Little is fair in regulating taxi fares and licences

Through all the market reforms of the 1990s, examples of taxi market deregulation in Australia were as hard to find as a cab on New Year’s Eve. Only Darwin achieved any major reform.

Taxi markets in other Australian cities are highly regulated. The key to this is government control of market entry – by restricting the number of taxi licences and mandating prices for all types of journeys.

Regulation continues despite various studies, many undertaken pursuant to national competition policy, recommending otherwise.

Given the costs imposed by regulation, and the benefits that would flow from deregulation, why have governments been so reluctant to undertake reform?

The focus for deregulation has become the cost of compensation for government. Although consumers gain from deregulation, taxi licence owners oppose it because when the barrier to market entry is abandoned licences would lose their value overnight.

In 2005, the average Melbourne taxi licence was worth $347,000. With 3049 taxis in Melbourne, this represents a cumulative loss of value of more than $1 billion. Governments are concerned about having to pay such large amounts in compensation as part of the reform process, but if you look at the legal and equity arguments, their concerns simply aren’t justified.

Legal arguments focus on whether a taxi licence is a property right, and whether deregulation is unjust interference by the government with this property right.

In response to this, there is a common view that while taxi licences are a property right, they are issued subject to an implied condition that government policy in relation to those licences may change and the effect of any such change would not attract compensation.

While this proposition has not been tested in the Australian courts, in 2001 the Irish High Court upheld this view when Irish taxi drivers demanded compensation.

Equity arguments arise because by deregulating taxis the government is reducing the value of assets it sold or its policies encouraged people to buy. There are two main considerations that count against strong equity claims for compensation.

The first consideration relates to how and when taxi licences were acquired. Most taxi licences were acquired inexpensively decades ago. These owners have already had high returns on their investment and therefore should not be entitled to compensation.

This argument applies also to owners of taxi licences bought from other licence holders at later times. For example, taxi licences changed hands for $25,000 in 1982. These owners would also have had time to achieve good returns on their investment.

For recent buyers of taxi licences, the issues are more complex. Arguably, they were taking a risk in making this purchase. Investments in intangible assets are generally high risk and this is especially the case with taxi licences that are directly dependent on government policy. Investors in taxi licences hope to secure high returns and high returns are normally associated with high risk.

Although government policy on taxi licences has changed little over a long period of time, it has been a contentious issue for more than 10 years. People buying taxi licences knew or ought to have known that the licence carried with it no guarantee that policy would remain the same.

Like other high-risk investors, they should not be entitled to compensation when their judgement about the future proves to be incorrect.

The second consideration concerns expense incurred as a result of the licence. Regulation can prompt investment decisions that lose their value when it is repealed.

For example, tariff barriers provided an incentive for substantial investment in factories and other assets that may have no alternative uses without tariffs. Therefore there is a case for compensating factory owners for removing tariff barriers.

However, this is not the case with taxis. The main investments are the taxi vehicle itself and taxi network membership, which are relatively small investments compared with the price of a taxi licence.

Despite the lack of arguments in support of compensation claims, it is likely that taxi licence owners would still claim compensation in the event of deregulation and this may make the reform process politically difficult.

What must be remembered is that deregulation will deliver substantial benefits to consumers, particularly to those dependent on taxis such as the elderly and disabled. Governments should act with them in mind.

Krystian Seibert is the author of ‘Finding A Cab: A Better Deal for Taxi Customers’ in the Winter issue of Policy magazine, published by the Centre for Independent Studies.