Taxi industry inquiry



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The impacts of reform


The proposed reforms will affect individuals and businesses in the taxi and hire car industry in differing ways and to varying degrees. Most industry participants will face some adjustment to changed circumstances. In some cases, adjustment will present business opportunities and be seen as positive; in others, adjustment will present difficulties and be seen as negative.

        New entry


The inquiry’s licensing reforms have been carefully designed to minimise the amount of new entry in the short term. The focus of these reforms is to redistribute some revenue from licence holders to drivers in the short term and, in the longer term, allow market forces (as dictated by changing demand for taxi services) to play a much greater role in determining the supply of taxis.

The new condition that drivers must receive 55 per cent of the taxi’s revenue will add around $7,000 in costs per year for the average operator. The price point of around $20,000 per year for new licences (in the Metropolitan zone) means that operators will pay roughly the same amount as at present (that is, a current annual assignment value of $28,000 to $30,000 along with the existing practice of paying drivers 50 per cent of the fare box). The effect of this ‘balance’ between existing and new licences should result in fairly low levels of new entry in the short term. In addition, the initial period of industry adjustment to reform will create uncertainties for individuals making commercial decisions about entering the market. Accordingly, the inquiry considers that claims of a ‘flood’ of new taxis by some industry interests are misplaced.

Despite these constraints to entry, there may be some ‘irrational’ market entry in the short term. The inquiry has heard from operators who are deeply frustrated with the treatment they receive from licence holders and who have stated they will seek to obtain a licence from the Government simply to become ‘independent’ and free of the obligation to pay assignment fees (and other payments) to a licence holder. The inquiry notes that licence holders themselves have the power to influence new entry by offering lower assignment prices and fairer lease terms.

Clearly, some new entry will deliver immediate benefits to consumers in terms of greater service availability. It is also likely to deliver benefits to the industry by allowing some unmet demand to be supplied, particularly at peak times such as Friday and Saturday nights. The inquiry’s view is that the market will ultimately determine the level of new entry that is viable and sustainable over the longer term. As experienced by other jurisdictions that have removed quantitative licence restrictions; as long as sufficiently stringent regulations are in place to ensure the safety and quality of services, ‘excessive’ entry will be resolved ultimately by a competitive taxi market. There may be a difficult initial period of adjustment for the industry, but  given its many decades of protected status  the inquiry does not consider this an unreasonable or unfair outcome.

It will be essential for the Victorian Government to ‘hold the course’ during the early years of reform to allow the industry to adjust to the new policy settings.

        Industry adjustment


Taxi drivers have been major losers under the current restricted entry system and will be better off under the inquiry’s reforms. The inquiry expects its recommendations to significantly improve the prospects of drivers by providing them with a fairer  and guaranteed  split of revenue, tightening up entry requirements to improve service, enhancing the bargaining power of experienced drivers and giving drivers an opportunity at reasonable prices to become licence holders.

The impacts on taxi operators will vary depending upon the size and location of their fleets and whether they own their licences. Operators who do not own a licence will experience lower costs from the reduction in assignment prices (although these will be offset by higher driver remuneration), while owner-operators will not benefit from this reduction.

Other elements of the reforms (such as the removal of mandatory affiliation with networks) will lead to significant benefits for taxi operators. Overall, the costs of operating a taxi will be lower and operators will have more choice in the networks they join, the services and equipment they purchase, and the types of service they provide. There will be more networks of various sizes that offer operators a bigger range of services.

Hire car operators also stand to benefit from the reforms, being able to offer a greater range of pre-booked services  from the premium, ‘high end’ market to more affordable and/or specialised services.

Adverse impacts of the reforms are most likely to be felt by the holders of perpetual, transferable and assignable licences purchased within the last 10 years  and especially those who acquired their licences after 2007. Licence values in Melbourne were around $475,000 at the start of the inquiry (and may have softened in recent months). The inquiry’s analysis suggests that these values may reduce to between $250,000 and $300,000, although it is impossible to make a precise prediction. The annual income available to licence holders from assigning their licences will reduce from around $30,000 per year to around $20,000 per year. The inquiry’s examination of the approximately 4,330 taxi licences on issue in metropolitan Melbourne shows that around 450 owners who acquired licences post-2006 would experience a negative return as a result of these reforms. There may also be other instances of significant adverse financial impacts.

The inquiry’s analysis is that there are no legal or economic grounds for compensating licence holders. Amongst other reasons, since 1983 there has been an explicit provision in the relevant Victorian legislation that compensation is not payable to an existing taxi licence owner as a consequence of decisions to issue any other licence or vary any licence conditions or terms. It is also evident that, over the last 25 years, efforts have been made by successive governments to move away from less restrictive taxi licensing  including the sizeable release in recent years of new licences in Melbourne. These efforts should have suggested to licence holders that the value of these licences could be subject to changes in policy and regulation, and that the high assignment returns obtained from these licences contained a significant ‘reward for risk’ component.

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. Comparing the value of a recently acquired metropolitan Melbourne taxi licence to the average net wealth position of Victorian households indicates that 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.

Despite concluding there are no compelling legal, economic, equity or policy arguments for compensating licence holders, the inquiry accepts that some owners may suffer significant financial difficulties as a consequence of the reforms. The inquiry is suggesting to the Victorian Government that it consider providing tightly targeted assistance where such financial difficulties can be demonstrated.


        Country Victoria


Many country networks told the inquiry that because they believe they are providing a high quality service, the underlying regulation of the industry is working and should not be changed. The inquiry does not agree with this reasoning. While acknowledging that many country taxi operators offer an excellent service and are dedicated to serving their local communities, the inquiry does not consider this to be sufficient grounds for refusing opportunity to others, impeding competition or denying that improvements can be made  especially in light of the clear evidence of poor taxi availability in small country towns and some regional centres.

The inquiry strongly rejects the assertion that its recommendations represent a ‘one size fits all’ approach to reform. In fact, the inquiry has sought regulatory solutions that reflect differences in industry structure: for example, in relation to fare setting and uniform livery requirements. Nor do the draft recommendations reflect a ‘metropolitan only’ focus. The inquiry has found inefficiencies specific to regional Victoria and major gaps in service availability. It is clear that country operators are subjected to unnecessary costs and have limited scope to expand their businesses.

There is little evidence to suggest that there will be a ‘flood’ of new entrants to regional and country markets as claimed by some industry interests. Incumbent operators will have a significant market advantage and new entrants will have to incur substantial costs associated with the acquisition of a licence and other set-up expenses. As in Melbourne, new entrants will still have to assess whether they can maintain a viable operation.

It is clear that the biggest losers from maintaining a highly regulated taxi market in country areas are customers, who are faced with limited service choices, highly regulated fares and inflexible point-to-point transport options.

As already noted, the inquiry remains of the view that the form of restriction on taxi licence numbers should be changed to one based on price. This will leave the decision about entering the country taxi or hire car market to those best placed to make the commercial judgement about whether they can operate a service profitably in a particular area. Over time, this should lead to a better matching of supply with demand for services, increasing the availability and type of services in many country areas.

The inquiry has reviewed its zoning recommendations in light of concerns raised by country networks and others. After further consideration of geography, population and licence price data, the inquiry’s revised approach proposes four zones, with some revisions to the specific allocation of service areas.

The inquiry’s recommendations will also remove unnecessary regulation for country and regional operators. The removal of the continuous service provision will also give them a much greater choice around the services they offer and enable them to better match services with community needs.

The inquiry has also maintained its position in relation to a price notification system in Regional and Country zones. The adoption of this system will put greater control in the hands of country operators and networks, allowing a tailoring of services and prices to the costs of running their business. Removal of such restrictions will also encourage greater flexibility, innovation and choice in taxi services. Revenue for country operators should be boosted by allowing shared ride and fixed route services and allowing taxis to provide community transport when it is efficient to do so.

In short, the inquiry’s strong view is that its proposed reforms offer significant new opportunities for country operators and networks, as well as opening up the prospect of more flexible and responsive services  and a greater availability of services  to customers in regional Victoria.



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