The problems of the cab industry were caused by regulation. The solution is clear, argues Richard Allsop.

22 IPA Review | June 2011 www.ipa.org.au © Newspix Taxi mess an old, stubborn failure of government

It will take brave governments to deregulate ’s taxi markets, writes Richard Allsop. But doing so will be worth the struggle.

he complaints are endless. The taxi driver didn’t know the way; the taxi driver did not speak English; the taxi was dirty; the fare was too high: and, if it was after the office Christmas party on a Friday nightT in December, there was no cab at all. So why don’t we have geographically aware, English- speaking drivers, piloting clean, ever-available taxis around our cities at reasonable fares? In large part, it is the fault of successive governments, who for decades have put the interests of rent-seeking taxi industry incumbents ahead of taxi customers. There is no doubt taxi customers are unhappy. Writing in the Daily Telegraph in late 2007, Miranda Devine captured the particular problems of taxis in : The December taxi drought now extends into October or any day when there are more than two events in Sydney. Promises by the industry to stagger the 3pm changeover time, which causes the post-lunch taxi drought, have come to nothing, as taxis disappear from 2pm to 4pm. In , train performance was seen as a key factor in the defeat of the Labor Government in last November’s Victorian Election, yet surveys conducted by ’s Department of Transport have consistently shown a greater degree of customer dissatisfaction with taxis than with the much maligned trains. So, given that improving the trains was seen as a key performance indicator for the new Victorian government, it was perhaps surprising that, when it came to taxis, nobody seemed to be applying much pressure to governments to fix

Richard Allsop is a Research Fellow at the Institute of Public Affairs. www.ipa.org.au IPA Review | June 2011 23 the problems. Given the situation, it Founded in 1928, it was initially with the highest being $650,000 on was pleasing to see that the Baillieu one of a number of competing taxi the Gold Coast, while Melbourne Government clearly recognised there companies, but by 1960 it had tops the capital city values at around is a major taxi problem, by setting become the sole operator in , $530,000. While there are still plenty up an inquiry, headed by the former and later in Fremantle also. No of owner-operators in the industry ACCC head Allan Fels, to undertake problem there, except that, when the (usually employing a driver or two to a review of all aspects of the industry. Western Australian Government set do the night shift), many operators And when Fels looks at the up the Taxi Control Board in 1964, now hold licenses assigned to them taxi industry, he will see that the it gave Swan Taxis a seat at the table by passive investors. In Melbourne, issues with taxis are just as much a to, in the company’s own words, licenses are currently assigned for problem of poor government policy, allow the industry to ‘control its own about $38,000 per annum, not a as are the problems that afflict public destiny’. Preventing the development bad return on the license holder’s transport systems around the country. secure investment. In most cases, the This might seem an odd statement, operators assigned the licenses of the given that taxis have always been passive investors are fleet operators provided by the private sector, and who then hire drivers. rail services are usually a government decades of The most obvious problem responsibility, but it is decades of bad “ created by restricting the ability of public policy which have created a bad public new entrants to enter the market is taxi industry monster. It will now stagnation in the number of taxis. take a brave government to slay it. policy have While no Australian city matches the When it comes to brave situation of New York, where there governments, Jeff Kennett’s 1990s created the were 1400 fewer cabs in 2004 than in Victorian Government is close to top 1937, for lengthy periods, Australian of the class. Kennett recognised that taxi industry taxi numbers have failed to keep pace the taxi industry was failing to deliver monster with population growth. For instance, for locals and creating a very poor Perth managed to avoid increasing impression for tourists. He took a taxi numbers for 14 years between keen interest in the industry, insisting ” 1989 and 2003. Logically, growth in that all taxis be painted yellow and taxi numbers should have exceeded that drivers wear a uniform. However, of any competition might be a more population growth as prosperity has these mandated reforms were, in accurate description. increased and more people should be many ways, treating the symptoms People tend to forget just how able to afford taxis. of the problem rather than the root restrictive transport regulation was Imagine if, for the past few causes. in economy in the decades, coffee shops had been The root of most of the evil is the 1950s and 1960s. Gradually, most licensed like taxis. There would only system of taxi licensing which evolved of the silly restrictions on how many be a few more now than there were in in each Australian jurisdiction, and interstate airlines there could be, how the 1970s, they would all charge the indeed in most places in the Western far you could cart bread from the same for a cup of coffee, none would world, in the middle decades of the bakery which produced it, or which be allowed to offer any premium twentieth century, which restricted items could only be carried by rail service, they would largely employ the right of new entrants into the were removed, but the restrictions on staff with no knowledge of coffee industry. Combined with regulations taxis have remained. and they would charge a ten per cent around industry structure, the types As with any artificially restricted surcharge on credit card payments. of services taxis can provide and the product, the cost of taxi licenses Which brings us to Cabcharge, price they can charge, the licensing soared unnaturally high and became the company founded in 1976, with system has created a deadly policy a tradable commodity. These days, the laudable aim of providing a way for cocktail. licenses are often held by passive the taxi industry to handle non-cash A typical example of how the investors, impressed by the capital fares. The founder of the company, Australian taxi industry developed growth and steady annual returns. Reg Kermode, is still in charge of is provided by Swan Taxis in Perth. License values vary around the nation, what is now a listed company which

24 IPA Review | June 2011 www.ipa.org.au A taxi is left parked in Flinders St during a protest by taxi drivers | © Newspix

is big enough to appear in the ASX in other Australian cities as well. the competition-averse NSW state 200. In an excellent 2010 paper, Governments around the country have government stop issuing disabled looking at the effect of taxi regulation entrenched the position of Cabcharge registration plates, effectively killing in Sydney, economist Peter Abelson by issuing cards for users of the multi- at birth any potential competition explained that: purpose taxi schemes that only work between Cabcharge and Lime. The Cabcharge, Premier and on Cabcharge machines. This is one Last year, the Federal Court Legion taxi radio networks of many ways in which governments ordered Cabcharge to pay $15 control over 90 per cent of have not assisted the creation of more million in penalties and costs for the taxi operators and taxis competitive taxi markets. contraventions of section 46 of in Sydney, with the latter As part of its attempt to operate in the Trade Practices Act. Yet, it is the two networks having a strong the Sydney taxi market with its Lime successive governments that have allegiance to Cabcharge. Taxis, Macquarie Bank spent millions established the regulatory regime This virtual monopoly is creating a new payment system, Live, under which Cabcharge has operated made possible because the as an alternative to Cabcharge. Lime for decades. government regulates that all was based on providing disabled access While customers are the big operators must affiliate with an cabs, but soon after Lime launched, losers in the current taxi industry established network. one of the taxi companies in the arrangements, non-owner drivers are Cabcharge stable, Taxis Combined, also doing poorly. Drivers in the taxi It is not just in Sydney that Cabcharge responded by adding 60 wheelchair- industry have rarely been employees. has a dominant position, as it is a accessible Taragos. In response, Traditionally, the industry model was major shareholder in taxi businesses www.ipa.org.au IPA Review | June 2011 25 Taxi rank in Brisbane | Creative Commons | Daniele Sartori

that there would be a 50:50 split of the 12 months before acquiring a taxi Someone should be able to become a revenue between the operator and the driver’s license, in Victoria the holding taxi operator for the cost of a vehicle, driver, but that has changed in recent of an international driver’s license with as-of-right registration, subject years. The emerging model is that satisfies the requirement. Not only to some basic checks. drivers lease a cab from the operator, have taxi operators employed large Deregulation has occurred in a providing a bailment payment which numbers of Indian students, the large number of places around the world, is more than half the average annual taxi depots in recent years have taken including Ireland, New Zealand, the cab revenue. The driver then also to sending staff on overseas recruiting Netherlands and several US cities, and has to pay for fuel, repairs, insurance drives. Sourcing drivers from India has generally delivered a significantly etc. The net effect of this model has has become harder for operators in improved service to users. In 2006, been that driver incomes have halved, recent months as numbers coming to Adrian T. Moore and Ted Balaker leaving them earning often little more Australia have crashed. published a review of the substantial than $5 per hour. Of course, there is nothing wrong scholarly literature examining the Customers critical of a driver’s with immigrant taxi drivers. What is merits of deregulation and found lack of geographical knowledge or wrong is that there is little incentive for that ‘most economic studies of taxi English should reflect on what they a driver to do well and earn enough to deregulation find it to be on net really expect for $5 per hour, especially become an owner operator. Instead, to beneficial’. Most of the arguments given that driving a taxi at night is the earn the full right to operate you need used in favour of restrictions have most dangerous occupation there is, over half a million dollars. In recent been shown to be fallacious. A outside street prostitution. Driving years, the Victorian Government, 2007 OECD report concluded that taxis really is an entry level job, along with a number of other state not only did entry restrictions not literally in the case of many drivers, governments, issued some extra improve capacity utilisation, but ‘on especially in Melbourne. While other licenses, often with time restrictions. the contrary the case could be made states insist that drivers must have While this is better than nothing, that increased entry and associated held an Australian driver’s license for what is needed is deregulation. economies of density, as well as shorter

26 IPA Review | June 2011 www.ipa.org.au passenger waiting times, warranted is my investment?’: ‘Queensland were making excellent returns. subsidies for entry’. Governments have always supported However, the conversation took Deregulation became a live regulation of the taxi industry in this a bizarre turn when one caller argued issue in Australia for a few years state. that the system where fat cat license after the introduction of National The 1999 Productivity owners make big profits, at the expense Competition Policy (NCP) in 1995, Commission Report on ‘Regulation of the humble drivers, was an example as states had to review the blatant of the Taxi industry’ provided an of the faults of economic rationalism. restrictions on competition in their excellent discussion of the issues Not only did the host not correct the existing arrangements. In the end, involved in compensation and, in caller and point out that economic

Taxi deregulation has occurred around “ the world, and has delivered significantly improved service to users

the Northern Territory was the only particular, whether a government” rationalists actually oppose licensing jurisdiction which deregulated, with issued license can have property right systems such as the ones that restrict the new open regime commencing status. They cited various examples the numbers of taxis, but he managed on 1 January, 1999. It led to an which argued both ways. However, to find an economist who accepted immediate increase in taxi numbers whichever view one takes of the legal that the plight of taxi drivers was an and a clear improvement in waiting position, ultimately, any government example of ‘market failure’! times for customers. The Western going down the de-regulation route The conclusion of all involved Australian Government’s review will probably need to find some in the discussion seemed to be that also recommended reform. The sort of compromise between full more regulation was needed to stop Court Liberal Government ignored compensation (which Australia-wide owners making such big profits and the recommendation, but the would cost taxpayers several billion to ensure drivers secure a reasonable Labor Government elected in 2001 dollars) and no compensation which income. How typical is it that, even supported it for a while before, may be somewhat harsh on investors. when regulation so manifestly fails, unfortunately, they then bottled And, while there appears to be the instinctive reaction of talkback it, caving in the day before the taxi a growing number of voices pushing callers, media types, and even some industry was to have a big rally at for deregulation of Australian taxi economists, is to look for a solution Parliament House. markets, it is not just the compensation that involves more regulation, rather Of course, if Australian issue which presents a hurdle for the than acknowledging the blindingly governments did go down the brave politician. obvious point that deregulation is deregulation route and stare down The reaction to a demonstration more likely to achieve the desired the likely big rallies of the vested of taxi drivers in Melbourne a couple objectives. interests, they would still be left with of years ago illustrates the point. While A deregulated taxi industry the vexed issue of whether or not to the main concern of those protesting will not mean that taxis are always compensate the aggrieved. Licenses was driver safety, the demonstration available and always clean, or that the are sold to investors with assurances also triggered a more wide-ranging driver will always knows the way, or that they are as safe as houses. If discussion about the economics of speak English well, but it will greatly one wanted evidence about how the taxi industry. Quite reasonably, enhance the chances of some of these confidently taxi companies present, the host and talkback callers on outcomes occurring. The alternative then the website of Toowoomba one Melbourne station is clearly not working for anyone, based taxi company, Garden City were expressing concern that drivers except a small collection of vested Cabs, provides it in answering its were earning a pittance (and getting interests. R own rhetorical question, ‘How secure bashed), while owners of taxi licenses

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