a function of fares (P), variable costs (a), passenger kilometres per taxi (q) and fixed costs (F). Fixed costs include a return or margin for the operator.

Taxi response (waiting) time is inversely and non-linearly related to the number of vacant taxis (V). C₁ is a constant, which can be derived from the initial waiting time and number of vacant taxis per hour (occupancy ratio).

V depends on both the number of taxis and the demand for those taxis (that is, as total taxis increase, V increases). N is the total number of taxis, T is the average hours driven per taxi and C₀ is the average time it takes to drive one passenger kilometre (derived from average trip length, time and average speed).

The form of the model adopted assumes that more taxis will uniformly decrease waiting times  that is, they will not just sit at ranks. In that sense, it may be considered a better model of how the cruising/hail or pre-booked markets work.

For policy analysis, the model can predict what will happen following a number of different kinds of policy ‘shocks’. For example, it can illustrate how reducing fares to eliminate payments to licence holders will result in lower fares. It could also lower demand for taxi services as waiting times rise if there is no increase in the number of available taxis. The predicted quantity effects from lower fares are then conditioned by this response, which depends on the elasticity of demand with respect to (the now higher) waiting time.

The outputs of the model include:

Price (average fare per km)

Number of taxis

Total demand (passenger km)

Response time (waiting time)

Passenger kilometres per taxi

Sales per taxi

Costs per taxi (including operator return)

Payments to licence holders

Cost per taxi per km

Occupancy ratio per taxi.

Payments to drivers can be incorporated as part of the costs of taxi operation. This can be modelled either as part of fixed costs or variable costs, or with an element of both. Driver payments per hour can also be incorporated by relating costs to revenues, as per existing revenue-share arrangements which are prevalent in Victorian markets. The inquiry generally modelled driver payments as a fixed cost, on the basis that full time taxis are modelled (average 5,565 hours of operation) and that offering payments below current levels is not plausible as drivers will not work for less than current (very low) levels of remuneration. This is consistent with the current ‘driver shortage’ widely reported in the industry and believed to be due primarily to insufficient remuneration.

The model also can be augmented to estimate the effect of more hire cars on taxi demand by incorporating hire cars directly into the taxi demand function (with taxi demand negatively related to hire car demand).

The model can also be used to produce estimates of effects of policy changes on community welfare; that is, taking into account the effects of changes on consumers’ surplus (the excess of consumer value over the market price) and producers’ surplus (the excess of profits over resource costs).

The model starts with a picture of the Melbourne market in 2011, but can be modified to incorporate changes in market structure over time (such as shifts in demand due to increasing population).

To use the model effectively, it must be populated or ‘calibrated’ using available data that is relevant to Melbourne. The data required to calibrate the model, plus the inquiry’s current estimates and source, is provided in Table 9. These values are then used as the ‘base case’ or starting values in policy simulations.

The inquiry has used the model to inform a number of its key policy recommendations (and to assess other options that are not being recommended). This has included:

Impact of changing driver remuneration from 50/50 to other splits

Impact of reducing licence prices while leaving fares unchanged

Impact of increasing the number of taxi licences more generally, such as via an approach that maps the release of taxi licences to demand for taxi services and/or other triggers

Impact of increasing the number of hire car licences on taxi demand.

The outcomes of the modelling are discussed at relevant points in this report. The inquiry also comments further in this section on aspects of the modelling that provide further context to its recommendations on particular issues: predicted new entry under the proposed licensing approach; the welfare costs of restrictions on taxi licences; and comparing the inquiry’s licensing proposals with those advanced by industry representatives.

The inquiry notes that the modelling it has developed is a useful way to capture the key effects of policy changes. However, this modelling should not be seen as definitive. Industry participants may not always behave exactly as the modelling predicts, particularly as the kind of reforms proposed by the inquiry will cause a significant change to prevailing industry practices. This might mean that the results of reform in the short term are different to those modelled before settling down to the predicted outcomes that subsequently emerge.

As an example, the model can be used to predict the number of taxis that would enter under the proposed $20,000 annual fee and a higher share of the fare box for drivers. This is discussed further in section 3.3.3. The model output for this appears in Table 10 below and is based on the following process:

An estimate of the impact of the higher revenue on driver payments is entered (based on the nominal 10 per cent increase from 50 to 55 per cent).

The model is re-solved by changing the number of taxis so that payments to licence holders are reduced from the base case of $29,000 to $20,000 (the new annual licence price). $29,000 is used as the starting licence price, reflecting that the current price is around $30,000 but that prices for assignments tend to be set over three-year periods, so that there is a lag in the average assignment price moving to the current price.

Adjustments may also be made to expected revenue, reflecting changes from other parts of the package (such as advertising revenue) or to account for expected lower costs. This has not been included in the output below.