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.