Part D – Understanding and improving industry performance (PDF ...

10.2.2. Detriments from restrictions
on licences
Quantitative restrictions on entry have obvious effects
on market structure: they directly limit how many firms
can enter the market. These restrictions allow holders of
licences to earn profits from the supply of taxi or hire car
services. These profits may be earned either by operating
the taxi or hire car or, as discussed below, by assigning
the taxi licence to an operator.
The restrictions are costly for consumers because:
1. Prices are higher than necessary to provide the
service (as the assignment costs, which are real costs
for taxi operators, are built into regulated fares)
2. Restrictions exacerbate problems of meeting demand
at peak times
3. Restrictions limit service innovation
4. Restrictions impose a significant regulatory burden
and create the risk of the licensing authority choosing
the wrong price and quality combination.
Further detriments result from related regulations that
are, to some extent, a function of the restricted licensing
regime. This includes zoning regulations and restrictions
on the operation of hire cars.
The nature and significance of these detriments are
discussed in the following four sections.
1. Effects of licence prices on fares
In metropolitan Melbourne, the most obvious symptom
of the current supply restrictions is the price (nearly
$500,000) at which taxi licences trade and the value
attached to licence assignments (around $30,000 per
year). Assignment values reflect annual profits that can be
earned in operating a taxi, while licence values reflect the
discounted sum of annual profits that may be earned in
operating a taxi. 10
The fact that assignments represent industry profits
is not universally accepted within the industry. The
inquiry understands this is because assignments do not
necessarily track industry profitability smoothly. The ESC
has described this as assignments showing a degree of
‘price stickiness’ – noting, for example, that there was
limited downward pressure on assignment fees in late
2007 even though LPG prices were rising. 11
Further, assignment prices have risen over the past few
years even though there have been no fare increases
and there have been cost increases relating to network
service provider (NSP) fees and insurance. Some
submitters put this down to “competition within the
brokerage sector of the industry”, with “prices being
artificially manipulated…to the benefit of licence owners,
taxi brokers and other key industry players with a vested
interest in ensuring that prices are retained at the current
high levels”. 12 The VTD also comments that it is difficult to
understand why the demand for licence assignments is
so high given the cost pressures on operators. 13
The inquiry accepts that there is some evidence of inefficiency
in the assignment of licences. This is discussed further below.
Nonetheless, the inquiry’s view is that in the medium to longer
term, it is not possible for assignment values to be totally
divorced from the profitability of operating a taxi licence.
The fact that more and more licences are being assigned
also strongly suggests that operators are able to make the
profits necessary to justify paying the assignment fee.
The reason that assignment fees create higher prices for
consumers is that these fees are recovered from fares:
although they are technically a rent and not a cost, they
form part of the cost base estimated by the ESC to
calculate efficient taxi fares. The ESC notes that:
Assignment fees represent a significant proportion of
taxi revenue. For an average 7.7 km journey the
average base fare in Victoria is approximately $17.35,
of which assignment fees account for $3.05, or 17
per cent. 14
Treating these economic rents as costs means that, other
things being equal, fares are higher than they would be in
a market where licences had no intrinsic value. 15
It is important to recognise that this source of
inefficiency is a direct result of licence restrictions. In
a market without licence restrictions (and non
prohibitive licence fees), there would be no
assignment fees as each operator would also be a
licence holder, and operators would be free to earn
economic profits that correlate with their level of input
into the industry. Hence, restricting licences creates a
transfer of economic profit away from operators, and
licence holders receive this in the form of an
economic rent. 16
10 A number of submissions noted that the Victorian Government is now
the largest owner of taxi-cab licences in Victoria. In particular, the
Government leases licences – notably, 600 ‘green top’ peak service
taxis and 530 licences released in 2011 under the Greater Melbourne
Taxi Licence Release
11 ESC Staff Paper, Submission to the Taxi Industry Inquiry, SS151, p.31
12 Ambassador Taxis, Taxi link and Cabways, Joint submission to the
Taxi Industry Inquiry, SS233, p.29
13 VTD, Op. Cit., p.26
14 ESC Staff Paper, Op.Cit., p.27
15 It is possible that other things may not be equal. In particular, lowering
fares with no increase in supply will increase waiting times and may
therefore decrease demand. The gains to consumers from reducing
fares on their own may not be as high as the assignment profits
currently earned
16 ESC Staff Paper, Op. Cit., p.32
Understanding industry performance CUSTOMERS FIRST 183