ICRC ISSUES PAPER
DETERMINATION OF PRICES FOR TAXI SERVICES
NOVEMBER 2001
Submission
by
The Canberra Taxi Proprietors Association
and
Canberra Cabs
in consultation
with
Professor Des Nicholls BSc(Hons), MSc, PhD
School of Finance and Applied Statistics
Faculty of Economics and Commerce
Australian National University ACT
February 2002
ICRC ISSUES PAPER
DETERMINATION OF PRICES FOR TAXI SERVICES – November 2001
SUBMISSION BY
CANBERRA TAXI PROPRIETORS ASSOCIATION
February 2002
1. Background.
Since the last submission 12 months ago the ACT has seen turmoil in the ACT Taxi industry, basically as a result of the flow on effects of the Freehill review of the Taxi and Hire-Car industry.
This review, the major recommendations of which are supported by the ICRC, proposed deregulation of the restriction on the number of taxi plates issued but at the same time maintain regulations on virtually all other aspects of the taxi industry. It is surprising that the Freehill review, and indeed the ICRC, only wished to deregulate the number of taxis allowed to operate. They have not advocated the deregulation of the ICRC control over the maximum fares taxis can charge, or other controls in this industry.
Since the submission last year,
· A further 10 WATs have become operational,
· The Queanbeyan taxi fleet (16 taxis) has been allowed to operate in the ACT,
· ACTION buses has introduced its ‘nightrider’ service over December-January in direct competition with the ACT Taxi industry. This service provided transport to customers for a fixed fare of $5. Given the massive subsidies made by ACT ratepayers to ACTION each year, and the cost of this additional service (bus driver’s wages, plus penalty pay and other payments for working late hours which taxi drivers work in the normal course of their duties) issues of unfair competition and contestability arise. From information presented in the ACT budget papers for 2001/2 the total subsidy to ACTION is $51.9m which equates to $422 per ratepayer.
· The previous Government gave approval for a second network (Yellow Cabs Canberra Pty Ltd) to commence.
In addition the previous Government tried to force all WAT operators to join the new network. The new Government does not support this action and has agreed that individual WAT owners should have freedom of choice as to which network they should belong.
The increase in taxi numbers operating within the ACT since the last submission has been accompanied by a continuation of a downward trend in taxi hirings. In the CTPA submission of January 2001 it was predicted that the proposed increase in taxi numbers would have an adverse affect on hirings per taxi and therefore on taxi operator and driver revenue. In January 2001 the prediction, as shown in Graph 1 of the submission and reproduced here, was considered to be pessimistic for taxi operators and drivers.
It is unfortunate but nonetheless a reality that the pessimistic predictions were optimistic relative to the actual outcomes. Based on a full twelve months operation with an additional ten WATs on the road or 243 taxis in total, each taxi was more than 1,000 hirings worse off than the January 2001 pessimistic prediction. For a fleet of 259 taxis, which presently exists, the actual outcome approximates a further shortfall of 1,000 hirings against the January 2001 pessimistic prediction.
The previous ACT Government suggested that a downturn in taxi hirings must have been the product of the poor level of service provided by Canberra Cabs. It made this statement in spite of its own independent surveys that showed Canberra’s taxi service to be highly regarded by the community and a service that performed well in all respects albeit that WATs services needed improvement. It is notable that a downturn in taxi hirings is being experienced throughout the major state capital cities.
In analysing data for the submission to the WAT Review by the ICRC, an analysis of data obtained during August 2001 showed that over a period of 26 days there was a demand of an average of less than 50 services a day from the disabled. This corresponds to less than 2 services per day per WAT. What this shows is that the increase of 10 WAT plates last year was not as a result of the demand for WAT services. Indeed it could be argued that there were more than enough WATs available in the ACT; what does need addressing is the incentive required for a WAT to give priority to calls from the disabled. The Canberra Cabs submission to the WAT review proposed the introduction of a ‘lift fee’ to be subsidised by Government. While this is the situation in Victoria, this was not accepted by the ICRC.
2. Taxi Costing and Pricing Model
The issues paper refers to the ICRC Taxi Costing and Pricing Model January 2001and concludes that the surplus shown by the model suggests that taxi fares should fall. The Commission is able to draw this conclusion only by ignoring the social impact of its decision (see Section 20 (g) of the Act) on drivers. The Commissions position argues for a fare that does not have the capacity to provide a driver with a fair return for his labour. Canberra Cabs has been asked to submit a version of the new Costing and Pricing Model updated for current revenues and costs. The version presented later in this submission provides a model that does not ignore the social impacts and avoids the perverse outcomes flagged by the Commission in its previous taxi fare report. The
model in this submission further develops and refines the ICRC Costing and Pricing Model and provides figures which represent the actual cost of a viable business.
3. Plate Values.
The terms of reference for this review requires the Commission to further develop and refine the costing and pricing model, and ‘ make provisions, where appropriate, for return on investment …’ .
In its Issues paper the Commission invites comments on whether plate values should be accounted for in the costing and pricing model for setting taxi fares, and if so, the method by which it should be included.
This issue was considered by the Commission in its report Taxi Fares for 1 July2001-30 June 2003 issued in May 2001. In that report the Commission states
‘…. The Commission acknowledges that there are difficulties in incorporating plate values in the model for fare setting purposes. It believes that, having raised the prospect as a point of discussion, the disadvantages of its retention outweigh the advantages. As a result the Commission has decided to exclude plate values from the revised model.’ (page v of the Executive Summary)
Given that this issue was fully considered by the Commission less than 12 months ago and the above decision made, it is surprising that it should want to reconsider this, particularly given the debate which took place on this subject around this time last year prior to the Commission ruling on the exclusion of plate costs from the cost and pricing model.
One must ask the question as to whether this issue would have been raised this year had it not been for the decision by the IPART in NSW to include plate values in the cost index approach to setting fares in NSW.
Had the ICRC included plate costs/lease fees in the costing and pricing model at the same rate as that adopted in NSW, namely 14% of total operating expenses, this would have resulted in an additional fixed cost of $17,964 in the case of the owner driver/bailee driver and $22,265 in the case of bailee drivers only. The final model adopted by the Commission last year and reproduced as Table 3.1 on page 3 of the Issues paper would then have shown a net loss of $12,045 in the case of owner/drivers/bailee drivers and a net loss of $13,915 in the case of bailee drivers only.
If the Commission is to suddenly decide to include plate lease costs into the costing and pricing model, the question arises as to how is it going to compensate owners and drivers as a result of the impact of not incorporating this in the model it adopted last year?
There is also a school of thought that if the quotas on taxi plate numbers are removed and the plate value is reduced to a small fraction of what it is currently, the Government would be obliged to pay compensation to plate owners (as is the case in the Northern Territory). This may be a moral obligation rather than a legal obligation. Notwithstanding that, if the costing and pricing model were to contain a plate cost/lease cost component it could be seen by some that there would be less of an obligation on the Government to pay compensation to plate owners in the event that plate quotas are deregulated and their value is significantly reduced as a result.
It is surprising that the Commission can even consider the inclusion of plate costs, after the discussions on this issue last year, and the acceptance of a model excluding plate lease costs. This is particularly so when these costs, if included, represent 14%-15% of the total operating costs. Other than driver payments, plate costs in the NSW cost model are almost twice the size of the next greatest cost, that being LPG fuel (at 8%).
4. Network Fees.
The Commission has raised the size of Canberra’s network fees as an issue. This appears to be based solely on the argument that the fees are higher in Canberra than in Sydney. The base fee for 2002 for Canberra Cabs is set at $1,113 made up of $438 Co-operative services charge and $730 radio dispatch charge. This reflects the fact that Canberra Cabs is in the process of outsourcing its radio dispatch service to a company that provides taxi radio dispatch services to more than 3,000 of the Sydney based taxis. It is of course one of the interstate providers to which the Commission refers in the issues paper as having relatively low costs compared to Canberra. The fact that the new company has priced the cost of establishing a call centre in the ACT and providing a state of the art dispatch system, including driver safety features, at a price comparable to that being charged by Canberra Cabs was no surprise to Canberra Cabs. When compared with inter-state capitals the difference in costs is simply the result of the smaller the fleet the higher the fees will be.
It is also noteworthy that one issue relating to the cost of maintaining the fleet is the significant increase in legal/consultant fees as a result of Government decision-making and the associated requirements for the supply of information and the preparation of submissions. That is the Government and the ICRC are contributing directly and significantly to this cost in their request for information.
Leading up to, and since the National Competition Review Canberra Cabs has been involved in continuous submission preparation and/or legal actions to protect itself and its members. This, together with information required to be supplied to Government, has all added to the cost of maintaining Canberra Cabs as an efficient taxi service.
The Issues paper points out that Yellow Cabs has indicated that their network fees will be around 30% lower than those offered by Canberra Cabs. Maybe that’s one of the reasons Yellow Cabs has still not become operational.
5. Other Cost Items.
In addition to network fees all of the other costs presented by Canberra Cabs and upon which the Commission has been highly reliant in the past are verifiable. The source of the cost is provided in notes to the Costing and Pricing Model, alternatively the cost is to be found in the independently audited annual financial statement of the Co-operative. Canberra Cabs looks forward to the audited and verifiable information to be presented to the Commission by Yellow Cabs Canberra Pty Ltd.
In its final report on Taxi Fares for 1 July 2001 – 30 June 2003 the Commission introduced doubt about the veracity of service quality reports provided to the Government by Canberra Cabs. The Commission recommended that “administrative actions required of Canberra Cabs by the MOU, eg independent audit of quarterly reports be properly enforced and / or reviewed”. Had the Commission enquired it would have found that the reports had been audited in accordance with the MOU by Duesburys Chartered Accountants. The Commission’s subjective judgement is reflected in its flawed reporting.
6. Fare Structure.
In the Commission’s Issues Paper, the Commission states that “during the last review this issue was discussed with Canberra Cabs which stated that a standard distance charge irrespective of time of day would act as a disincentive for taxis to accept longer trips.”. This is incorrect. The consistent position taken by Canberra Cabs has been that a variable distance charge favouring night drivers would act as an incentive for night drivers to operate. On the other hand a higher flagfall at night has the potential to exacerbate problems for drivers dealing with unruly, intoxicated passengers. This is a clear disincentive to drivers at night. The Commission also stated “ that the current fare structure acknowledges a differential between day rates (1, 3 and 5) and night rates (2, 4 and 6) rates, with the latter higher presumably to provide an incentive to have taxis available when the demand is generally lower.” The Commission’s presumption is incorrect. The differential between the day and night rate with the latter higher is so that the night driver receives a loading for working outside “business hours” and is consistent with the general communities attitude to shift loadings.