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

Metropolitan NSPs charge affiliation fees per 28 day
period and that the same fee is generally charged without
reference to the licence type or how many booked jobs
are taken. For example, peak service taxis are charged
the same fee as a 24-hour taxi, despite being only
permitted to operate for up to 16 hours per day.
Regional NSP fees are understood to be more expensive
because those smaller networks have fixed costs that
must be shared by fewer affiliates. Platinum Taxis on the
other hand is believed to have kept fees below market
rates as part of its strategy to attract new operators.
Costs associated with the running of large NSPs are
understood to be largely fixed costs: that is, costs that do
not vary with output. These costs include the cost of IT
and telecommunications infrastructure. This means that
there are some economies of scale associated with NSP
operation, as the owner of Silver Top Taxis explains:
The attractiveness of the services that a particular
network service provider offers to taxi drivers and end
users tends to increase with the number of taxis
affiliated with, and users of, that network. The
communication systems that are used to operate also
exhibit economies of scale to a certain degree. For
these reasons, it is an expected (and efficient)
economic outcome that the provision of network
service provider services will naturally gravitate
towards a relatively small number of providers. 60
The variance in prices for network services between
metropolitan and regional areas demonstrates this
economy of scale to some extent. However, taxi
operators have advised the inquiry that prices for network
services in Melbourne have continued to increase
annually above the rate of CPI for the last 10 years, with
affiliation fees having risen around 15 per cent above
the rate of CPI over this period. It is notable that, during
this period, more than 1,100 additional licences were
released into the metropolitan Melbourne market, which
should have further assisted NSPs to achieve greater
economies of scale, fund new infrastructure and maintain
or even reduce fees to affiliates. Based on today’s fees,
the additional licences alone have resulted in NSPs
enjoying a share of additional annual affiliation revenue in
the order of $7.7 million.
The inquiry considers that while economies of scale
may have been achieved by the progressive mergers of
smaller suburban networks and the growth in number of
operators, it is possible that the benefits have not been
passed on to operators by way of lower affiliation fees.
The Essential Services Commission noted in its
submission:
A number of factors suggest that NSPs are in a
position to charge excessive affiliation fees. 61
The ESC contends that these fees may be less than
efficient because they are likely to contain an element
of monopoly rent due to there being few competing
networks in any given taxi area. The ESC’s view is
supported by these observations regarding increases in
fees in recent years.
The relatively large size of the Melbourne networks by
comparison with networks in other Australian capital
cities suggests that relatively low network service fees in
Melbourne could be expected. However, the affiliation fees
of the major Melbourne NSPs appear to be comparable
with similar networks across Australia, with Melbourne fees
only slightly below the average. Since networks in other
jurisdictions also have dominant market positions, it cannot
be claimed that this demonstrates that the Melbourne
network service fees are not excessive.
Despite the apparent comparative cost of monthly
affiliation fees across Australia, the cost of affiliation in
Melbourne does appear to be disproportionately high
when measured by the number of jobs dispatched
to taxis. This further suggests that the economies of
scale that have been achieved by Melbourne networks
are not being passed on to their affiliates. Figure 11.7
demonstrates that the cost of affiliation when measured
per booked job is $4.10 for Melbourne while Sydney is
almost half the cost at $2.20.
60 Gange Corporation, Op.Cit., p.5
61 Essential Services Commission, Op.Cit., p.13
Understanding industry performance CUSTOMERS FIRST 245