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Fair regulation, not fare regulation

By Krystian Seibert - posted Wednesday, 30 November 2005


The facts are deregulation in the form of the removal of fare and entry regulation delivers significant benefits. The review conducted in Victoria estimated that entry regulation costs taxi customers $72 million every year. While this is just an estimate based on economic modelling, there are also practical examples of the benefits that deregulation has provided for consumers.

For example, in the case of the Dublin taxi market, entry regulation was removed in 1997. Subsequently, between 1997 and 2001 the proportion of customers waiting for a taxi longer than five minutes decreased from 72 per cent to 51 per cent. In 1997 20.3 per cent of hours surveyed had waiting times of less than five minutes and by 2001 this had increased to 60.2 per cent. In 1997 the average waiting time for a taxi after midnight was over 30 minutes in 43 per cent of the hours surveyed and in 2001 this had decreased to 6.2 per cent. Significantly, just under half of taxi customers surveyed believed that taxi services had improved between 1997 and 2001, while only 6.2 per cent believed they had worsened.

Perhaps the main explanation for the reluctance of governments to deregulate their taxi markets is the issue of compensation. As taxi licences currently trade for $346,860 in Melbourne and at similar levels in other major cities, governments point out they would need to compensate taxi licence owners for the inevitable loss of value that would result from deregulation, in particular the removal of entry regulation. Given there are 3,049 licences currently available in Melbourne, even compensating taxi licence owners at half the licence value would cost over $500 million.

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This is obviously a significant disincentive for governments to move towards a deregulated taxi market structure. While paying out compensation may be viewed as a necessary for political reasons, it is doubtful whether it is necessary for legal reasons. Under the Australian Constitution, the government can acquire property under just terms, which basically requires them to pay some sort of fair and equitable level of compensation in return.

However, it is debatable as to whether taxi licences are in fact property rights and even if they are, whether any change in government policy that affects their value would require compensation to taxi licence owners. There have been a number of decisions of the Irish High Court which have rejected the proposition that taxi market deregulation requires compensation for taxi licence owners.

In the decision of Hempenstall v the Minister for the Environment (1992), the High Court pointed out taxi licences are property rights created by law and are subject to the conditions created by law. One such implied condition is that the government may change the conditions under which the property rights are created. Therefore while changes to the conditions may affect the value of the taxi licence, such changes are a legitimate interference with property rights for which there is no legal requirement for compensation.

In the decision of Humphrey and Other v the Minister for Environment, for Local Government and the Attorney General (2000), the High Court followed the reasoning in Hempenstall and conclusively ruled that there is no requirement to pay compensation to taxi licence owners where a change in government policy effects the value of the taxi licence.

The most recent decision was that of Gorman, Kearns, and National Taxi Drivers Union v the Minister of State and the Attorney General (2001), a judicial review of the initial High Court decision in Humphrey. The court affirmed the decision in Humphrey and further stated that deregulation only minimally interferes with property rights because taxi licences are not expropriated by the government, taxi licence owners can still dispose of them and use them as they see fit. The court viewed this as a further argument against compensation.

In further support of the approach of the Irish courts, Irish banks do not lend against taxi licences as a primary security, because the value of licences is subject to future changes in government policy. The position is the same in Australia with major banks such as the Commonwealth Bank only lending against taxi licences if some other form of primary security is provided. Given these developments, governments cannot maintain that compensation is an impediment to reform. It is likely that they simply wouldn’t have to pay any if they didn’t want to.

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There is a strong case for deregulating taxi markets in Australian cities. Of course, like any process of reform it would not be without difficulty. But reform is primarily about benefiting consumers rather than satisfying industry bodies, and with the massive costs imposed on consumers by the current industry structure, change is necessary. The Bracks Government in Victoria recently published a document discussing options for a third wave of economic reform in Australia, comprehensive reform of the taxi industry should be included as part of this third wave.

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About the Author

Krystian Seibert is a public policy professional based in Melbourne. He has worked as a policy adviser to two Australian Ministers and studied regulatory policy at the London School of Economics.

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