Will implementing Prof Fels’ recommendations improve taxi services for Victorians?

The State government has now received the final report from the Taxi Industry Inquiry. While there is some conjecture about the impact of the recommendations, there is agreement on one aspect. Reducing the cost of the taxi licences will destroy the capital value of the current licence holders. The future value of the existing licences is a matter for debate but it will certainly be considerably less than the $450,000 that they currently command in the marketplace.

There is also general agreement that the payments to taxi drivers are far too low and there is anecdotal evidence that this is beginning to affect the availability of drivers and the availability of taxis. Reducing the annual cost of a taxi licence will decrease taxi costs and increase revenue per taxi for licence holders whether this translates to increase payments to taxi drivers depends on the extent to which the licence holders pass the cost savings on.

We have drawn a causal loop diagram (CLD) that serves as a model for our dynamic simulation of the proposed changes. In this model, the arrows indicate the causal relationships that demonstrate the interconnected and dynamic structure of the taxi industry.

The starting point in the model is the Price of taxi licences (shown in red). As the price goes down, the number of taxis will go up, as will revenue per taxi. This is indicated by the letter O at the end of the arrow meaning the variables move in the opposite direction. This means that dropping the price of licences will increase the revenue but also increase the number of taxis. More taxis means that the revenue per taxi will go down.

As the number of taxis goes up, the waiting times come down (also indicated by an O). The report argues that as waiting times come down, demand will go up (again, indicated by an O).  This increased demand will lead to an increase in the revenue per taxi. This, there are two influences on taxi revenue: increased demand, which will increase revenue and more taxis which decrease it.

Taxi revenue is currently the sole determinant of the driver payments. If taxi revenue declines, driver payments decline and the number of drivers will also decline. This will lead to fewer, not more, taxis on the road.

The first iteration of the model began with taxi numbers increasing, but the model suggests that taxi numbers may actually decrease until the market finds a new equilibrium.

With a taxi numbers declining as a result of driver shortages and declining revenue, we find that waiting times go back up, demand goes down and revenue per taxi declines even further. The counterintuitive conclusion that arises from the dynamics described in the model is that reducing the price of taxi licences is likely to have a long-term and detrimental effect on the industry.

It is not known how many new taxis will enter the market. However, unless existing licence holders drop their annual leasing fee to equal the government’s new annual taxi licence cost, then all existing leaseholders, some 5000, would apply for the new government licenses. This will mean that the existing licence holders and holders of the new government licenses will be competing for a decreasing pool of drivers.

The other policy option open to the Government is to increase the revenue by increasing fares. Fare increases have a twofold impact, they increase the revenue per taxi but they decrease the demand. At best, this policy is likely to have little or no impact on the overall dynamics and profitability of the industry.

The conclusion is clear. Decreasing the price of taxi licences and increasing fares is unlikely to have long-term beneficial effects within the industry. It will be necessary to bring about significant systemic and structural change to do this.

Our detailed simulation modelling can show the impact of differential fares for peak hours and short trips, changes in regulations regarding zoning and changes to the balance between fares and flag falls. It can also show the impact of linking license fees to improvements in quality.



Why the refugee problem won’t go away

It is often useful to think about organisational and social problems in terms of the  language of stocks and flows which work rather like a bathtub with inflows ( the tap), accumulations  (the bath tub) and outflows (the plug hole).

If we apply this thinking to the refugee situation we have a very simple diagram shown below.

 Here, refugees arrive ( the inflow), they remain in detention (the accumulation) and they are processed (the outflow). The increase in refugees in detention is a result of the arrivals outstripping those that are processed. There are two ways around this: decrease the rate of arrivals or increase the  processing. Both of these will lead to a decrease in the numbers of refugees in detention.

Both solutions have inherent problems. The difficulty in stopping the boats has been outlined in the press recently. It is highly likely that the Indonesian government would not cooperate with this policy. Increasing the rate at which refugees are processed  also has inherent difficulties because of the feedback that exists between processing and arrivals. This feedback is shown by the red arrow.

News about the increased processing is fed into the  network and increases the arrival rate.

The solution does not lie in changes that can make be made to this particular  structure.

The solution lies somewhere else and is shown in the third diagram

This diagram adds the legal entry process for refugees. News about these applicants has a feedback effect to the arrivals of the so-called illegal immigrants. If the rate at which legitimate applicants are processed increases, then we can expect the rate at which the illegal immigrants seek to arrive by boat to decrease with a consequent decrease in the numbers of people held in offshore detention centres.

This solution will not decrease in the refugees coming to  by boat but it will decrease the refugees held in detention centres.


Why the transplant program will continue to run into overcrowding problems

A recent article in The Age  reported that the lung transplant  theatres at The Alfred Hospital had been closed for lack of funding. While there was some debate about whether this was necessary, the structure of the system suggests that the retrieval and transplant processes are coming under increasing pressure.

The  Federal Government has funded appointments of doctors to identify potential organ donors in hospitals. This policy has been particularly successful and donation rates have risen.This has combined with some significant improvements that  the coordinating body,DonateLife, has made to the system.

It is principle of systems theory that improving one part of the system  will place increasing stress on the unimproved  parts of the system. When this improvement, in this case increased funding  for the identification of donors, occurs at the beginning of the system,  the whole system comes under pressure.

The causal loop diagram below shows the dynamics of this process.

The improvements to the donation process and the increased funding increases the number of organ transplants and reduce the waiting list.

This creates pressure on the downstream donation and hospital processes which have not received the  increased funding of the  donor identification process.

There are some unintended consequences as well. Many organ donors require  a second  or possibly third transplant, so there is is delayed pressure on the system. In addition, improvements in medical technology  will lead to a broadening of the criteria for both  donors and and recipients. This serves to increase the waiting list. This means that the decrease in the waiting list as result of the increased funding may not be as great as was expected.

The main problem however remains the unequal distribution of funding across system. This, in addition to the  built-in dynamics of the system, means that situations such as the one that occurred at The Alfred will become more frequent.