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REGULATORY CAPTURE, PROPERTY RIGHTS AND TAXI DEREGULATION-A CASE STUDY
Sean D Barrett, Economics Department, Trinity College, Dublin.
THE DEREGULATION DECISION
This paper examines the economic and legal aspects of the deregulation of taxi services in Ireland by a decision of the High Court in 2000 and affirmed by judicial review in 2001. Market entry had been restricted from 1978 to 2000. A ministerial proposal to increase the number of taxis by adding vehicles to existing taxi licences was challenged in the High Court by hackney drivers of private hire vehicles. In Irish transport law taxis are public hire vehicles which may be hailed on the street or at taxi ranks while hackneys are private hire vehicles which are hired by phone.
The legal challenge of hackneys to the insider-only expansion of taxi licences was successful. Entry to the taxi sector was deregulated by the High Court. Murphy,J., in his taxi deregulation judgement in the High Court stated that “ a quantitative restriction not alone affects the rights of citizens to work in an industry for which they may b e qualified but it also manifestly affects the rights of the public to the services of taxis, and, indeed, restricts the development of the taxi industry itself.”
Murphy,J., also stated that the scheme of issuing new licences to existing licence holders only rather than to the wider community “is a blanket restriction which renders nugatory applications from parties other than current taxi licence holders. It represents a fettering of the Minister’s discretion which affects the rights of citizens to work in an industry for which they may be qualified and, further, which affects public access to taxis and restricts the development of the taxi industry.”
The judgement also referred to the EU dimension to the case. “I have come to the conclusion that the scheme purportedly put in place by (Statutory Instrument) 2/2000 may very well indirectly discriminate against Member States of the European Union other than Ireland in a manner which is prohibited by Article 12 of the EC Treaty. I venture that all, and if not, the great majority of current licence holders are Irish nationals. By restricting the grant of new licences to this category of persons, the Minister is effectively precluding nationals of other EU Member States from becoming the owners of new taxi licences in Ireland.”
Following the deregulation judgement there was a dramatic increase in taxi numbers. Data published by the Department of Transport in November 2002 showed large increases nationally and in the five main cities. The data are shown in Table 1.
Table 1 ; Taxi Numbers Immediately Before and Two Years After Deregulation. Ireland 2000-2002
2000 2002 Index
Ireland 3,913 11,630 297
Dublin 2,722 8,609 316
Cork 216 590 273
Galway 148 410 279
Limerick 207 434 210
Waterford 41 147 358
Source: Department of Transport statement of 20 November 2002.
The Irish increase in taxi numbers since deregulation was more dramatic than in anyof fourteen countries covered in a joint study by the International Road Transport Union, the European Conference of Ministers of Transport and the OECD. (2001). The study found that the number of taxis increased over 100% in Romania since 1989, by two thirds in Austria since 1989, by 60% in the United Kingdom since 1985, by almost 20% in the Netherlands since 1994 , and by 15% in Sweden between 1990 and 1998. Relatively stable taxi numbers were found throughout the above period in Finland, France, Germany, Belgium, Hungary, Spain, and the province of Quebec. Bakker found that taxi numbers in the Netherlands rose by 50% between 1999, the last full year before deregulation, and 2003. In 2003 there were 1.5 taxis per 1,000 residents in the Netherlands compared to 2.9 in Ireland. The Irish taxi deregulation of market entry was also more dramatic than in New Zealand where taxi numbers increased by 2.6 times between deregulation in 1989 and 1994 from 2,762 vehicles to 7,191 vehicles. (Bekken, 2005).
Bekken(2005) finds that “Ireland stands out as an extreme case, with neither significant direct nor indirect regulations regarding market entry and requirements imposed on operators.” The Irish taxi deregulation is thus more dramatic than in other countries, as was the airline deregulation decision permitting market entry by Ryanair between Dublin and London in 1986. The Irish taxi market is an interesting case study of regulatory capture, rent seeking and the role of new market entrants.
REGULATORY CAPTURE AND RESTRICTION OF NEW MARKET ENTRY
Pressure from incumbent licence holders, including street blockades, brought a Government decision in 1978 to limit the number of licences by statutory instrument. This led to the licences acquiring a scarcity value. As the Irish economy grew rapidly after 1987 in the “Celtic Tiger” era, the value of taxi licences rose rapidly to a high level by international standards.
Dublin taxi numbers remained unchanged at 1,800 between 1978 and 1991/2 when there was an increase of 150. In 1997 there were 1,974 licences and on the eve of deregulation in late 2000 there were 2,724 licences. Had taxi numbers been indexed to real GDP there would have been a fleet of 4,200 in 1997 compared to the actual licensed fleet of 1,974. (Fingleton, Evans and Hogan, 1997, 6)
Restricting entry to the taxi business became policy in an era of rapid economic growth. Between 1978 and 2000 the number of persons employed in Ireland increased by 63% from 1.1m to 1.8m. Unemployment fell from almost 18% in 1986 to 3.7% in 2001. The number of overseas visitors increased from 2m to over 6m in 2000, stimulated by the deregulation of access transport in 1986 through the licensing of Ryanair. Thus the abolition of economic rent in one area of transport increased it in another because of an inconsistency in the approach to deregulation across the transport sector.
The failure to increase taxi numbers in the fastest growing economy in the OECD caused widespread dissatisfaction because of the shortage of taxis in Dublin and elsewhere. Research by Oscar Faber (1998) found that 75% of those interviewed in street surveys disagreed or strongly disagreed with the statement that taxi and hackney services “can be hired easily at peak times”. 72.6% of businesses experienced difficulties in obtaining a taxi, in particular between 4 and 6 p.m. The report found that in Dublin city centre some 9% of hourly observations resulted in average waiting times in excess of 15 minutes. During the period 23.00 hours to 04.00 hours waiting times in excess of 90 minutes were “frequently observed”.
TAXI LICENCE PRICES AND PROPERTY RIGHTS
The price of a taxi licence in Dublin rose from €4,400 in 1980 to €114,000 in 2000. Table 2 shows the growth of taxi licence prices in Dublin throughout the period of restriction of new market entrants. Taxi licence prices in Ireland are shown to be above those in other countries thus indicating a larger gap between regulated supply and a market determined supply. The large growth in taxi numbers in Ireland since deregulation confirms that there was a large gap between the prederegulation regulated supply and a market determined supply.
Table 2: Taxi Licence Prices in Ireland and Elsewhere before Deregulation in 2000. (€)
Ireland
Dublin 114,000
Killarney 89,000
Ennis 136,000
Cork 89,000
Galway 102,.000
North America/New Zealand
San Diego ,Phoenix, Seattle (1970s) 51,000
New York (1988) 25,000
New Zealand (1989) 13,000
Ottawa 72,000
Boston 95,000
United Kingdom/Europe (1990/1992)
Leeds 13,000
Manchester 39,000
Glasgow 15.000
Marseilles 20,000
Bonn 9,500
Munich 9,500
Sources: Affidavits filed in the High Court (Dublin), 2000, 699JR 2000; Kahn,A. (1988), The Economics of Regulation, p. 111/11, Government of Ireland, Interdepartmental Committee, 1992.
Table 3 shows the rise in taxi licence prices in Dublin from 1980 to 2000, the period of restriction of new entrants. The licence price rose from €4,400 to €114,000, indicating a rapid increase in the rent earned by incumbents because of the restrictions on new market entrants.
Table 3: Taxi Licence Prices in Dublin 1980-2000 (€)
1980 4,400
1985 9,100
1990 54,600
1995 89,000
2000 114,000
Source; Barrett (1991) and affidavits, op. cit.
The development of a secondary market in taxi licences also leads to the separation of taxi licences from taxi driving. Kenny and McNutt (1998) found in Dublin “a vibrant market for individuals who rent plates and then act as an intermediary between the owner and the driver.” The drivers were likened by Kenny and McNutt to urban sharecroppers. They estimated that one individual controlled 45 plates and that there were 1,500 drivers without licences in Dublin, known as “cosies” who rented licences from licence holders. Based on the cost data in the Oscar Faber report (1998), Kenny and McNutt state that “it is hard to see why the established plate owner does not hire out the plate completely, rather than drive the car themselves (unless they have a very low opportunity cost of their time)”.
The Oscar Faber Report estimates that half the average fare revenue from taxi operation in Dublin in 1997 was required to rent a vehicle and taxi licence plate from a licence holder (59). The average taxi licence cost in the Oscar Faber Report was €102,000. By contrast the price of a Toyota Carina, the most popular model purchased for taxi use was just under €23,000, according to Appendix H of the Oscar Faber Report. The taxi licence, whether purchased outright at market entry or rented over the period of operation, was therefore a significant cost of operating in the regulated market. Without restrictive licensing the new market entrant could purchase 4.4 vehicles at market entry from savings in not having to buy a licence from a market incumbent. Since deregulation the local authority administration fee for the issue of a taxi licence is €6,300. Market entry costs of €125,000 for a vehicle and licence before deregulation have fallen to €29.300 since deregulation, a fall of 77%.The Oscar Faber Report estimated that under regulation the annual capital cost to a cosy of a taxi vehicle and licence was €18.280 (Box 2), compared to €1,493 capital cost for the vehicle only (Box 1). The abolition of the licence scarcity value has thus reduced the cost base of the industry and this should in time result in lower fares.
INVESTMENT OR GAMBLING?
Financial institutions did not accept taxi licences as collateral for loans. Licence purchases were typically financed by mortgaging other assets such as houses. The owners of licences described themselves as having invested in the industry through the purchase of licences and claimed to have thus acquired property rights. Economists who supported deregulation contended that the taxi licence purchasers were more correctly categorised as gamblers who had taken a bet that governments would never deregulate the sector.
In Irish law there are three judgements that taxi licences do not confer property rights and that the terms under which they are held may therefore be altered without compensation. The judgements may be summarised as follows;-
Case A ; In 1992 taxi licence holders opposed extra hackney licences because these would reduce the value of taxi licences. The judgement of Costello J in Hempenstall v the Minister for the Environment (1992) stated that “property rights arising in licences created by law (enacted or delegated) are subject to the conditions created by law and an implied condition that the law may change those conditions. Changes brought about by law may enhance the value of those property rights (as the Regulations of 1978 enhanced the value of taxi plates by limiting the numbers to be issued and permitting their transfer), or they may diminish them….. But an amendment of the law which by changing the conditions under which a licence is held, reduces the commercial value of the licence cannot be regarded as an attack on the property right in the licence- it is the consequence of the implied condition which is an inherent part of the property right in the licence.”
Case B: In 1998 hackney owners attempted to create a secondary market in hackney plates as applied in 1991/2 when a temporary moratorium on hackney licences created a licence value of €25,390. The hackney licence holders sought to apply the taxi licence precedent of restricting entry to their sector. The High Court judgement of Geoghegan J in O’Dwyer v Minister for Environment (1998) stated that “ hackney licences are regulated quite differently and the mere fact that the regulation of hackneys does not produce a similar side effect produced by the regulation of taxis, does not in any way render the regulatory scheme discriminatory… Because of the long established policy of restricting the number of taxi licences in taximeter areas, there has been for many years a saleable market in taxi licences but there never was such a market in hackney licences except during that very short period in 1991/1992. There could be no obligation on the Minister to create such a market.”
Case C: In the judicial review (2001) of the taxi deregulation judgement of Murphy J in 2000, Carney J dealt with the property rights issue as follows:-
1. “as the only interference with their rights has been one implemented by means of an implied condition of which the Applicants were fully aware and one which is envisaged by the very terms and conditions under which a licence is held, then it would seem incongruous if the State were obliged to introduce a concomitant scheme of compensation.”
2. “ the interference with property rights is not only justified but is minimal in that the applicants are still free to dispose of their licence and also to use it as they see fit, There has been no expropriation of their licences.”
3. “The payments made in the secondary market achieved the objective for which they were made at the time, namely the purchase of a job when jobs were otherwise unobtainable”.
4. “the applicants are mistaken if they believe that there is an automatic right to compensation in all circumstances.”
With three High Court judgements against compensation for the holders of taxi licences on deregulation of the sector the licence holders sought, as an alternative, payments for solacium. This term is defined as relief in sorrow or misfortune, a source of comfort or consolation, consolation for disappointment or similar, something that makes up for a disadvantage and compensation or indemnification. (Oxford Latin Dictionary, 1990, 171)
The solacium case was endorsed in late 2002 by the report of the Taxi Hardship Panel notwithstanding the above High Court verdicts. In economic terms the solacium case is compensation under a new name and the compensation proposals are at odds with the court verdicts and economic logic. A further problem is that the payment of compensation in the face of both the court judgements and economic logic will make any further deregulations in the Irish economy more difficult to achieve. The attempts by the prederegulation licence holders to roll back the High Court deregulation decision by political pressure since 2000 are analysed below.
REGULATORY CAPTURE AND POLICY CHANGE
In the High Court the licence holders cited assurances given to them by the government that the sector would not be deregulated. The State disputed that such assurances were given. The judgement of Carney J dismissed the relevance of such assurances. “It is unnecessary in the instant case to establish whether such representations had been made or assurances given to the Applicants on foot of which they formed a belief that the previous policy would not be altered. However, even in the event that such assurances had in fact been given, even by high-ranking members of the Executive, the nature of such assurances is such that they could only be regarded as conditional… A person or group of persons who have benefited from a previous policy can legitimately make representations as to why policy should not be changed. They cannot, however, legitimately expect to fetter the body’s statutory discretion to adopt a new policy in the public interest, as it the public interest and not the private rights incidentally created that the public body must ultimately seek to vindicate.”
THE LICENCE HOLDERS’ CASE AGAINST DEREGULATION
The arguments made against taxi deregulation may be divided into two categories- those made successfully during the period 1977 to 2000 against deregulation, and those made unsuccessfully in the High Court cases in 2000 and 2001.
In making the case against deregulation in the 1970s taxi licence holders “complained that the absence of control over the numbers entering the trade had resulted in a greater number of vehicles operating than the demand justified, with the result that incomes were depressed”. (Interdepartmental Committee, 1992,28).
A report for the National Prices Commission (1977) concluded “that too many taxis were licensed to operate and that there should be a controlling agency to deal with such matters as the number of licensed operators, the establishment of service standards etc” (ibid. 28). In 1978 the government decided to give local authorities the power to limit taxi numbers.
The Interdepartmental Committee (1992) stated that “rather then recommend deregulation the committee believes that a policy of gradual liberalisation is a more appropriate strategy. The proper application of such a policy resulting in the regular issue of new licences in line with demand would confer the same benefits as open entry without introducing the negative aspects. While, in theory, it would not eliminate the market for transfer licences, in practice a more liberal policy in the issue of new licences in line with demand would gradually reduce the value of such licences.” (30)
In 1998 the Oscar Faber Report stated that “ultimately entry deregulation of the taxi market is the best policy” (45) but recommended the issuing of 350 licences per year for a ten year period followed by full entry deregulation (52). Faber believed that “full and immediate entry deregulation might lead to excessive entry into the market, which would then take some time to reach equilibrium” and that “ entry deregulation would impact very severely on a minority of individuals who have recently bought licence plates on the open market “ (46). New licences would be issued by the local authority for £15,000. “The number of licences issued must be kept small in the transitional period to ensure that above normal incomes can be earned by existing plate owners, thus ensuring that they are compensated for the reductions in licence plate values” (51). Appendix 1 of the Oscar Faber Report estimated that a fleet of 5,901 taxis would be needed after ten years to serve the Dublin market. In a little over two years the deregulated Dublin market in the Spring of 2003 had over 9,000 taxis.
Kenny and McNutt (1988) state that “if the Oscar Faber reasoning does not support free entry now, it would not support free entry in 7-10 years time, if the market price of plates has not fallen to free entry levels” (13). They also note that the recommendations of the Dublin Taxi Forum of an annual increase of 200 taxis per annum to 2002 without further proposals for increases and no commitment to deregulation would have a minimal impact on plate prices.
Fingleton, Evans and Hogan (1998) recommended that a second licence should be given free to each existing licence holder with those who had bought in the previous five years given an extra licence immediately while the remaining licence holders would receive an extra licence after two years. Full deregulation of entry would take place at the end of five years. They estimated that 4,200 taxis were required in Dublin based on GDP growth since 1978 when quantity licensing was introduced. The actual number of taxis in 1974 was 1997, or only 47% of the estimated required number based on economic growth since 1978. The excess of 9,000 taxis provided by the deregulated market in early 2003 was therefore 3.3 times the regulated market in 2000 and more than twice the number estimated to be required by economic growth over the years 1978/1998.
The Irish case study indicates several difficulties inherent in gradual entry liberalisation as opposed to entry deregulation. Both the Oscar Faber Report and the Dublin Taxi Forum Report significantly underestimated the additional number of licences required compared to actual market entry in a deregulated market. To increase the number of taxis by a number short of free entry retains a scarcity value for taxi licences and increases the number of persons holding such licences. A policy of slow but eventual deregulation will therefore have more opponents at the end of a proposed transition period than a policy of immediate deregulation. Nonetheless, the government proposed to confine the issue of more licences to existing licence holders and some of their drivers. The Minister for the Environment and Local Government proposed in November 1999 to issue an additional licence in Dublin to all holders of an existing taxi licence. In addition 500 extra licences would be issued to those without a licence. Preference in the issue of the extra 500 licences would be given to those who drove taxis but did not own them, the aforementioned “cosies”.
The Minister’s proposals were opposed by four hackney operators. These are private hire vehicles, in contrast to taxis which are public hire vehicles. Taxis ply for hire in public and may stand for hire at designated ranks and use bus lanes while hackneys cannot. Taxis are regulated in their prices while hackneys are not. The four hackney operators were granted a judicial review by the High Court in February 2000 of the November 1999 proposals of the Minister for the Environment and Local Government.
In defence of the scheme to issue new licences overwhelmingly to incumbents rather than new market entrants, at the judicial review the Minister denied that “any local authority has taken account of extraneous or irrelevant considerations. Neither have the local authorities had regard to the preservation or fostering of the economic interests of one section of the community as alleged.” The allegations referred to were that licence holders had achieved regulatory capture over the regulatory authorities at the expense of aspiring new entrants, consumers and the public at large. The State also pleaded that the provisions of Article 40.1 of the Constitution, providing for equality before the law, are not applicable to the holding of taxi licences.
In opposing unsuccessfully the deregulation of the taxi sector achieved by the legal action of the hackney licence holders, the taxi licence holders cited Toner and Dempsey. Toner(1998) concluded that “the effects of taxi deregulation were not so beneficial to consumers due to increased fares and deteriorated service quality. In addition, the returns to operators as well as drivers also decreased, and there was no significant evidence of innovation in the industry. On the other hand the structure of the industry became more fragmentary with increased single operators and taxi leasing. Therefore, this study concludes that market entry should be regulated somehow and the level of fares also needs to be controlled. In addition, more stringent regulations are necessary in order to ensure high quality and improved safety in taxi services.”
Dempsey (1996) concludes that “given the failure of deregulation to produce consumer pricing and service benefits, coupled with its propensity to injure carrier productivity and profitability, most communities which have experimented with deregulation have rejected it, and re-regulated in whole or in part their taxi industry” (‘115). Dempsey proposed that “new entry should be modest, measured and monitored. In deciding which among several applicants should be allowed to operate in the market, a prudent regulatory authority might choose the applicant which, for example, has a sound financial base and a seasoned and experienced managerial team, a minimum fleet size with centralised radio dispatch to serve the entire community adequately, trained and experienced drivers, adequate insurance, and a young, safe and environmentally sound fleet of cabs…..the regulatory authority must be careful to expand entry on a phased-on basis only very gradually…” (119).
In the Irish case the consumer argument for extra taxis, combined with the rights of those outside the taxi sector to enter that sector, succeeded in the High Court over the case made by the licence holders relying, inter alia, on the above studies. The increase in new entrants has been dramatic and the consumer response has been overwhelmingly positive.
Toner’s recommendation that “market entry should be regulated somehow” involves some exclusion of potential entrants and infringement of their rights to enter a sector for which they are qualified, and thus conflicts with the High Court judgement of Murphy J. cited above. Any measure which stops new entry short of the level under free entry will cause taxi licences to retain a scarcity value which will increase if demand for taxi services grows faster than the limited increases in supply under the cautious entry policy proposed by Dempsey. The new licence holders will join with existing licence holders to seek regulatory re-capture. The combined group if old and new licence holders will form a bigger obstacle to any further new entrants under either a gradual basis or deregulation.
Barriers to entry such as minimum fleet size and a seasoned and experienced managerial team., as proposed by Dempsey, deny both a career choice to new entrants and the consumer benefits of new entry. If there are economies of scale in taxi operation an open market will itself lead to increased fleet sizes without regulator intervention. If there are no economies of scale a regulator imposed minimum fleet size both increases costs to users and deters new investors. A study of the deregulated shared taxis sector in Northern Ireland by Barrett and McLaughlin(1984) found that the administration requirements were minimal. A regulatory requirement for “a seasoned and experienced managerial team” is thus both a barrier to new entry and a cost-increasing measure.
THE RESULTS OF DEREGULATION
The evaluation of taxi deregulation in Dublin by Goodbody Economic found that “over two-thirds of people believe that deregulation was a good idea with 14% disagreeing.” The impact of the large increase in market entry was shown in the declines in waiting times for taxis. “In 2001, 48% of persons waited for less than five minutes, a considerable improvement compared to 25% in 1997”. Just under half of all taxi users considered that the service has improved with only 5% indicating that the service has disimproved.
After midnight the average wait time was in excess of 30 minutes for 43% of the hours surveyed in 1997 and for only 6.2% in 2001. 20.3% of hours surveyed had waiting times of less than five minutes in 1997. Under deregulation this increased to 60.2% in 2001.
On vehicle quality Goodbody found that “most cab users find the quality of the vehicles acceptable” and that “it would be difficult to argue that there is demand for radical change in this area.” The pre-deregulation fleet was found by Oscar Faber to have almost a third of taxis over seven years old and two-thirds of hackney cabs over seven years old. The service improvements in the November 2000 deregulation were the annual testing of taxis under the National Car Test and the compulsory issue of printed receipts for each journey.
Around the second anniversary of taxi deregulation in November 2002 the licence holders made claims that criminals had entered the deregulated taxi sector and that vehicle standards had deteriorated. During 2002 eleven Dublin taxi licences were revoked by the Carriage Office on police recommendation. Separate data are not published for pre and post deregulation licence holder offences. The taxi licence revocation rate of 1.2 per thousand compares with a general crime rate of 58 per thousand in the Dublin Metropolitan Area. Two heavily publicised cases in late 2002 of incidents involving taxi drivers referred to the prederegulation period. The complaints were largely generated by the industry itself and reflect attempted regulatory recapture rather than consumer sovereignty.
LICENCE HOLDERS’ ATTEMPTED REGULATORY RECAPTURE.
Pressures by the licence holders to reverse or reduce the impact of the deregulation of the sector included a series of strikes, poster campaigns in taxis against the outgoing government in the 2002 general election and lobbying through the country’s largest trade union, SIPTU. The use of the trade union vehicle by a group of self-employed persons to pursue a campaign against deregulation secured the legal privileges of the trade union movement for the taxi drivers. By contrast these exemptions did not apply when another group of self employed people, farmers. picketed meat and milk plants without seeking to avail of trade union legal privilege.
In an administrative and political system with a strong tradition of interventionism and regulatory capture, and weak consumer representation, the taxi operators set out to reverse two major parts of the High Court decision deregulating the sector. These were the decisions against compensating taxi licence holders for the loss of the licence value and the freeing of market access to new entrants. The instruments used in pursuit of the goal of reversing the deregulation decisions were the Taxi Hardship Panel and the Office of National Taxi Regulator.
Although there were three High Court judgements against compensation for taxilicence holders, the government appointed on 5 February 2002, a Taxi Hardship Panel “to examine and report in general terms on the nature and extent of extreme personal financial hardship experienced by individual taxi licence holders arising from loss of income as a direct result of the liberalisation of the taxi licensing regime on 21 November 2000.”
THE TAXI HARDSHIP PANEL (2002)
The Taxi Hardship Panel recommended the payment of €12.6m to address “persistent claims that certain taxi licence holders have suffered extreme financial hardship” following taxi deregulation. The recommendation is made notwithstanding the report’s acknowledgement that the panel “is aware that, since 1992, the Courts have clarified on a number of occasions that there can be no legal duty on the State to compensate taxi licence holders in relation to open market values of licences.” The preface to the report states that “we realise that our findings will provoke considerable debate, ranging from those who believe that no payment of any kind is justified to those who feel substantial compensation is warranted. It is our view that our recommendations provide for a fair and final settlement of all grievances that taxi licencees had as a result of liberalisation.” The compensation payments recommended are shown in Table 4.
The payments recommended are proposed to be outside both the tax and social welfare systems in that they would not be treated as taxable income or included in assessment of entitlements for social welfare payments. This recommendation contrasts with the use of a comprehensive definition of income in computing both tax payments due and social welfare entitlements. The proposed payments are additional to refunds of €6.35m. where local authorities had charged licence holders more than the subsequent deregulated access cost of a licence under limited market entry schemes before deregulation. In addition taxi licence holders were allowed capital allowances over five years to cover the purchase price of a taxi licence before deregulation. The allowances could be offset against both trading income and rental income.
Table 4; Recommendations for Taxi Hardship Compensation (2002) (€)
Per Person Total Cost (m.)
1. Widows 15,000 1.110
2 65 years plus 13,000 2.028
3 No pension 13,000 5.629
4 Wheelchair taxi 3,000 0.948
5 Large loans 9.000 2.889
6 Capital claims - -
7 Insufficient information - -
8 Extra working hours - -
9 Invalids 13,000 0.975
Total 12.604
Source: Taxi Hardship Panel (2002)
The panel reported that “amongst the many and varied medical conditions cited as being directly attributable to, or intensified by, liberalisation, are strokes, hypertension, high cholesterol and heart problems, stress, anxiety and panic attacks, depression, asthma, back problems and fatigue” and that “this by no means purports to be an exhaustive list of ailments.”
There were 3,912 taxi licences prior to deregulation and 2,006 licence holders made representations to the panel. Of these, 46.1% returned a fully completed submission form to the panel and 29.3% partially completed the form. The remaining 24.6% of forms were not returned.
In the categories listed in Table 4, categories 1,2 , 3 and 9 refer to the loss of income when widows, pensioners and invalids rented out licences. Category 4 refers to those who made an extra investment in wheelchair accessible vehicles. Category 5 refers to those who purchased licences with loans based on houses as collateral because financial institutions did not accept taxi licences as collateral. The remaining disallowed categories include those seeking compensation for loss of capital value and those who claimed that they had to work extra hours since deregulation.
The panel’s report, surprisingly, contains no reference to the way in which a monopolistic rent came to be attached to taxi licences and the cost of such monopolistic rent to society as a whole over the period in which new market entrants were restricted. The economic absurdity of compensating people for the loss of their ability to ban new entrants to their sector is ignored. The legal judgements against the recommendations made by the panel are set aside without analysis. No examination is made of the role of the welfare state in dealing with hardship in this specific case, or in general. In addition the Hardship Panel recommended that its payments should not be subject to income tax and that the payments should also be disregarded in assessing the recipients for social welfare payments. The report makes no reference to the gains to the Irish economy as a whole from deregulation and to the precedent which it creates by adding to the potential costs of deregulating other sectors in future.
THE NATIONAL TAXI REGULATOR (2003)
The role of the regulator is to apply a “national focus” to taxi standards and licensing, to issue licences in consultation with the police to set standards for drivers, their training, requirements for entry, comprehensive local knowledge and other testing, promotion of disability awareness and an acceptable dress code for drivers, vehicle standards, “an acceptable uniform colour for vehicles, overseeing taxi vehicle testing, and setting licence fees. (Department of Transport statement, 20 November 2002)
In the statement establishing the regulator the government stated that the High Court judgement “created the legal position that limiting of taxi licences in the interests of existing licence holders could not be sustained.” However, the statement added that “it is now time to bring forward legislation that will bring stability to the industry, develop a proper and effective structure, establish lasting career opportunities for all those involved, and to offer the customer a service that is modern, efficient and operated to highest standards.”
There are obvious dangers to deregulation in the government statement above such as seeking to “bring stability” to a rapidly expanding industry over two years following over twenty years of stagnation, and in seeking “lasting career opportunities for all those involved” when the government was well aware of the wish of the sector to ban new entrants and its success in doing so in the very recent past. These dangers are combined with the prospect that even bona fide quality controls become barriers to contestability as frequently happened in Irish transport policy in the past. The designation of the new office as a national one precluded a situation in which even a single local authority might licence taxis on a more liberal interpretation of the High Court decision of October 2000.
A further cause of concern that the government might wish to water down the High deregulation decision is the announcement of a Taxi Advisory Council to consist of representatives of the industry, other stakeholders, Gardai (police), consumer interests, disability interests, tourism interests, business, public transport and other relevant sectors.” Such bodies opposed deregulation in the 1990s and were cited in evidence by the taxi interests during the High Court hearings. Potentially this problem could recur given the weakness of consumer representation in Ireland, the tradition of regulatory capture and the less than ringing endorsement of the court deregulation decision in the government statement of 20 November 2002. In November 2003 the Taxi Advisory Council was replaced by a National Taxi Advisory Council. At the launch of this body the Minister for Transport stated that he wished to work with the industry, the Taxi Regulator and the Taxi Council to enhance the role of taxis and hackneys “ as an integral part of the public transport system.” The Minister referred to the enhanced role for taxis as a result of expenditure of €35m to double the number of quality bus corridors in Dublin and similar projects in the other main cities.
An interim nonstatutory regulator was appointed in February 2003 and the post became a statutory one later in that year. His first public intervention of the regulator, in March 2003, was to investigate the purchase of a taxi licence by the chief executive of Ryanair, Mr Michael O’Leary on foot of complaints by the existing licence holders. Since the sector had been deregulated by the High Court some two years earlier market entry was open to any new entrant. The regulator investigated the licence concerned not withstanding that the notice of the establishment of the National Taxi Regulator stated that in “October 2000 a High Court judgement created the legal position that limiting of taxi licences in the interests of existing licence holders could not be sustained.”The licence was found to be valid. It appears likely however that there will be further producer pressures on the regulator to revisit the High Court decision permitting new entrants. This has already occurred in the case of the High Court decisions concerning the ineligibility of taxi licence holders for compensation when the sector was deregulated.
From the perspective of contestability the appointment of the regulator has a number of disadvantages. The emphasis throughout the announcement is on new market entry as a problem. The gains from deregulation are overlooked as are the problems caused by the previous success of licence holders in achieving regulatory capture for over two decades. In addition to cost of an extra bureaucratic layer there is a reduction in local government autonomy.The statement that “it is now time to bring forward legislation that will bring stability to the industry” implies that the increase from 4,000 to 12,000 in taxi numbers is seen by the government as a problem rather than a solution. The Regulator is currently titled Commissioner and the regulatory body is titled The Commission for Taxi Regulation.
The Claimed Disadvantages of Taxi Deregulation, 2005.
At ECMT Round Table 133 in April 2005, several presenters and discussants suggested the negative impacts from taxi deregulation shown in Table 5. These problems did not arise in the Irish taxi deregulation case study but they are a useful template in comparing the actual and feared results of deregulation
Table 5: Suggested Negative Impacts of Taxi Deregulation, 2005.
(i) Chaos on streets;
(ii) Taxis congregating at airports;
(iii) Congestion at taxi ranks due to a shortage of places;
(iv) Increase in accidents;
(v) Fighting among taxi drivers as happened in the Netherlands and Sweden;
(vi) Depressed earnings of drivers;
(vii) Problems of a shortage of taxis in rural areas.
(viii) A decline in vehicle standards.
(ix) Neglect by deregulated taxi sector of off-peak hours, less popular areas,” no shows” by booked taxis, trip refusals, route-swamping, and schedule jockeying.
(x) Control of the sector by monopolistic Dispatch Centres.
Source ECMT Round Table 133, Papers by Bakker, Bekken, Darbera, Liston-Heyes and Heyes, op. cit
The above problems did not occur in the Irish taxi deregulation. Taking in turn the ten points made in Table 5, the Irish experience of taxi deregulation in relation to each of the problems raised was as follows;-
(i)Chaos on streets;
There was no chaos on the streets apart from a small number of protest cavalcades organised by the pre-deregulation taxi licence holders The 300% increase in taxi numbers was popular in a fast growing economy with an expending tourist sector. Shorter evening and night waiting times for taxis enhanced safety on streets.
(ii) Taxis congregating at airports;
There were no incidents of taxis congregating at airports. Passenger numbers at Irish airports were increasing rapidly due to airline deregulation. Airport bus services were significantly liberalised at Dublin, the biggest Irish airport by a factor of eight with the licensing of independent bus companies to serve the wider Dublin area, Galway, and Waterford and intermediate points. The state bus companies also expanded their airport services. The liberalisation of airport bus and coach services was an administrative decision and was not part of taxi deregulation which was a decision of the High Court. The Commission for Taxi Regulation (2006) abolished the charge of €1.50 for hiring taxis at Dublin Airport. This had been introduced prior to liberalisation to encourage supply at the airport. The Regulator stated that “there is no longer a need to retain such a charge. Accordingly, this charge will not be permitted under the new national taxi fare.”
(iii) Congestion at taxi ranks due to a shortage of places;-
There were no reports of a shortage of places at taxi ranks. The previous queues at taxi ranks of people waiting for taxis were reduced as waiting times for taxis fell sharply. In a fast growing economy where taxi numbers had been held down for over two decades the extra taxis resulted in more trips rather than a need to increase the number of taxi places at ranks.
(iv) Increase in accidents;
Separate accident data for taxis are not published in Ireland. However the accident rate for all vehicles fell after taxi deregulation from 11.0 per billion vehicle kilometres in 1999 to 10.9 in 2002. (National Roads Authority). Taxi vehicle inspection standards were raised on deregulation. The deregulation policy allowed drivers who had previously rented licences and vehicles from licence holders to become owner drivers. This might be expected to increase rather then reduce driver interest in safety. The increased availability of taxis affords more car drivers, who are tired, for example, the option to take a taxi instead.
(v)Fighting among taxi drivers;-
Fighting between incumbent and new entrant taxi drivers did not occur in Ireland after taxi deregulation. The possible reasons include the strong rate of economic growth in Ireland at the time of deregulation and the fact that many new entrants were previously either cosies or drivers for licence holders or hackney drivers on private hire, and were known to the previous incumbents. Acrimony between incumbent and new entrant taxi operators was not a result of deregulation in Ireland. Taxi deregulation was a decision by the courts. Opposing court decisions by resorting to violence would have undermined the public’s opinion of the incumbent taxi licence holders because there was a broad public welcome for taxi deregulation.
(vi) Depressed earnings of drivers
The buoyancy of the Irish labour market made depressed earnings unlikely. The Irish I minimum wage of €7.65 per hour in mid-2005 was the second highest in the EU with unemployment at 4.4% the lowest in the EU and the growth in numbers employed over twenty years from 1m to almost 2m is unparalleled in the OECD. The floor wage in 2005 set by the minimum wage was €18,000 per year. Taxi deregulation reduced costs for new entrants because the €114,000 taxi licence cost when licences were scarce was reduced to only €5,000 when licences lost their scarcity value. The cost of entering the taxi sector fell from €114,000 for the licence plus €20,000 for a vehicle before deregulation , to €5,300 for a licence and €20,000 for a vehicle after deregulation, a fall in entry costs of 81%. As the sector was deregulated in a fast growing economy with full employment and a high minimum wage rate, and deregulation reduced the licence cost at entry from €114,000 to €5,300, taxi operators’ costs fell after deregulation while the numbers of passengers grew. There was no evidence of a decline in earnings for taxi operators.
(vii); Problems of a shortage of taxis in rural areas;-
Table 1 shows that the number of taxis outside the major cities and towns also increased after deregulation. There were 579 taxis outside the main cities in 2000 and 1440 in 2002. Table 2 above indicates that the costs of restricted entry to the taxi sector in Ireland were not confined to the Dublin region. For example the town with the largest taxi licence price before deregulation was Ennis with a population of 15,000. The area of the urban district of Killarney is only 2 square miles and the population is 9,000, but the licence price was almost 70% of the licence price in Dublin which has a population of almost 1 million. The largest proportionate increase in taxi numbers in the two years after deregulation among the four main cities shown in Table 1 was in Waterford, the smallest of the cities in Table 2 with a population of 35,000. The bulk of small public service vehicle hire work in rural areas is performed in hackneys. The hackney owners took the legal case at the High Court which overturned the measures which would have confined the expansion of the taxi sector to incumbents while excluding new entrants. The Irish deregulation experience in the taxi sector does not indicate any case for retaining restrictive entry to the sector in smaller cities and towns or rural areas.
(viii) A decline in vehicle standards;-
Fear of a possible decline in vehicle standards after deregulation in Ireland was countered by stricter and more frequent vehicle testing. The Goodbody report on taxi deregulation, cited above, found that vehicle standards were not a problem.
(ix) Neglect of off-peak hours and less popular areas, no shows by booked taxis, trip refusals, route swamping and schedule jockeying;-
These problems were not encountered in taxi deregulation in Ireland. The large increase in supply was more likely to solve rather than exacerbate neglect of off-peak hours, less popular areas and trip refusals. Booked taxis compete with hackneys under the Irish system and by not showing up they would lose market share. Taxi trips are typically once-off journeys performed by owner drivers. Route swamping and schedule jockeying were thus not a feature of Irish taxi deregulation and were not raised in the public debate over the policy.
(xi) Control of the sector by monopolistic dispatch centres:-
Darbera (2005) describes the dispatch centres serving the private hire vehicle sector as “probably a natural monopoly and calls for new regulations.” This has not been a feature of taxi deregulation in Ireland which increased the numbers of owner drivers operating from ranks and being hailed on streets. The private hire or hackney business did not have entry restrictions. Drivers dissatisfied with the dispatch centres retain the options of moving to new dispatch centres or operating as owner drivers. The use of monopolistic power by dispatch centres over hackney operators might be limited by counterveiling responses from hackney operators. For example, low cost airlines bypass travel agents by using the internet in order to deal directly with their customers. Disintermediation is also an option for either hackney operators or their customers seeking to avoid monopolistic dispatch centres.
CONCLUSION
The Irish taxi deregulation resulted from a High Court decision in favour of potential new entrants and against those who wished to retain a scarcity value for taxi licences. There was a dramatic increase in new market entry unprecedented by international standards. This was predictable since the monopolistic value of Irish taxi licences was also unprecedented by international standards. Large reductions in passenger waiting times have made deregulation popular among the public. There has not been a reduction in either driver or vehicle standards.
Taxi deregulation in Ireland followed a restriction of new entrants for twenty-two years, the second half of which was a period of rapid economic growth leading to full employment. The spectacular results of deregulation indicate that before deregulation taxi licence holders attained regulatory capture over the political and administrative system of taxi licensing. Their success in restricting new market entry raised the price of Irish taxi licences to among the most expensive in international surveys.
Taxi deregulation in Ireland was achieved by a High Court decision. As expected, the licence holders opposed deregulation. Their success in achieving government payments in compensation for deregulation through lobbying in the political process contrasts with the failure of their legal challenge to deregulation. The wider consumer interest and the national benefits from taxi deregulation are at risk if producer dominance and regulatory capture are restored in the future.
Taxi deregulation in Ireland resulted from the striking down by the High Court of a scheme to control expansion of taxi numbers and to confine these largely to incumbents. Schemes of gradual liberalisation rather than deregulation of market entry would have been much less radical in terms of new market entry. Taxi licences would thus have retained a scarcity value based on monopolistic rent which could not be bidden away by a sufficient number of new entrants. The Irish experience is that there should be full and immediate deregulation rather than mere liberalisation of taxi markets.
The implications of the judgement of Murphy J concerning the rights of new market entrants to work in an industry for which they may be qualified and the rights of the public to services are significant in an economy with many cases of regulatory capture. If extended to other sectors the judgement would revolutionise the economy. For example in a report on the Bus and Rail Passenger Transport Sector, the Competition Authority (2001) noted the wider significance of the taxi verdict and stated that “in the light of a recent High Court decision, it may actually be questionable whether quantitative restrictions on (bus) licensing such as those provided for by the practice of the Minister under the 1932 Act are constitutional or compatible with EC Treaty rules (6).” Current legal opinion is that the taxi deregulation decision is indeed a turning point in Irish law dealing with property rights and market access. Property rights have been incorrectly interpreted in the taxi case as permitting incumbents to seek the restriction of new entrants. The Irish experience is that where there have been new entrants in sectors such as taxis, airlines, and buses on some routes, there have been significant economic gains.
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8772 words.
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