Victorian Taxi Association submission to Taxi Services Commission
‘Proposed Excessive Entry Test – Public Consultation Paper’
March 2014
Introduction
In principle, the VTA does not agree with the Government’s new approach to taxi licensing. The
model being pursued by the Government is based on theoretical models, when empirical studies
have demonstrated that there are many negative externalities suffered by the customer, when
similar policies were implemented in the Northern Territory, New Zealand, Ireland, parts of the USA
and South Korea.1 Despite following different paths to reducing regulation of taxi licensing, all of
these jurisdictions have since seen a decline in customer service levels and industry sustainability,
and all of which are the result of an oversupplied market.
This oversupply is allowed to occur because incorrect assumptions about the economic rationale and
motivators on the part of new market entrants were made by the Government/regulator. Past
experience has consistently shown that the decisions of new market entrants are clearly not
necessarily rational or based on quality information and planning as is assumed in the consultation
paper.
However, the VTA recognises that the Government have taken this decision regarding taxi licensing
and respect their authority to do so. We also recognise that it is the job of the Taxi Services
Commission (TSC) to implement the Government’s chosen reforms, and for this reason remain
committed with working with the TSC to ensure the reforms are implemented in such a way as to
ensure negative externalities are minimised, Victoria’s taxi service improves and the industry
remains sustainable.
The proposed excessive entry test, as described in the consultation paper and in section 143AA of
the Transport Legislation Amendment (Foundation Taxi and Hire Car Reforms) Bill 2013, is
represented as a rigorous process that will effectively ensure that the new approach to licensing
which seeks to increase competition does not produce the potential ‘perverse outcomes’ which are
observed when there is an excess supply of taxis.
This can be seen as an admission that there is some chance that the new licensing regime may not
work in the anticipated way and so there is a need to have a test that provides empirical evidence
that the policy has not worked as anticipated and the perverse outcomes are very likely to occur.
This can then be used to justify limits to the number of licences available. We will therefore take
the opportunity in this submission to explore a number of methodological issues with the proposed
approach to protecting against excessive entry to the metropolitan and urban & large regional taxi
markets which we believe will fundamentally compromise the facility of the test.
1
Arirang News Korea, available online at: http://www.youtube.com/watch?v=HizzJ8E3P6k&feature=youtu.be.
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Articulating potential perverse outcomes
It is important to provide a more exact description of the range of perverse outcomes and the
importance which is attached to each issue. The key perverse outcomes discussed in the taxi
deregulation literature are:
1. Fares increase instead of decrease - This occurs when the increase in supply exceeds the
increase in demand so taxi occupancy rates fall and cab drivers are forced to charge more to
cover operating costs and a normal income;
2. Customer confusion - It may not be possible to give potential customers access to the
information which makes it possible for them to make an informed decision concerning
which cab to select in any given situation;
3. Fears over safety and increasing compliance costs - In some instances, deregulation has lead
to a situation in which a significant number of cars in the industry are poorly maintained and
in some cases uninsured. To ensure that this does not happen, the Government has set
certain standards which means creating extra red tape at a time when they are saying they
wish to reduce red tape. The enforcement of these standards are expensive;
4. Cream skimming - In practice a significant increase in the number of cabs may not improve
services in all areas of Melbourne as many of the new entrants will focus all of their
attention of those more profitable segments of the market.
5. Congestion - Extra cabs require increased rank space to operate effectively. If the extra
spaces are not provided this can produce conflicts between drivers and between drivers and
customers.
6. Barriers to entry also have benefits - The existence of barriers to entry can help to deter less
reliable people from entering a market, so removing such barriers will make it more likely
such people enter the market.
7. Driver remuneration decreases – Published studies show that an increase in supply always
exceeds any associated increases in demand, which has the effect of causing a decline in
occupancy rates which in turn has a negative impact on driver remuneration.
While a study of issues associated with the airline industry is of general interest here it would be
more helpful if reference was made to the many studies which examine perverse outcomes in the
taxi industry when policies designed to make the industry more competitive were implemented.
Two frequently quoted studies which contain very useful lists of references and which set out some
of the practical problems that have been encountered when taxi markets have been deregulated
are:
-
Roger F. Teal & Mary Berglund (1987) “The Impacts of Taxicab Deregulation in the USA”
Journal of Transport Economics and Policy, 1987, p 37 - 56.
2
-
Paul Stephen Dempsey (1996) “Taxi Industry Regulation, Deregulation and Reregulation: The
Paradox of Market Failure”, Transportation Law Journal V24 (1) p 73 - 120.
While these references are from a pre-mobile phone era the recent improvements in
communications have little impact on the results of their critiques.
Assumptions and review cycle
As referenced in the introduction, the VTA has serious concerns about the validity of the strategy
that is being used to deal with the possible perverse outcomes. Using a set of indicators to
determine when to reduce the number of licences is essentially a ‘reactive strategy’.
How long the lag between having over supply in the market and the time at which the excess supply
is reduced depends on how long it takes to gather and process the relevant data. It is noted in the
paper, that assessments on licence release will be made on a six monthly basis. The TSC require
data from the metropolitan Network Service Providers (NSPs) on a monthly basis. As a result it
should be possible to make this evaluation on a monthly basis. If this approach is not taken, it is
questionable why the industry is required to carry this large cost burden if the regulator will not be
willing or able to use the supplied information in a timely fashion. Another option for avoiding issues
associated with excess supply (and administratively cheaper for the TSC) is outlined below.
If the TSC intend to run the formal evaluation, where evaluations are made every 6 months, a more
informal process should be developed whereby sudden changes in market behaviour, for example a
surge in licence applications, can trigger a response whereby the TSC cease issue new licences until
the excessive entry test is run. Such a trigger could be based on a monthly application quota. Once
the quota of applications is met the TSC cease issuing licences. This would help avoid issues
associated with oversupply that, as discussed further below, due to issues associated with market
exit are hard to rectify in hindsight. So in summary the VTA would suggest that on top of the formal
6 month evaluation process a less formal monthly system in also introduced that is administratively
cheap to run yet can easily be introduced simultaneously.
The wording of the public consultation paper indicates that the null hypothesis or status quo is that
a policy which makes the industry more competitive will not produce perverse outcomes. Typically
to reject a null hypothesis, the evidence in support of possible perverse outcomes would need to be
extremely strong. From the VTA perspective this suggests that the probability of actually rejecting
this null hypothesis and reducing the number of licences is very low. The VTA would like to state
that we see this situation as worth monitoring closely.
The outcomes produced by economic models, on which the proposed model is founded, rely on a
range of strong assumptions about how the taxi market operates. There are two assumptions that
are made in the standard economic models that appear to have little validity in the case of the taxi
industry:
1. market participants have easy access to all relevant information needed to make rational
decisions; and
2. entry to and exit from the industry is easy
3
These assumptions are often violated in the taxi industry and this leads to behaviours which are
more consistent with results from Behavioural Economics rather than the results from Neoclassical
Economics. Examples are explored below.
Industry information
While the large existing operators have much relevant information this is not the case for both small
operators and for potential market entrants. They have little knowledge of either costs or potential
revenues.
The demand for taxi services is extremely complicated. The averages differ from hour to hour, from
day to day and from month to month. Thus it is incorrect to think that there is a single demand
function for taxi services. There are hundreds of demand functions associated with different time
periods and different locations. In many cases these averages are of limited value because these
demand levels have very large variances. Even large existing operators have very limited knowledge
of demand conditions in this industry. Their way of dealing with this is to use rudimentary forms of
interval estimates when making plans for what services it is appropriate to supply.
In practice this means that for all operators, their limited knowledge of future demand does not
allow them to accurately forecast demand in a way that lets them schedule the appropriate number
of cabs at a particular time and location. In practice this means that at any point in time or at any
location it is reasonable to assume that there will be excess demand for or excess supply of taxis
rather than the number needed for a competitive equilibrium.
Industry exit
With new Government licences soon to be available, entry to the industry will become easier. There
are major issues with assumptions about the ability to make rational decisions to enter the market
and the ability of industry participants to leave the market.
Market entry
This is no apparent source of information on industry performance available to potential market
entrants on which to make informed decisions. History tells us that entry to the taxi market is not
rational, and that in many cases new entrants do so to, in effect, buy themselves a job. The TSC
should be more than be aware of this after the catastrophic effects of GMTLR, especially in relation
to the wheelchair accessible licences.
The VTA also has experience in this area, because for many years its training subsidiary, Taxi Industry
Training Victoria (TITV) ran the operator course that all new entrants had to sit. It was clear to TITV
and the VTA that despite information provided during the course which clearly demonstrated a lack
of business viability, course participants would go ahead and enter the market. This can be
discussed in more detail if required.
The publication of data reported to the TSC by the industry would contribute to improving the
situation. This data is collected with the hope of offering a foundation for more evidence-based
decision-making on the part of the regulator. It is only fair that the same benefit be extended to the
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industry. It is also reasonable to expect, that with greater availability of quality industry information,
decisions regarding entry and exit of the market are more informed.
Market exit
For most new entrants, when they start to experience difficulties it is extremely difficult to work out
whether their losses are short term or long term. As many of them are people who equate buying a
licence with buying a job or buying a comfortable retirement (and in some cases have used early
retirement packages to purchase their licences), it will be extremely difficult for them to admit that
their losses are ongoing even when the evidence is overwhelming. They will persist in thinking that
their position will turn around eventually. They will then adopt strategies that will enable them to
survive until their business becomes profitable. There are several types of strategies they might
employ:
-
further increase supply which could drive prices down further and help ensure even
more operators are not viable;
-
fail to maintain their cars satisfactorily; or
-
work longer hours which brings an associated range of risks, such as the persistence of
drug reliance in the trucking industry.
The taxi industry is unique in regard to market exit because it is far easier to remain in the industry
and be a part of the supply chain at very low levels of profitability when compared to other
industries. If we use a milk bar business as an example, the milk bar must purchase stock, pay rent
and in some case pay for labour. If they are unable to do this they will be forced to close their doors.
A taxis business, on the other hand, finds it easier to resist pressures to exit the market. The rent
payable is paid up from as of July 1 2014 or in monthly instalments and the labour cost is that of the
owner and if they do chose to utilise other people's labour this is done traditionally via bailment
where the labour recovers the earnings at no cost to the owner (because the arrangement between
operator and driver is not defined as one of employment there are fewer costs associated with the
arrangement). The only other cost the owner is likely to have to account for is any outstanding debt
associated with the vehicle.
The indicators that will be used in the test for excessive entry may or may not be able to identify
when these behaviours are occurring. As in the trucking industry these behaviours can lead to what
are essentially low probability extreme events, such as increasing numbers of serious accidents in
which passengers are killed or seriously injured. It would be useful to look at the numbers of
extreme events such as these as one of possible indicators of problems in the taxi industry for
inclusion in the test.
It would also be useful to consider how to develop policies which allow for these violated
assumptions, that is, how can relevant information be made more readily available, and how can we
make entry to and exit from the industry easier.
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Indicators
The proposed test includes a number indicators for which it is proposed that data be collected.
These are supposed to serve as evidence of either excess demand or excess supply which will
produce perverse outcomes. In some cases, the outcomes the indicators are supposed to ‘indicate’
do not have a direct relationship, as portrayed in the paper, and all indicators lack robustness. A
critical analysis of the proposed indicators is provided in Attachment 1.
Far more consideration needs to be given to how the proposed indicators match up with the Key
Performance Indicators (KPIs) in other areas, for example, the KPIs established governing licence
release in the ACT.2 None of the indicators in the consultation paper have associated metrics and are
thus not measurable in any sense. It seems to suggest all indicators will be subjectively viewed by
the decision makers within the TSC at the time of review. Not only is this subjective approach highly
questionable from a methodological point of view, but this approach also fails to take the
opportunity to establish what would effectively act as industry service benchmarks. It is vital that
the test and the included indicators set expectations for both customers and the industry as to what
should reasonably be anticipated in regards to service quality and availability, not only to create
accountability but to offer the industry standards it should work towards. At the same time we need
to consider the costs associated with obtaining this data. Once again, the regulatory burden and
straight costs of reform, in this case to licensing and data collection, have not been adequately
considered or costed to date. It simply must be recognised that escalating regulatory and reporting
requirements impose a cost which will ultimately be reflected in the price of services.
Further, the nature of the relationship between the values of the listed indicators and the different
perverse outcomes needs to be explored and articulated. Specifically, evidence must be used to
answer the following questions when these indicators are used to identify situations of excess
demand or excess supply:
-
Are these indicators Leading, Coincident or Lagged indicators?
-
Are these relationships positive or negative?
-
Are they weak or strong relationships?
It is then necessary to look at the methodology that is used to determine appropriate benchmarks
for these indicators that can be used to justify changes in the number of licences. It is not selfevident which methodology should be used to obtain benchmarks. As historically little relevant data
has been collected by the regulator, it is obvious that there will be a significant lag between the time
at which the legislation is passed and the time at which we have enough data to obtain reliable
benchmarks.
It is also vital to consider an appropriate statistical methodology to use with the benchmarks for
excess demand and excess supply in the taxi industry. In many studies, benchmarks are based on
2
Nicholls, Des, Supply and Demand Issues Relating to the ACT Taxi Industry, Canberra Taxi Industry
Association, July 2012.
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simple averages. As is pointed out in “The Flaw of Averages” by Sam Savage3, plans and policies
based on averages are wrong on average.
For an industry such as the taxi industry it seems far more appropriate that the Statistical Process
Control approach developed by W. Edwards Deming be used. This approach argues that for large
complex operations such as the process of providing taxi services 24 / 7 over a very large area, it
must be recognised that variation in the quality of taxi services can have two quite distinct causes
which Deming refers to as:
Common causes - that are inherent to the process such as the limitations of the
communications system and differences in the amount of traffic congestion; and the
Special or assignable causes - that occur independently of this process, such as major traffic
accidents that produce severe traffic holdups.
Deming argues that there is some level of variation i.e. errors and mistakes, that are associated with
the common causes which is natural for any large complex system. To reduce this level of variation
in the quality we have to improve the complete system. Here we first note that issues associated
with levels of traffic congestion are beyond the control of any taxi company. They can only control
the quality of the cars, the drivers and their communication systems and they can also control the
number of cars in service.
It is difficult to see how anyone can argue that simply increasing the number of taxi licences must
reduce the natural level of variation due to the common causes.
Finally, of real concern to the VTA is the notion that the proposed system seems to attribute any
positive outcomes to an increase in competition and therefore justifies leaving entry open. What this
approach fails to recognise is taxi operators and taxi drivers who have innovated and /or improved
their product would in this case have less chance of gaining a larger reward for their efforts. In
effect, this reduces the incentives to improve service levels because the better the industry performs
the more exposed it is. It is important to note that the VTA is of the firm view that there can be a
positive sum scenario whereby the industry's interest (business viability) and consumer interest are
both served simultaneously.
Acknowledgments
This VTA submission has been has been prepared in collaboration with Dr John Shannon, Senior
Lecturer in the Faculty of Business, Economics and Law, La Trobe University Business School.
END
Contact:
Georgia Nicholls
Senior Adviser, Government Relations and Communications
[email protected]
9676 2635 – 0427 552 140
3 Savage, Sam L., The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty, John Wiley &
Sons, June 2009.
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Attachment 1
Critical analysis of proposed indictors
Indicator
1
Average fares charged
(incl. discounts)
VTA response
The VTA agrees with the rationale for this indicator, but have some concerns about the application. A reduction of the average
fare can also indicate increasingly marginal businesses making a last ditch attempt to sustain themselves.
Of critical importance here is the time path of the reduction. If occurring gradually over time, it is likely to indicate a sustainable
reduction of fares which is beneficial to the customer and could be the result of competition evolving. However, if it occurs as a
sudden or deep cut, it could either indicate a business in trouble or another perverse reason.
Further, some parameters need to be given here as to what level of reduction would indicate benefit to customers. For example,
a 0.001% reduction could be a mere accounting difference and represents no benefit in real terms to customers. Before it is
considered relevant, the reduction in costs would need to represent a significant saving for the customer.
Waiting times are a useful indicator but must be interpreted so we account for other demand factors.
A fall in waiting times could also indicate improved efficiency and use of technologies, and or reductions in congestion.
This indicator should be complemented with a distributional indicator, see proposed indicator 11.
2
Average waiting times
for booked services
3
Customer complaints
4
Taxi quality ratings
It is also necessary to establish parameters, such as a percentage reduction in wait times which are consistent with known
seasonal demand patterns. We also need to be aware of the time path to ensure that the reduction is indeed a meaningful one
and not a short term or seasonal adjustment. For example it is reasonable to expect that wait times in late Jan will be shorter
than wait times in mid Dec.
Finally, the VTA would question whether the average is the appropriate metric in this case, as the average will be skewed by
extremes at both ends. It may be more appropriate to use the median or an interval estimate.
In using complaints as a measure of the adequacy of supply, the focus needs to be on complaints that relate directly to supply
(e.g. properly adjusted wait times), not general issues.
The VTA does not agree that better quality rating necessarily indicate benefits of entry. A decline in the quality of taxis could be
reflective of poor returns to operators which is the result of oversupply of the market. It is our view that higher quality ratings in
the main reflect improved financial returns to the industry and increased business sustainability, not the benefits of increased
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5
6
Taxi driver quality
Ratings
Number of operators
7
Taxis per 1000
population in district
8
Average occupancy rate of taxis
9
Recent assignment
values of existing
licences
10
Number of recent
assignments made
11
PROPOSED - Distribution of taxi
services
entry.
As above, it is the VTA's view that higher driver quality ratings reflect improved financial returns to the industry and increased
business sustainability, not the benefits of increased entry.
The VTA do not see this measure as relevant to the issue of excess supply and think it should be removed.
The number of operators in the market is not necessarily relevant to supply. More operators in the market can indicate a
number of things and be impacted upon by other macro-economic indicators such as the unemployment rate. The number of
operators is also affected by changes to the structure of the industry and the sustainability of different business models affected
by other reforms, such as the shift in fare box split.
It is also a concern that a large number of individuals making decisions independently and with no awareness of what others in
the market are doing, could allow a ‘tragedy of the commons’ type scenario to evolve where individual operators acting in their
own best interest damage the industry.
It is the VTA’s view that this measure is of far less relevance that an effective distributional indicator, as discussed at 11. It is
suggested that a rise in this indicator reflects greater competition, which it does, but it does not reflect sustainability of that
competition.
The VTA agrees that this is a very important indicator in terms of determining excess supply. However, occupancy is difficult
measure because there are so many businesses in the market, and as a result the confidence interval would be quite wide. A
significant threshold should be established, at around 5 per cent above the rate of the day, above which occupancy is able to rise
before it is assumed the market is undersupplied. This would help ensure the industry receives a return on investments in
efficiencies, and customers continue to receive an excellent service and benefit from these efficiencies.
The VTA do not see this measure as at all relevant to the issue of supply and think it should be removed.
Assignment prices are not relevant in the context of making decisions on licence supply. Changes in assignment values and the
number of assigned licences is as much reflective of structural adjustments to the industry as anything else. Given the marginal
state of the industry at present, it is unrealistic to expect reduced assignment prices for operators to translate to cheaper fares
for customers, especially in the short to medium term.
See above.
The VTA do not see this measure as at all relevant to the issue of supply and think it should be removed.
Large fleet size does not necessarily equate to a good taxi service if these taxis are not located where excess demand exists. The
obvious problem for the metropolitan area is that it is large and taxis are free to work wherever they choose. Misalignment in
distribution and demand can occur because of the failure of individuals to locate their business where the demand exists, not
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necessarily an overall shortage of available taxis.
12
PROPOSED – Register of
extreme events
It is for these reasons that the VTA proposes that a new distributional indicator should be included which could be based on the
data reported by NSPs to the TSC on a monthly basis.
Taxis becoming involved in accidents particularly where fatigue is considered a leading factor should be monitored to ensure taxi
drivers are not working longer than reasonable to hours to sustain their business.
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