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I strongly urge you all to read OFT956, ‘Evaluating the Impact of the Taxis Market Study’
The OFT commissioned Europe Economics in March 2007 to evaluate the impact of the OFT's 2003 market study into the taxi and PHV sector in the UK and their 135 page report was published in October 2007.
Strangely this report, although on the Internet, has been kept very quiet by the government, DfT and OFT. Could the reason be that Europe Economics have dared to criticise the OFT's 2003 report???
EUROPE ECONOMICS EVEN GO AS FAR TO SAY (Paragraph 6.40);
'The nature of the street and rank hiring segment involves externalities which affect consumers and which justify some continuing regulation.'
They calculate the losses sustained by taxi drivers in the 48 licensing authorities that have de-regulated since the 2003 report using different scenarios, including loss of licence/plate value and also due to taxi drivers' additional waiting times between jobs. The Evaluation Report estimates that the annual driver cost increases in the 48 LAs that have de-restricted since 2003 is up to £31,010,865 and further estimates that the annual potential driver cost increases in the LAs which still remain restricted would be £89,006,063 if those LAs de-restricted.
The report also comments in detail on topics which include;
Loss of productive efficiency of taxi drivers in de-regulated LAs
Continually mentions enforcement issues
Tick off the OFT for the omission in the 2003 Market Study
Offers lessons to the OFT for future studies that they might conduct and not just in the taxi sector
The disproportion in consumer benefits in decreased waiting times (in hiring a taxi) of 0.13 minutes (7.8 seconds) to the driver's detriment in waiting times (between hirings) of 5.22 minutes (5 minutes & 13 seconds)
Emphasises that de-restriction has invariably lead to lowering of vehicle and driver qualities and standards
Reiterates Section 16 of the Transport Act 1985
Restates the Parliament Transport Committee's two critical responses in February and March 2004 to the OFT's 2003 Market Study
Restates the governments position at that time (which has not changed) that the decision on regulation or de-regulation was best left to LAs and should not be statutory
Contrasts the DfT's assertion that SUD surveys should take into account latent demand, which contradicts case law; Regina vs Brighton Borough Council ex p Bunch 1989
Makes it clear that provisions in the DDA did apply to PHVs and not just taxis
That the Licensing Act 2003 has resulted in SUD being 'largely a thing of the past', even in still restricted LAs
Driver's working hour increasing from 35-45 hours per week before de-regulation to 50-60 hours per week after de-regulation
The loss of journeymen drivers (Birmingham = 'jockeys') after de-regulation and the benefits that they gave to the trade and consumer
Mentions that in Ireland de-regulation became a political issue with owners eventually receiving compensation for losses of licence premium values
Etc, etc, etc, etc
I have read the OFT956 in its entirety and offer my summary of this 135 page document below. If you want to read the whole document just type in OFT956 into Google or your preferred search engine and there it is.
FOR THOSE OF YOU IN LAs THAT ARE ABOUT TO DE-RESTRICT OR ARE ALREADY DE-RESTRICTED & ARE THINKING OF RE-RESTRICTING THIS WHOLE DOCUMENT IS A M U S T R E A D
In the meantime here is my summary of OFT956.
SUMMARY of OFT956
‘Evaluating the Impact of the Taxis Market Study’
2.1
In March 2007, Europe Economics, an independent economics consultancy, was commissioned by the Office of Fair Trading (OFT) to evaluate the impact of the OFT's 2003 market study into the taxi and PHV sector in the UK.
2.3
Specifically, the OFT suggested that this study should not replicate the work involved in the 2003 study. Instead it should identify, and quantify in monetised terms:
• the impact the 2003 study has had on consumers of taxi and PHV services since its publication in 2003. In doing so, the research was required to address how the 2003 study has affected:
• taxi numbers
• waiting times
• fares
• quality of service (including vehicle cleanliness and safety, driver training, and number of illegal taxis)
2.5
The evaluation was also required to discuss the impact of the 2003 study on the different members of the taxi and PHV sector such as drivers, vehicle owners, licence owners, and taxi and PHV operating firms.
THE FINDINGS OF THIS EVALUATION COMMISSIONED BY THE OFFICE of FAIR TRADING INCLUDE;
1.6
… There also continues to be quantity control on the number of licensed vehicles in a large number of local authorities.
1.8
De-restriction should lead to lower passenger waiting time and more taxi journeys with corresponding benefits to consumers. New taxi drivers should also benefit from the change. However, existing taxi drivers will see increased costs per taxi journey through having to wait longer for each fare.
1.15
Evidence from the sample LAs tells us that the average passenger waiting time has decreased significantly since 2003 in both restricted and de-restricted areas, but the reduction in waiting times has been greater in de-restricted areas. In our sample LAs, the average reduction in passenger waiting time for taxis hired at ranks was 10 percentage points greater in de-restricted than in restricted areas.
1.16
The amount of time taxi drivers wait between fares has increased in both restricted and de-restricted areas, but with considerably larger increases in de-restricted areas. In our sample LAs the average increase in driver waiting time of taxis hired at taxi ranks was 77 per cent more in de-restricted than in restricted areas. This increase in driver waiting time is significantly greater than the reduction in passenger waiting times although account must be taken of the small samples for both observations. This suggests a decrease in the productive efficiency of the taxi industry – the benefits to consumers in terms of decreased waiting time are more than offset by the costs to taxi drivers of providing an improved service.
1.22
The loss in productive efficiency of the market (due to de-regulation) that we have been able to estimate taking into account both the increase in driver costs and the improved quality of service resulting from the reduced passenger waiting time is between £8 million and £29 million per year.
1.27
We have not been able to obtain any data on either the usage of illegal taxis or illegal taxi related crime. However the increase in licensed taxis following de-restriction should reduce the opportunity for illegal taxis to operate with corresponding benefits to consumers. Enforcement in respect of completely unlicensed vehicles and PHVs illegally plying for hire remains an important issue.
1.29
In addition we have estimated a loss in productive efficiency associated with the increase in driver waiting time following de-regulation. This effect was not addressed in the 2003 study.
1.35
… although the OFT's principal focus is on how markets are working for consumers it should also take into account the wider welfare effects of any proposed changes. Where changes may create significant losses to the producers of goods or services, not related to the exercise of market power, this may increase resistance to change and act as an obstacle to beneficial longer term developments. Consideration of transitional arrangements may be necessary.
3.5
The original policy for licensing vehicles (TPCA 1847) permitted any number of hackney carriages to be licensed that licensing authorities saw fit. Subsequently section 16 of the Transport Act 1985 stated that:
The grant of a licence may be refused, for the purpose of limiting the number of hackney carriages in respect of which licences are granted, if, but only if, the person authorised to grant licences is satisfied that there is no significant demand for the services of hackney carriages (within the area to which the licence would apply) which is unmet.
3.17
The Parliament Transport Committee produced two critical responses to the OFT report in February and March 2004, largely centred on the question of quantity restriction. They pointed out a series of what they considered to be fundamental weaknesses in the arguments put forth by OFT. The strongest objections were that:
• There was no 'real evidence' to support the case that waiting times are lower in areas without quantity restrictions. Furthermore, the 2003 study did not acknowledge evidence from the analysis suggesting that fares were lower in restricted areas.
• The report was lacking in evidence to support the case for quantity de-restriction. Its quantitative results only seemed to buttress this conclusion after 'adjustments' had been made, the details of which were never fleshed out. Moreover its 'statistical and survey evidence were flawed'.
• The report neglected to consider the relationship between the taxi and PHV markets.
• Although Annexe H ('Modelling the effects of taxi regulation') supported the hypothesis that entry regulation had a positive impact on service quality, the main report neglected to discuss this.
• Although Annexe H concluded that the effect of quantity controls on consumer welfare were ambiguous, the main report 'completely disregards' that conclusion.
• The report did not consider the experience of de-restricted areas that reverted to restriction where the regulatory policies failed.
3.19
In responding to the Transport Committee's objections, the Government acknowledged all of them and agreed with some. However, it was not deterred from overall acceptance of OFT's conclusion that quantity restrictions should be minimised, since keeping them in place unnecessarily engendered consumer detriment. However, the Government also maintained that the decision to do so was best left to the LAs, and should not be statutory.
3.23
In June 2004, the DfT issued a follow-up letter …
3.25
Interestingly, the DfT letter states in paragraph 13 that 'for the survey to be effective, latent demand should be taken into account'. This marks a distinct policy shift which contradicts the ruling of the 1989 case R v. Brighton Borough Council ex p. Bunch. The case specifically found that the LA 'need only look at patent demand, and need not consider latent demand in the market place' when using unmet demand surveys to establish justification for quantity restriction.
3.28
Annexe D, 'Local accessibility policies for taxis prior to taxi regulations being made under the Disability Discrimination Act 1995', explained why policy with regards to wheelchair accessibility requirements for taxis had not been finalised. The DfT initially stated that it would devise and phase in a policy for taxis between 2002 and 2012. But paragraph 1 of Annexe D states:
When we realised that this could not be achieved in a way that would be acceptable to both disabled people and the taxi trade, the Minister announced in 2000 that regulations would not be introduced in 2002.
3.29
Therefore the Annexe offered suggestions on how LAs may best proceed under these circumstances. The emphasis of the note was that the decision about wheelchair accessibility requirements was 'entirely a matter for local consideration and decision'. Furthermore, the DfT urged those LAs holding back on drawing up local policy in anticipation of national guidance not to do so. The note also outlined several suggestions for formulating policy, among them being to invite manufacturers to present vehicles that could then be examined by representatives from disability rights organisations; experience sharing between authorities; and taking into consideration forms of disabilities apart from those that require wheelchairs for transportation.
3.31
While the Guidance exists explicitly to aid LAs to standardise quality and safety regulations, it makes abundantly clear that local authorities are best endowed to set policy. It also stresses the importance of not over regulating and in so doing imposing excessive costs to drivers and LAs alike. DfT emphasises that LAs
Want to be sure that each of their various licensing requirements is in proportion to the risk it aims to address; or, to put it another way, whether the cost of a requirement in terms of its effect on the availability of transport to the public is at least matched by the benefit to the public.
The Licensing Act 2003
3.39
The most direct impact on the taxi market is that the previous demand peaks around the fixed pub and club closure time have been smoothed over the later hours of the night and early morning. This could lead to the reduction of waiting time in previous peak times. However, taxi drivers may have to stay out later. One stakeholder we interviewed claimed that in certain areas of the country the taxi trade opposed the Act. Today drivers cite the Act as one reason they now find they must stay out later in order to earn the same revenue as before.
Disability Discrimination Act
3.41
The DDA has significant implications for the taxi sector – according to the DfT website, although disabled people travel a third less than the general public, they make greater use of taxis and PHVs. Amendments to the relevant Regulations in 2005 made clear that provisions in the DDA did apply to taxis and PHVs. However specific implementing regulations have not yet been introduced and there continue to be variations between LAs on the accessibility requirements for new vehicles.
5.22
Our analysis (which is set out in more detail in Annexe 4) shows that in addition to the benefits that consumers could expect from de-restriction in the street and rank hiring sector, there would also be a cost to existing taxi drivers through an increase in their waiting time between journeys. This represents a reduction in productive efficiency.
5.34
There are several notable factors, other than the 2003 study, which have affected either the de-restriction of the LAs or the supply/demand characteristics of the market. First, as explained in Section 2, the view of stakeholders is that the Licensing Act 2003 has had a significant impact on the demand for taxi services. It arguably smoothes the demand peaks around the previous fixed closure time of pubs and clubs, which should lead to a decrease of waiting time in these previous peak hours. This effect is common to both restricted and de-restricted areas and we would therefore expect there to have been benefits to consumers from shorter waiting times during those previous peak times even without the 2003 study.
6.14
The average passenger waiting time has decreased substantially since 2003 in both restricted and de-restricted areas. This may, in part, be explained by the changes in alcohol and entertainment licensing hours introduced in 2005 which spread out the 'closing time' peak demand for taxis. However the reduction in waiting times has been greater in de-restricted areas. In our sample LAs, the average reduction in passenger waiting time for taxi journeys hired at taxi ranks was 0.13 minute (7.8 seconds), or 10 per cent of initial passenger waiting time per trip greater in de-restricted than in restricted areas.
6.15
At the same time driver waiting time has increased in both restricted and de-restricted areas with considerably larger increases in de-restricted areas. In our sample LAs the average increase in driver waiting time of taxi journeys hired at taxi ranks was 5.22 minutes (5 minute & 13 seconds), or 77 per cent of initial driver waiting time per trip more in de-restricted than in restricted areas. This increase in driver waiting time is significantly greater than the reduction in passenger waiting times.
6.19
We have not been able to obtain any data on either the usage of illegal taxis or illegal taxi related crime. However the increase in licensed taxis following de-restriction should reduce the opportunity for illegal taxis to operate with corresponding benefits to consumers. Enforcement is an important issue. A main concern of taxi operators, in addition to the operation of completely unlicensed vehicles, was with PHVs illegally plying for hire on the street, particularly late at night.
6.23
Third, there is a need for quality regulation, as mass entry has also generally led to a decrease in quality of service. Kopp (2007) suggested that there may be a danger of regulatory capture as the decrease in service quality has in some cases led to re-restriction.
6.24
In Ireland the devaluation of the licence in the aftermath of de-restriction became a political issue. The government issued compensation to licence holders, albeit based on their individual economic loss.
6.29
We have also estimated the additional cost of providing taxi services in de-restricted areas resulting from the additional driver waiting times that we have observed. We have adopted two alternative approaches. First we have estimated the additional cost to existing taxi drivers based on the elimination of the licence premium. This suggests an annual cost increase in productive efficiency per taxi of around £3,000. Grossed up over the number of taxis prior to de-restriction, this gives an estimated increase in costs of £15 million. An alternative approach is based on the observed waiting times valued either at the same values as we have used for passenger waiting or at the value of the minimum wage. This gives increased costs in the range £12 million to £31 million.
6.30
The net loss in productive efficiency of the market taking into account both the increase in costs and the improved quality of service resulting from the reduced passenger waiting time is therefore between £8 million and £29 million per year.
6.31
This is consistent with the findings of the OXERA literature review (2003). Previous studies had found that where entry control was abolished but fares control was maintained at the existing level, this led to an increase in consumer surplus but a reduction in overall welfare, as the increase in taxi numbers led to cost increases.
Comments on the 2003 study
6.38
We have estimated the value to consumers of these reduced waiting times and a corresponding further potential benefit if de-restriction was extended across the whole market. There was no explicit valuation of this benefit in the 2003 study. In addition we have estimated a loss in productive efficiency associated with the increase in driver waiting time following de-restriction. This effect was not addressed in the 2003 study.
6.39
In carrying out this Review we have identified some further aspects of the work which might have been approached differently and from which we have drawn lessons to be taken into account in future market studies.
6.40
In our assessment of consumer benefit resulting from the 2003 study we have been very conscious of the complex interactions involved in the market for taxi services. The nature of the street and rank hiring segment involves externalities which affect consumers and which justify some continuing regulation. Different factors operate in the pre-booking segment which is subject to much lighter regulation. The way in which competition takes place, both within and between segments, is something we have sought to take into account in assessing the impact of changes in regulation.
6.42
In our view a more detailed analysis of different elements in the market would have given the OFT a better understanding of the welfare implications of the changes it proposed and would have enabled it to provide an estimate, albeit subject to qualifications, of the value of consumer and other benefits or detriments. The absence of such an estimate is an omission from the 2003 study.
6.43
Particular issues which we consider could have been subject to more detailed scrutiny include:
• the segmentation of the market between ply-for-hire (involving taxis only) and telephone bookings (involving both PHVs and taxis) and between urban and rural areas
• the distinction between the supply of taxi services and the numbers of taxis, particularly the way in which de-restriction may increase the number of taxis but reduce the number of journeyman drivers
• the way in which continuing fare regulation for taxis at previous levels may reduce the benefits of de-restriction of taxi numbers and may also limit the ability of both consumers and drivers to provide a trade-off between price and quality of service, and
• the effects of de-restriction both in creating losers as well as winners and possible short-term disruption while markets adjust, for example, over-supply of new taxis leading to town centre congestion and additional emissions.
6.44
This more detailed scrutiny would have allowed the OFT to present a fuller picture of the operation of the market and to assess the welfare implications of possible changes. This would have added to the credibility of its findings and recommendations and would have provided a stronger basis for responding to criticisms of the study.
D.16
After de-restriction, more taxis will enter the market and as a result passenger waiting time will be reduced, thus consumers will be willing to pay more for a taxi trip which is more attractive. However, the increase in demand does not match the increase of supply, which means driver waiting time will increase. Therefore it will be more costly to supply taxi journeys, including the existing taxi journeys,….
E.11
According to stakeholders, turnover of drivers in the taxi and PHV industry is 'massive': turnover of PHV drivers is approximately 40 per cent per year, and due to the existence of higher barriers to entry in the taxi market (quantity restrictions, the Knowledge, etc.), turnover for taxi drivers is lower and between 8 and 10 per cent per year.
E.14
Taxi drivers are mostly self-employed, and it is difficult to collect income data on individual taxi drivers. However, our stakeholder interviews do shed light on certain issues. Taxi vehicles can be rented or bought, and typically a new hackney vehicle (outside London) costs around £22,000 to buy or about £250 per week to rent. While new vehicles are likely to pay for themselves with longer lives, renting causes drivers to effectively pay for a new vehicle less than every two years. Insurance costs have been quoted to us at from £1,200 to £1,500 per year; however, for those with bad records or credit constraints, it can be much higher.
E.23
The practice of tariff setting differs greatly between LAs, but a number of stakeholders have told us that many LAs follow an indexed formula similar to that used by the Public Carriage Office in setting the taxi tariffs in London:
Total tariff = average national earnings + operating costs (4.1) E.24
Average national earnings are used as a proxy for labour cost in driving taxis. Operating costs cover many items including vehicle cost, parts, fuel, insurance, garage and servicing, etc. Currently average national earnings and operating costs respectively account for roughly 60 and 40 per cent in taxi tariffs in London.
E.26
One particular issue raised by stakeholders is the difference between different tariffs. Normally tariffs for evening and weekends (Tariff 2) are higher than those for day time on weekdays (Tariff 1). However, some stakeholders have suggested that the difference between tariffs may be too small to give taxi drivers enough incentive to work in unsocial hours (for example late nights and weekends). De-restriction would allow journeymen drivers who were previously forced to work during night more freedom in choosing their working hours, and this may reduce the supply of taxi services in late night when the negative impacts of illegal taxis might be the highest.
E.44
Table A5.2 shows that the average driver waiting time at taxi ranks in both restricted and de-restricted LAs have increased significantly since 2003, and that the increase in driver waiting time was greater in de-restricted areas. Moreover, the difference in the increase of driver waiting time is bigger than that of the reduction of passenger waiting time.
E.56
Enforcement is an important issue, and stakeholders suggest that many LAs do not devote the necessary resources to ensure effective monitoring and enforcement, especially during late night or peak hours. However, the main concern, apart from the operation of completely unlicensed vehicles, raised by stakeholders representing taxi drivers was with PHVs illegally plying for hire on the street, particularly late at night.
E.59
The view among stakeholders interviewed that drivers have had to work longer hours for lower income since taxi de-restriction was nearly unanimous. Estimates vary, but stakeholders suggest that on average a driver previously working 35-45 hour weeks now must work 50-60 hour weeks to earn the same income. The suggestion that drivers have to work longer hours is consistent with our findings on driver waiting time at taxi ranks.
Experience of other jurisdictions
Ireland
E.64
After de-regulation, the number of taxis soared from 2,720 in 2000 to 9,230 in 2002. Unsurprisingly waiting times were significantly reduced. However, the utilisation rate of taxi vehicles decreased, as journeymen drivers switched to become taxi owners. The demand for taxi services did not increase as much as the supply, which reduced the profitability in the industry and put pressure on quality and fares.
E.66
One interesting issue is the compensation for previous licence holders. The deregulation effectively wiped out the second-hand value of the tradable licence plates. Certain licence holders suffered extreme personal financial hardship and, as a result, a Hardship Panel was established to consider the need for compensation, which did issue compensation to previous licence holders based on their individual economic loss. The Office of Taxi Regulator was also established following the de-restriction.
US and Canada
E.67
Schaller (2006) uses data from 43 communities in the US and Canada to assess the effects of entry regulation on taxicab availability and service quality. The paper finds that very different results appeared in the two taxi market segments: the street and rank hiring segment and the pre-booking segment. Entry de-restriction in street and rank hiring market usually leads to excess supply, which in turn results in the deterioration of vehicle and driver quality. On the other hand, when entry is de-restricted in the telephone order market, there is often an undersupply of cabs.
The Netherlands
E.74
The Netherlands taxi industry was substantially de-restricted in 2000: quantity control was removed, fixed fare regulation was replaced by a maximum fare regulation, and transport zones were abolished. Having watched the mixed effects of de-restriction in other countries, the Netherlands avoided a policy of complete deregulation and, instead, 're-regulated' the industry through re-centralising of licensing and intensifying enforcement. Furthermore, de-restriction was phased in on a gradual basis, under a system of intense monitoring to safeguard basic service quality and fair competition.
E.75
Bakker (2005) found that while the total number of taxi drivers and taxi vehicles has increased, there has been a decrease in the actual operating hours and annual revenue per taxi. The real fare had increased after de-restriction, and consumer satisfaction and efficiency remained more or less the same. However, the turbulence in the market increased, as indicated by the increase entry and exit of taxi operators. The consumer satisfaction on availability of taxi services has increased even after the abolishment of 24 hours service requirement.
F.29
As explained in our conceptual framework, the two main types of consumer benefit from de-restriction are: first, the reduction of waiting time on existing taxi journeys in the street and rank hiring segment, and second, the benefit from additional taxi journeys in this segment. In this sub-section, we quantify the second type of benefits. Some of the additional taxi journeys in the street and rank hiring segment were the taxi journeys that would have been pre-booked if de-restriction had not taken place (i.e. switch between hiring methods), and others will be entirely new taxi journeys. Arguably these two types of additional taxi journeys may present different consumer benefit; however, due to data availability, we assume that the consumer benefit from each entirely new taxi journey will be the same as each taxi journey switched from pre-booking.
Price differential
F.37
As explained in our conceptual framework, in the street and rank hiring segment, taxi drivers have little incentive to offer discounts to customers and the regulated maximum level of fares are normally the actual level of fares charged in practice. On the other hand, the fares of PHVs are not regulated and they could enter the pre-booking segment and compete with taxis freely, which would lead to a quality-adjusted fare level lower than the regulated maxima. In addition, at peak times, when both taxis and PHVs are in short supply and so consumers cannot effectively shop around, PHVs have the flexibility to charge higher prices than taxis as they are not constrained by fare regulations.
Annual increased cost per driver £3,169
Realised total annual driver cost increase in LAs which have de-restricted since 2003 £14,765,039
Potential total annual driver cost increase in LAs which have remained restricted £42,377,986
Annual realised driver cost increase in LAs which have de-restricted since 2003 £31,010,865
Annual potential driver cost increase in LAs which have remained restricted £89,006,063
Annual realised driver cost increase in LAs which have de-restricted since 2003 £12,306,755
Annual potential driver cost increase in LAs which have remained restricted £35,322,325
F.76
There are several main conclusions from our estimations of the welfare impacts of de-restrictions.
F.77
First, de-restrictions in the 48 LAs that have de-restricted since 2003 have led to realised annual consumer benefits ranging from about £2 million to £5 million, depending on assumptions.
F.78
Second, the same de-restrictions have led to driver cost increase, and the magnitude of the realised annual driver cost increase ranges from about £12 million to £30 million, also depending on assumptions.
F.79
This is consistent with the findings of OXERA literature review (2003). As a specific example, it cited Toner and Mackie (1992), which considered the impact of de-restriction. It found that, in the scenario where entry control was abolished but fares control was maintained at the existing level, this led to an increase in consumer surplus, as taxi numbers increase substantially, but a reduction in overall welfare, as the same increase in taxi numbers led to cost increases.
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