Fair regulation, not fare regulation

It doesn’t take an economist to work out that something is wrong with the structure of taxi markets in Australia. All you have to do is look at the taxi ranks of our major cities.

If it is a Saturday night and you want to hire a taxi in Melbourne or Sydney, chances are that you will be waiting at the taxi rank for quite a while because there simply aren’t enough taxis available. If it is a Monday afternoon, you may find there are plenty of taxis waiting at the taxi rank because there simply aren’t enough customers who want to hire them. So basically we have a situation where sometimes there are long lines of customers waiting for taxis and at other times there are long lines of taxis waiting for customers.

Could it be that the structure and regulation of taxi markets in Australia is the cause of such problems? The answer to that question is a definite "Yes".

Over the past 20 years, the Australian economy has been subject to significant structural reform and deregulation, initiated by the Hawke-Keating Labor governments. The removal of restrictive regulations and the injection of competition into Australian industry explains the unprecedented increases in productivity, flexibility and economic growth of the past 15 years. However, throughout this time taxi markets in all our major cities have managed to avoid any significant reform.

While state and territory governments have conducted reviews and studied reform options, so far the only government to deregulate their taxi market has been that of the Northern Territory. No other state or territory government has taken any significant steps to deregulate taxi markets. Even Jeff Kennett, who is often lauded as a resolute reformer of the Victorian economy, was not determined enough to properly reform the Victorian taxi market. The extent of his “reforms” was to require all taxis to be painted yellow (intitially he wanted them to be pink) and introduce dress codes for drivers.

There are three main aspects to the regulation of taxi markets in Australia, fare regulation, entry regulation and safety regulation. Fare regulation involves the government determining and mandating fare levels in the market. Entry regulation involves the government restricting the number of taxis in any given market. Safety regulation involves the government mandating rules and standards for taxis and taxi drivers relating to matters such as vehicle maintenance, security surveillance and driver education.

While some form of safety regulation is appropriate to minimise safety risks to taxi customers and taxi drivers (for example, having basic safety standards for taxi vehicles and licensing standards for taxi drivers), there is no credible justification for fare or entry regulation. Fare regulation hinders flexibility that is necessary for the taxi market to adequately respond to different market conditions. There are long lines of customers waiting for taxis at certain times and long lines of taxis waiting for customers at other times because fares cannot be adjusted to respond to different levels of demand for taxis. If they could then they would be increased when demand is high and decreased when demand is low. Entry regulation also hinders flexibility as the number of taxis in the market cannot increase as the demand for taxis increases with economic growth.

While the size of the Australian economy increased by nearly 400 per cent since 1985, the number of taxis available in Melbourne has increased by only 6 per cent. The fact that the number of taxis is effectively static explains why the price of taxi licences is so exorbitant and why their price continues to increase.

In Melbourne a licence currently costs $346,860 compared to $133,100 in 1993. Prices are at similar levels in Sydney and other major cities. Taxi industry bodies consistently lobby governments to increase taxi fares pointing to the low level of taxi driver incomes, which average between $8 and $15 per hour in Melbourne. These low incomes can be explained by the fact many taxi drivers do not own their taxi licences and must therefore rent them from the various individuals and companies that do own them. Given the cost of a taxi licence this rent is substantial and has the effect of lowering taxi driver incomes.

Given these facts, why are governments so hesitant to undertake any major reform of taxi markets? There are two main explanations for this hesitation: first, many governments have a flawed belief that deregulation would not produce a better outcome in the taxi market; second, because of anxiety about the need to pay compensation to parties that would be adversely affected by any reform.

In relation to the first point, governments and taxi industry bodies often selectively cite studies to support their claim that deregulation in not a desirable option. For example, the Victorian Government announced in 2002 that it would not undertake any significant deregulation of the Victorian taxi market. It rather opted to make available a small number of additional restricted taxi licences that can only be used during times of peak demand, such as evenings and weekends.

While such a reform is a step in the right direction, it is still a continuation of the policy of entry regulation. In support of its decision, it cited two studies which concluded that deregulation is not an advisable option. This is despite the fact the independent National Competition Policy review conducted for the Victorian Government by KPMG in 1999 recommended the removal of all entry restrictions in the taxi market. The reviews conducted for the state governments of New South Wales and Western Australia made similar recommendations.