Back in June, I posted an article supporting widespread reform of the taxi industry:
A key factor behind the unreliability of the taxi industry across Australia is that taxi licences have been artificially restricted via government regulation. In the case of Melbourne, the overall number of licences has barely risen since the 1970s, despite the huge growth in the city’s population.
Reflecting this undersupply, the price of Melbourne taxi licences had also skyrocketed – from under $130,000 in 1989 to over $500,000 in 2012 – an increase of over 7% per annum.
This deliberate undersupply of taxis has had some deleterious impacts on the industry.
The lack of competition and “closed shop” mentality has meant that there is minimal incentive to improve performance and provide better services. It has also driven a wedge between the driver, who typically earns a pittance, and the customer, who pays too much for the service. For example, according to the agency which sets taxi fares in New South Wales, a taxi driver earns a paltry $29,000 a year, whereas customer surveys of taxis costs and service typically show widespread disatisfaction.
As with land, the rental value component of taxi fares goes to the owners of the plates, just like rents on land. So taxi drivers are typically left paying the licence holder an exorbitant share of their fares – often 50% – leaving them with little left over.
The restriction on taxi licences is totally unnecessary, punishing drivers whilst also leaving customers paying high prices for (often) poor service.
Fortunately, change is afoot. Former ACCC Chairman, Professor Alan fels, was recently engaged to lead the Victorian Taxi Inquiry, which recommended a comprehensive overhaul of the licencing system. Under the reforms, the government will sell licences for $22,000 a year and will no longer restrict how many are sold.
By increasing the supply of taxi licences and lowering their cost, more drivers will be able to purchase their own licence, operate independently, and keep what they earn. Customers should also benefit from more taxi availability and potentially lower prices…
It seems I was far too conservative in estimating the boost to taxi licence values brought about by government restrictions on the supply of plates, with the AFR today claiming that licence values rose by a whopping 17% per annum in the 25 years to 2010 – roughly 50% above the property and sharemarkets:
What turbo-charged that value was the fact that plates were granted in perpetuity at the same time as there was an effective government ban on new plates being issued. Little wonder plate values tripled to more than $500,000 in the past 20 years.
Now license value have fallen to around $300,000, thanks to reforms by the Victorian Government that will see yearly licences sold for $22,000 (plus inflation) – effectively boosting supply – as well as a requirement that drivers get a minimum 55% of the fare box, which will reportedly cost plate owners some $7,000 a year.
Obviously, plate owners aren’t happy. After realising massive capital growth, they are seeing the first material decline in plate values in at least 30 years. And they seem to have an ally in former Liberal Premier, Jeff Kennett, who refused to liberalise supply in the 1990s (helping to drive-up licence values) and is now arguing for compensation from the Government:
“There is a fundamental breach to what I believe the Liberal Party is about in encouraging small business and recognising hard work and reward”…
Mr Kennett said he also had sympathy for the protesters at parliament arguing: “If you came and destroyed the value of my house I would be upset. I have never seen a group of people treated so badly and disgracefully.”
“The government gets away with this because there are so few people involved”…
“We know there is a moral responsibility, it is just not Liberal policy ever, under any circumstances to retrospectively pass a law that destroys a person’s assets,” he said.
Unfortunately for Kennett, his argument does not appear to stand up to scrutiny, given that perpetual licences have since 1983 contained an explicit clause ruling-out compensation for changes to licence terms. Hence, it is wrong to argue that the Government has changed the rules retrospectively as it has acted within the letter of the law. Thankfully, the Victorian Transport Minister, Terry Mulder, agrees:
“People who own a taxi licence who are going to buy one or sell one or are holding one do so in the knowledge that the legislation is very clear,” he said.
“People who want to go into that market do so knowing full well that if the government should make any change to the licence conditions no compensation is payable”…
“It is not our intention to flood the market [with licenses]. We want competition out there. We want people out there lifting their game.”
He adds that the government had decided to set the annual cost for a new leased licence at $22,000 plus inflation as a way of limiting the damage to existing licence holders.
Hopefully, the Victorian Government will hold firm with its planned reform program, and ignore squealing from Kennett and the taxi industry. Restrictions on taxi licences serve no useful purpose and are a relic from Australia’s protectionist past. As such, it is far better to set performance standards and allow anyone who wants a taxi licence to obtain one (for a fee), subject to meeting those standards.
