Taxi industry inquiry
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- Licence owner cohort: year licence acquired Average price paid in year
- RETURNS ‘WITHOUT REFORM’
- F igure 8
- Effects lessened by proposed new licence price
Table 7 Estimated returns (IRR) from taxi licences with and without licensing reform
Note: Returns from assigning or operating a licence prior to 1999 are estimated. A value of six per cent of the licence value is used consistent with the lower end of returns earned over the post-1999 period. The main features illustrated in Table 7 are:
Another way of presenting the effect on licences is to plot the with-and-without-reform returns by year of purchase, but showing only the difference in returns (column G). This is illustrated in Figure 7 where the red bars in the graph show the difference in returns. For example, the effect of the reform on licences purchased in 2000 is a reduction of 3.2 percentage points (11.5 per cent to 8.3 per cent), appearing as the red bar. This figure shows, as did Table 7 on which it is based, that the larger impacts of licensing reform on returns are concentrated in licences purchased since the early 2000s (and more particularly from 2007). Figure 7 The effect of licensing reform on returns earned by licence owners 
The assessment of returns from taxi licences also needs to take into account the likely cost and risk borne by the purchaser of the licence. This information is captured in the ‘cost of capital’ for the licence owner, which reflects the compensation required by an investor for the effects of inflation, the time value of money and the risk associated with the investment. The estimated with-and-without-reform returns described in Figure 7 can also be plotted against the inquiry’s estimate of the average opportunity cost of capital (the long-term bond rate plus an estimated risk premium for the asset class) faced by a licence owner over the period of licence ownership: that is, the average cost of capital for a licence held for 10 years reflects the average of the estimated cost of capital over the same 10 years. This is set out in Figure 8, which compares the returns from taxi licence investment and an estimated cost of capital that would have applied for that cohort of licence owners. Figure 8 highlights yet again that the adverse effects of reforms in terms of investment returns are related to the length of time licences have been held. For licences purchased since the early 2000s, the estimated returns with reform are below the cost of capital for the corresponding periods. F It is apparent from the analyses in Table 7 and Figures 7 and 8 that returns to licence owners acquiring a licence in or after 2007 will be most affected by a fall in taxi licence values. There is a clear differential impact of the licensing proposal upon more recent acquirers of licences (who paid high market prices to enter the industry) versus long term incumbents in the industry. Licence ownership data held by the regulator enables the following analysis of the number of licences and owners involved in the effects set out in Table 7 and Figures 7 and 8. Of approximately 4,330 taxi licences on issue in metropolitan Melbourne:
Having identified the effects on taxi licence values, the next step is to consider whether these likely effects warrant some additional policy measure (or measures) in conjunction with the implementation of the inquiry’s package of recommendations.
Before undertaking this step, it is important to note that the inquiry’s recommendations on taxi licensing do not propose that unlimited licences be available for nominal administrative charges, despite such an approach being justifiable on economic grounds. As noted in the Draft Report, the inquiry recognised that under a scheme where any qualified person could receive a licence at administrative cost only, licence values would fall from the current price of high $400,000s in Melbourne to virtually zero overnight. Instead, the inquiry has adopted a more moderate path of reform to alleviate the impacts on licence values. The inquiry stated in the Draft Report: An immediate move to a full open market would undermine existing market values of licences and drive these to zero. With current values for perpetual licences around $500,000 in Melbourne and over $300,000 in many areas outside of Melbourne, this would impose severe losses on licence holders, some of whom will not have obtained excessive returns on their licences in the past, having acquired them well after restrictive licensing was first introduced. The inquiry is unwilling to recommend a full open market without some measures to offset the losses licence holders would suffer, even if these are paper rather than actual losses for many licence holders. The licence owners who made submissions in response to the Draft Report did not view the proposed pricing of new taxi licences as a moderate or compromise measure intended to lessen the effect of the reforms on their licences. However, the fact remains that the option of pricing at administrative cost was rejected by the inquiry as unacceptable because of its impact on licence owners. Instead, the inquiry has maintained the approach in its Draft Report of setting a significant price on new licences ($20,000 per year in Melbourne). This ensures that licence holders will continue to receive an income stream and some capital value on their licences. This is an implicit form of assistance built into the reform package.
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