Guest post by Rod Bogaards*
Recent announcements by the NSW and WA Governments to legalise ride sharing service UberX have also included proposals for ‘adjustment assistance’ for taxi plate owners.
Taxi plate owners are understandably concerned over the loss of value in their taxi plates caused by the erosion of the taxi monopoly. Taxi associations have been lobbying state governments for compensation if Uber is legalised.
The NSW Government announced a $250 million industry adjustment assistance package to taxi plate owners. This assistance will be funded by a levy on all point-to-point transport providers, equivalent to $1 per trip for five years. Similarly, the WA Government announced the establishment of a transition assistance package and hardship fund (although the details are still to be finalised).
The Queensland Government has commissioned its own independent review of the taxi industry and will have to decide whether any assistance is justified.
According to the Sydney Morning Herald, some lukewarm support for taxi compensation has come from the architect of the Commonwealth Government’s recent Competition Policy Review, Professor Ian Harper. Conversely, the Economic Regulation Authority in WA says there are three reasons why there is no justification for state government compensation for taxi owners.
- Loss of taxi plate value is due to technological change not a change in government policy
The value of taxi plates has already shrunk irrespective of whether governments legalise Uber. This reduction in value has come about by technological innovation, not a change in government policy. The demise of state taxi monopolies has been brought about by the entry of ride sharing services rather than any government action. Governments are therefore under no obligation to pay compensation.
But, even if it were due to a government policy change, the case for compensation is not clear cut. It is generally accepted that governments should compensate where they reduce or remove physical property rights. However, property rights that are generated solely by government regulation (such as taxi licences) are generally assessed on a case-by-case basis.
- Governments should not compensate taxi owners for poor investment decisions
The purchase of a taxi plate is an investment like any other financial investment. Investors in taxi plates should have been aware of the risks associated with the relatively large investment they made. Similar to other investments, due diligence was required to assess whether the risk-return trade-off of owning a taxi plate was a sound investment. Taxi plate ownership was never a risk-free investment since there was always a risk that technological change or regulatory reform would reshape the taxi industry.
If compensation is paid in such circumstances it would set a very expensive precedent. There are many industries experiencing rapid technological change and many investors in these industries will not recoup their investments.
- It is unfair for consumers/taxpayers to compensate taxi owners
Asking consumers to pay more to taxi plate owners is very difficult to justify on fairness grounds, given they have borne the costs of the taxi monopoly for decades in the form of higher taxi fares and longer waiting times than would have existed in a market without supply restrictions. It would be inequitable for consumers to pay for the privilege of removing the taxi monopoly — they have borne such high costs already. A 2012 study by CIE estimates around $24–40 million is transferred from consumers to the 2,881 taxi licence owners in Queensland each year due to the limit on the number of taxi licences.
It would also be unfair on taxpayers to pay compensation. Transferring money from taxpayers to taxi plate owners would have to be justified on the basis that taxi owners are somehow more deserving than those taxpayers funding the compensation.
According to the OECD, the New Zealand and Irish Governments deregulated the taxi industry without compensating taxi owners.
The Queensland Government’s approach will have important implications for consumers and taxpayers and set a precedent for other regulated industries that are being challenged by technological change.
*Rod Bogaards is an economic consultant and former Director of the Productivity Commission.
Very good points here, the taxi industry has done little to adapt its operations for many years and stood behind its monopoly position. Taxis are already given many considerations at airports, CBD designated taxi areas, designated traffic lanes on freeways with buses that other services cannot access. Many owners do not drive themselves and have simply relied on others to operate their business for many years thinking they had a guaranteed return from their plates, they should receive nothing.
Yes, there are very good arguments for not compensating them. Thanks Glen.
I don’t understand why the introduction of Uber into the public transport sector is any different to the introduction of internet shopping to the retail
sector. Both face new competition due to technology, but neither will be killed off by the new market entrants. Rather, the competitive landscape has changed and capital values of incumbent businesses (taxi plates or the value of retail businesses) will change depending on how the incumbents react.
Sure, the value of taxi plates will reduce. But so did the value of shopping centres on the back of internet sales; or the value of bus companies on the back of cheaper interstate airline tickets; etc etc.
Virtually every industry operates under some form of regulation (a form of a license to operate in a sector or area). This is not materially different to a taxi license. So why would the holder of a taxi licence be eligible for compensation from a change in technology when no other industry is?
Great point, Jim. I vaguely remember those days of ridiculously expensive interstate air travel. Deregulation and privatisation certainly improved that sector!
Very interesting and insightful point-of-view.
I agree that before doling out tax-payer funds to the taxi-industry, the government should concentrate on collecting fair taxes, GST and income tax from the Uber sector.
My Uber driver the other day said they’re all now paying tax and hence they’re fully legal. Thanks for the comment, Katrina. It certainly is an insightful post from Rod.
Rod does make some interesting points though I’m not sure it’s not a change of government policy. True, it is in response to technological change and not government policy change in isolation. It is likely also true that the value of existing taxi plates has decreased already due to Uber and therefore I wouldn’t think the full plate value would require compensation. However I suspect there may be a case for some compensation though more thought on this would be required. Perhaps where the capital value of the plate can be proven to have been recovered then there is little case for compensation. Of course these plates may still have some future value depending on the model the Qld Govt. ends up going with.
The ‘management rights’ industry in Qld might provide a better analogy than retail where the ‘rights’ to manage apartment buildings in this state are sold by developers to investors, often for many $M. Investors then either live-in and manage the building themselves by providing caretaking and letting services to the body corporate and investor owners, or as some of the larger companies do, put a manager in (so very much like the taxi owner driver and the plate owner that puts a driver in the seat). These contracts are up to 25 years and the body corporate (the owner of the building) has little say in these ‘rights’ being traded. This industry is currently being disrupted by Airbnb (re. the letting component) where resident managers typically have contracts that do not allow anyone else in the building to set up a letting service in competition to the onsite manager. Again, it is not clear whether Airbnb in all council areas is legal and the state government will also have this on their plate very soon I suspect (http://www.abc.net.au/news/2016-01-06/high-rise-residents-fight-back-against-short-stays/7071042).
Interesting post Rod, thanks.
Given that the PM is constantly talking about the need for innovation, it would seem a bit ironic to give customers’ or taxpayers’ money (and some taxpayers never use taxis) to compensate an industry that has been disrupted by innovation!
Rod’s other point – that customers have probably paid too much for cabs in the past due to the lack of competition in the sector – also needs to be considered when thinking about compensation.