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REVIEW OF HIRE CAR LICENCE FEES FINAL REPORT

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					         August 2004 Final Report




REVIEW OF HIRE CAR LICENCE FEES
FINAL REPORT




                     Essential Services Commission
                     Level 2, 35 Spring Street
                     Melbourne 3000, Australia
                     Telephone      +61 3 9651 0222
                     Facsimile      +61 3 9651 3688
                     reception@esc.vic.gov.au
                     www.esc.vic.gov.au
                                           Preface




The Minister for Transport wrote to the Commission under Division 9 of Part VI of the Transport
Act 1983 requesting that it investigate and report by 1 August 2004 on the appropriateness of the
hire car licence fee in relation to its effectiveness in meeting the objectives of the Government’s
reform package for the taxi and hire car industry. The Commission wrote to the Minister to request
a one month extension to the review to allow sufficient time for the large volume of material and
information submitted to the Draft Report to be incorporated into the Final Report. This request
was granted and the Final Report was submitted to the Minister by 1 September.

The Government’s reform package was announced in May 2002. It included the immediate
removal of the public interest test for entry into the hire car industry and the introduction of a
licence fee. Expected outcomes of the package included lower industry cost structures, improved
service quality for consumers, increased demand for taxi and hire car services through lower real
prices over time and the promotion of competition within and between the taxi and hire car
industries.

The terms of reference also require the Commission to report on the means of determining the
administrative process for setting the licence fee in the future and the timing of any further
determinations or reviews of the fee. The Minister requested that the Commission have regard to
the impact on the industry and consumers and the community in general, in addition to regional
issues including the accessibility of services in regional Victoria.

The Commission released an Issues Paper in April and a Draft Report in June. Both documents
included background information to the review, details of the Commission’s analytical approach to
addressing the terms of reference and information about the hire car industry and invited
submissions from industry stakeholders and other interested parties. The Draft Report also
contained the Commission’s draft recommendations for the level of the metropolitan and country
hire car licence fees and the administrative process for determining their level in the future.
Information provided to the Commission during this review has assisted with the preparation of
this report.




JOHN C TAMBLYN
Chairperson




                                                  i   Essential Services Commission, Victoria
                                  Executive Summary

The Victorian Government announced its taxi and hire car reform package in May 2002 in
response to the reviews of legislation governing these industries carried out under National
Competition Policy requirements. The package removed requirements that applicants for a hire car
licence be assessed via a public interest test and present a business case. Applicants would be
entitled to receive a hire car licence ‘as of right’ upon the payment of a $66,000 licence fee (for
metropolitan hire car licences). The reform package also included a commitment to review this fee
within two years.

The Minister for Transport gave the Essential Services Commission terms of reference to conduct
this review on 5 February 2004. The terms of reference require the Commission to investigate and
report on:

(i)     the appropriateness of the current level of the hire car licence fee in relation to its
        effectiveness in meeting the objectives of the package of reforms;

(ii)    the means of determining the administrative process for setting the licence fee in the future;
        and

(iii)   the timing of further determinations or reviews of the licence fee that should occur over
        time.

The review has been conducted pursuant to Division 9 of Part VI of the Transport Act 1983. The
Commission notes that the terms of reference relate to a single element of the regulatory
framework for commercial passenger vehicle industry, namely the licence fee, and the
Commission is prevented from assessing the impact of other elements of the prevailing regulatory
framework (as has been suggested in some submissions).

The review has had regard to the objectives of the Government’s reform package. These
objectives were elaborated in the Victorian Government’s report to the National Competition
Council (‘NCC’) on its implementation of National Competition Policy (‘NCP’) and include, inter
alia, increased competition both within and between the hire car and taxi industries, lower industry
cost structures and more transparent setting of fares. Achieving these objectives will involve,
among other things, facilitating new entry to the hire car industry, which is expected to generate
significant benefits for consumers through a reduction in fares and improved service standards.

The metropolitan licence fee of $66,000 was gazetted in January 2004, just prior to the
commencement of this review. A country licence fee is yet to be gazetted so that new entry
outside of Melbourne has not been possible.


                                                    i   Essential Services Commission, Victoria
There has been some new entry since the gazettal of the fee in January 2004 and this has been
confined to the metropolitan hire car industry. However, the Commission has concluded that new
entry is unlikely to be sustained in the medium term if the fee remains at its current level.

The Commission has reviewed data provided by the Victorian Taxi and Tow Truck Directorate
(‘VTTD’) on the prices at which existing metropolitan licences have been transferred in the
secondary market over the past several years. This data suggest that the average market value of a
metropolitan licence since 2000 has been in the range of $50,000 - $55,000. The Commission has
concluded that the current metropolitan licence fee of $66,000 has been set at a level substantially
above the underlying secondary market price and that a reduction in the fee is required if the
objectives and expected outcomes of the Government’s reform package are to be achieved.

The Commission has reviewed the literature on supply restrictions in the taxi and hire car industry.
While the Commission recognises that a case can be made on public interest grounds for the use of
supply restrictions in the cruising market, it considers that the public interest case for applying such
restrictions to the pre-booked segment of the market is far less convincing.

The Commission also disagrees with the view of some submissions that supply restrictions are
required in order to maintain quality and service standards, as has been argued in some
submissions to this review. Any decline in these standards or increase in unlicensed activity (such
as touting by hire car operators) that occurs as a result of an increase in the number of licences on
issue would represent a failure of quality regulation (that could be overcome by the application of
regulation or the provision of adequate resources for enforcement). Reliance on supply restrictions
to maintain service standards is an inefficient and ineffective mechanism, the cost of which is
ultimately borne by consumers.

Greater competition within and between the taxi and hire car industry can be expected to generate
significant benefits for consumers in terms of lower fares and improved services. For example, the
Commission would expect the hire car industry to develop to a point where it would represent a
genuine alternative to taxis in the ‘immediate dispatch’ segment of the prebooked market. Greater
competition in this area may also have benefits in the form of improved service availability in the
cruising market as taxis re-balance the supply of their services towards that market. Greater
competition would also provide consumers with more choice in terms of the mode of transport
when they undertake journeys.

In developing its recommendations, the Commission has taken into account the Government’s
stated intent when announcing its taxi and hire car industry reform package of ensuring a phased
transition from an industry where supply has been heavily regulated toward one which is lightly
regulated.




                                                     ii   Essential Services Commission, Victoria
The terms of reference also require the Commission to have regard to the impact on industry,
consumers, the community in general and regional issues, including the accessibility of services in
regional Victoria. As a result, the Commission has considered the likely negative impact of a
reduction in the gazetted hire car licence fee, the most notable of which is the impact on the
financial position of existing licence holders who view their licences as tangible assets and have
structured their financial situations accordingly.

The Commission has considered a number of options for the level of the metropolitan hire car
licence fee. Following the publication of the Draft Report, the Commission received a large
number of submissions that argued strongly that substantial hardship would result from the
adoption of a $33,000 fee (including GST), as recommended. In light of this, and the need to be
mindful of the Government’s policy of undertaking a phased transition to reform, the Commission
has now taken the view that a $44,000 fee (including GST) is a more appropriate recommendation
for the purposes of this review. However, it notes that this fee is the maximum fee that is likely to
be consistent with sustained medium term entry to the industry, particularly given the above
conclusion that the underlying market value of licences in the medium term is around $55,000 and
that the $66,000 fee set in January 2004 is substantially above the prevailing secondary market
price.

In order to minimise the costs of adjustment, the Commission recommends that existing licence
holders who have purchased a metropolitan licence from the VTTD since the gazettal of the fee in
January 2004 should have the difference between the current fee and the new fee refunded to them
on request. In addition, hire car operators who purchased metropolitan hire car licences in the
secondary market after the gazettal of the current fee should be able to make application to the
VTTD for an ex gratia payment to be made. The payment should be equal to the difference
between the new metropolitan hire car licence fee and the current fee, unless the purchaser has paid
an amount less than the current fee for their licence. The Commission believes these
recommendations are appropriate due to exceptional circumstances surrounding the gazettal of the
metropolitan licence fee, namely the widespread lack of awareness within the hire car industry and
the objectives and expected outcomes of the Government’s reform package including this review
and its possible implications.

The Commission believes that the approach to setting the country hire car licence fee should be
generally consistent with that adopted for the metropolitan licence fee. It has therefore proposed a
fee of $16,500 (including GST). While there is substantial uncertainty regarding the market value
of country licences, limited data available to the Commission suggests that the proposed fee of
$16,500 would represent a relatively small discount to the current market price. It has adopted this
proposal in preference to the $9,000 fee recommended in the Draft Report to ensure consistency
with the revised recommendation regarding the metropolitan fee and in response to concerns
expressed regarding the possible impact of competition from hire cars on the provision of taxi



                                                   iii   Essential Services Commission, Victoria
services to vulnerable groups in smaller communities, given the importance of ensuring that taxi
services to disabled persons and other vulnerable groups are maintained. Some submissions
expressed concern that an increase in effective competition may undermine the viability of existing
taxi and hire car operators and may threaten the ongoing provision of services (such as wheelchair
accessible vehicles) to specific members of the community. While the Commission is doubtful
that this would occur (and would, in any case, favour the use of direct subsidies to ensure the
availability of these services), it believes there is a case for adopting a cautious approach to reform
in regional areas.

The Commission recognises, however, that the impact of a single, gazetted fee is likely to differ
according to the area in which the licence holders intend to operate. For example, in less densely
populated areas, a fee of $16,500 may represent a significant barrier to entry, thereby denying
consumers access to the benefits of greater competition. As a result, the Commission recommends
that the VTTD should be granted discretion to consider the likely impact of the provision of
additional services in country areas and to waive a portion of the gazetted fee or reject an
application, depending on their circumstances. This process must, however, be transparent and
unambiguous and the VTTD’s decisions should be open to appeal. The Commission suggests that
if the VTTD chooses to exercise its discretion, it should be required to document and publish the
reasons why it has waived a portion of the gazetted licence fee or the reasons why it considers that
denying regional consumers access to additional hire car services is in the public interest.

The Commission also considers that it will be essential to ensure that the licensing authority
implements the new fee in a timely way and recommends that the licence fee should be payable in
four equal annual instalments, as recommended in the McQuillen Report to the Government which
preceded the announcement of the reform package.

The Commission expects an increase in the number of licences on issue if its recommendations are
adopted. Some submissions to this review have suggested that current regulatory arrangements are
such that this would necessarily result in an increase in unlicensed activity and a decline in quality
standards. As noted above, such an outcome would represent a failure of compliance with quality
standards and enforcement of licence conditions that cannot be (and has not been) addressed by
imposing restrictions on the supply of hire car vehicles. Therefore, whilst it is an issue that is
outside its terms of reference, the Commission suggests that the effectiveness of current
administrative arrangements and the monitoring and enforcement of quality standards and licence
obligations should be reviewed and reformed to the extent necessary to ensure that service quality
is maintained in future. Particular emphasis should be placed on developing improved
arrangements to prevent touting at Melbourne Airport (a frequently cited example of unlicensed
activity).




                                                    iv   Essential Services Commission, Victoria
The Commission believes that if its licence fee recommendations were implemented, it would be
appropriate to require the Commission to undertake a further review of their level after a period of
three years. The terms of reference for that review could then call for an assessment of the
prevailing arrangements against the objectives and expected outcomes of the Government’s taxi
and hire car reform package. A review at that time would also provide an opportunity to
independently assess the VTTD’s performance in exercising its discretion with regard to country
licence applications (if that recommendation is adopted).

To assist in the conduct of this further review, the Commission also recommends that the VTTD
implement a data collection strategy in the interim, so that the information for future reviews will
be significantly improved vis-à-vis the current situation.




                                                   v   Essential Services Commission, Victoria
                                                             Contents




                                                                                                                                                  Page
1   INTRODUCTION .................................................................................................................................. 1

    1.1            BACKGROUND TO THIS REVIEW..............................................................................................1
    1.2            TERMS OF REFERENCE ...............................................................................................................2
    1.3            ROLE OF THE ESC .........................................................................................................................2
    1.4            STRUCTURE OF THIS FINAL REPORT ......................................................................................3
2   TERMS OF REFERENCE.................................................................................................................... 4

    2.1            INTRODUCTION ............................................................................................................................4
    2.2            OBJECTIVES AND EXPECTED OUTCOMES OF THE GOVERNMENT’S TAXI AND HIRE
                   CAR REFORM PACKAGE .............................................................................................................4
    2.3            CONSIDERATION OF THE IMPACT OF THE COMMISSION’S RECOMMENDATIONS ...10
3   BACKGROUND TO THE TAXI AND HIRE CAR REFORM PACKAGE .......................................... 12

    3.1            INTRODUCTION ..........................................................................................................................12
    3.2            NATIONAL COMPETITION POLICY AND DEVELOPMENT OF THE TAXI AND HIRE
                   CAR REFORM PACKAGE ...........................................................................................................12
    3.3            IMPLEMENTATION OF THE REFORM PACKAGE .................................................................13
4   THE VICTORIAN HIRE CAR INDUSTRY ......................................................................................... 16

    4.1            HIRE CAR REGULATION AND LICENCE CONDITIONS.......................................................16
    4.2            STRUCTURE OF THE INDUSTRY .............................................................................................17
5   CHARACTERISTICS OF THE MARKET FOR COMMERCIAL PASSENGER VEHICLE SERVICES
    21

    5.1            MARKET FOR COMMERCIAL PASSENGER VEHICLE SERVICES......................................21
    5.2            SUBSTITUTABILITY OF TAXIS AND HIRE CARS .................................................................22
    5.3            AGGREGATE DEMAND FOR HIRE CAR SERVICES..............................................................26
    5.4            EXPECTED BENEFITS OF COMPETITION...............................................................................27
6   SUPPLY RESTRICTIONS IN THE COMMERCIAL PASSENGER VEHICLE INDUSTRY .............. 31

    6.1            INTRODUCTION ..........................................................................................................................31
    6.2            STAKEHOLDER VIEWS ON THE NEED FOR SUPPLY RESTRICTIONS .............................31




                                                                             vi    Essential Services Commission, Victoria
                                                                  Contents




    6.3           ENFORCEMENT OF EXISTING QUALITY STANDARDS ......................................................35
    6.4           THE CASE FOR MAINTAINING SUPPLY RESTRICTIONS ....................................................37
7   IMPACT OF THE CURRENT ARRANGEMENTS............................................................................. 40

    7.1           INTRODUCTION ..........................................................................................................................40
    7.2           METROPOLITAN HIRE CARS....................................................................................................40
    7.3           ACCESS TO CAPITAL .................................................................................................................45
    7.4           CONTRIBUTION TO OPERATING COSTS................................................................................46
    7.5           COUNTRY LICENCES .................................................................................................................47
8   FRAMEWORK FOR DEVELOPING RECOMMENDATIONS ........................................................... 48

    8.1           INTRODUCTION ..........................................................................................................................48
    8.2           TRANSITIONAL ISSUES .............................................................................................................49
    8.3           ADMINISTRATIVE PROCESS FOR SETTING THE LICENCE FEE IN THE FUTURE .........60
9   RECOMMENDATIONS ...................................................................................................................... 62

    9.1           FUTURE HIRE CAR LICENCE FEES..........................................................................................62
    9.2           ADJUSTMENT ISSUES ................................................................................................................64
    9.3           FUTURE REVIEWS ......................................................................................................................65
    9.4           IMPROVING INFORMATION IN RELATION TO LICENCE FEES AND RELATED ISSUES
                   ........................................................................................................................................................66
    9.5           CONCLUSION – EXPECTED OUTCOMES OF ADOPTING THE RECOMMENDATIONS ..67
APPENDIX 1        TERMS OF REFERENCE .................................................................................................. 1
APPENDIX 2        VICTORIAN HIRE CAR LICENCE CONDITIONS ............................................................. 2
APPENDIX 3        ESTIMATING THE MARKET PRICE OF A HIRE CAR LICENCE .................................... 7
APPENDIX 4        REVIEW PROCESS AND KEY DATES........................................................................... 10




                                                                                   vii     Essential Services Commission, Victoria
                                                   Final Report – Hire Car Licence Fees Review




1      INTRODUCTION

The terms of reference for this review require the Commission to investigate and report on the
appropriateness of the current level of the hire car licence fee in relation to its effectiveness in
meeting the objectives of the Government’s reform package for the taxi and hire car industry. This
chapter provides background to the review.

1.1    Background to this review

The Transport Act 1983 provides for the regulation of commercial passenger vehicles by the
industry regulator, the Victorian Taxi and Tow Truck Directorate (‘VTTD’). Taxis, hire cars,
special purpose vehicles and restricted hire vehicles also fall within this category. The VTTD
issues licences for each of these vehicle categories and sets their conditions, including any
application or administrative fees. Under Division 9 of Part VI of the Act, the Minister for
Transport (‘the Minister’) may refer any matter relating to licence fees for hire cars or special
purpose vehicle licences to the Essential Services Commission (‘the Commission’).

On 5 February 2004, the Minister wrote to the Commission requesting that it investigate and report
on the appropriateness of the hire car licence fee in relation to its effectiveness in meeting the
objectives of the Government’s reform package for the taxi and hire car industry. This package
was developed by the Government following its review of taxi and hire car legislation in
accordance with the requirements of the National Competition Policy (‘NCP’).

On 7 April 2004, the Commission released an Issues Paper that outlined its approach to addressing
the terms of reference. In addition, the Paper invited submissions from stakeholders and other
interested parties on any other matters relevant to the terms of reference by 30 April. The
Commission received eight submissions to its Issues Paper and information from these
submissions assisted in preparation of the Draft Report. The Commission also held meetings with
key industry stakeholders such as industry associations and individual hire car operators.

The Commission released its Draft Report on 21 June 2004 and invited comments from
stakeholders and other interested parties by 12 July. In response, a total of 61 submissions were
received. The Commission also held further meetings with key industry stakeholders. The
Commission received a significant volume of relevant information and number of submissions
after 12 July and therefore, wrote to the Minister to request a one-month extension to the review to
allow them to be reflected in the Final Report. The request was granted and the Commission was
subsequently requested to report to the Minister by 1 September 2004, rather than 1 August as had
initially been required by the terms of reference.

The Commission has drawn on material and information provided in submissions in the
preparation of this report. Where quotes from submissions have been included, they have been
reproduced verbatim.

The process for completion of the review including key dates is presented in a table in Appendix 4.




                                                   1   Essential Services Commission, Victoria
                                                                Final Report – Hire Car Licence Fees Review



1.2     Terms of reference

The terms of reference for the review require the Commission to investigate and report on:

(i)     the appropriateness of the current level of the hire car licence fee in relation to its
        effectiveness in meeting the objectives of the package of reforms;

(ii)    the means of determining the administrative process for setting the licence fee in the future;
        and

(iii)   the timing of further determinations or reviews of the licence fee that should occur over
        time.

The terms of reference specifically direct the Commission to have regard to the following matters:

(i)     the impact on the industry and consumers and the community in general; and

(ii)    regional issues, including accessibility of services in regional Victoria.

The terms of reference are reproduced in full at Appendix 1.

1.3     Role of the ESC

The Commission is Victoria’s independent economic regulator of prescribed essential utility
services supplied by the electricity, gas, ports, grain handling and rail freight industries. It also has
a role in undertaking specific investigations as requested by relevant Ministers under industry
specific legislation, in this case, the Transport Act.

In the terms of reference for this review, the Minister has requested that the Commission should
have regard to the objectives in section 8 of the Essential Services Commission Act 2001 where
relevant. As drafted, the Commission’s objectives relate to the provision of essential services by
regulated industries, as defined in the Act.

The primary objective is the protection of the long term interests of Victorian consumers with
regard to the price, quality and reliability of essential services. In seeking to achieve this primary
objective, the Commission must have regard to facilitating objectives that include the prevention of
the misuse of monopoly or non-transitory market power, the facilitation of effective competition
and the promotion of competitive market conduct and ensuring that users and consumers benefit
from the gains from competition and efficiency.1




1
        Other facilitating objectives under section 8 of the Essential Services Commission Act 2001 include the facilitation of
        the financial viability of regulated industries and ensuring that the misuse of monopoly or non transitory market power
        is prevented.




                                                                2    Essential Services Commission, Victoria
                                                  Final Report – Hire Car Licence Fees Review



Section 187 of the Transport Act specifies the conduct of the Commission’s investigation and
provides for it to receive written submissions or statements, hold public hearings and consult with
any person deemed appropriate. Section 190 requires the Minister to present a copy of the
Commission’s final report to each House of Parliament within seven sitting days of receiving the
report and then ensure a copy is available for public inspection.

1.4    Structure of this Final Report

This report draws on material and analysis that was previously included in the Commission’s
Issues Paper and Draft Report. However, it can be read as a complete document and has been
updated following the receipt of stakeholder submissions to the Draft Report.

This paper is structured as follows:
•     Chapter 1 describes the review and the Final Report, restates the terms of reference,
      discusses the role of the Essential Services Commission and describes the administrative
      process for the review.
•     Chapter 2 describes the Commission’s interpretation of the terms of reference and
      considers stakeholders’ response to that interpretation.
•     Chapter 3 considers the Government’s taxi and hire car reform package, the context in
      which it was developed and the process by which it was to be implemented.
•     Chapter 4 provides an overview of the Victorian hire car industry and describes the current
      regulatory framework, the structure of the industry and industry developments since the
      release of the reform package.
•     Chapter 5 chapter considers the market for hire cars and for commercial passenger vehicle
      services generally and the impact of current regulatory arrangements on the supply of and
      the demand for these services.
•     Chapter 6 considers the views of stakeholders with respect to the need, or otherwise, for
      supply restrictions in the market for commercial passenger vehicle services.
•     Chapter 7 considers industry outcomes under the present arrangements and draws
      conclusions about the impact of the current metropolitan licence fee (and absence of
      country licence fee) on entry and competition in the hire car industry.
•     Chapter 8 draws on the conclusions reached in Chapters 6 and 7 and discusses the process
      by which the Commission has developed and assessed its recommendations regarding the
      hire car licence fee.
•     Chapter 9 outlines the Commission’s recommendations for Victorian hire car licence fees
      and future reviews relating to their level.




                                                  3   Essential Services Commission, Victoria
                                                    Final Report – Hire Car Licence Fees Review




2      TERMS OF REFERENCE
The terms of reference require the Commission to consider the appropriateness of the current hire
car licence fee in meeting the objectives of the Government’s taxi and hire car reform package.
This chapter describes the Commission’s interpretation of the terms of reference and considers
stakeholders’ response to that interpretation.

2.1    Introduction
The terms of reference for this review require the Commission to investigate and report on the
appropriateness of the current level of the licence fee in meeting the objectives of the taxi and hire
car industry reform package.
In developing its recommendations, the terms of reference require the Commission to have regard
to the impact on the industry and consumers and the community in general, and to consider
regional issues, including the accessibility of services in regional Victoria.
The Commission notes that the terms of reference relate to one specific element of the regulatory
framework for the commercial passenger vehicle industry, namely, the hire car licence fee. Some
submissions have suggested that the Commission should direct its attention to other elements of
the regulatory framework (such as the current regulatory administration arrangements, prescribed
vehicle standards for hire cars and the prohibition on hire car activity in the cruising segment of the
market, for example) that have greater implications for competition within and between the hire car
and taxi industries and for industry operating costs. The Commission has acknowledged these
comments but notes that it is bound by the terms of reference in conducting this review and has
undertaken its analysis and developed its recommendations accordingly.
In the preparation of its Issues Paper and Draft Report and the subsequent consultation process, the
Commission became aware of divergent views as to the objectives of the Government’s reform
package, its expected outcomes, the process by which those outcomes are to be achieved and by
implication, the basis of this review’s terms of reference. It also became apparent that there was a
general lack of awareness among members of the hire car industry of the reform package and its
published objectives and implications.
This chapter outlines the Commission’s interpretation of its terms of reference, which in turn,
forms the basis for the development of its recommendations about the hire car licence fee. It also
considers the Government’s stated approach to reform that has guided the Commission in the
preparation of its final recommendations, its analysis of the likely impact of those
recommendations and their consistency with the Government’s approach.

2.2    Objectives and expected outcomes of the Government’s taxi and hire car
       reform package
In both its Issues Paper and Draft Report, the Commission referred to the Victorian Government’s
report in 2003 to the National Competition Council (‘NCC’) on its implementation of the NCP and
noted that this document provided the clearest and most recent statement of the objectives and
expected outcomes of the taxi and hire car reform package. The Commission also referred to the
Department of Infrastructure’s website, which outlined the expected benefits of the reform



                                                    4   Essential Services Commission, Victoria
                                                                  Final Report – Hire Car Licence Fees Review



package. The relevant sections of the Government’s report and the Department’s website are
reproduced in Boxes 2.1 and 2.2 respectively.

    Box 2.1 The Government’s expected outcomes and key elements of the reform package

    The key elements of the taxi and hire car reform package are:
    •    relaxation of entry into the taxi and hire car industries through a phased program of
         additional taxi licence releases and removal of the public interest test for entry into
         the hire car industry;
    •    greater transparency and input of economic expertise in taxi fare determination;
    •    improved quality of services;
    •    open and transparent mechanisms to signal Government policy information to
         market participants; and
    •    flexibility is built in to allow for further reforms.
    The expected outcomes of these reforms include:
    •         lower industry cost structures;
    •         improved service quality for consumers;
    •         increased demand of taxi and hire car services, through lower real prices over time;
    •         fairer prices to consumers of taxi services;
    •         setting of taxi fares to be more transparent, with greater input of economic
              expertise;
    •         greater competition within and between the taxi and hire car industries; and
    •         reforms that are fiscally responsible.2

                               Box 2.2 Expected benefits of the reform package

    Industry reviews such as those undertaken by KPMG and Mr McQuillen had identified
    specific problems with the taxi and hire car industry, particularly in relation to the
    availability of services. The Department of Infrastructure has reported that the reform
    package was expected to lead to:
    (i)         Improved responsiveness and services, particularly late at night;
    (ii)        More equitable access to taxis for people with disabilities and people living in
                regional and outer metropolitan areas;
    (iii)       Greater financial certainty for taxi operators;
    (iv)        Improved driver standards and better careers for drivers; and
    (v)         More standards for the operating environment to improve service performance.3




2
           Department of Treasury and Finance (2003), op cit, pp.89 - 90
3
           See Department of Infrastructure website (http://www.doi.vic.gov.au) and Victorian Taxi Directorate (2002), Taxi and
           Hire Car Reform in Victoria for further details




                                                                  5   Essential Services Commission, Victoria
                                                              Final Report – Hire Car Licence Fees Review



The Government’s process for implementing the taxi and hire car reform package is reproduced in
Box 2.3.
                   Box 2.3 The Government’s approach to the implementation
                                  of taxi and hire car reform
       According to the Government’s Report on Victoria’s Implementation of National
       Competition Policy, the approach that is being taken to reform incorporates four key
       elements:
       •      a phased transition to reform. The reforms allow the transition along the
              continuum from a highly regulated industry to a more lightly regulated one.
              There has been a lack of action from previous governments in opening up
              entry into the taxi and hire car industries. The phased approach that is being
              adopted is fiscally responsible, as well as lessening adjustment costs with the
              pre-announcement of policy measures.
       •      an equitable approach. The reforms do not allow for further windfall gains
              for those in the industry. Rather, there should be a gradual reduction in
              licence values. The annual fee payable on each additional taxi licence is set
              at a level that makes these licences an attractive substitute to existing
              perpetual licences, as well as to return revenue to taxpayers, thus
              contributing to government costs of overseeing and monitoring the industry.
       •      a realistic approach. The package encapsulates substantial reform, with an
              approach that can be feasibly implemented over the next twelve years. The
              package is viewed as an effective one to meet the government’s objectives
              for the industry and the community.
       •      These reforms do not represent the end point of reform. It is expected that
              further reforms may be required over time. The package builds in flexibility
              to allow for further reform where, over time, the reforms do not sufficiently
              address existing problems. For example, the collection and publication of
              performance of the industry against standards will allow ongoing assessment
              of whether further measures are needed to improve the attainment of
              objectives. Additional 24-hour taxi licences are to be issued if performance
              does not meet standards. In addition, there is the assessment of the level of
              the market-based hire car licence fee by the ESC in May 2004.4

It is these Government statements that the Commission considers should be taken into account in
assessing the appropriateness of the current hire car licence fee in relation to its effectiveness in
meeting the objectives of the reform package (as required by the terms of reference). The
Commission’s analysis, conclusions and draft recommendations were undertaken and prepared in
this context.




4
       Department of Treasury and Finance (2003), op. cit., page 92




                                                              6   Essential Services Commission, Victoria
                                                            Final Report – Hire Car Licence Fees Review



A number of submissions to the Draft Report appeared to disagree with or failed to recognise the
Commission’s interpretation of the terms of reference and the basis of that interpretation. For
example, Mr John Kapnias, Managing Director of Southern Cross, stated that:

         “The Government’s objectives of the 2002 Industry Reforms are as follows:
         1.     Improve customer service
         2.     Improve customer access to taxis and hire cars
         3.     Encourage Industry sustainability and competitiveness
         4.     Improve careers for drivers and operators”.5
And:

         “Sustainability implies the existence of a number of conditions including:
         •      An element of balance between supply and demand.
         •      Consumer confidence in the service delivery and a perception of value in
                the fare paid
         •      Adequate return on the suppliers invested time and capital encouraging
                further invest in staff and driver training, new vehicles, technology and
                infrastructure.
         •      Industry confidence in the regulatory framework.
         At the moment it would be fair to say that few of these conditions exist. That is,
         the industry is not sustainable. The ESC proposal does nothing to move the
         industry toward point of balance. In fact, by undermining the confidence of the
         existing industry participants, the draft proposal lessens the industry’s
         sustainability.”6

While these representations of the Government’s objectives appear consistent with the expected
outcomes of the reform package as stated on the Department of Infrastructure’s website
(reproduced in Box 2.2) they appear to be incomplete in that they do not appear to take account of
the other elements of the Government’s approach to reform as set out in its 2003 report to the
NCC. In general, submissions that disputed the Commission’s interpretation of the terms of
reference or expressed ignorance of their basis failed to provide a basis for adopting an alternative
interpretation of the Government’s objectives and expected outcomes.




5
       Submission to Draft Report from Mr John Kapnias, Managing Director, Southern Cross, page 1
6
       Ibid., page 5




                                                            7   Essential Services Commission, Victoria
                                                              Final Report – Hire Car Licence Fees Review



The most detailed submission on this matter, however, was that received from Mr Carlo Carli MP,
Parliamentary Secretary to the Department of Infrastructure. The Commission views Mr Carli’s
submission to the Draft Report as being of particular relevance as he was the Chairman of the
Government’s Implementation Working Group for the reform package. Mr Carli stated that:

         “The Essential Services Commission (ESC) draft report needs to be radically
         rewritten and the recommendations reconsidered. The 2002 Government Taxi
         and Hire Car reforms placed an emphasis on the sustainability and
         competitiveness of the taxi and hire car industry. It also realised that the
         reform process needs support from the Taxi and Hire Car industry. The ESC
         draft report radically breaks with this policy direction basing the shift on the
         virtues of industry deregulation.”7

And:

         ”The Government rejected any radical deregulation of the taxi industry on the
         basis of the cost of compensation and the documented experience from other
         jurisdictions. The Government reform document noted that deregulation led to
         poor outcomes such as:
         •    Enormous influx of new operators
         •    Lower profits
         •    Lower occupancy rates
         •    Higher fares
         •    Lower quality
         •    Congestion in city centres, airports, major hotels.
         The Government accepted that hire car could provide some competition with
         taxis. However there was also some marked differences. The differences
         include the requirement that taxis act as a common carrier, which prevents
         them from refusing passengers, whereas hire cars are not subject to this
         restriction and can refuse passengers. The common carrier requirements
         ensure that taxis operate as part of the public transport system. The taxi
         industry also has a service obligation to provide wheelchair services, which the
         hire car industry does not.




7
       Submission to the Draft Report from Mr Carlo Carli MP, Parliamentary Secretary to the Department of Infrastructure,
       page 2




                                                              8   Essential Services Commission, Victoria
                                                    Final Report – Hire Car Licence Fees Review



          The Government’s Taxi and Hire Car Reform therefore rejected deregulation
          as the panacea for the problems of the industry.”8

Mr Carli also stated that:

          “The ESC draft report also suggests that a deregulated hire car industry would
          directly compete with taxi vehicles thereby deregulating the taxi industry by
          stealth and potentially creating a minicab situation.”9

Mr Carli’s concerns about the Commission’s draft recommendations appear to relate to their
possible impact on the taxi industry and a belief that the Commission had advocated a programme
of broadly based deregulation that is inconsistent with the Government’s broader approach to
reform. Similar views were expressed in some submissions from industry participants. As a
general response, the Commission notes that its terms of reference and by necessity, its
recommendations, relate only to licence fees for metropolitan and country hire cars. Other aspects
of the regulatory framework, including the prohibition on hire car activity in the cruising market
and measures to establish and administer quality standards, are outside the scope of this review.

Accordingly, the Commission does not consider its draft recommendation for the future level of
the metropolitan hire car licence fee can be appropriately characterised as deregulation of the taxi
and hire car industries or that a recommended reduction in the licence fee should be viewed as
deregulation of the taxi industry by ‘stealth’. The Commission’s only comments in the Draft
Report about the broader regulatory environment refer to the concerns expressed in some
submissions about the effectiveness of the existing regulatory system, particularly with respect to
the enforcement of existing regulations and licence conditions and that a review of current
arrangements may be warranted to improve their effectiveness.

Deregulation of the taxi and hire car industries, as it has been applied in other jurisdictions, would
involve a relaxation not only of supply restrictions via the reduction or removal of licence fees, but
also a relaxation of vehicle and driver standards, the removal of taxi fare regulation and the
removal of restrictions on the activity of certain categories of commercial passenger vehicles (the
prohibition on hire car activity in the cruising segment of the market, for example). These other
elements of the regulatory framework, some of which are more likely to impact on the degree of
effective competition between taxis and hire cars than current licence values, are outside the scope
of this review and this report does not include any recommendations that relate to them.
Nevertheless, the Commission recognises that some characteristics of the taxi and hire car industry
mean that directly targeted regulation with appropriate and adequate resourcing for enforcement, is
likely to generate superior outcomes for industry participants and passengers alike in terms of
efficiency and welfare. These issues are discussed in more detail in Chapter 6.




8
        Ibid., pp. 4 - 5
9
        Ibid., pp. 6 - 7




                                                    9   Essential Services Commission, Victoria
                                                    Final Report – Hire Car Licence Fees Review



In relation to Mr Carli’s comment that the Draft Report represents a radical break with the
direction of the Government’s taxi and hire car reforms, his submission does not address the
statements contained in the 2003 report to the NCC or refer the Commission to other official
documentation setting out an alternative statement of Government policy. The Commission notes
in this regard that the Department of Treasury and Finance report to the NCC is an official
document against which the NCC has assessed Victoria’s compliance with its NCP commitments.
As noted above, the Commission has relied on it for this reason in interpreting its terms of
reference.

It has been suggested by some that licence fees must be maintained at their present level for the
objectives of the reform package to be met. The Commission has taken the view, however, that the
approach being taken to reform (as set out in the 2003 NCC report) envisages a ‘gradual reduction
in licence values’ over time. Some industry participants have also suggested that the term
‘industry sustainability’ means the maintenance of current licence values. The Commission views
sustainability as a situation where there is sufficient ongoing confidence in the industry and its
future prospects to continue to invest in and provide innovative hire car services that meet the price
and service quality requirements of consumers in an expanding and increasingly competitive inter-
modal market for passenger transport services.

The Commission notes that the reform package was intended to alter some elements of the existing
regulatory framework (particularly those that were likely to impact on decisions about entry) with a
view to promoting competition within and between the taxi and hire car industries. The
Commission therefore, continues to hold the view that the terms of reference require it to assess the
appropriateness of the current hire car licence fee against the objectives, expected outcomes and
approach to reform that have been reproduced in this chapter and has undertaken its analysis and
reached conclusions on that basis.

2.3    Consideration of the impact of the Commission’s recommendations

The terms of reference require the Commission to have regard to the impact on the industry and
consumers and the community in general, in addition to regional issues such as the accessibility of
services in regional Victoria.

A large proportion of the submissions received following the release of the Draft Report expressed
concern about its expected (adverse) impact, suggesting that the Commission had had insufficient
regard to the impact of its recommendations (contrary to the terms of reference). In particular, the
draft recommendation to reduce the metropolitan licence fee was criticised on the grounds that it
would adversely affect the financial viability of many existing operators. For example, Mr Carli
stated:

         “The hire car industry is predominately made up of small businesses where the
         license value is often the most valuable asset. The firms even borrow on the
         value of licenses. Destroying license values could have a dramatic impact on
         the viability of these businesses. For hire cars the ESC draft document
         recommends a dramatically drop in license values followed by a further review.
         The ESC foreshadows that the further review would reduce license fees to the
         annual cost of administration and enforcement.




                                                    10   Essential Services Commission, Victoria
                                                  Final Report – Hire Car Licence Fees Review



         Hire car owners would clearly be concerned about the destruction of the asset
         value of licenses, the impact on the future of their businesses and they would
         have a case for compensation. Particularly as some have only recently paid the
         government for these licenses.”10

Numerous submissions also expressed concern that the Commission’s draft recommendation for
the country licence fee would, if adopted, provide insufficient protection to existing country
operators, thereby threatening the ongoing provision of services to certain community members.

The Draft Report discussed the possible impact of its recommendations on the existing operators
and the ongoing provision of services in regional Victoria. However, the views (and details of
personal circumstances) received from respondents on the likely impact of the draft
recommendations have provided additional material and perspective that have informed the
development of the Commission’s final recommendations. The specific issues and the appropriate
manner with which they should be dealt are discussed in detail in Chapter 8.

In conducting this review, the Commission has been mindful of the stated approach to reform that
is reproduced in Box 2.3 and in particular, that the process of reform, whilst expected to generate
significant benefits for consumers through the promotion of competition, is intended to be a phased
transition that is fiscally responsible and attempts to lessen costs (on existing operators, for
example) as far as possible. Therefore, the Commission’s analysis of the net benefits of any
change to the hire car licence fee has taken account not only of the benefits to consumers of
reduced operating costs and greater competition, but also of the need to carefully manage any costs
that could be imposed on existing taxi and hire car operators in metropolitan and regional areas.




10
       Ibid., pp. 7 - 8




                                                  11   Essential Services Commission, Victoria
                                                            Final Report – Hire Car Licence Fees Review




3      BACKGROUND TO THE TAXI AND HIRE CAR REFORM
       PACKAGE

This chapter considers the Government’s taxi and hire car reform package, the context in which it
was developed and the process by which it was to be implemented

3.1    Introduction

The previous chapter discussed this review’s terms of reference and the objectives and expected
outcomes of the Government’s reform package. This chapter provides background to the
development and implementation of the package by VTTD. The Commission notes that the
reform package was developed in the context of National Competition Policy and is intended to
fulfil the Government’s obligations in this regard.

3.2    National Competition Policy and development of the Taxi and Hire Car
       Reform Package

NCP was given effect by agreements signed by Commonwealth and State / Territory leaders in
April 1995. One element of the NCP was a requirement that all governments review and reform
all legislation that restricted competition. The guiding principle for the review was that legislation
should not restrict competition unless it could be demonstrated that the:
(i)    benefits of the restriction to the community as a whole outweigh the costs; and
(ii)   objectives of the legislation can only be achieved by restricting competition.
The Government engaged KPMG Consulting to undertake a review of Victoria’s taxicab and small
commercial passenger vehicle legislation as part of its NCP commitments.11 The review concluded
that quality controls such as driver and vehicle standards were essential to minimise safety risks to
passengers and drivers but fare regulation and restrictions on entry imposed significant costs on
consumers in the form of higher fares, restrictions on the types of services available and reduced
quality of service (longer waiting times, for example).

Mr Rob McQuillen undertook a further review of the industry in February 2001. That review
identified service deficiencies at certain times of the day (peak times and late at night), raised
concerns about the value of taxi licences and taxi assignment fees and made a number of
recommendations about future regulation of the taxi and hire car industry.12



11
       KPMG Consulting on behalf on Department of Infrastructure (1999), National Competition Policy review of taxicab
       and small commercial passenger vehicle legislation.
12
       Mr Rob McQuillen (2001), National Competition Policy: Review of taxicab and small commercial passenger vehicle
       legislation, Summary report, conclusions and recommendations.




                                                            12    Essential Services Commission, Victoria
                                                              Final Report – Hire Car Licence Fees Review



The Victorian Government announced its reform package for the taxi and hire car industry in May
2002 to address problems that had been identified by the two reviews. The package contained 17
initiatives, the majority of which related to taxis.13 Those initiatives relating to hire cars were as
follows:
(i)     the immediate removal of the public interest test for entry into the hire car industry;
(ii)    changes to the entry process for the hire car industry with the introduction of a fixed price
        licence fee for metropolitan and country licences and a commitment that the Commission
        would assess the level of the fee within two years of the announcement of the reforms to
        ensure it did not represent a significant barrier to entry; and
(iii)   relaxation of the hire car vehicle standards to allow for a wider range of vehicles to operate
        in the industry, while maintaining a distinction between taxi and hire car standards.
Prior to the removal of the public interest test, applicants were required to demonstrate to the
VTTD that there was a demand for their proposed service that was not being met by existing
operators. Furthermore, the VTTD was required to have regard to the likely effect of the proposed
service on existing providers, who were able to object to the application. The NCP review
concluded that the public interest test effectively acted as a barrier to new entry.14

The NCC’s most recent assessment of the taxi and hire car reform package considered the removal
of the public interest test, implementation of the licence fee and the Commission’s review. It
concluded that that whilst the fee was ‘significant’, the package met NCP requirements. The NCC
also noted the proposed phased approach to reform and concluded that it was in the public
interest.15

3.3     Implementation of the reform package

The reform package was publicly announced in May 2002. However, the metropolitan hire car
licence fee was not gazetted until 14 January 2004.16 The Commission is aware that the VTTD
held discussions with some industry stakeholders regarding a possible country hire car licence fee
during 2003. However, a country hire car fee has not been gazetted and it is expected that this will
not occur until the Commission has completed this review.

The Commission understands that the metropolitan hire car licence fee announced at the time of
the release of the reform package in May 2002 ($66,000 including GST) was intended to reflect the



13
        See Department of Infrastructure website (http://www.doi.vic.gov.au) and Victorian Taxi Directorate (2002), Taxi and
        Hire Car Reform in Victoria, for further details
14
        See KPMG (1999), op cit, page 83 and Regulatory Reform Task Force, (1997), Tourism Industry: Regulatory Audit /
        Reform Discussion Paper, Section 1 for further discussion.
15
        National Competition Council (2003), Assessment of governments’ progress in implementing the National Competition
        Policy and related reforms: 2003 - Volume one: Overview of the National Competition Policy and related reforms,
        page 2.11
16
        Victorian Government Gazette, No. S5 Wednesday 14 January 2004




                                                              13    Essential Services Commission, Victoria
                                                            Final Report – Hire Car Licence Fees Review



average market value of a metropolitan licence in the twelve months prior to the announcement of
the package. However, the VTTD has since acknowledged in discussions with the Commission
that the average market value of a metropolitan licence over this 12-month period was more likely
to be in the range of $50,000 - $55,000 and that a premium had been added. That the secondary
market value of a licence fell within the lower range is confirmed in a press release from the
Victorian Hire Car Association (‘VHCA’) in May 2002 and an article in the industry paper, Taxi
Talk, by Mr George Kapnias, then President of the VHCA in June 2002.17 These publications
suggested the 12-month average value over the relevant period was $54,000 and $53,900
respectively.

The Commission is not aware of the rationale for the addition of the premium but notes that Mr
McQuillen had previously recommended implementation of a metropolitan fee licence at the
prevailing market rate and cited $60,000 only as an example. The implications for new entry and
competition of setting a fee for a new licence that exceeds the average price paid in the secondary
market are discussed in more detail in Chapter 7.

The VTTD prepared documentation to publicise the package and Mr Carlo Carli wrote to all hire
car licence holders in June 2002 to inform them of the Government’s reform package and to clarify
some of its details. A number of submissions to this review, however, claim to have been unaware
of the details of the package and in particular, of the announcement and subsequent gazettal of the
metropolitan licence fee and the Government’s commitment to request that the Commission review
the fee two years after the announcement of the package.

For example, Mr Gerard Mahoney of Rollston Limousines, stated in reference to the
Commission’s draft report, that:

         “The draft has totally overlooked and dismissed the inadequacies of VTD and
         the methods of notification of Hire Car industry Licence holders. I have
         verified proof that many licences holders have not received one piece of
         literature as to the gazetted changes to Hire Car Licences & industry
         reforms.”18

Some submissions raised more general concerns about the communication of Government policy
to the hire car industry. For example, Mr Bruce Mossig, Secretary to the Victorian Country
Limousine Association, stated that:

         “The VTD has failed over many years to communicate the Governments
         objectives clearly and unambiguously to the industry, if the industry is supposed
         to be in competition with and provide substitute services for taxis.”19




17
       See “It’s on – Hire Car deregulation” by Mr George Kapnias, Taxi Talk, June 2002, pp. 12 - 14
18
       Submission to the Draft Report from Mr Gerard Mahoney, Owner / Manager, Rollston Limousines, page 1
19
       Submission to the Draft Report from Mr Bruce Mossig, Secretary, Victorian Country Limousine Association, page 2




                                                            14    Essential Services Commission, Victoria
                                                Final Report – Hire Car Licence Fees Review



Awareness of the regulatory framework is obviously a major influence on decisions regarding
entry and investment in an industry. The Commission notes that uncertainty about the prevailing
regulatory environment or the nature of likely changes to that environment would be expected to
discourage new entry and / or expansion by incumbents. The implications of a lack of awareness
of the taxi and hire car reform package and of regulatory uncertainty more generally for
recommendations about the process for reviewing licence fees are discussed in more detail in
Chapter 8.




                                                15   Essential Services Commission, Victoria
                                                    Final Report – Hire Car Licence Fees Review




4      THE VICTORIAN HIRE CAR INDUSTRY

This chapter provides an overview of the Victorian hire car industry and describes the current
regulatory framework, the structure of the industry and industry developments since the release of
the reform package.

4.1    Hire car regulation and licence conditions

Hire cars are vehicles licensed by the VTTD as one category of commercial passenger vehicles
under the Transport Act 1983 to pick up and carry passengers for a fee. Other licence categories
are taxis, restricted hire vehicles and special purpose vehicles.

Hire cars compete with taxis for business in the ‘pre booked’ market for passenger vehicle
services, i.e. where a vehicle is booked by telephone and then dispatched, and are prohibited from
making or accepting any offer to be hired off the street or within a public place. Licence
restrictions on hire cars prohibit them from accepting passengers that have arrived at Melbourne
Airport by aeroplane unless a booking has been made prior to the arrival of the flight. Unlike taxi
fares, the fares charged by hire car operators are not regulated and are agreed between the operator
and the hirer at the time of booking. Although official data on hire car fares is not collected, the
Commission understands that hire cars generally command a premium over taxi fares that is likely
to reflect superior vehicle and service standards.

Hire car licences are issued for operation in either metropolitan Melbourne or in regional Victoria.
Under current zoning arrangements, a metropolitan licence holder can operate on a statewide basis;
country hire cars can drop off or pick up within the metropolitan area but not complete entire
journeys within that area.

Prior to 1996/97, a metropolitan hire car licence applied only to hire cars with an operational
address within a 50km radius of the GPO. However, the VTTD expanded the area to allow
operators based within a 110 km radius to operate their vehicles as metropolitan hire cars, although
operators based within the 50km and 110km radius at the time of the change were able to choose to
operate their vehicle as a country hire car. This meant they benefited from the more generous
vehicle age limit criteria but could not undertake complete trips within the 50 km radius. Hire cars
outside the 110 km radius were automatically categorised as country hire cars.

The Commission understands that in 2003, the VTTD sought to reclassify all hire cars within an
80km radius of the GPO as metropolitan hire cars and those outside this limit as country hire cars.
However, agreement with key industry participants was not reached and the proposal has not
proceeded.

A licence applicant is required to undergo a police check to determine if he / she is a fit and proper
person to hold a licence. Licence ownership is transferable, subject to VTTD approval. However,
the right to operate a licence cannot be assigned or leased to any other person and control and
management of the vehicle remains with the licence holder. This contrasts with taxi licences,
which allow for assignment of a vehicle, a process by which control of its operation is ceded to
another party who pays a fee for that right.



                                                    16   Essential Services Commission, Victoria
                                                    Final Report – Hire Car Licence Fees Review



A prospective licence holder must present a vehicle to the VTTD that meets the prescribed hire car
standards and then pay the prescribed fees. The fees are set via Government Gazette at a level
determined by the licensing authority subject to Ministerial approval. The scheduled fees for a
metropolitan hire car licence are:
•       application fee of $154;
•       one-off licence issue fee of $66,000; and
•       annual licence fee of $123.

Fees for a country hire car licence have not been gazetted.

The VTTD prescribes minimum vehicle standards and age criteria according to the make and
model of the licensed vehicle. These standards are based on a vehicle’s age (rather than mileage)
and are outlined in Appendix 2, along with the other licence conditions imposed by the VTTD.

In January 2004, the VTTD amended some elements of the vehicle standards for hire car following
the gazettal of the metropolitan licence fee. As a result, some vehicles that are now presented for
inspection as part of a licence application that were previously required to be new (Ford Fairlanes
and Holden Statesmen, for example), can be approved at any age up to that at which the vehicle is
required to be retired (five years in this example).

4.2      Structure of the industry

Table 4.1 summarises the number of licences for commercial passenger vehicles on issue in
Victoria.
Table 4.1 Commercial Passenger Vehicle licences on Issue in Victoria (as at 31 May 2004)

    Licence category                                          Number of licences on issue
 Metropolitan Hire Cars                                                   477
 Country Hire Cars                                                         61
 Metropolitan Taxis                                                      3,373
 Outer suburban and regional Taxis                                        864
 Restricted Hire Vehicles                                                 635
 Special Purpose Vehicles                                                1,129
Source: Victorian Taxi and Tow Truck Directorate

According to the VTTD, the 477 metropolitan licences are held by approximately 380 different
entities, the 61 country licences are held by 55 entities.

The VTTD has received 25 applications for new metropolitan licences since the announcement of
the taxi and hire car reform package in May 2002 (although two of those applications were
received prior to the gazettal of the licence fee in January 2004, leaving some doubt as to whether




                                                    17   Essential Services Commission, Victoria
                                                                 Final Report – Hire Car Licence Fees Review



these applicants were aware of the specific requirements for a licence to be issued.) Eight of the
applications have been successful and in each case, resulted in the release of a new licence with a
payment of $66,000. The remaining 17 applications have either been approved or are pending and
have not yet resulted in the release of a new licence.20

The VTTD has received three applications for country licences since the announcement of the
reform package; none has been approved as yet. The Commission notes that there is no possibility
of a licence being issued under current conditions as no country fee has been gazetted. The VTTD
has received numerous enquiries regarding country licences but prospective applicants had been
advised not to submit a formal application. This presumably reflects the fact that as a fee has not
been gazetted it is not possible to issue licences to any applicants.

The Commission’s Issues Paper and Draft Report contained details of the distribution of country
hire cars across Victoria. However, submissions to both documents disputed the accuracy of this
information on the basis that while licences are notionally based in particular regional areas (an
inevitable result of the public interest test), no effective enforcement of this requirement is
exercised and as a result, many licences are operated in areas other than those for which they are
issued.

As a result, the Commission has been unable to reach firm conclusions about the availability of
hire car services or identify any shortfall in the provision of services in specific regions.

A further initiative that the VTTD intends to undertake over the next twelve months is the
consolidation of various commercial passenger vehicle licence categories. This process will
potentially result in the conversion of 115 metropolitan and 32 country special vehicle licences to
hire car licences. The 115 metropolitan licence holders will be granted the option of the
conversion at no charge, while the VTTD has indicated that the classification of the 32 country
licences will be determined following the completion of this review.

4.2.1 Other categories of licensed passenger vehicles

The Transport Act provides for the licensing of other categories of commercial passenger vehicles
that provide similar services to those provided by hire cars. Changes to the regulatory framework
for any one of these licensed vehicles have the potential to impact on the market for all licensed
vehicles.

Although taxis and hire cars would be expected to offer similar services, the Victorian Taxi
Association’s (‘VTA’) submission to the Issues Paper highlighted some of the differences between




20
       It is believed that licences in respect of these applications are yet to be approved or issued either due to the applicant
       not presenting a vehicle for approval by the VTD or not paying the gazetted licence fee, since these constitute the two
       main substantive requirements for licence issue.




                                                                 18    Essential Services Commission, Victoria
                                                               Final Report – Hire Car Licence Fees Review



these two related forms of transport by providing a summary of the different regulatory obligations
and standards applying to taxis and hire cars.21

For example, taxi licences contain common carrier obligations that require drivers to take any
person who has hired or is attempting to hire the vehicle where they want to be taken.22 This
obligation has led policy-makers historically to view taxis as a component of the public transport
system, particularly where train, tram and bus networks are less developed.23 By contrast, hire cars
do not have such obligations.

Other differences highlighted by VTA include the obligation for taxi operators to ensure their fleets
are available 24 hours a day, seven days a week and each taxi cab must be connected to an
approved taxi network to ensure they are available at all times.

Taxis bear a distinctive livery that differentiates them from other vehicles on the road, including
other commercial passenger vehicles. The distinct livery indicates to potential hirers that the
vehicle is of a known type and uniform standard and its fares are regulated.

Taxis are also recognised to have particular importance for user groups for whom other forms of
transport are not suitable, such as the disabled. The Government’s Multi Purpose Taxi Program
(‘MPTP’) provides for subsidised taxi transport for people with severe or permanent disabilities;
the Program does not extend to hire cars.

Special purpose vehicles are licensed to operate solely for a specific purpose (such as weddings or
specialty tours). Restricted hire vehicles are similar to hire cars. They are differentiated by their
unique nature, i.e. classic, vintage or veteran vehicles or by their unique construction, such that
they provide a service that no other licensed vehicle can (e.g. tourist buses, motorcycles, off road
four wheel drives).

More generally, hire car licences are subject to different sets of regulatory restrictions, imposed by
the licensing authority, that mean competition between the different categories of licence is
constrained to greater and lesser degrees.

4.2.2 Trade in Hire Car Licences

Hire car licences can be traded, subject to VTTD approval. There is no central exchange for the
transfer of licences and the Commission understands the trades generally take place through
brokers. There is no formal requirement for parties to a trade to notify the VTTD of the price at
which a trade takes place although, in practice, it has received price information in relation to the
majority of traded licences (which the VTTD has provided to the Commission).



21
       Submission to the Issues Paper from Victorian Taxi Association, pp. 2 - 9
22
       However, regulations allow a driver to refuse a customer under specific circumstances, e.g. offensive behaviour
23
       See Victorian Taxi Directorate (2002), op cit.




                                                               19    Essential Services Commission, Victoria
                                                               Final Report – Hire Car Licence Fees Review



101 metropolitan hire car licences were traded from the end of May 2002 (the announcement of the
reform package) to the end of April 2004. This represents an annual turnover rate of around seven
per cent of the total number of licences in this category. Trade prices were reported for 91 (or 90
per cent) of those trades. The average price of the 91 reported trades was approximately $55,500.
Of the 91 trades, 82 (or 90 per cent) were conducted at a price below $66,000; the remaining 9 (or
10 per cent) were conducted at a price equal to or above $66,000.24

Ten trades of country hire car licences have been reported since the end of May 2002. These
trades have taken place at a range of reported prices (from $14,000 to $75,000) but it is difficult to
draw any conclusions about licence values across regional Victoria due to the absence of licence
restrictions on the area in which a country licence holder may operate (aside from the prohibition
on the completion of an entire journey within the specified metropolitan region), for the reasons
noted earlier in this chapter.

Prices for three of those trades were $45,000, $61,000 and $75,000. The VTTD has suggested to
the Commission that these are likely to represent trades in country hire cars that have metropolitan
operating rights (as discussed above). Such licences clearly have a substantially greater value than
other country hire car licences as the remaining trades occurred at prices ranging from $14,000 to
$33,000.




24
       Note that the $66,000 metropolitan licence fee was not in place when the majority of these trades took place




                                                               20    Essential Services Commission, Victoria
                                                             Final Report – Hire Car Licence Fees Review




5       CHARACTERISTICS OF THE MARKET FOR
        COMMERCIAL PASSENGER VEHICLE SERVICES

This chapter considers the market for hire cars and for commercial passenger vehicle services
generally and the impact of current regulatory arrangements on the supply of and the demand for
these services.

5.1     Market for commercial passenger vehicle services

The Commission notes there is a distinct lack of data and information relating to the market for
commercial passenger vehicle services, including changes to the demand for and supply of such
vehicles. In the absence of reliable quantitative data, the Commission’s analysis and conclusions
are based on information provided to it during this review by industry participants, qualitative
analysis, anecdotal evidence and analysis undertaken in other jurisdictions.

Three distinct market segments for supply of commercial passenger vehicles can be identified.
They are as follows:
(i)     Hail segment – where vehicles pick up customers from the street after being hailed;
(ii)    Rank segment – where customers queue at a designated point for a vehicle; and
(iii)   Pre-booked segment – where vehicles are booked by telephone and then dispatched to the
        customer. Telephone bookings can be made for some future time or for immediate
        dispatch of the vehicle.
Hire car licence conditions prevent operators from competing with taxis in both the hail and rank
segments of the market (referred to collectively as the cruising market). No official analysis is
undertaken of the absolute volume of business undertaken by hire cars or the demand for hire cars
relative to taxis, despite a regulatory requirement that hire car operators keep records of all hirings.
The Commission’s Draft Report noted that KPMG estimated, in its 1999 NCP review, that the
prebooked market accounted for 45 to 50 per cent of total taxi trips in metropolitan Melbourne.25
This figure will be higher in regional areas and will depend on the population density of the area in
question. KPMG estimated that the prebooked segment accounted for between 80 and 100 per
cent of business in regional areas.26

The NCC has suggested that the cruising market appears to constitute 40 to 60 per cent of total taxi
services (less in regional areas) but also emphasises the lack of quality data.27 The Commission



25
        KPMG, op cit., page 31
26
        Ibid., page 69
27
        National Competition Council (2002), Assessment of governments' progress in implementing the National Competition
        Policy and related reforms - Volume One: Assessment, page 5.16




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                                                     Final Report – Hire Car Licence Fees Review



notes that in general, it has been difficult to identify the proportion of total demand for commercial
passenger vehicle services that falls within the prebooked category and which hire cars are able to
service.

5.2     Substitutability of taxis and hire cars

As the taxi and hire car reform package is seeking to promote competition within and between the
taxi and hire car industries, the Commission has assessed the degree to which the licence fee
impacts on effective competition between taxis and hire cars and considers the extent to which they
are viewed as substitutes.

The licence fee clearly affects relative cost structures. However, other regulations such as different
quality standards for vehicles, requirements for vehicles to be retired after a specified period of
time and licensing arrangements for other commercial passenger vehicles also affect relative cost
structures and may be more significant than the licence fee in influencing decisions regarding
entry, investment and innovation.

Hire cars are one of a number of categories of commercial passenger vehicles that provide on
demand, point to point, personal transport services. Despite the difference identified by the VTA,
taxis provide a service that would appear, at first glance, to represent an effective substitute for hire
car services in many instances and for some demand segments. Other categories of commercial
passenger vehicles that are licensed to offer services in specific, limited circumstances (such as
weddings or tours) are special purpose vehicles and restricted hire cars.

The market for commercial passenger vehicles exists within the wider passenger transport market,
which includes both public and private transport options. The various modes available in this
wider market including trains, trams and buses (in the public transport segment) and privately
owned cars, motorcycles or other vehicles (in the private transport segment). A consumer’s choice
of preferred mode depends on the individual circumstances of the journey in question and the
combination of price and quality of service that is offered by the available options. A journey to
the Melbourne Airport provides an example. If a consumer needs to get to the airport, he / she can
use public transport, engage a taxi or hire car, or use their own vehicle and the parking facilities
that are available at the airport. Each option provides a different combination of price and quality
of service.

The Issues Paper noted that studies of the taxi and hire car industries undertaken in other
jurisdictions and by other regulatory agencies suggested that hire cars and taxis might be effective
substitutes in specific circumstances for many consumers. In its 2002 NCP assessment, the NCC
referred to “evidence of declining patronage of taxis in some jurisdictions (which) suggests that
continuation of tight taxi supply restrictions may be leading to substantial substitution away from
taxis towards other modes of transport. At least some of this substitution appears to have been to




                                                     22   Essential Services Commission, Victoria
                                                              Final Report – Hire Car Licence Fees Review



hire cars”.28 However, the NCC warns of a lack of available data and differing restrictions on hire
cars across the States and Territories. The NCC concluded that:

      “… hire cars and other forms of on-demand point-to-point transport services have the
      potential to impose, at least, substantial competitive pressures on taxis across the full range
      of taxi services. The extent of this competitive pressure across all taxi services may depend
      on the freedom granted to taxi alternatives to operate in the ways that taxis operate; that is,
      to the extent that there are regulatory constraints on hire cars they will be a less than perfect
      substitute.29”

The Productivity Commission stated that:

      “In Australia, owing to entry restrictions, hire cars tend to operate predominantly in the
      premium end of the phone market, but conceptually they are no different from taxis in
      responding to phone bookings. As the development of the United Kingdom mini cab industry
      demonstrates, without entry controls there would most likely be a wider range of hire car
      operators offering both higher and lower quality levels than taxis presently offer.30”

As discussed in the Commission’s Draft Report, the hire car industry in Victoria has historically
focussed on the premium end of the commercial passenger vehicle market, providing a superior
level of service (including higher quality vehicles) at a higher price than taxis, particularly in the
business and tourism sectors. This focus on the premium market has, in part, been a reflection of
regulatory factors, such as vehicle standards and previously, restrictions on minimum hiring times
although such restrictions have recently become less severe in their extent.31

While it appears generally true that hire cars have focused largely on the premium market,
submissions to the review have indicated that country hire cars in particular, currently undertake
substantial contract based work for the Department of Veterans Affairs (‘DVA’) at prices that are
significantly below regulated taxi fares. The position of country hire cars is one in which a high
degree of price sensitivity exists among consumers and appears to have led to greater pressure to
undertake work such as the DVA contracts at prices which are not commensurate with a premium
service. This has been the case notwithstanding that the larger relative size of the pre-booked
market segment in non-metropolitan areas would otherwise be expected to enhance hire cars’
ability to compete with taxis. This experience in country areas appears to indicate both that hire
cars are economically able to compete directly with taxis and that some elements of the industry
are moving toward serving this wider ‘non-premium’ market. This suggests the possibility of a
significant further expansion in the market for hire car services over time.




28
       Ibid., pp. 5.8 – 5.9
29
       Ibid, page 5.10
30
       Productivity Commission (1999), Regulation of the Taxi Industry: Commission Research Paper, page 7
31
       Most recently, the VTTD has relaxed restrictions on what cars can be approved to commence operations as a hire car.




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5.2.1 Demand factors

The demand for commercial passenger vehicle services is likely to fall into three broad categories:
(i)     Corporate sector – inelastic with respect to price but sensitive to quality issues such as
        vehicle standards, punctuality and reliability;
(ii)    Private or social demand – used for leisure and commuting purposes. Likely to be more
        price sensitive but less sensitive to reliability (although depends on the purpose for which
        the vehicle is engaged); and
(iii)   Tourism demand – least sensitive to time but highly sensitive to other quality factors such
        as reliability.
There are very few estimates of the relative importance of each of these categories within the
overall market for commercial passenger vehicle services although the KPMG report referred to
VTA estimates for the taxi industry of 31 per cent, 53 per cent and 16 per cent respectively.32

Another significant source of demand for commercial passenger vehicles is for veterans’ affairs
work. In its submission to the Issues Paper, the DVA stated that for the 2002/03 financial year, it
purchased $1.84m of hire car services across Victoria, of which $1.21m was with rural based
operators and $0.63m with metropolitan operators. In the same year, it also purchased $5.01m of
taxi services, the majority of which ($3.5m) was for services within metropolitan Melbourne.33

DVA noted that it arranged its purchases of commercial passenger vehicle services based on price
and availability in respective areas across the state. It stated that as hire cars were able to compete
on the basis of price for work under 80km, as opposed to taxis, they were given preference where
available and competitive. Its experience was that veterans generally preferred hire cars due to
their higher vehicle standards, the type of vehicles available and superior comfort levels,
particularly for longer journeys and where more than one veteran was transported.

DVA noted that it viewed hire cars and taxis ‘largely if not wholly substitutable in terms of the
basic passenger vehicle they provide’ but that taxis and larger hire car operators often provided a
more effective telephone booking service due to economies of scale. Further, it noted that hire cars
did not provide special access vehicles for the transport of wheelchair dependent customers.

5.2.2 Stakeholder views on the substitutability of taxis and hire cars

The Commission invited views on the substitutability of taxis and hire cars. A range of competing
views was received.




32
        KPMG, op cit, page 27
33
        Submission to the Issues Paper from the Department of Veterans’ Affairs, page 2




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                                                            Final Report – Hire Car Licence Fees Review



In its submission to the Commission’s Issues Paper, the Victorian Hire Car Association (‘VHCA’)
stated that:

         “Hire Car and SV [Special Vehicle] operators tend to concentrate on providing
         a high level personalised service to niche markets such as weddings, funerals,
         corporate and government work. Any crossover with the taxi networks is at the
         margins and mainly extends to pre-booked airport and dinner transfer work.”34

In its submission, the VTA suggested there was limited substitutability between taxis and hire cars
for most consumers and that hire cars provided a more exclusive service than taxis were able to
offer (due to their distinct livery and uniform standard, for example).35 Furthermore, the VTA
suggested that taxis’ common carrier obligations meant that taxi drivers were subject to pressures
and safety concerns that did not apply to hire car operators. For example, taxi operators needed to
maintain 24 hour communication networks and install global positioning systems, cameras,
recording devices and driver duress alarms which in turn, generated costs that do not apply to hire
cars (due to their private carrier status).

However, Mr Kevin Hall from Timesaver Guided Tours noted that:

         “Competition also currently exists between the hire car and taxi industries …
         the hire car industry is concerned about the increasing level of competition
         from taxis, particularly from that sector using vehicles of hire car standard (for
         example, Ford Fairlane, Holden Statesman) and charging a premium fare.

         An observer only has to compare the number of pre-booked taxis with the
         number of hire cars in the Premium Parking Area at Melbourne Airport,
         waiting to pick up clients off incoming flights, to see the level of competition in
         this part of the market – often the proportions are close to 50/50.

         Some hire car operators charge little more than taxi fares, and sometimes
         charge lower. In fact, hire cars in country regions under contract to the
         Department of Veterans Affairs charge “substantially below taxi fare levels” …
         The ever-present touts at Melbourne Airport compete with taxis and ethical hire
         car operators by offering fares at or below taxi fares.”36

A number of submissions to the review referred to the different charges applying to taxis and hire
cars respectively (in relation to parking and Citylink, for example) that are taken into account in
journeys to the Melbourne Airport. These submissions suggested that the higher fees faced by hire
cars placed them at a relative cost disadvantage on these journeys. Therefore, it appears that hire
car operators view themselves as competitors with taxis for this aspect of their business.



34
       Submission to the Issues Paper from the Victorian Hire Car Association, page 3
35
       Submission to the Issues Paper from the Victorian Taxi Association, pp. 2 - 9
36
       Submission to the Draft Report from Mr Kevin Hall, Owner / Operator, Timesaver Guided Tours, page 4




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                                                             Final Report – Hire Car Licence Fees Review



The Commission notes that it appears the taxi industry is increasingly serving the premium sector
of the market (through the provision of ‘silver’ services and vehicles of higher standard, for
example) even as hire car operators are increasingly moving into the wider mainstream market.
Therefore, the overall picture may be one in which the degree of substitutability between these two
categories of commercial passenger vehicle is increasing, thereby improving competition for the
benefit of consumers. Despite the scepticism expressed in some submissions, the Commission is
of the view that hire cars have the potential to represent an effective substitute to taxis for a range
of consumers in a range of circumstances based on industry analysis and submissions to the
review.

5.3    Aggregate demand for hire car services

Some submissions to the Commission’s Draft Report argued that the current and recent state of the
hire car market is one in which demand, and hence income, levels have been static or in decline.
These submissions have argued that the Commission should bear this in mind when developing
recommendations regarding the future of the hire car licence fee. In general terms, it has been
argued that the likely impact of a significant reduction in the licence fee, leading to substantial new
entry, would be a major increase in competition for a share of market demand that is not
increasing. It is suggested that this, in turn, would lead to an outbreak of illegal activity, such as
touting, and a general decline in service quality. The implication of these submissions appears to
be that the Commission should demonstrate that sufficient additional demand exists to support an
increase in the supply of hire cars before recommending a reduction in the licence fee.

For example, the VTA stated:

         “The cold hard fact is that, like the taxi industry, the hire car industry is in
         sharp decline due to competition from the extraordinary growth of private car
         ownership in the last 10 years and especially since the introduction of GST with
         its resultant impact of car prices following the removal of sales taxes.

         There is most unlikely to be any sustainable increase in supply of hire car
         services in the present environment of long term downturn in demand for SCPV
         [small commercial passenger vehicle] services, and any realistic research of
         the market for SCPV, including hire cars, would confirm that fact.”37

The Commission notes that there is limited factual evidence on which to argue there is currently an
oversupply of commercial passenger vehicle services since data on demand indicators such as the
number of trips and total revenue earned is not systematically collected for either taxis or hire cars
(as was pointed out by KPMG in its 1999 NCP review). The most direct available indicator of
relative supply is that of licence values. Melbourne taxi licence values are understood by the
Commission to be currently at or near historical peaks, having shown no apparent decline in



37
       Submission to the Draft Report from the Victorian Taxi Association, page 5




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                                                                 Final Report – Hire Car Licence Fees Review



response to the Government’s reform package and its limited release of peak period taxi licences.
Similarly, as noted in the Commission’s Draft Report, hire car plate values have been either steady
or rising in recent times. These observations – plus the very high absolute value of taxi licences –
suggest that available service supply is relatively low and demand is buoyant.

That said, the NCC’s 2002 report found evidence that the taxi industry faced a long-term decline in
market share in a number of States and Territories, including Victoria.38 However, it argued that
this decline could well reflect the fact that demand was being diverted to less preferred substitutes
(public transport or self driven vehicles) as regulatory restrictions on the supply of taxi services had
diminished the industry’s capacity to serve its market at acceptable levels of quality, reliability and
price. To the extent that this is correct, an increase in the supply of hire car (or taxi) licences might
be expected to reverse, or at least slow this trend, with some lost market share potentially being
recaptured from private cars.

In relation to hire cars in particular, there are sectors of the market (the immediate dispatch
segment of the prebooked market, for example) within which they have historically played little
role but where they could reasonably be expected to compete if their number increased and more
innovative and cost effective arrangements were adopted. For these reasons, the Commission does
not agree that the impact of an increase in supply will necessarily lead to suppliers being forced to
compete for a share of a static or declining market.

The view that it is necessary to ensure there is sufficient demand present in a market before an
increase in supply is justified is not accepted as a matter of public policy in markets across the
economy generally or, under the principles of NCP, for markets where some regulation may be
warranted provided the costs of restricting competition and entry can be more than offset by public
benefits. Among other reasons, this is because effective competition can result in increases in
demand for a service and changes in market share among competitors due to changes in cost, price
and service quality that appeal to consumers of the service.

By removing the public interest test as part of its 2002 reform package, the Government explicitly
rejected continued reliance on this view as the appropriate basis for regulation of the hire car
market. To argue that decisions on the future of the hire car fee must be based on a demonstration
that available demand is sufficient to warrant increased supply is a de facto argument for a
continuation of – or a return to – the use of the public interest test. Such a position cannot be
reconciled with expressed Government policy, the terms of reference for this review or with sound
market and regulatory analysis.

5.4     Expected benefits of competition

The pre-booked segment comprises requests for immediate dispatch or for a vehicle to be
dispatched at some future time. Hire cars are, at least in principle, substitutable for taxis in both



38
        National Competition Council (2002), op. cit., pp. 5.7 – 5.9




                                                                 27    Essential Services Commission, Victoria
                                                            Final Report – Hire Car Licence Fees Review



parts of the segment. However, the practical degree of substitutability of hire cars and taxis varies
substantially between the two parts of the segment. This is because the hire car industry is
currently largely atomistic in nature with few substantial networks in place. This is likely to be a
reflection of the regulatory approaches taken to date (particularly the effect of the public interest
test) and the historical development of the market – where demand was previously more focused
on specific special occasion bookings than on large scale operations in direct competition with
taxis.

In these circumstances, the ability of hire cars to service the on demand, or immediate dispatch,
market is currently quite limited. That is, individual operators and smaller networks have limited
capacity to respond quickly to calls for the immediate dispatch of a vehicle due to their lack of
scale, call centre facilities and the greater time delays and distances between the nearest available
vehicle and the customer. This view has been confirmed by some submissions. For example, Mr
John Kapnias from Southern Cross stated that:

         “The hire car market at the moment is highly splintered, under capitalised and
         poorly organized. Most operators work as independents or through small
         unofficial groups. They are totally unable to capture any of the cruising market
         due to the existing licence conditions. They are able to service only a tiny
         portion of the pre-booked market for various reasons including the following:
         - the lead time required to travel to the pick up point.
         - Melbourne’s large geographic area
         - The tendency for travellers to require a vehicle predominantly at peak time
         - The competitive nature of the market obliging suppliers to ‘look after’ their
           clients and therefore reserving their services for their few best clients.”39
The role of hire cars in the market is, therefore, necessarily geared toward the pre-booked market.
The Commission expects that the ability of hire cars to provide greater competition to taxis in the
immediate dispatch segment of the market could be enhanced over time if there were an increasing
tendency for cars to form networks and for these networks to grow in size. The probability and
speed of such an occurrence is likely to depend in large part on the overall number of hire cars in
the market. Hence, the entry of new operators or an expansion by existing operators in the hire car
market is likely to determine their ability to provide competition to taxis across a broader spectrum
of market demands. This in turn, generates benefits for consumers in terms of price and superior
service standards.

The Commission expects that further benefits to consumers would be expected to arise from hire
cars providing increased competition in the pre-booked market and its indirect effect on supply in
the cruising market. As hire cars provide increased competition to taxis in the immediate dispatch



39
       Submission to the Draft Report from Mr John Kapnias, Managing Director, Southern Cross, page 2




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                                                    Final Report – Hire Car Licence Fees Review



segment of the pre-booked section of the market, it is likely that taxi operators would shift focus, to
some extent, toward the rank and hail segment. That is, increased competitive pressure in one part
of the market can be expected to lead to a re-balancing of taxi services resulting in improved
service and availability for customers across the market as a whole. In this respect, increased
competition from hire cars can be expected to yield consumer benefits throughout the commercial
passenger vehicle market, notwithstanding that hire cars cannot themselves compete in all
segments of the market.

The Commission notes that some aspects of the Government’s reform package, the introduction of
peak taxi licences for example, are aimed at service deficiencies that have been identified in some
areas of the cruising market. For the reasons outlined in this section, greater competition within
the prebooked segment is likely to complement these other measures.

In practical terms, the VHCA’s submission to the Draft Report provided some indication of the
benefits to consumers that are generated by enhanced competition.

         “As the number of licences on issue have grown in the Hire Car Industry and
         the level of supply has continued to exceed the rate of growth in demand,
         consumers across Victoria have been the beneficiaries of an increasingly more
         competitive hire car industry.

         In 1988 to engage the services of a hire car it was standard to pay ‘depot to
         depot’ charges calculated on a time basis. For example, a booking from
         Toorak to Melbourne Airport was charged by calculating the time the vehicle
         left its depot, say West Melbourne or Carlton, travel to the pick up point then to
         the airport and return to the depot. If the total time taken was two hours and
         the hourly rate was $45, the total charge was $90. Taxi rates were
         approximately $25 - $30.

         Today in 2004, consumers are the beneficiaries of being able to obtain a Fixed
         Price Transfer prior to engaging the services of a Hire Car. This is now the
         Industry standard. Typically from Toorak to Melbourne Airport consumers can
         expect to pay $60 - $75, depending on supplier. This is inclusive of tolls, GST
         and parking charges – none of which applied in 1988. A taxi fare for the same
         trip of 30km is approximately $55 - $65. Therefore, on this example taxi fares
         have doubled during this period and hire car fares have almost halved. This
         clearly shows the current system works to the benefit of consumers.

         In 1995 the major metropolitan based supplier of hire cars to the DVA did so at
         a rate of $1.44 per kilometre. Today the major supplier of hire cars to the DVA
         does so at a rate of $1.05 per kilometre inclusive of GST. Country based
         operators earn between 60-75c per kilometre. This compares to a standard taxi




                                                    29   Essential Services Commission, Victoria
                                                            Final Report – Hire Car Licence Fees Review



         which charges $1.31 per kilometre plus flagfall plus stoppages. Clearly the
         current levels of increased licences are producing a more competitive
         industry.”40

Changes to the competitive environment may also influence the choice that consumers make with
regard to their preferred mode of transport for particular journeys. The Commission has already
observed that journeys to Melbourne Airport appear to represent a large proportion of business for
hire car operators. As noted, consumers wanting to travel to the Airport are able to choose
between a range of different modes of transport. The Commission is aware of the significant
growth in the volume of parking facilities available at and near the Airport over recent years. For
example, during 2002/03, the Airport completed the expansion of its long term and staff car
parking facilities by 1,000 spaces - a total of 4,800 long term spaces are now available - opened a
new business car parking facility and expects to complete an expansion of its short term car
parking facilities by 3,300 spaces by April 2005 (in addition to its existing short term capacity of
approximately 3,100 spaces).41

This would appear to suggest that many consumers are choosing to drive their own vehicles rather
than engaging a taxi or hire car which in turn, suggests that there is scope for hire cars to pursue
this business. The promotion of competition within and between the taxi and hire car industries
and the subsequent reduction of fares and improvement of service standards would be consistent
with this and could be expected to assist these industries in winning back market share from the
self-drive segment of the passenger transport market.




40
       Submission to the Draft Report from Mr George Kapnias, Chairman – ESC Response, Victorian Hire Car Association,
       page 9
41
       See Australia Pacific Airports Corporation, Annual Report – 2003 and Melbourne Airport Media Release, “Extension
       to Melbourne Airport’s Short Term Car Park”, 13 February 2004, for further details




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                                                             Final Report – Hire Car Licence Fees Review




6       SUPPLY RESTRICTIONS IN THE COMMERCIAL
        PASSENGER VEHICLE INDUSTRY

This chapter considers the views of stakeholders with respect to the need, or otherwise, for supply
restrictions in the market for commercial passenger vehicle services.

6.1   Introduction

The Commission’s draft recommendation was to substantially reduce the metropolitan hire car
licence fee in order to promote competition within and between the taxi and hire car industries, as
required by the Government’s reform package. The Commission received a large number of
submissions to this review that opposed this recommendation. A frequently expressed view was
that the nature of the industry is such that supply restrictions are necessary to ensure quality
standards and to limit unlicensed activity. This chapter reviews and responds to these submissions.
It has also been claimed that the Commission has ignored or been selective in its consideration of
the economic literature relating to the rationale for regulation (and supply restrictions in particular)
and has advocated an approach that will ultimately impose costs on consumers. This chapter also
assesses the validity of these claims and the relevance of case studies that appear to support the
ongoing use of supply restrictions.

6.2    Stakeholder views on the need for supply restrictions

The Commission noted in Chapter 2 that submissions received in response to the Draft Report have
argued that its recommendations constituted the deregulation of the industry, contrary to the
direction of stated Government policy. Several submissions have also argued that a reduction of
the licence fee would be inconsistent with the maintenance of appropriate quality standards in the
industry.
The Commission’s Draft Report suggested that the optimal level for the licence fee is one that
seeks only to recover administrative and enforcement costs. However, it has not advocated the
adoption of such a fee, recognising that it is not a practical approach in the current context and the
implementation of such a fee would be contrary to Government policy. The Draft Report stated:

          “ … while the Commission believes that the optimal fee at which hire car
          licences should be issued is one limited to the recovery of administrative and
          compliance costs associated with the regulation of the industry, the immediate
          implementation of such a fee would not be consistent with the Government’s
          broader approach to reform of the taxi and hire car industry.”42




42
        Essential Services Commission, Review of Hire Car Licence Fee – Draft Report, page 32




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                                                             Final Report – Hire Car Licence Fees Review



The actual recommendation made in the Draft Report was for the continuation of a substantial
licence fee ($33,000) that would, necessarily, continue to restrict entry to the industry below the
levels that would occur if such a fee did not exist. The recommendation contained in the Draft
Report was that any future changes to the licence fee should be subject to a further review and
should be based on an assessment of the success of the prevailing fees in achieving the
Government’s stated reform objectives. More importantly, the Draft Report argued for the
continuation and even the strengthening of quality regulation in the industry.

The Draft Report also noted that some submissions had argued that the retention of a substantial
licence fee was necessary to maintain high quality standards in the industry. Further submissions
received since the publication of the Draft Report have also put forward this view, notwithstanding
the Draft Report’s comments to the contrary. Examples of views to this effect advanced in
submissions are as follows:

         “One feature of taxi and hire car is the relative low cost of entry. In an
         unregulated situation the low cost of entry could attract people with limited
         employment opportunities. Generally hire car operators migrate from the taxi
         industry with an established network of customers. However new entrants may
         enter without an established or ability to establish such a network client group
         and they would depend on touting.”43

         “The report suggests that an influx of multiple operators on low cost licences
         with a massively reduced sense of ownership in the industry can only benefit
         consumers. This simply does not parallel real life experience and is not
         supported by any evidence put forward by the ESC. The industry believes that
         this can only be detrimental to the long term interests of consumers. If
         operators/drivers do not have a high sense of ownership in the industry, there
         will be no incentive to drive high standards of service and investment. The ESC
         only needs to look at how the taxi industry standards have progressively
         deteriorated since regulations changed in 1983 to allow investors into the
         industry.”44

         “Desperate operators offer no ongoing benefit to the consumers. They may
         operate cheaply and even at below cost. When it comes to update their vehicle
         (and often well before) they find that their business model is unsustainable … In
         leaving the market they only leave a negative impression on the consumer
         who’s perception and expectations of the industry is lowered. Thus the
         downward spiral continues. More cars on the road will simply force operators




43
       Submission to the Draft Report from Mr Carlo Carli MP, Parliamentary Secretary to the Department of Infrastructure,
       page 8
44
       Submission to the Draft Report from Mr George Kapnias, Chairman – ESC Response, Victorian Hire Car Association,
       page 4




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                                                          Final Report – Hire Car Licence Fees Review



       to cut more corners, cut costs further, run cars longer and hire drivers willing
       to work for less – who are therefore lower skilled than present.”45

       “New entrants to the industry will find it difficult to operate a small business of
       this nature regardless of what the licence fee value is. Operating costs have
       risen considerably over the years thus eroding profit margins. Certain
       operators are resorting to unethical practices in order to survive under this
       environment not to mention the unlicensed vehicles being used. Allowing or
       encouraging more entrants in to the hire car industry will create further
       problems. Even at this stage authorities are finding it difficult to keep some
       control over the industry, putting the public at considerable risk, e.g. properly
       licensed drivers, vehicles maintained poorly. How will this in turn improve
       service standards and safety?”46

       “In my view the attraction of an undervalued $33,000.00 hire car licence to
       new entrants to the industry would attract personnel currently employed in the
       taxi industry and would eventually bring the hire car industry down to the level
       of taxis.”47

       “The ESC draft also fails to explain how an influx to the industry of operators
       on cheap licences will raise service levels and standards. The VTD
       recommended price was set at $66,000 (inc GST) in order to have operators
       who were making a real financial commitment to enter the industry. This would
       ensure that operators had to be honest and financially interested in the industry
       before they ran in purchased hire car licences.48”

       “The decrease in licence selling price has also brought to light other issues that
       is believed will affect the quality and service standard of the hire car industry.
       Lower prices will increase the amount of drivers entering the hire car industry.
       An increase in the amount of drivers is something desired by the industry,
       however it will be of greater benefit to the industry if entering drivers
       purchased their licences at the current price of $66,000. This is due to the fact
       that drivers will have the desire to provide a higher quality service to customers
       if they have invested a large amount of money in their investment, just as
       investor’s such as myself have done so in the past and to the present date.”49




45
     Submission to the Draft Report from Mr John Kapnias, Managing Director, Southern Cross, page 2
46
     Submission to the Draft Report from Mr George Andrianopoulos, Director, Image Limousines
47
     Submission to the Draft Report from Mr Peter Turnbull, Director, First Class Services Pty Ltd
48
     Submission to the Draft Report from Mr Andrew Travaglini
49
     Submission to the Draft Report from Mr Tony Lioudakis




                                                          33    Essential Services Commission, Victoria
                                                              Final Report – Hire Car Licence Fees Review



The Commission notes that these submissions have not produced evidence to support their claim
that there is a link between the payment of substantial licence fees and the provision of a quality
service.

It is evident from the experience and analysis of numerous market studies that the maintenance of
supply restrictions necessarily limits entry to and competition within an industry, resulting in
increased costs and prices to consumers and decreased availability, range of quality of products
and services. The real costs of restricting entry to an industry – whether via a high licence fee or
other means – are widely observed in practice in a range of industries and represent a commonly
accepted conclusion of economic analysis. By contrast, the proposition that restricting entry will
improve service quality is supported neither by evidence or theory.

Some submissions have suggested that the licence fee acts as a bond that demonstrates a
commitment to the industry. However, the key characteristic of a bond is that it is potentially
forfeited in the event of poor behaviour – in this case, the provision of sub-standard service. Under
current regulatory arrangements, there is no possibility of hire car operators forfeiting the value of
their licences. Even in the unlikely event that the VTTD were to exclude an operator from the
industry50, the licence itself remains a transferable asset that can be sold to a new entrant at the
prevailing market price. Thus, it provides no direct, financial incentive toward good behaviour, as
does a bond.

A second, related argument advanced by the VHCA is that the payment of a substantial licence fee
demonstrates a commitment to the industry. The costs of entering this industry are relatively high,
comprising the licence fee, provision of a car of prescribed standard, plus administrative and
marketing expenditures, at a minimum. This is likely to total significantly more than $100,000
(more again in the case of stretched limousines), a commitment that remains quite high even with a
reduction in the licence fee of the magnitude proposed by the Commission in its Draft Report. The
Commission therefore, questions whether the licence fee, in itself, should be regarded as
representing a significant commitment to the industry by new entrants, relative to the other
substantial costs of entry and operation.

It is also relevant in this regard that the licence is readily saleable on the secondary market and will
remain so regardless of the level at which the fee is set. The liquid nature of the licence – and of
the vehicle required to enter the industry – is not consistent with the view that entrants must
necessarily be committed to the industry for the long term. On the contrary, the liquid markets for
both licence and vehicle mean that new entrants would usually be able to exit the industry without
incurring a substantial loss of assets. A view that a long-term commitment to the industry is
necessary to ensure that quality standards are maintained could lead to the conclusion that non-
transferable licences are preferable to transferable ones. However, no submissions to the
Commission have put forward such a view.




50
        An event that has not, to the Commission’s knowledge, ever occurred.




                                                              34    Essential Services Commission, Victoria
                                                             Final Report – Hire Car Licence Fees Review



There is also an apparent inconsistency between advocacy of high licence fees to maintain quality
standards and the generally positive response to the recent relaxation of hire car standards by the
VTTD. As mentioned, recent changes to prescribed vehicle standards allow older vehicles to be
placed in service as hire cars than was previously possible. The effect of these changes has been to
reduce the effective cost of entry to the industry by allowing entrants to purchase an older car at a
lower price than was previously possible. The price of an older vehicle could be significantly less
than the previous cost in some cases. The reduction in entry costs resulting from these changes is
likely to be of a similar magnitude to that which would follow if the Commission’s draft
recommendation for a reduction in the licence fee structure was accepted. However, no
submissions have been received that have opposed the relaxation of vehicle standards on the
grounds that quality of service may suffer as a result of reduced entry costs. Rather, the changes
have generally been supported by industry.51

In summary, the Commission has received no evidence to support the view that a high cost of entry
to the industry is positively associated with service quality and it does not agree with the view that
the licence fee provides incentives for quality maintenance in the same way as a bond. Also, the
Commission does not agree that a ‘long-term commitment to the industry’ is necessarily an
appropriate objective of policy. On the contrary, efficiency is best served where there are low
barriers to exit such that poorly utilised assets can be redeployed to more productive uses as
expeditiously as possible. If a hire car operator is achieving sub-normal returns, that operator
should exit the industry rather than demonstrating a ‘long-term commitment’ to it.

6.3    Enforcement of existing quality standards

A related argument put forward in submissions is that entry restriction must be maintained at a
high level as a ‘second best’ means of assuring quality. This argument is based on a view that
current administration and enforcement activity is ineffective in maintaining quality standards and
policing unlicensed activity and any increase in the number of hire cars will only exacerbate this
problem.

An example of this argument is provided by Mr Peter Episcopos, who stated that:

         “ … the proposal would see service standards plummet, safety compromised
         and consumers left with a second-class industry operated by people with no
         real financial commitment to running a successful business. It could also lead
         directly to open conflict between hire cars and taxis, which will result in an
         unmanageable situation. As to which the Victorian Taxi Directorate (VTD) is
         already not coping with policing the industry.




51
       The Commission notes that the VHCA estimated that the recent changes to prescribed vehicle standards would lead to a
       saving of between $300-$400 per month for operators.




                                                             35    Essential Services Commission, Victoria
                                                             Final Report – Hire Car Licence Fees Review



          The ESC states that it’s recommendations are ‘based on the assumption that
          existing quality and safety regulations will be enforced through appropriate
          service and quality regulation’. However, even the most casual observers
          would seriously question the VTD ability to police the taxi and hire car
          industry. In fact, current doubts about the capacity of the VTD to effectively
          enforce existing standards and rules across the industry will simply be
          highlighted and exacerbated.” 52

And Mr Dursun Ali Volkan, of Executive Limousine and Taxi Service Pty Ltd, stated that a
reduction in the metropolitan licence fee would:

          “ … substantially increase, un-licensed/un-governed/un-regulated/un-
          trained/un-professional operators with a serious erosion of service and safety to
          the public. If you examine the current level of public complaints against Taxi
          and Hire Cars you will find that the Taxi industry bears all the responsibility.
          The transference of Taxi operators to the Hire Car industry will simply transfer
          some if not all of the sub-standard operators to the hire car industry,
          broadening the Enforcement responsibilities of the Victorian Taxi Directorate,
          who currently struggle to maintain law and order and compliance.”53

This is also an issue in country areas. For example, Mr Bruce Mossig, Secretary of the Victorian
Country Limousine Association, stated:

          “The sale of cheaper licensing just outside Melbourne will promote ‘not
          correctly licensed’ operation within Melbourne. We have absolutely no
          confidence that the VTD has any capacity to control this situation, given its past
          record”.54

However, the Commission notes that the current reliance on supply restrictions to indirectly
maintain quality standard and limit unlicensed activity is already largely ineffective. A frequently
cited example is the level of touting at the Melbourne Airport. This confirms the Commission’s
view in its Draft Report that reliance on supply restrictions is likely to be ineffective and inefficient
as a means of exercising control over service quality.

A decline in quality standards and a high incidence of unlicensed activity represents a failure of
quality regulation which may be due to inappropriate regulation, insufficient resourcing for
enforcement, an inability to enforce standards (for whatever reason) or a combination of these
factors. The Commission believes that an improvement in the application of quality standards
should be pursued regardless of the level of the licence fee.




52
        Submission to the Draft Report from Mr Peter Episcopos, Director, Orioss Pty Ltd
53
        Submission to the Draft Report from Mr Dursun Ali Volkan, Executive Limousine and Taxi Service Pty Ltd
54
        Submission to the Draft Report from Mr Bruce Mossig, Secretary, Victorian Country Limousine Association




                                                             36    Essential Services Commission, Victoria
                                                              Final Report – Hire Car Licence Fees Review



6.4    The case for maintaining supply restrictions

The persistence of supply restrictions generates costs for consumers of hire car services by
contributing to the cost of providing such services and by inhibiting competition between hire car
operators. As a result, any relaxation of those restrictions and hence, any increase in the degree of
competition, will generate benefits for consumers in the form of reduced fares and over the longer
term, improved service standards due to investment and innovation within the industry.

The existence of substantial capital values for taxi and hire car licences derives from the policy of
imposing supply restrictions (i.e. restrictions on the number of participants in the market) and the
economic rents that accrue to the holders of those licences. The market prices of these licences
simply reflect the capitalised value of the stream of scarcity rents that can be earned as a result of
the supply restrictions.

The Government’s reform package represents a departure from the previous policy approach by
advocating greater competition within and between taxis and hire cars and a gradual reduction in
licence values over time. However, numerous submissions to the review have, despite the
Government’s stated objectives and approach to reform, expressed the view that the nature of the
market for commercial passenger vehicles is such that supply restrictions are necessary in order to
overcome inherent market failure issues.

For example, Mr Carli stated that:

         “The ESC analysis is based on a theory, which posits that taxi, and hire car
         services are no different from other services available on the private market
         such as grocery stores, coffee shops or hardware shops. Essentially market
         forces left to them will provide a balance between supply and demand and
         provide the optimal outcome. Yet that theory is refutable both in the history of
         regulation in the taxi and hire car industry and the results of deregulation.”55

In order to assess the basis for these views, it is necessary to consider the nature of the market for
commercial passenger vehicle services. The characteristics of the cruising segment of the market
are fundamentally different from the pre booked market. 56 For example, the ability of consumers
to shop around within this segment is limited. At ranks, consumers generally take the first vehicle
available and are less able to differentiate between the other vehicles in the queue on the basis of
price or quality.

Passengers that hail vehicles on the street also have difficulties comparing the price and quality of
different operators. As a result, governments in many jurisdictions have historically restricted



55
       Submission to the Draft Report from Mr Carlo Carli MP, Parliamentary Secretary to the Department of Infrastructure,
       page 10
56
       See Productivity Commission (1999), op. cit. and Independent Pricing and Regulatory Tribunal of New South Wales
       (1999), Review of Taxi Cab and Hire Car Industries for further information.




                                                              37    Essential Services Commission, Victoria
                                                               Final Report – Hire Car Licence Fees Review



operation in the cruising market to regulated vehicles such as taxis that have distinct markings and
regulated fares, the uniform quality of which is known to consumers.

The nature of the pre booked segment, on the other hand, enables consumers to shop around and
negotiate on the basis of price and quality. Therefore, competition may occur between operators
that provide a range of different prices and quality standards and for the services offered by taxis
and hire cars; the market failure issue that arises at the point of sale in the cruising market is not a
factor here.

In surveying the economic literature relating to the rationale for supply restrictions, the
Commission has noted two papers that are particularly worthy of attention. The first is a
submission to the KPMG NCP review conducted in 1999 that was prepared by Dr Paul Hooper on
behalf of the VTA (that was also included as part of the VTA’s submission to the Issues Paper).57
The second is a paper by Professor Paul Dempsey entitled ‘Taxi Industry Regulation, Deregulation
and Reregulation: the Paradox of Market Failure’ (which has been frequently cited in submissions
and elsewhere).58

Each paper comprehensively reviews the economic literature relating to supply restriction and
concludes that a legitimate theoretical case can be made for restricting supply in some elements of
the commercial passenger vehicle industry. Each paper cites case studies to support this finding.

In addition, the NCC notes that some literature argues that the experience of deregulating entry to
the taxi and hire car industries has been negative.

      Some studies consider the experience of the United States, where many cities deregulated the
      taxi industry during the 1970s and 1980s, as being negative. Teal and Berglund (1987) and
      Price Waterhouse (1993) (cited in KPMG Consulting 1999) report a range of adverse
      outcomes. These include increased fares (particularly in the short run), higher rates of trip
      refusals and no-shows, older vehicle fleets and lower vehicle standards, lower productivity
      (that is, trips per cab) and limited service improvements despite increasing taxi numbers
      because cabs tended to congregate in well-serviced areas such as airports. Many of these
      problems relate, however, to failures of quality regulation, rather than to supply
      deregulation.59

The Commission recognises that an argument can be made in favour of supply restrictions in order
to achieve an optimal outcome in the cruising market. However, it also notes the view of the NCC
and others to the effect that the outcomes of US experience with the removal of supply restrictions
are often misreported and that the problems highlighted in many studies that are critical of the
deregulation of supply are generally due to an associated removal of quality regulations.



57
        Dr Paul Hooper (1999), Submission of the Victorian Taxi Association on the Review of Regulation of the Victorian Taxi
        Industry
58
        Professor Paul Dempsey (1996), Taxi Industry Regulation, Deregulation and Reregulation: the Paradox of Market
        Failure, Transportation Law Journal, Vol. 24:73, pp. 73 - 120
59
        National Competition Council (2002), op. cit., page 5.3




                                                               38    Essential Services Commission, Victoria
                                                    Final Report – Hire Car Licence Fees Review



It is essential to underline, however, that these findings are specific to the cruising market where
there is potential for market failure at the point of sale. Where consumers are able to compare a
range of competing services on the basis of price and quality, the case for restricting entry is
substantially less persuasive and there is very limited support in the literature for the use of supply
restrictions.

Other case studies provide examples of the inappropriate removal of quality regulation or the
failure to combine the removal of supply restrictions with appropriate quality standards and
resourcing for enforcement activity. The London minicab industry is a frequently cited case study
where specific problems (such as excessive touting, sexual assaults and other forms of illegal
behaviour) are attributed by some to irresponsible deregulation. The Commission notes that recent
moves to address concerns in this industry have focused solely on quality issues and have not
included any element of supply restriction. The case studies cited in submissions and these other
studies, whilst worthy of note, are not relevant to this review which is considering the
appropriateness of a single element of the prevailing regulatory structure (i.e. the level of the hire
car licence fee).

Even if the case for restricting entry to address market failure in the prebooked market was
accepted, the Commission noted in its Draft Report that it would be necessary to require just
enough supply restriction to achieve a superior outcome to that provided by the unregulated
market. This would be a difficult task to perform in practice and the potential for ‘regulatory
failure’ is significant. Observations by the NCC and others provide a picture of continuing
declines in the relative supply of taxis over several decades in all major Australian cities. This
provides evidence of the failure of regulation to achieve an optimal matching of supply and
demand conditions (or to effectively address the service quality / licence enforcement problem) by
seeking to address the market failure in relation to service quality through supply restrictions.
Thus, the evidence tends to support the view that supply restrictions have acted against the public
interest rather than to improve it, even where a theoretical case can be made for supply restrictions.

The NCC, in its 2002 assessment of taxi industry reforms noted that most of the reviews of the taxi
and hire car industries conducted in Australian States and Territories had concluded that in
practice, supply restrictions yielded net costs to the consumer and could not be justified.60 The
Victorian NCP review stated that:

      “The greatest influences on the size of the losses are the licence values and the elasticity of
      demand. As the licence value grows (assuming other things equal) the size of the losses
      increases at an increasing rate…The efficiency losses grow exponentially as price-cost
      margins and licence values increase.”61




60
       Ibid., page 5.23
61
       KPMG Consulting (1999), pp. 92 – 93




                                                    39   Essential Services Commission, Victoria
                                                    Final Report – Hire Car Licence Fees Review




7      IMPACT OF THE CURRENT ARRANGEMENTS

This chapter considers industry outcomes under the present arrangements and draws conclusions
about the impact of the current metropolitan licence fee (and absence of country licence fee) on
entry and competition in the hire car industry.

7.1    Introduction

The taxi and hire car reform package was announced approximately two years ago in May 2002.
In relation to hire cars, the removal of the public interest test and the requirement for a business
case, together with the establishment of a licence fee of $66,000 were intended to lead, inter alia,
to:
•     a relaxation of entry into the taxi and hire car industries;
•     greater competition within and between the taxi and hire car industries; and
•     a phased transition to reform.

This review requires the Commission to consider the appropriateness of the current level of the fee
in relation to its effectiveness in meeting the package’s objectives. Therefore, this chapter will
consider the impact of the current arrangements and assess the extent to which they are consistent
with the Government’s objectives and expected outcomes.

7.2    Metropolitan hire cars

Central to the Commission’s terms of reference is consideration of the current and expected future
impact of the existing licence fee structure on the hire car market and in particular, the degree of
effective competition. The Commission argued in its Draft Report that there is a high risk that
maintenance of the licence fee at its current level would substantially constrain the likely rate of
new entry to the industry and that the Government’s intention of encouraging increased
competition would thereby be undermined.

By contrast, a number of submissions have argued that the current fee of $66,000 represents a fair
price that will not restrict entry. Many of these submissions have cited the number of licence
applications received immediately following the eventual gazettal of the $66,000 fee in January
2004 and argued that this reflects a high level of interest in licences at current prices.

The 23 licence approvals would, upon issue of the actual licences, represent an increase of around
five per cent in the stock of hire car licences. Such an increase, within the space of a few months,
would appear to be substantial. However, it has occurred within the context of an effective freeze
on the issue of new licences lasting almost two years – i.e. the time between the announcement of
the reform package and the gazettal of the fee – and is likely to reflect an element of pent-up
demand for licences. Seen in this context, the approval of new licences amounting to five per cent
of the total stock over a two year period represents a very much smaller rate of increase. As noted
in the Draft Report, the fact that the current review was announced shortly after the gazettal of the
fee inevitably creates difficulties in forming firm conclusions. At the very least, however, it is not



                                                    40   Essential Services Commission, Victoria
                                                               Final Report – Hire Car Licence Fees Review



possible to state categorically that the gazettal of the current fee has been associated with what
could be described as a high level of new entry.

The Commission has also noted that the value of metropolitan licences in the secondary market
appears to have risen in the months immediately prior to the gazettal of the fee. This suggests that
there is currently quite strong interest in entry in the current market conditions. The most recent
average licence sale values are as follows:
•     October 2003 - $57,000 (5 trades)
•     November 2003 - $58,700 (8 trades)
•     December 2003 - $66,000 (2 trades)
•     January 2004 - $64,700 (7 trades)
•     February 2004 - $70,000 (4 trades)
•     March 2004 – $64,000 (6 trades)
•     April 2004 – $63,320 (5 trades)
•     May 2004 – $57,500 (3 trades)

The graph below provides an illustration of the average sale price of a metropolitan hire car licence
on a quarterly basis from 1997 to the end of 2003 inclusive. The Commission notes that trade
prices for existing hire car licences fluctuate significantly over relatively short periods of time.
There are indications that expectations about the prevailing regulatory framework, including the
licence fee, are likely to impact upon prices that are observed in the secondary market. The large
decline in licence values following the release of the KMPG report in 1999 (which recommended
deregulation of entry across the taxi and hire car industries) lends support to this conclusion, as do
the more recent movements that have occurred since the gazettal of the licence fee.62




62
       It has also been suggested in some submissions that the sharp decline coincided with the introduction of the GST




                                                               41    Essential Services Commission, Victoria
                                                                                                                                                                                                                                                          Final Report – Hire Car Licence Fees Review



                                                                                                                                          METROPOLITAN HIRE CAR (MH) LICENCES
                                                                                                                                                                                    Average Purchase Price per Quarter
                                                                                                                                                                                    Total No. of Licences on Issue

                                $90,000
                                                                                                                                                                        $80,071
                                                                                                                                               $78,500                                                                                                                                                                                                                                                                                                    520
                                $80,000                                                    $75,143
                                                                                                                              $74,417
                                                           $69,250                                          $69,500
                                $70,000




                                                                                                                                                                                                                                                                                                                                                                                                                                                                NO. OF MH LICENCES ON ISSUE
                                                                                                                                                                                                                                                                                                                                                                                                                                                          500
       AVERAGE PURCHASE PRICE




                                                                                                                                                                                        $58,778                                          $58,667                                                                                                        $58,667                                                                          $57,892
                                                                                                        $63,889                                                                                                                                                                                                           $57,400
                                $60,000                                                                                                                                                                                                                                   $56,429
                                                                     $58,469                                                                                                                             $52,455                                                                                                                                                                                                        $52,520
                                                                                                                                                                                                                                                      $55,667                                     $49,833                                                                               $50,181
                                $50,000                                                                                                                                                                                                                                                                                                                                                                                                                   480
                                                                                                                                                                                                                    $50,333                                                $49,800                                      $49,635                              $50,800
                                          $48,633                                                                                                                                                                                                                                                                                                                                                   $47,764

                                $40,000
                                                                                                                                                                                                                                                                                                                                         468              468            468              468            469             469              469
                                                                                                                                                                                                                                                                                                                          464                                                                                                                             460
                                $30,000                                                                                                                                                                                                                                                   460            460
                                                                                                                                                                                                                                                                           459
                                                                                                                                                                                                                          455             455              455
                                                                                                                                                                                          453              453
                                $20,000                                                                                                                                  449
                                                                                                                                                         446                                                                                                                                                                                                                                                                                              440
                                                                                                                           444            444
                                                                                                            442
                                $10,000                                                     438
                                                                            436
                                                            431
                                            429
                                     $-                                                                                                                                                                                                                                                                                                                                                                                                                   420
                                            1997 (Qtr 4)

                                                             1998 (Qtr 1)

                                                                            1998 (Qtr 2)

                                                                                             1998 (Qtr 3)

                                                                                                            1998 (Qtr 4)

                                                                                                                           1999 (Qtr 1)

                                                                                                                                          1999 (Qtr 2)

                                                                                                                                                         1999 (Qtr 3)

                                                                                                                                                                         1999 (Qtr 4)

                                                                                                                                                                                          2000 (Qtr 1)

                                                                                                                                                                                                           2000 (Qtr 2)

                                                                                                                                                                                                                          2000 (Qtr 3)

                                                                                                                                                                                                                                           2000 (Qtr 4)

                                                                                                                                                                                                                                                           2001 (Qtr 1)

                                                                                                                                                                                                                                                                           2001 (Qtr 2)

                                                                                                                                                                                                                                                                                          2001 (Qtr 3)

                                                                                                                                                                                                                                                                                                         2001 (Qtr 4)

                                                                                                                                                                                                                                                                                                                          2002 (Qtr 1)

                                                                                                                                                                                                                                                                                                                                         2002 (Qtr 2)

                                                                                                                                                                                                                                                                                                                                                          2002 (Qtr 3)

                                                                                                                                                                                                                                                                                                                                                                         2002 (Qtr 4)

                                                                                                                                                                                                                                                                                                                                                                                          2003 (Qtr 1)

                                                                                                                                                                                                                                                                                                                                                                                                         2003 (Qtr 2)

                                                                                                                                                                                                                                                                                                                                                                                                                          2003 (Qtr 3)

                                                                                                                                                                                                                                                                                                                                                                                                                                           2003 (Qtr 4)
Therefore, the Commission expects that the recent gazettal of the metropolitan licence fee of
$66,000 is likely to have been viewed by industry participants as an endorsement by the regulator
of this value of licences. This perception may also have underpinned the rising average prices of
licences exchanged over the period around the time of the gazettal and subsequently. This view
was supported by some submissions. For example, Mr Andrew Travaglini noted that:

                                “I have wanted to enter the hire car industry for over 18 months and was
                                waiting for key information to be made available for decisions to be based on. I
                                am aware that the Government’s reform package was announced in May 2002.

                                However, the key information was obtained when the Victorian taxi directorate
                                (VTD), a government regulatory body, announced that metropolitan hire car
                                licence fee were set at $66,000 (inc GST) in early January 2004. This was
                                crucial in the decision making process because it set a ballpark figure that I
                                could work from. I was then able to purchase hire car licences at $58,000, no
                                goodwill, because the vendor accepted it. The vendor knew that I could
                                purchase plates direct from the VTD so has to accept a slightly lower value in
                                selling price.”63

In summary, the Commission is of the view that the eventual gazettal of the metropolitan licence
fee ended an apparent period of uncertainty within the hire car industry and reinforced the notion




63
           Submission to the Draft Report from Mr Andrew Travaglini




                                                                                                                                                                                                                                                          42                      Essential Services Commission, Victoria
                                                                 Final Report – Hire Car Licence Fees Review



(for many) that licences were a tangible asset, the value of which would continue to be
underpinned by Government regulation. This view provides some explanation for the relatively
high number of licence applications and the increase in secondary market licence values. This
should also be viewed in the context of an apparent widespread lack of awareness of the
Commission’s review and the objectives and expected outcomes of the taxi and hire car reform
package more generally.

7.2.1 Market value of a metropolitan hire car licence

Appendix 3 shows that the metropolitan hire car licence fee was set at a level that exceeds the
secondary market licence value.

Records of metropolitan licence trades in the period since May 2002 suggest that very few licences
traded for more than $66,000 before January 2004.64 The average value of metropolitan licences
traded in the first four months of 2002 (i.e. immediately prior to the announcement of the reform
package) was $52,200. The average value of licences traded in the two years prior to the
announcement of the package was almost identical at $52,800. Chapter 3 of this report indicated
that there is general agreement with the Draft Report’s finding that the fee had been gazetted above
the market value of the licence.

It should be noted that the level of uncertainty regarding the ‘true’ level of the market price that
faced the regulator appears to be low. The data supplied to the Commission by VTTD includes the
price at which around 90 per cent of all licences transferred were sold. This constitutes a sound
basis for estimating the market price and does not imply a need to implement a premium (in the
name of conservatism, for example).65

The implication of the above for the future of the licence fee appears clear: the minimum reform
required at present, simply in order to achieve an objective of offering licences for sale at the
market price that prevailed prior to the announcement of the reform package is a reduction in the
licence fee to around $50,000 plus GST.

Gazettal of the licence fee above the market value

The Commission noted in its Draft Report that gazetting a licence fee based on the prevailing
secondary market valuation (or at a higher value, as it appears has occurred) virtually guarantees
limited new entry to the industry in the absence of a sustained increase in demand, thereby
inhibiting competition (contrary to stated Government policy).




64
       Two licences traded for $68k and $70k in April 2002, prior to the announcement of the reform package.
65
       This observation relates to the price of MH licences, since the data relates to a substantial number of trades. It is
       accepted that significant uncertainty exists in relation to the value of country licences, since the number of trades with
       declared transfer prices is low, while there is also a likelihood that licence values will vary across the state.




                                                                 43    Essential Services Commission, Victoria
                                                               Final Report – Hire Car Licence Fees Review



The market value of hire car licences essentially represents the capitalised value of the economic
rent derivable from the relative scarcity of these licences, in conditions where new licences are
unavailable.66 Economic rents can only exist where barriers to new entry prevent them from being
competed away. In the hire car industry, the presence of the public interest test – an explicit barrier
to new entry – prior to the announcement of the reform package, created such an environment and
inflated the value of hire car licences. Setting the licence fee at (or above) the market value of
licences in effect sustains the pre-reform situation and supports the pre-existing value of licences.

New entry reduces the relative scarcity of licences. This means that the total value of economic
rent available to licence holders is not only reduced but is spread over a larger number of licences.
Both effects reduce the annual amount of economic rent accruing to one, efficiently exploited
licence so the capitalised value of this economic rent is reduced accordingly. Thus, any incidence
of new entry without an overall increase in demand will reduce the value of all hire car licences.

It follows, therefore, that even if the licence fee of $66,000 accurately reflected the market value of
licences, a small volume of entry would depress the market value of a licence below the set fee and
would thus make any further new entry uneconomic at the gazetted price. In other words, there is
unlikely to be any demand for new licences from the VTTD at the gazetted price, since licences
will be available in the secondary market at lower prices.

The above analysis is essentially static in nature. That is, it holds when demand for the services of
hire cars remains relatively constant. Entry could be supported at the current gazetted price, if
significant increases in the demand for hire car services were to occur. That would have the effect
of increasing the relative scarcity of licences and thereby sustaining (and possibly increasing) the
market value of the licence. Innovative service provision and/or dynamic efficiency improvements
could have the effect of bringing forward such increases in demand. However, the most likely spur
to such improvement is more competitive market conditions arising from new entry. Thus, the
static barrier to entry created by the current fee is likely to prevent the dynamic gains that would be
needed in order to justify entry at the current price.

Any positive effect of the fee gazettal on licence market values is unlikely to be sustained if not
consistent with underlying market conditions. Thus, the signs of interest in new entry that have
begun to be evident immediately following the official gazettal of the fee cannot necessarily be
taken as indicative of future trends in this area. The history of fluctuating licence market values
would suggest that the market value of a licence could fall below the set fee again, effectively
precluding further entry. It is noteworthy that even when there have been increases in the value of
observed trades for existing licences, only five licences had changed hands at prices in excess of
$66,000 up to June 2004. However, prospective entrants are unlikely to apply for a new licence
when an existing licence can be purchased at a price below the gazetted fee. In such



66
       This conclusion, which flows directly from standard economic theory, was adopted implicitly or explicitly by the great
       majority of NCP reviews of the taxi and hire car industries, as well as by the NCC in its 2002 NCP assessment. Some
       reviews discussed the possibility that goodwill contributed a proportion of these observed licence values, but generally
       concluded that goodwill was not a significant element, at least with respect to taxi licence values.




                                                               44     Essential Services Commission, Victoria
                                                                Final Report – Hire Car Licence Fees Review



circumstances, the total number of licences on issue is likely to remain unchanged or increase more
slowly in response to any increase in demand.

Submissions to the review did not include any clear views regarding the likely future evolution of
licence values in the secondary market if the gazetted licence fee were maintained. Thus, the
evidence presented to the review is limited to the history of the gazettal of the fee and the data
concerning the exchange of licences. This evidence supports the conclusions that:

•     there is limited experience to date in respect of appropriateness of the current metropolitan
      hire car fee and its impact on the secondary market price and new entry due to the delay in
      gazetting the fee by the licensing authority;

•     while there is evident interest in new entry at the prevailing licence fee at present, there are
      reasons to doubt that this will be sustained; and

•     the market price has remained below the regulated price until very recently and may retreat
      towards its historical level in the short to medium term if market conditions do not return
      revenues sufficient to support the higher prices observed since the recent gazettal of the fee
      by the VTTD.

7.3    Access to capital

Data on industry cost structures received from the VHCA suggest that access to capital forms a
potentially significant barrier to entry to the industry. The two major capital items that determine
ability to enter the industry are the cost of the vehicle and the cost of the hire car licence.
Currently, the total value of these two items is of the order of $120,000. Cars that are eligible for
use as hire cars typically cost around $50,000 – $55,000,67 although the figure will obviously be
higher depending on the vehicle in question (and will certainly be higher for a stretched limousine,
for example). Thus, the current licence fee of $66,000 is often larger than the capital cost of the
vehicle.68 More importantly, however, lease finance is likely to be available readily in respect of
the car as it is clearly, a tangible asset. By contrast, there may be greater difficulty in obtaining
finance in respect of the purchase price of the licence although some submissions to this review
have suggested that financial institutions have accepted hire car licences as security.69

Irrespective of the relative importance of the licence fee in terms of initial capital requirements, it
represents an additional requirement for capital funds and financing costs that would not be
required in its absence.




67
       e.g. Holden Statesman or Ford Fairlane.
68
       Though an important difference is that the hire car licence is perpetual, whereas the vehicle necessarily has a limited
       life.
69
       The Commission has no information about the terms on which finance is provide in these circumstances but it is
       possible that they are more restrictive




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                                                   Final Report – Hire Car Licence Fees Review



The Commission has noted that Mr Rob McQuillen may have recognised the impact of capital
requirements in his report when he recommended that the hire car licence fee should be payable in
four annual instalments.

      “The initial licence issued could be regarded as a temporary licence with payments being
      phased over 4 years, e.g., market value at date of issue $60,000: payments of $15,000 a year
      for four years. If the temporary licence holder established a viable business a full licence
      would be issued with no further payment.” 70

Mr McQuillen’s recommendation was not implemented but the Commission is not aware of any
explicit rejection of the recommendation by the Government or the regulator. Apart from the
conclusions of this review about the fee and its likely impact on entry and competition, the
Commission believes that implementation of the instalment payment option recommended by
McQuillen would facilitate entry to the industry, while it has no negative impact on incumbents in
the industry (apart from that arising from the increased competition deriving from additional
entry). The Commission believes this measure should therefore be adopted regardless of the view
taken regarding the future licence fee and further consideration should be given to the time period
over which instalment payments could be made and the pattern of those payments.

7.4    Contribution to operating costs

The Commission also noted that the licence fee contributed to the operating costs of hire car
licence holders. A reduction in industry cost structure is a stated expected outcome of the reform
package.

In terms of its relative contribution, the Commission acknowledges that the contribution of the
licence fee (and any interest on funds borrowed to purchase a licence) is likely to be small. This
view was based on submissions to the Issues Paper and confirmed in submissions to the Draft
Report. For example, the VHCA stated:

         “The ESC strongly promotes the argument that the best way to drive down fares
         in the Hire Car Industry is to attack the cost base of the service providers. This
         is an entirely valid approach. But in choosing to concentrate solely on the cost
         of licences the ESC has overlooked the main cost drivers for hire car operators
         …

         Largely, licences are viewed as superannuation by long term participants in the
         industry and as a realisable asset to those who may have been tempted to enter
         the Industry but wish to execute an exit strategy.




70
       Mr Rob McQuillen (2001), op cit., page 16




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                                                           Final Report – Hire Car Licence Fees Review



         The interest cost as a total proportion of overall costs is nominal and represents
         only an additional cost of $1.60 per trip over a ten year period.

         By the way of background the Industry lobbied the State Government to allow
         for more relaxed entrance age limits on vehicles. Since the new regulations
         have come in this year Industry participants can now register a second hand
         Statesman/Fairlane and are no longer obliged to put these cars on the road
         only if they are brand new.

         The potential saving of up to $300-$400 per month to operators that choose to
         register an older car is greater than the interest cost on purchasing a licence
         but does not have the destabilising consequences of deregulation of licencing.
         Nor are there any fiscal repercussions on the State Government.”71

The Commission notes, however, that its terms of reference relate solely to the hire car licence fee
and whilst other elements of the regulatory framework (such as prescribed vehicle standards) are
likely to have a more significant impact, they are outside the scope of this review.

7.5    Country licences

The Commission’s analysis with respect to the impact of the current arrangements in country areas
is far simpler. A fee has not been gazetted so it is not possible for a new country licence to be
issued even if the applicant has evidence of demand for additional services. Therefore, the
Government’s objectives are not being met in country areas and consumers are denied the benefits
of greater competition for commercial passenger vehicles.

The Commission noted that in Chapter 3 that the VTTD had proposed a country licence in 2003
but had not been able to reach agreement with industry participants as to its appropriate level.

As a general observation, this is a highly unusual approach for a regulator to adopt, i.e. to seek the
approval of industry prior to implementing a licence fee. Rather, the level of licence fees are
generally determined on the basis of some guiding principle, such as cost recovery or the
willingness of an applicant to pay for a licence, which is communicated effectively to industry
stakeholders.




71
       Submission to the Draft Report from Mr George Kapnias, Chairman – ESC Response, Victorian Hire Car Association,
       pp. 12 - 13




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                                                     Final Report – Hire Car Licence Fees Review




8       FRAMEWORK FOR DEVELOPING RECOMMENDATIONS

This chapter draws on the conclusions reached in Chapters 6 and 7 and discusses the process by
which the Commission has developed and assessed its recommendations regarding the hire car
licence fee. The most significant issues that emerge in the development of recommendations about
licence fees are the likely impact on existing operators within both the hire car and taxi industries.

8.1   Introduction

One element of the objectives and expected outcomes of the Government’s taxi and hire car reform
package was the promotion of competition within and between the taxi and hire car industries.
Furthermore, the package was developed to fulfil the Government’s NCP obligations and in the
context of NCP principles, the general presumption of which is that regulation should not restrict
competition unless there is a net benefit to society from the restriction and there is no other, less
restrictive way of achieving that net benefit.

In the preceding chapters, the Commission concluded that the current metropolitan hire car fee is
unlikely to encourage significant new entry on the grounds that it exceeds the average market value
of a licence over the previous four years and represents a significant contribution to initial capital
requirements for new entry. In addition, the absence of a country licence fee prevents new entry in
regional areas. While there is the possibility of some level of new entry, it seems likely that the
extent of such entry, under these conditions, would at best be modest. The Commission has
therefore concluded that the current regulatory arrangements are not consistent with the primary
objectives of the Government’s objectives and expected outcomes for the hire car industry. Its
recommendations have been developed accordingly.

The Commission considers that the Government should not rely on economic regulation to
maintain quality standards, although a number of submissions have supported this approach.
Furthermore, the Commission does not believe that the objectives of the reform package require
maintenance of licence fees at their present level. Rather, the package envisages a gradual
reduction in their value over time. The Commission has concluded that the retention of the licence
fee at its current level is an inefficient and ultimately ineffective mechanism for maintaining hire
car standards, the ultimate cost of which is borne by consumers.

In developing its recommendations, the terms of reference require the Commission to have regard
to the impact on the industry, consumers, the community in general and regional issues. The
Commission has also been mindful of the Government’s stated approach to reform that involves a
fiscally responsible, phased transition to a more lightly regulated industry that minimises
adjustment costs.

As a result, an analysis of the net benefits of any reduction in the hire car licence fee must take into
account the costs that would be created by that reduction in addition to the benefits to consumers of
greater competition in terms of lower prices and improved service standards.

The terms of reference also require consideration of an administrative process for determining the
future level of the licence fee. In developing its recommendations, the Commission has had regard



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to ‘best practice’ principles for regulation which attempt to ensure regulatory certainty as far as
possible. Regulatory frameworks, processes and outcomes should be directed to maximising social
welfare (i.e. net benefits, when considered from the viewpoint of society as a whole), taking into
account dynamic efficiency impacts and giving equity considerations due weight, including any
transitional issues. Regulatory administration should be transparent, accountable and consistent in
its application and the views of all interested parties, including operators, users and potential
entrants should be considered in the regulatory process.

As a final point, the Commission is aware of the absence of a significant data set for the hire car
and taxi industries. As a result, the Commission has been obliged to rely largely on first principles
reasoning, qualitative and anecdotal evidence to inform its analysis and the preparation of its
recommendations, particularly with respect to the provision of hire car services in regional
Victoria. For this reason, its recommendations relating to the level of licence fees are to some
extent, arbitrary in nature, reflecting judgements based on the information currently available. This
problem can be overcome in the future through the development of appropriate processes for the
collection of industry data and information.

8.2    Transitional issues

The Commission has found that the value of the licence throughout most of the past several years
has been in the vicinity of $50,000 - $55,000 (although there was a transient peak in values during
1998-99). As discussed, the higher values seen in the first few months of 2004 are likely to have
been affected by the gazettal of the fee that validated $66,000 as the current value of a licence – an
effect that will recede over time if returns to licences are not commensurate with this value.

In the previous chapter, the Commission noted that the issue price of new licences must be below
the current market price if substantial entry to the industry is to occur. This is because each new
entry to the industry inevitably exerts a negative influence on the price of all licences. However,
the Government’s objectives of increasing competition in the hire car industry and increasing
competition between hire cars and taxis will require a market environment that continues to be
attractive to new entrants.

A significant reduction of the licence fee would also reduce the total capital requirements for entry
to the industry. This would assist in overcoming the apparently significant issue of access to
capital in limiting entry.

In terms of benefits to consumers of commercial passenger vehicle services, a reduction in the fee
will promote competition, a reduction in industry cost structures and increased demand through the
development of improved services, all of which are expected outcomes of the reform package.

However, when a key element of a regulatory framework is amended, a key issues for
consideration is the nature and extent of any adjustment costs that may be imposed on existing
industry participants. The Government’s stated approach to reform envisages that these costs
should be minimised. Therefore, any recommendation about the appropriate future fee must
necessarily be based on targeting any reduction of the fee to a level that balances the Government’s
objective of encouraging entry and enhancing competition with the need to manage costs transition
appropriately. The possible negative impacts on existing hire car operators in metropolitan and




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                                                               Final Report – Hire Car Licence Fees Review



regional areas and on the taxi industry of a reduction in the hire car licence fee are considered in
the following sections.

8.2.1 Transitional issues – hire car industry

Regulation of the commercial passenger vehicle industry has historically imposed limits on the
volume of new entry. In the hire car industry, this restriction took the form of the public interest
test. As a result, taxi and hire car licences have attained a scarcity value and the Government’s
reform package sought to relax entry restrictions and reduce the value of these licences gradually
over time.

Although the Government’s NCP obligations are well known and the reform package was
announced in May 2002, there appear to be many industry participants and potential entrants to
both the hire car and taxi industries that have continued to make investment decisions on the basis
that this approach to regulation will continue. Hire car licences have often been viewed in a
similar manner to taxi licences and some respondents indicated that they expected licence values to
follow a similar path to taxi licences. At the same time, hire car licences represent a cheaper
alternative for a new entrant seeking to enter the commercial passenger vehicle industry or for a
taxi driver, for example, seeking to acquire a licence (as taxi licence values are estimated to be
approximately $330,000).72

It is apparent from a number of submissions that the majority of current licence holders, including
those that have entered the industry or expanded their operations since May 2002, view their
licence as a tangible asset and structure their financial situations accordingly. For this reason, the
Commission’s draft recommendation to reduce the metropolitan licence fee was strongly opposed
by some industry participants and existing licence holders. For example, the VTA stated:

         “An immediate and major concern, one with significant social, economic and
         most certainly political consequences, is the effective recommendation of the
         Commission, namely that the property of citizens be substantially devalued to
         their economic detriment, and be so devalued without any form of
         compensation.

         These are not assets being devalued by market forces; but assets with a residual
         value the result of continued government and bureaucratic mismanagement and
         lack of direction, now about to be delivered an economic coup de grace on
         grounds of pure ideology.”73

And:



72
       On the basis of submissions to the Issues Paper and Draft Report, it appears that many new entrants to the hire car
       industry are ex-taxi drivers.
73
       Submission to the Draft Report from the Victorian Taxi Association, page 2




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                                                             Final Report – Hire Car Licence Fees Review



         “… no consideration has been given to the effect on operators of having a
         major asset devalued by a stroke of the bureaucratic pen. Often licences are
         used as collateral for security for borrowings. A marked reduction in the value
         of an asset, especially mid repayment process, can cause serious liquidity
         problems as lenders scramble for greater security and consequently cause a
         shunting effect on other collateral and their related cash-flows. Consequent
         refinancing expenses too can be a significant, if hidden, burden on the
         licencee.”74

Examples of the views of some existing licence holders are as follows:

         “Almost without exception most in the industry would have borrowed for or
         against licences as a business decision. Individuals would consider the value of
         their licence as part of their retirement planning and any decision to halve the
         previously determined value of $66,000 would create an extreme financial
         burden on those affected.”75

And:

         “To enter the hire car industry I had to re-finance my home loan so as to be
         able to purchase hire car licences. I then approached the bank and offered my
         hire car licences as security, which they accepted, so that I could facilitate an
         overdraft in order to sustain my debtors’ ledger. In order to run my business;
         the purchase of the hire car licence was a small component. It is a minor part
         of the daily running and operating costs associated in running a hire car when
         you look at it over an extended period of time.

         As you can imagine my small business revolves around the value of the hire car
         licences because it has formed my asset base for my small business. A
         revaluation would send me to the wall, put my young family out on the streets
         and be left with debts that my small business could no longer support.”76

The Draft Report noted that any substantial reduction in the licence fee that might occur as a result
of this review would impact most significantly on licence holders that have entered the industry
since the gazettal of the fee and paid the current fee of $66,000 to the VTTD and those operators
that have purchased licences in the secondary market at a price that exceeded $66,000. The taxi
and hire car reform package, announced in May 2002, included a commitment to a review of the
hire car licence fee two years after announcement of the package with a key criterion for that
review to be the effect of the fee in relation to the explicit objectives of the reform package.




74
       Ibid., page 3
75
       Submission to the Draft Report from Mr Noel Sinclair, NJ &SA Sinclair Pty Ltd – Chauffeur Services
76
       Submission to the Draft Report from Mr Andrew Travaglini




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                                                              Final Report – Hire Car Licence Fees Review



It is therefore reasonable to conclude that anyone who has purchased a licence since the
announcement of the reform package (either from the VTTD or in the secondary market) has done
so in an environment of an explicit government policy of regular review of the licence fee
involving the prospect of it being adjusted downward. Purchase of a licence in these circumstances
would therefore seem to imply either a lack of understanding of the implications of the licence fee
review commitment or a conscious acceptance of the risk of a loss in the licence value should there
be a subsequent downward adjustment in the fee charged for new licences.

However, a mitigating factor (initially discussed in Chapter 3) of which the Commission is
conscious, is the apparent lack of awareness of the details of the reform package, including this
review, within some elements of the industry.77

For example, Mr Anthony McKay noted that:

         “On 15th May 2004 I finalised the purchase of my first Hire car licence from the
         VTD at the nominated price of $66,000 (GST inc). It was only upon enquiring
         for another application form from the VTD on 24th June 2004, intending to
         purchase my second licence that I was informed to take into account the price
         review which was taking place. I had received no such advice when applying
         for my first licence in early April 2004.

         I subsequently have been made aware that licence holders should have received
         a letter from ESC dated 9th March 2004 and also a copy of the Issues Paper
         sometime in April.

         I have to advise you that neither of the above mentioned documents have been
         received either by myself or in my work office which is the registered address
         with the VTD for in excess of 10 hire car licences

         Had the documents been received I would certainly not have gone ahead with
         the purchase of my Hire Car Licence until the review had been completed.”78

The Commission has some concerns about the manner in which details of the reform package were
communicated to existing industry participants and to potential entrants. In its Draft Report, the
Commission expressed the view that the majority of existing operators and potential new entrants
would generally be expected to seek qualified financial advice and information about likely or
forthcoming changes to the industry’s regulatory framework prior to undertaking a financial
investment as significant as the purchase of a new or existing licence. This view has not been
confirmed by submissions to this review and in addition to a lack of awareness, it appears that very
few of those who were aware of the review perceived that licence values could fall as a result of



77
       In March 2004, the VTTD sent a letter to all hire licence holders on behalf of the Commission to inform them of the
       review.
78
       Submission to the Draft Report from Mr Anthony McKay




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                                                      Final Report – Hire Car Licence Fees Review



Government policy initiatives. While this does not in itself represent a reason for not pursuing the
announced reforms or a reduction in the scheduled licence fee, it should be taken into account in
the development of recommendations including with respect to the manner in which adjustment
costs are handled.

The Commission recognises that a reduction in the gazetted fee impacts on existing operators; the
precise extent of that negative impact is, however, very difficult to assess. This in turn,
complicates the consideration of mechanisms for minimising adjustment costs (through refunds or
compensation payments, for example).

The Government has sold licences at the gazetted fee since January 2004 and, as at 1 July 2004,
had issued eight licences at this price. Previously, the VTTD issued licences (at a small fee
apparently based on administrative costs) subject to satisfaction of the public interest test. The
Commission expects that some of those operators who received licences from the VTTD during
the life of the public interest test have since exited the industry by selling their licence and realising
a capital gain. Others may still be operating in the industry, having earned above normal profits
due to the explicit restriction on entry. There will, however, be many operators that have
purchased their licence in the secondary market at a range of prices. The Commission notes that
there is insufficient information available about the industry (and the period over which licences
are held) to make an informed judgement about this.

The Commission’s draft recommendation was to immediately reduce the metropolitan licence fee
to $33,000. A reduction in the fee to $33,000 in the current context in which the market value of a
licence is approximately equal to the $66,000 issue price would necessarily entail a paper loss of
$33,000 for each existing licence holder (or, at least, in respect of each existing licence). However,
the average market price of a licence in the period May 2002 to February 2004 was $54,500 on the
basis of the information available to the Commission. Licence values appear to have been in the
vicinity of $50,000 – $55,000 for most of the past four years and many existing operators would
have entered the industry by purchasing a licence at a price below the gazetted fee or would not
have paid a significant licence fee, having applied for a licence under the public interest test.

If the medium term ‘market’ value of a hire car licence is in the vicinity of $55,000, a reduction in
the fee to $33,000 would entail a paper loss closer to $22,000 (rather than the $33,000 that a simple
comparison of the current licence issue price and the notional new price of $33,000 would
suggest). Thus, the size of the loss that would be borne by most existing licence holders in the
event of a 50 per cent reduction of the current issue price may be of the order of $20,000.

A number of submissions to the review have suggested that the current metropolitan licence fee
constitutes a relatively low proportion of the overall expense base of the hire car industry. On the
basis of the VHCA submission for example, this expense is almost certainly less than 10 per cent




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                                                                Final Report – Hire Car Licence Fees Review



of total expenses, whereas the Commission notes that taxi plate values have been estimated in NCP
review to constitute around 25 per cent of costs.79

If the price of the hire car licences contributes relatively little to total operating expenses, it follows
that reductions in the plate value will have only a limited effect on the businesses of existing
operators in terms of their operating costs. That is, an implicit amortisation of the capital loss
involved over several years would be equivalent to a very modest increase in operating expenses,
as indicated above.80 Such a conceptual approach to the issue would appear appropriate in the case
of the majority of industry participants who expect to continue in business over the medium term.
Furthermore, a significant reduction is unlikely to place an incumbent operator at a significant cost
disadvantage relative to new entrants.

This suggests that long-term participants in the hire car industry would, in most cases, not suffer
substantial hardship as a result of even a significant reduction in the issue price of new hire car
licences.

The position of those licence holders that intend to exit the industry in the short term is somewhat
different, as a paper loss (the size of which depends on the initial price paid) is made concrete via
the lower sale price of the asset. Their individual circumstances, in terms of when and through
what means the licence was initially acquired, determine whether this represents a real loss or the
loss of an unrealised paper gain. In the example of the draft recommendation, those who initially
purchased licences for no more than $33,000 have lost an unrealised capital gain, rather than
suffering an actual loss in the value of their initial investment. It can be noted that many licences
were issued by VTTD under the public interest test at nominal cost, while there may be some
operators that purchased their licences at prices that were not substantially higher than $33,000.

The Commission notes that this analysis has particular relevance to those existing operators that
view their licence as a tangible asset and as part of the retirement funding arrangements. On the
basis of this review, this appears to be a common view of licences. For example, Mr Peter
Turnbull states:

          “I am 49 years old and have been in the hire car industry for over ten years. I
          have no superannuation; the three commercial passenger vehicle licences I own
          are my superannuation on retirement.”81




79
        The comparison with taxi plate values arguably points to the omni-present risk involved in retaining a substantial plate
        value – the constant pressure from interested parties on regulators to act in ways that would allow the licence value to
        increase. Submissions to the review provide examples of this tendency: a number argued that the licence fee should
        rise regularly by CPI based amounts, while others argued that the country fee should be set at $66,000, or at $33,000.
80
        The paper loss of $20,000, for example, could be considered conceptually as an additional business expense to be
        amortised over the time the licence was held. Given a ten year time horizon, the additional expense would be equal to
        around $2,000 per annum or $165 per month. Thus, the additional cost would be equivalent to an increase in business
        expenses of about 3.9%.
81
        Submission to the Draft Report from Mr Peter Turnbull, Director, First Class Services Pty Ltd




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                                                         Final Report – Hire Car Licence Fees Review



The Commission also notes that some existing operators state that they have borrowed funds
against the value of other assets (such as their houses) in order to purchase licences and would be
obliged to provide additional collateral if the value of the licence was reduced. For a highly geared
licence holder or one that has no other tangible assets, this may represent a genuine concern. On
the basis of submissions to this review, some respondents appear to have structured their financial
arrangements in such a way; the extent of this is, however, impossible to quantify.

The Commission notes that financial industry practice is such that where borrowing is secured
against a separate, tangible asset, a reduction in the value of the licence is highly unlikely to require
further security to be provided as the financial institution’s security position is unchanged. In this
situation, it would be equivalent to a decline in the value of a share portfolio, for example.

Previous changes to licence values

The Commission noted in its Draft Report that an additional perspective on potential losses of
licence value is provided by review of the changes in the value of existing licences over time based
on trades prices observed in the secondary market. This shows that there have been several sudden
shifts in licence values, in both directions, in past years. For example, data provided by the VTTD
indicates that quarterly average sale prices:
•     Rose by over $20,000 in early 1998;
•     Fell by $12,000 in late 1998;
•     Fell by $21,000 in early 2000;
•     Rose by $8,500 in late 2000.

The largest single fall, in early 2000, apparently coincided with the publication of the NCP review
of the taxi and hire car industry, even though no policy changes were made at that time, and the
introduction of the GST.

These observations indicate that the value of the licence has historically been subject to some
volatility and that long term industry participants have necessarily had to cope with the (positive
and negative) impacts of this volatility. A reduction in the licence fee of the size recommended in
the Draft Report is not outside the range of the observed volatility in licence values in past periods.

Country licence holders

The position of country licence holders is less clear as there is less information available and very
few trades in country licences. The Commission has previously noted that the ten trades in country
licences since January 2002 have ranged from $14,000 to $75,000 (although the trades at the upper
end of this range are likely to have metropolitan operating rights, as discussed in Chapter 4).82
When those ‘exceptional’ country licences are excluded from the analysis, the average price paid



82
        Prices were reported for eight of these trades




                                                         55   Essential Services Commission, Victoria
                                                   Final Report – Hire Car Licence Fees Review



for country licences is approximately $20,000 for the remaining seven trades. Given the very low
number of trades in question, it is possible that many country licences were allocated under the
public interest test and therefore, only a nominal fee would have been paid.

Summary

The Commission has concluded that the metropolitan licence fee exceeds the market value of a
licence in the secondary market over the previous three years. The absence of a gazetted country
fee prevented new country licences from being issued. Therefore, in order to promote hire car
entry and more effective competition within and between hire cars and taxis and a gradual
reduction in licence fees and values (consistent with the objectives of the Government’s reform
package) the Commission recommends an immediate reduction in the metropolitan fee and the
immediate gazettal of a country licence fee. This chapter has outlined the issues that need to be
accounted for in making recommendations about their level.

The large number of submissions to this review have illustrated to the Commission how a
significant reduction in the fee would impact on existing operators. Despite the announcement of
the reform package and NCP more generally, licences are still viewed by many holders as tangible
assets. Whilst it has concluded that a reduction in the licence fee will generate benefits for
consumers, the consultation process has revealed that the costs of a reduction are such that a case
can be made for the reassessment of the draft recommendations. The Commission’s final
recommendations regarding appropriate levels for the metropolitan and country licence fees are
outlined in the next chapter.

Practical issues

As a final point, the Commission is conscious of the practical issues involved in recommending an
appropriate country licence fee. The Commission has previously mentioned that the VTTD
consulted with some industry participants during 2003 on a proposal to set a single fee of $17,500
for a country hire car licence regardless of the location of the operator but was unable to reach
agreement with industry participants.

In its Draft Report, the Commission noted that the economic returns from hire car operations were
likely to vary across different regions of the state according to differences in population density,
customer preferences and other aspects of demand for the services of hire cars. Therefore, it is
reasonable to assume that a single, gazetted fee for all country hire cars is likely to be below the
market value of a licence in some areas but exceed it in others. Accordingly, the impact of a single
licence fee on entry and increased service availability and competition is likely to differ between
regions.
Notwithstanding these considerations, it appears that a single licence fee for all non metropolitan
areas may be the most practical approach given the difficulty of enforcing geographic restrictions
on the operation of country hire cars. The Commission’s recommendations reflect a pragmatic
approach to this practical issue.
The Commission is also aware that the VTTD has consulted with industry on a proposal to classify
all hire cars within an 80km radius of the GPO as metropolitan hire cars and those outside the
radius as country cars. Whilst these boundaries are outside the scope of this review (and this report
contains no recommendations with regard to them), the Commission notes that an expansion of the



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metropolitan area would mean the relatively higher metropolitan fee would apply to some less
densely populated areas. This in turn, is likely to have implications for decisions about entry and
investment in these areas.

Although this report does not include recommendations about this issue, the Commission suggests
that it should be promptly resolved in order to remove any uncertainty about the prevailing
regulatory environment, particularly with respect to country hire car licences.

8.2.2 Transitional issues – the taxi industry

Metropolitan taxis

The Government’s reform package intends to encourage greater competition between the taxi and
hire car industries. Chapter 6 explained that the nature of the prebooked segment of the market for
commercial passenger vehicle services provided consumers with the opportunity to shop around
for the combination of price, quality and reliability that best suits their preferences. In principle at
least, this allows for more effective competition between hire cars and taxis for some demand
segments. This in turn, means that changes to the hire car licence fee potentially have implications
for taxi licence values, the extent of which ultimately depends on the extent to which consumers
substitute hire cars for taxis in practice.

The Commission, notes, however, that there are legitimate reasons for concluding that any change
to the metropolitan hire car fee that might occur as a result of this review, are unlikely to have a
significant negative impact on the taxi industry (and on taxi licence values). As previously noted,
the terms of reference for this review relate to the hire car licence fee, one specific element of the
broader regulatory framework. The Commission expects that other elements of that framework
that are outside the scope of this review, such as different vehicle standards and the prohibition on
hire car activity in the cruising market are likely to have greater significance for the degree of
effective competition between hire cars and taxis.

It should also be noted that the current number of metropolitan hire cars – 477 – is equal to only
around one seventh of the number of Melbourne taxis. This alone suggests that a substantial
increase in hire car numbers would be necessary before a discernible impact on competition with
taxis would be evident.

Data provided to this review indicates that ownership of hire car licences is widely distributed and
few networking arrangements exist. The Commission has previously noted in Chapter 5 that the
development of networks that reach a critical size would be a necessary step in allowing hire cars
to compete effectively with taxis in the ‘on demand’ or short-notice telephone booked market
segment.

The Commission noted that the NCC’s 2002 NCP assessment concluded that a hire car industry
that was not over-burdened by regulatory constraints on its operations could provide significant
competition for the taxi industry. Thus, if increased entry to the hire car industry is to occur, it is
entirely possible that it would lead to strengthening competition for market share in the pre-booked
market, with resulting benefits for consumers. Such competition has the potential to place some
downward pressure on taxi licence values. However, the extent of any such effect is likely to be
limited by the current small size of the hire car market compared with the taxi market and relative



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revenues of a taxi, which are apparently substantially larger than that of a hire car. More
importantly, the degree of competition would be substantially constrained by the ongoing
prohibition on hire car activity in the cruising segment of the market.

Country taxis

The objectives and expected outcomes of the reform package, and the stated approach to reform do
not differentiate between the provision of services in metropolitan and regional areas. However,
the terms of reference require the Commission to have regard to regional issues including the
accessibility of services in regional Victoria.

The Commission has noted that the nature of competition (and the potential for more effective
competition) between taxis and hire cars differs in regional areas, which in turn has important
implications for the country licence fee.

Although its submission to the Commission’s Issues Paper expressed scepticism regarding the
degree of substitutability between taxis and hire cars, the VTA recommended that the Commission:

        “… gives consideration in reaching its recommendations to the likely impact of those
        recommendations on the viability of the taxi sector and in particular on the community
        obligations role of the taxi industry.”83

The Commission believes that this is of particular relevance in regional areas where taxis assume
greater importance with respect to public transport functions due to the absence of well developed
train, tram and bus networks and their common carrier obligations. Taxis in regional areas also
provide services via Wheel Chair Accessible Taxis and the Government’s MPTP to individuals for
which there are few other available alternatives.84

As discussed in Chapter 2, the Commission’s draft recommendation regarding the country licence
fee attracted some criticism on the grounds that it would provide insufficient protection to country
taxi operators, thereby jeopardising the provision of essential (and often uneconomic) services to
specific classes of consumers (and particularly disabled passengers). In its submission to the
Issues Paper, the VTA stated that increased competition from the hire car industry might reduce the
viability of taxi services in regional areas and, potentially, reduce the availability of these services
to vulnerable client groups. Mr Carli also addressed this point by stating:

          “The ESC document declares it a virtue that hire cars should increase
          competition in large areas of country Victoria against localized taxi services.
          However hire cars doe not have wheelchair vehicles and are unlikely to provide




83
        Submission to the Issues Paper from the Victorian Taxi Association, page 13
84
        Taxis in metropolitan areas also provide these services but there is likely to be a wider range of alternatives modes of
        transport available in these areas




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         such an uneconomical service. Yet any loss of WAT services or local services
         will be a disaster for some of our most vulnerable citizens in country areas.

         Taxi have an obligation to provide 24 hour services, and WATs, hire cars do
         not. The fact that the delay in gazetting the licence fee was delays caused by
         disagreements on the price of a country license. In part it is the fear that if the
         fee is too low it will threaten country taxi and WAT services.”85

In response to the draft recommendation, a specific example was provided by Mr Barry Blain from
Warrnambool Radio Taxis:

         “In Warrnambool we have nineteen licences which comprises of sixteen cars,
         two wheel chair vans and one flash cab. Our company owns the wheelchair
         vehicles plus one taxi licence. Our Company subsidises the wheel chair vans.
         If the company did not have large base fees to subsidise these vehicles. We
         would have to hand these licences back, as is happening in other country towns.
         My concerns then are, what would the handicapped and disabled do. I am sure
         no one in the hire car industry would want to run vans at a loss and be on call
         24 hrs a day as we are, and the only reason we do that is to help the
         handicapped people. Our cars are out 24 hours a day 52 weeks a year and at
         nights especially early in the week do not make any money at all. They do this
         knowing that at different times in a week it gets busy and that subsidises the
         driver’s income. I am sure hire cars are not going to be available for work 24
         hrs a day when there is no work out there.” 86

Whilst the Commission recognises the validity of these arguments, it does not agree that the
relatively greater community service function that taxis assume in country areas represents, in
itself, a case for restricting entry for hire cars and thereby denying regional consumers the benefits
of greater competition. The Commission believes that the indirect subsidisation of these services
through supply restrictions denies regional consumers the benefits of additional services and
competition and is likely to be unsustainable, inefficient and in some cases, largely ineffective.

In its Draft Report, the Commission suggested that direct subsidies or the extension of the MPTP
to hire cars would be more effective and efficient in ensuring that all country operators (both taxi
and hire car) were able to provide such services on a viable basis to the consumers that require
them. This suggestion was not noted in any submissions to the review, including those that
expressed concerns about the viability of country taxis. The Commission continues to believe that
the use of direct subsidies for the provision of these otherwise uneconomical services is the
preferred solution but recognises that this approach may raise other issues for Government and




85
       Submission to the Draft Report from Mr Carlo Carli MP, Parliamentary Secretary to the Department of Infrastructure,
       page 8
86
       Submission to the Draft Report from Mr Barry Blain, Manager, Warrnambool Radio Taxis




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industry administrators. For example, it would entail a significant change to current administrative
practices, and raise issues about the revenue source for these subsidies.

Conclusion

In general, the Commission believes that hire cars are able to provide a viable alternative to taxis
for many consumers of commercial passenger vehicle services in metropolitan and regional areas
and this will develop further over time as new entry occurs and innovative services are provided by
hire car operators. However, the importance of the licence fee in relation to competition and
service quality with respect to other elements of the regulatory framework (such as restrictions on
activity in the cruising market and different vehicle standards) is unclear. At the very least, the
Commission expects that a significant reduction in the hire car licence fee would provide a relative
cost advantage to hire car operators and promote competition and new entry. While this may have
a negative effect on taxi licence values, the likely extent cannot be quantified but is likely to be
small. Greater competition to the extent that it occurs may encourage taxi operators to divert a
greater proportion of their operation to the cruising market.

8.3    Administrative process for setting the licence fee in the future

The terms of reference require the Commission to investigate and report on an appropriate
administrative process for setting the hire car licence fee in the future and the timing of further
determinations or reviews that should occur over time.

The Commission notes that the hire car licence fee constitutes a significant component of the cost
of entry to the industry and (a less significant component) of the ongoing cost of providing hire car
services. It also means that existing licences take on a substantial value as an intangible asset that
is reflected in the resale value of licences in the secondary market. Accordingly, uncertainty about
the future level of the fee is likely to discourage entry, reducing investment and innovation within
the hire car industry, thereby limiting the overall effectiveness of the Government’s taxi and hire
car reform package. To address these regulatory certainty issues, future administrative
arrangements should maximise transparency and predictability in the determination of licence fees.

In terms of future reviews of Victorian hire car licence fees, a number of submissions to the
Commission’s Draft Report suggested that the outcome of such reviews had been predetermined
and cited the Commission’s statements in the Draft Report that identified a theoretically optimal
fee as one based on recovery of administrative and enforcement costs. Therefore, entry and
investment in the hire car industry is likely to be deferred. For example, the VTA stated:

         “Operators and drivers cannot help but believe that they are being used as
         pawns by the Commission if the Commission recommends an interim price level
         for licence fees, knowing full well that it is government policy that in the long
         run licence fees be reduced to a nominal fee that merely covers administration
         and enforcement costs.

         Operators and drivers are citizens of Victoria; not pawns in some economic
         chess game. They have spouses and families and are entitled to be treated
         openly and with utmost good faith as they seek to preserve their futures and
         those of their dependents. A licence fee two stage demolition process, without



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         any room for compromise or bargaining, is nothing short of bureaucratic
         expropriation by another name.”87

The Commission’s reference in the Draft Report to a licence fee based on the cost of licence
administration was made in the context of a conceptual discussion of competition, entry and
efficient market outcomes. That approach was not reflected in its draft recommendations and was
not presented as a view of how licence fees should be set at some future time. On the contrary, any
future review of licence fees would be conducted on the basis of terms of reference established by
the Government and would presumably be required to reflect the objectives and outcomes of the
Government’s reform package as outlined in Chapter 2 of this report.

This review has identified the delay in the gazettal of the metropolitan licence fee and the absence
of a country licence fee as having had an adverse effect on the volume and timing of new entry.
Some submissions to this review have also expressed reservations about the extent of industry
awareness of some of the key elements of the Government’s reform package, most notably, the
licence fee, this review and other elements of current regulatory administration.

Uncertainty about the principles and processes to be applied, shortcomings in consultation and
transparency in the process and delays to the gazettal of the licence fee have all contributed to
considerable regulatory uncertainty about licence fee determination in the recent past. As a general
proposition, regulatory uncertainty undermines confidence, investment and performance in a
regulated industry, the cost of which is ultimately borne by consumers.

The Commission is of the view that policies, decisions and initiatives that impact upon the
regulatory framework for hire cars should be publicised widely for the benefit of industry
participants (including operators and users), potential entrants and the broader community and
should be open to scrutiny.

A further consideration in designing arrangements for future reviews of the regulatory
arrangements, including licence fees, is the likely or potential impact on the behaviour of existing
and potential industry participants. For example, announcement of a staged approach to reform
has the potential to create uncertainty and to influence market decisions including the
encouragement of behaviour that seeks to halt or reverse the direction of reform. New entry or
further investment may also be deferred until the process is complete and the environment
becomes more certain.

Based on assessment of the issues addressed in this chapter, the Commission’s specific
recommendations regarding the licence fee levels, the timing and need for any further reviews and
the conduct of those reviews are presented in Chapter 9.




87
       Submission to the Draft Report from the Victorian Taxi Association, page 4




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9      RECOMMENDATIONS

This chapter outlines the Commission’s recommendations for Victorian hire car licence fees and
future reviews relating to their level. In developing these recommendations, the Commission has
had regard to the requirements of the terms of reference.

The Commission expects that its recommendations will result in an increase in the total number of
hire car licences on issue. Some submissions to this review have suggested that an increase in
unlicensed activity and a decline in quality standards will be the necessary outcome of such an
increase.

The Commission has previously expressed the view that a decline in quality standards and an
increasing incidence of unlicensed activity would represent a failure of service quality and licence
compliance regulation. Although it is outside the terms of reference, the Commission suggests that
an improvement in the application of and compliance with existing quality standards and licence
obligations and a review of the effectiveness of current regulatory arrangements more generally,
should be undertaken regardless of the level of the licence fee. For example, this should involve an
assessment of and improvements in existing monitoring and enforcement practices of the VTTD,
the adequacy of resources and systems for compliance monitoring and enforcement activity and the
design and implementation of quality regulations. Particular emphasis should be placed on
developing improved arrangements to prevent touting at the Melbourne Airport, which was
frequently cited in submissions as one of the major examples of unlicensed activity.

9.1    Future hire car licence fees

Recommendation 1.1: A new metropolitan hire car licence fee should be gazetted immediately at
$40,000 plus GST.

While the Commission’s Draft Report recommended a fee of $30,000 plus GST, the substantial
number of submissions received and other consultations undertaken since the release of the Draft
Report have led to a modified view of the likely short to medium term impact of such a change on
existing participants in the industry. As a result, the Commission believes a more cautious
reduction of the current fee than that initially recommended is warranted. This is intended to
minimise hardship for existing industry participants while still supporting new entry to the industry
and, as a result, further industry development in line with the Government’s reform objectives. In
reaching this view, the Commission has been mindful of the Government’s stated approach of
facilitating a phased transition to reform, moving from a highly regulated industry (in terms of
supply restrictions) to a more lightly regulated one.

Recommendation 1.2: Country hire car licences be made available at a fee of $15,000 plus GST.

The Commission has been mindful of concerns expressed that the adoption of a low entry fee for
country hire cars could have important negative impacts on the disabled and other vulnerable users
of taxi services in regional Victoria. In particular, there is a concern that increased competition
from hire car services might negatively affect the viability of taxi services. While the Commission
has reservations as to the likely size of any such impact, a cautious approach can be justified to



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minimise this risk. Moreover, in light of the revised Recommendation 1.1, stated above, it is
considered that there should not be a substantially larger reduction in the value of existing regional
hire car licences than is being implemented in relation to metropolitan licences for the sake of
consistency.

Recommendation 1.3: The hire car licence fee should, at the request of the applicant, be payable
in four annual instalments

This recommendation, initially put forward in the McQuillen Report and also adopted in the
Commission’s Draft Report, is supported as a means of easing the initial capital requirements for
entry to the industry and thus providing additional opportunities for new entry without significantly
undermining existing licence values.

Recommendation 1.4: The VTTD should be granted discretion with respect to applications for
country hire car licences.

The Commission has concluded that a single non-metropolitan hire car licence fee is appropriate
for reasons of administrative simplicity and because in practice, licensed hire car operators are able
to easily transfer from one location to another. However, submissions to this review have
expressed concern about the potential impact of increased competition from hire cars on the
viability of country taxi operators and their ongoing provision of specific services to disabled
passengers. Whilst the Commission supports the use of direct subsidies to ensure continuing
provision of these services on a viable commercial basis rather than imposing restrictions on
competition to achieve that end, it recognises that this would represent a significant change to
existing administrative arrangements and also raises wider policy issues for government. An
alternative would be to permit the VTTD to exercise a discretion to deny an application where
there is evidence that the provision of essential services to specific community members would be
threatened by increased competition from hire cars and the VTTD considers that a net public
benefit would result from restricting competition in this way.

The Commission is also concerned that the setting of a fee at the level proposed in
Recommendation 1.2. may prevent smaller communities from having the opportunity to be served
by a hire car business. It is therefore considered appropriate to allow the VTTD to exercise
discretion to waive a portion of the fee where it is convinced by an applicant that it intends to
operate a business in a small community. The VTTD should also have the discretion to impose
restrictions on the area of operation and transferability of a licence that is purchased for this
purpose at a concessional rate.

In recommending these VTTD discretions, the Commission is mindful of the potential for such
arrangements to function as a revised public interest test or to increase regulatory uncertainty. It
therefore proposes that the VTTD be required to develop and publish criteria and guidelines to be
followed in its assessment of applications where it chooses to exercise its discretion. Its decisions
involving the exercise of discretion should also be open to appeal.

Where the VTTD decides to waive a portion of the gazetted licence fee for an individual country
licence application, a statement of the reasons for the fee reduction and the value of the revised fee
should be gazetted to ensure the VTTD’s decision is transparent. Where the VTTD decides to
deny an application or to otherwise impose restrictions on a licence, it should also be required to



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publish its reasons with supporting evidence as to why it considers that the public interest is best
served by denying or restricting the access of regional consumers to additional services. This
approach is consistent with National Competition Policy, the presumption of which is that
legislation should not restrict competition unless it can be demonstrated that the benefits of the
restriction to the community as a whole outweigh the costs.

Recommendation 1.5: The Government should require the changes to the hire car licence fees
recommended above to be implemented by the licensing authority immediately following their
announcement by Government.

The Commission notes that there is limited direct evidence of the impact of the current licence fee
on the industry and consumers due to the delay until January 2004 in gazetting the fee announced
by the Government in May 2002. Similarly, the failure to set a fee in relation to country hire cars
has meant that no entry at all has occurred since the announcement of the reform package.

This has delayed the implementation of the reform package and its expected benefits and it has also
created difficulties for the current review process. It will be necessary to ensure that similar delays
do not arise with the implementation of the Government’s decision on the recommendations of this
review. The delivery of the expected benefits of this next stage in the industry reform process will
depend on the timely implementation of the decision.

9.2    Adjustment issues

Recommendation 2.1: Hire car licence owners who have purchased licences from the VTTD at
the current fee should have the difference between the current fee and the new fee refunded to
them on request.

The Commission is mindful that the metropolitan fee was gazetted only in January this year and
that, in a situation where the existence and timing of the current review was not widely known,
purchasers of licences after that date would have had a reasonable expectation that the fee would
remain at this level for some time. In view of these special circumstances and because
Recommendation 1.1 proposes a one third reduction in the current fee level, it is considered
appropriate on equity grounds that such purchasers receive a refund of the difference between the
new fee and the current fee.

Recommendation 2.2: Hire car operators who purchased metropolitan hire car licences in the
secondary market after the gazettal of the current fee should be able to make application to the
VTTD for an ex gratia payment to be made. The payment should be equal to the difference
between the new metropolitan hire care licence fee and the current fee, unless the purchaser has
paid an amount less than the current fee for their licence (in which case the payment should be
the difference between the current fee and the amount actually paid).

While purchasers of licences on the secondary market have not paid money to the Government,
and are thus not in the same position as those who have bought licences from the Government, the
Commission believes that the circumstances are similar, in that their purchase decisions may have
been substantially predicated on the gazettal of a licence fee of $60,000 plus GST in January 2004
and their lack of knowledge of the current review and it possible implications. It is therefore
considered appropriate that the VTTD be authorised to review the position of such operators on a



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case by case basis and to make ex gratia payments where it is considered to be justified in the
circumstances of individual operators. The VTTD should be requested to publish criteria that will
guide its decision-making on this matter in order to ensure a transparent and equitable approach is
taken.

The Commission considers that Recommendations 2.1 and 2.2 are appropriate due to the
exceptional issues surrounding the gazettal of the metropolitan licence fee in January 2004. Most
notably, the Commission is conscious of the widespread lack of awareness within the hire car
industry of the Government’s reform package and, in particular, of this review, the implication of
which is that some hire operators have made decisions about entry and investment without a full
appreciation of possible changes to the prevailing regulatory framework. The Commission
anticipates that in future, effective communication to industry about the objectives and expected
outcomes of the Government’s reform package, as well as about the Government’s decisions on
the recommendations of this review, would ensure that a similar situation requiring consideration
of ex gratia payments does not arise.

9.3    Future reviews

The gazetted metropolitan and country licence fees should remain fixed until a further review of
their appropriateness is undertaken. The Commission’s recommendations for further reviews are
presented in this section.

Recommendation 3.1: Further reviews of the licence fee as required in the future should
continue to be conducted by the Essential Services Commission.

The Commission notes that the Government specifically inserted Division 9 into Part VI of the
Transport Act 1983 at the time of its implementation of the taxi and hire car reform package in
2002. This Division created a power for the Minister to refer matters to the Essential Services
Commission requiring it to review aspects of the regulatory framework and to report to the
Minister on options for further reform.

There are significant advantages in having the Commission conduct independent public reviews of
aspects of the implementation of the Government’s reform package under Division 9 of the Act,
including the benefit of ensuring that a transparent, consultative and consistent approach is brought
to the subsequent review process.

The Commission also notes that both the VHCA and VTA, among others, have expressed the view
that the Commission is an appropriate body to undertake such reviews. There are also advantages
in having the review conducted by a multi-sectoral regulatory body in order to avoid any questions
regarding the independence and objectivity of the review process.

Recommendation 3.2: A further review of the hire car licence fee should be undertaken three
years after the completion of the current review.

The Commission notes that the very limited experience with the current licence fee arrangements
in the lead up to this review necessarily means that there is some degree of uncertainty as to the
likely impact of the reforms now being recommended. It would therefore be prudent to ensure that
these impacts are assessed in a timely manner and that any further changes that are considered



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necessary at that time can be introduced after having regard to the effectiveness and impact on
market participants (licence holders and consumers) of the Government’s decision in relation to the
licence fee changes recommended by this review.

At the same time, the Commission is mindful of industry views on the need for stability in the
industry’s regulatory environment as a precondition for maintaining confidence, underpinning
investment and supporting viable new entry promoting business development in the short to
medium term. A period of three years, rather than two years, is therefore considered appropriate
before the next review is commenced.

Any subsequent review should assess the appropriateness of the licence fee that has been in place
against the objectives and expected outcomes of Government’s taxi and hire car reform package.
This would suggest that the fee would be regarded as broadly consistent with Government policy
objectives if it had led to significant new entry to the industry, improvement in competition and
consumer choice and continuing viability of the hire car industry as a whole during the three year
period between reviews.

The Commission also believes that there would be merit in considering the introduction of annual
hire car permits as an alternative to the sale of perpetual licences. It is possible that an annual
permit, with the fee set at an appropriate level, could constitute a means of facilitating further entry
to the industry without having a substantial negative impact on the licence values of existing
perpetual licence holders. In this respect, the recent implementation of fixed term, peak period taxi
licences in Melbourne has not had any noticeable negative impact on the value of perpetual taxi
licences.

The Commission notes that a ‘two tier’ licence arrangement of this sort has been adopted in the
context of the New South Wales hire car industry. Moreover, both perpetual, transferable licences
with fixed term, non-transferable licences are a feature of the Victorian taxi industry, while the
Government has indicated that it expects to continue to emphasise the issue of these fixed term,
non-transferable licences.

Finally, a further review would allow for independent assessment of the VTTD’s performance in
exercising its discretion to either waive a portion of a country licence fee or to deny an application
for a country licence (as per Recommendation. 1.4).

9.4     Improving information in relation to licence fees and related issues

Recommendation 4.1: Clearing house arrangements that ensure transparent and efficient
exchange of licences should be implemented in respect of metropolitan hire car licences.

Transparent clearing house arrangements would facilitate information flows among market
participants, improve the efficiency of the secondary market for licences and potentially improve
confidence and ultimately enhance the rate of entry achievable at the level of a particular regulated
licence fee. It would also provide an improved information base for assessing secondary market
conditions in the context of future licence fee reviews. Similar arrangements are currently being
put into place in relation to taxi licence sales and the option of including hire car licence sales in
this mechanism should be investigated.




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Recommendation 4.2: The VTTD should develop effective data collection arrangements in
relation to industry statistics and should make the relevant data widely available to assist in
future analysis of industry matters and decision-making relating to regulatory issues including
the future of the licence fees.

The Commission notes that there is a lack of adequate data to support detailed analysis of the state
of the hire car industry and ultimately, to underpin future reviews on the appropriate level of the
licence fee and related regulatory matters. To provide a basis for sound market and regulatory
analysis, the VTTD should be required to collect and monitor relevant industry statistics and to
make this data widely available in published reports. The existing regulatory arrangements require
hire car operators to collect and maintain data relating to their operations and operators consulted
in the course of this review have confirmed that the data is, in fact, held. Thus, the development of
a database and public reporting arrangements is feasible at a modest additional cost and requires
only data collection, analysis and reporting activities to be undertaken by the licensing authority.

9.5    Conclusion – expected outcomes of adopting the recommendations

The Commission believes that the adoption of a licence fee of $40,000 plus GST for metropolitan
hire cars and $15,000 plus GST for country hire cars would allow for greater entry to and
competition in the industry. The promotion of competition within the hire car industry is expected
to generate benefits for consumers in the form of more competitive fares, wider choice and
improved services.

The expected number of new entrants cannot be predicted. However, the fact that the VTTD has
received 25 applications for metropolitan licences since gazettal of the current fee indicates that
there is clear interest in establishing new businesses in this industry. The reduction of the fee to a
level below the medium term market value of licences to date should encourage this interest.

The Commission believes that level of entry to the industry should be sufficient to encourage the
formation of larger business units, or networks, that are better able to compete for telephone
booked ‘on-demand’ or immediate dispatch services and thus provide increased competition to
taxis, as foreshadowed by the Government’s reform package. Enhanced competition in the
prebooked segment is also expected to generate benefits for consumers in other segments of the
overall market for commercial passenger vehicle services. It is considered likely that a reduction
in the licence fee of the amount recommended will at least stimulate a commencement of these
competitive changes in the wider market for passenger vehicle services. However, it will be
important for the foreshadowed further review of the licence fee, to be conducted in three years
time, to consider these competition issues further and to ensure that they are a central consideration
in developing recommendations regarding the appropriate future level of the licence fee.

The Commission believes that a further benefit of the adoption of these recommendations may be
to improve the availability of hire car services in regional areas. There has, in effect, been no
possibility of any such improvement since the announcement of the 2002 reform package, since the
former arrangements for licence issue have not been replaced by new arrangements to date. The
Commission suggests that if its recommendation in relation to the level of the country licence fee is
accepted, the Government should give consideration to the merits of more direct arrangements for
ensuring the ongoing provision of specialist passenger vehicle services (including to the disabled)
and the fulfilment of community service obligations by regional service providers.



                                                    67   Essential Services Commission, Victoria
                                                    Final Report – Hire Car Licence Fees Review



The former application of the public interest test, when combined with apparently lower levels of
demand for hire cars in regional areas, has meant that there has been little possibility of new entry.
By contrast, the availability of new licences at a specified (and relatively low) fee is expected to
allow new, innovative and efficient services to be offered and greater dynamism and competition
to result.

The Commission also believes that implementation of the recommendations in relation to
improved transparency, accountability and predictability in the regulatory administration would
improve confidence in the industry and underpin its further development.




                                                    68   Essential Services Commission, Victoria
APPENDIX 1 TERMS OF REFERENCE

                                  Transport Act 1983
                    Notice of Reference Under Division 9 of Part VI
                           Review of Hire Car Licence Fees

To:    The Essential Services Commission
       Level 2, 35 Spring Street
       Melbourne

Background
1.    Under Division 9 of Part VI of the Transport Act 1983, the Minister administering the Act,
      may by written notice refer any matter relating to licence fees for hire car licences or special
      purpose vehicles to the Essential Services Commissioner to conduct an investigation into that
      matter.
2.    The Minister desires the Commission to review the current licence fees and to report its
      finding and recommendations to the Minister.
Consideration of Matters
3.    The Commission is to investigate and report on:
      (i) the appropriateness of the current level of the hire car licence fee in relation to its
            effectiveness in meeting the objectives of the package of reforms;
      (ii) the means of determining the administrative process for setting the licence fee in the
            future; and
      (iii) the timing of further determinations or reviews of the licence fee that should occur over
            time.
4.    I specifically direct the Commission to have regard to the following factors:
      (i) the impact on the industry and consumers and the community in general; and
      (ii) regional issues, including accessibility of services in regional Victoria.
5.    In conducting the investigation the Commission should have regard to the objectives in
      section 8 of the Essential Services Commission Act 2001 where relevant.
6.    Except as otherwise directed by this notice, the Commission is to conduct the investigation in
      a manner described in section 187 of the Transport Act 1983.
7.    I direct the Commission to submit its report to me by 1 August 2004.


Hon. Peter Batchelor MP
Minister for Transport
Minister Administering the Transport Act 1983

5 February 2004
APPENDIX 2 VICTORIAN HIRE CAR LICENCE CONDITIONS

                                      TRANSPORT ACT 1983

                            DEPARTMENT OF INFRASTRUCTURE

                                     Victorian Taxi Directorate

CONDITIONS GOVERNING THE OPERATION OF COMMERCIAL PASSENGER
VEHICLES CLASSIFIED AS METROPOLITAN HIRE CARS UNDER SECTION 145 OF
THE TRANSPORT ACT 1983.

1.      The licence holder must ensure that the driver of the licensed vehicle is aware of the
        conditions contained in this document.

2.      The licensed vehicle must:

(2.1)   be operated for the carriage of passengers only when:

        (a) a booking has been made at a time prior to commencement of the hiring; and

        (b) the hirer has arranged for the licensed vehicle to attend at a specified address or location
        to pick up the hirer or other passenger/s; and

        (c) the licensed vehicle is required to travel to that address or location in order to fulfil the
        hiring; and

        (d) in the case of a passenger/s arriving at Melbourne Airport by airplane, a booking has
        been made prior to the arrival at Melbourne Airport of the flight carrying that passenger.

(2.2)   comply with vehicle standards and vehicle age criteria specified by the Victorian Taxi and
        Tow Truck Directorate;

(2.4)   be registered in the name of the licence holder;

(2.5)   be managed and operated from the address specified on the licence;

(2.6)   be maintained to a high standard of presentation and a certificate of roadworthiness must be
        obtained for the licensed vehicle from a Licensed Taxi Tester (LTT) at intervals not
        exceeding 12 months and supplied to the VTTD within 28 days of the date of issue of that
        certificate.

(2.7)   display distinctive registration plates (eg. 'VHA’ or ‘VHB’) or alternative hire car
        identification as specified by the VTTD.

(2.8)   not be fitted with any fitting or equipment, either inside or outside the vehicle, other than
        those required or permitted by legislation, regulation or licence conditions, without the
        approval of the VTTD.
3.     The licensed vehicle is permitted, subject to conditions (2.1), to carry passengers to and
       from any place within the State.

4.     The licensed vehicle must be managed and operated by, or under the direct control of, the
       licence holder.

5.     Other than by the transfer of the licence approved by the VTTD under section 149 of the
       Transport Act 1983, the right to operate the licence must not be assigned, leased or by any
       other means transferred to the control and management of any other person.

6.     Hiring rates must be by agreement with the hirer made prior to the commencement of the
       hiring. The hiring of the licensed vehicle must be for the exclusive use of the hirer or
       passenger/s on whose behalf the hiring has been made.

7.     A Multi Purpose Taxi Program membership card must not be used, accepted or processed
       for any payment or part payment for a journey made in the licensed vehicle or for the hire
       of the licensed vehicle.

8.     Accurate records must be maintained of all hirings undertaken by the licensed vehicle.
       Records of hirings must include, but are not limited to, the name, address and telephone
       number of the hirer/passenger/s, pick-up address of the passenger/s, set-down address of
       the passenger/s, date and pick-up time for the hiring and the name and drivers’ certificate
       number of the driver undertaking the hiring and, in the case of passengers alighting from
       aircraft, the flight number applicable to that passenger’s arrival.

9.     The licence holder and driver must ensure that a diary containing details of the current
       hiring and any future bookings to be undertaken by the licensed vehicle is carried in the
       licensed vehicle at all times. The diary must:

       •   contain bound pages and have a protective cover;

       •   contain full records of hirings as specified in clause 8;

       •   be legible and kept in the English language; and

       •   be produced for inspection upon demand to an Authorised Officer or member of the
           police force.

Diary records must be made available for inspection upon demand to an Authorised Officer or
member of the police force. The licence holder or driver must, within a reasonable time, if asked
by an Authorised Officer or member of the police force give that officer or member an accurate
copy of the diary records or permit the officer or member to make a copy of those records.

Diary records relating to completed hirings must, if not being carried in the licensed vehicle at the
time, be held for a minimum of three (3) years at the address specified on the licence.

10.    If the licence is held by an incorporated body, the company must notify the VTTD seven
       (7) days of any change of personnel who constitute the directors of that company.
11.   Promotional signage may be displayed on the licensed vehicle subject to the following
      conditions:

      •   Placement

          Signage is permitted only in the following locations on the licensed vehicle:

          •    Rear Window

               either within the top 200mm or the lower 100mm of the available rear window
               glass. Signage is not permitted on both upper and lower sections.

          •    Front Door

          •    Number Plate Frames

               only on frames of a general standard appearance.

      •   Dimensions

          •    Letter /number height must not exceed 50mm

      •   Approved Content

          •    company/licence holder name;

          •    company logo/trademark;

          •    website address; or

          •    landline telephone number of the licence holder’s operational address as per
               conditions of licence (mobile numbers are not permitted)

      •   Print Style/Quality

          •    all signage must be of a professional standard and maintained to a high level of
               presentation.

          •    Other Approved Signage

          •    VHCA membership stickers (approx 7cm diameter) mounted on the front
               windscreen are approved, but must be located adjacent to the registration label.

      •   Conditions

      Licence holders must ensure that:

          •    rear window signage does not interfere with the driver’s view through the rear
               vision mirror;
•   signage is completely clear of, and does not impede the line of vision of the
    vehicle’s brake light operation from the rear;

•   any signage does not imply that the vehicle is licensed to be hired off-the-street or
    by direct booking with the driver; and

•   no other signs, stickers, labels or markings, other than those required or permitted
    by legislation, regulation or licence conditions, are displayed internally or
    externally on the licensed vehicle without the approval of the Victorian Taxi
    Directorate.
HIRE CAR AGE AND TYPE REQUIREMENTS

     TYPE OF VEHICLE                                                       VEHICLE FIRST                               VEHICLE FIRST
                                                                           LICENSED AS A HIRE                          LICENSED AS A HIRE
                                                                           CAR PRIOR TO 1                              CAR ON OR AFTER 1
                                                                           JANUARY 2004 NOT TO                         JANUARY 2004 NOT
                                                                           BE OPERATED BEYOND                          TO BE OPERATED
                                                                           AGE                                         BEYOND AGE
                                                                           (Years from date of                         (Years from date of
                                                                           manufacture)                                manufacture)

     Imported High Luxury Vehicles:
     (Rolls Royce, Bentley or other approved vehicle)                                         25                                       25

     Imported Luxury Vehicles with Wheel Base of 3100mm
     or longer:                                                                               15                                       15
     eg. BMW 745Li, 760Li; Mercedes S500, S600 or SEL                                        (17)                                     (17)
     models
     Imported Luxury Vehicles with Wheel Base between
     2800mm and 3099mm:                                                                       8                                        10
     eg. Mercedes S320, S420 or SE models; BMW “5”                                           (12)                                     (12)
     series & 735i, 745i
     Stretched Vehicle Limousine*
      (seating up to 12 people including driver):
     - Imported Luxury i.e. all models                                                        25                                       25

     - Australian Ford LTD, Holden Caprice                                                    12                                       12
                                                                                                                                      (15)
     - Australian Ford Fairlane, Holden Statesman                                             12                                       12
                                                                                                                                      (15)
     Australian Luxury:
     - Ford LTD and Holden Caprice                                                             6                                        7
                                                                                             (10)                                     (10)
     - Ford Fairlane and Holden Statesman                                                      5                                        5
                                                                                              (8)                                      (8)
     Other Vehicles:
     A vehicle (not listed above) which is designed to carry a                                5                                         5
     load of less than 2 tonnes and has a total seating                                      (8)                                       (8)
     capacity for less than 9 people including the driver, and
     which has a manufacturers’ recommended retail price
     (without optional extras) that is greater than the luxury
     car tax threshold (i.e. $55,134) that applies under the A
     New Tax System (Luxury Car Tax) Act 1999.

NOTE:

1.        Any vehicle licensed as a Hire Car must have a minimum wheel base length of 2800mm.

2.        Age limits are calculated from the date of the vehicle manufacturer's original compliance date. Age limits in ( ) apply to hire cars
          operating under VHC registration plates on 31 December 2003. Vehicle Identification Number will be used to verify vehicle
          eligibility for pre-2004 age limits, not registration plate number.

3.        *A stretched limousine must be based on a vehicle which would be acceptable for licensing as a hire car in its original configuration.
APPENDIX 3 ESTIMATING THE MARKET PRICE OF A HIRE
           CAR LICENCE

Available data indicate that there has been a degree of historical volatility in metropolitan hire car
licence values. That is, the average values at which licences change hands have varied
significantly from year to year and even from month to month. As well, there is significant
dispersion in the prices at which licences change hands even within the same time period.88 This
latter observation probably reflects the lack of widely available information on licence trades and
indicates a less than fully efficient market for hire car licences.

Given the volatility and uncertainty as to licence values, it is clear that an attempt to set a fee based
on a notional market price, as undertaken at the time of the announcement of the reform package
would necessarily have to involve determining an average of observed prices over a given period.
According to the Department of Infrastructure’s website, the licence fee is:

        “…based on the average price for a licence on the open market during the previous 12
        months.”

However, a review of data provided by the VTTD does not support this statement. The licence fee
was gazetted in January 2004. According to the VTTD data, the average price at which
metropolitan licences were traded in the secondary market during the previous twelve months (i.e.
during calendar 2003) was $52,089.

Alternatively, it can be speculated that this reference to the basis for calculating the fee referred in
fact to the average price during the twelve months prior to the announcement of the reform
package in May 2002, with the extended delay in VTTD gazetting the fee leading to the situation
in which the fee was above the market price as determined when put into effect. This possibility is
lent weight by the fact that VTTD’s proposal, distributed in June 2003, stated that:

        “The Licence Issue Fee for metropolitan hire car licences has previously been set at
        $66,000 (inc GST).” 89

However, calculation of the average price of licences in the twelve months prior to the
announcement of the reform package (i.e. second quarter 2001 to second quarter 2002) yields a
price of $51,424 – almost identical to the above calculation for calendar 2003 and also
substantially below the licence fee.



88
        For example, data supplied by VTD indicate that the sale prices of metropolitan licences during the second quarter of
        2002 varied from a low of $25,000 to a high of $70,000.
89
        Proposal: Reviewed Licensing Arrangements. Hire Car Licence Conditions. Transport Act 1983. Department of
        Infrastructure, Victorian Taxi Directorate, June 2003, p.9. Note that this document does not provide information on the
        means by which the fee was determined. Nor does it state when the fee was determined.
Moreover, even a longer term view of market prices for metropolitan hire car licences yields a
similar outcome. The average price of licences in the three years to end-2003 (i.e. in the three
years immediately prior to gazettal of the fee) was $53,049, again similar to the two averages
calculated above. Thus, the conclusion is inescapable that, for whatever reason, the current fee
was gazetted at a level that is significantly above both the market price as defined by the regulator
and most other feasible definitions of the market price.

The Commission has sought to understand how the fee of $66,000 might have been arrived at in
practice. A review of longer term data indicates that licence values reached a peak during the last
three quarters of 1999 at levels that were substantially above those seen either before or since.
Average values during this period were in the range $74,000 to $80,000. If a four year average is
constructed to include this peak period, an average price of $61,350 results. This represents the
largest possible average price that could be constructed and is near the licence fee that was
ultimately gazetted.

However, such an approach is an inappropriate one to take in setting a market price, as is indicated
clearly if a longer term perspective on licence values is taken. The NCP review of the taxi and hire
car industries undertaken in Victoria notes that hire car licence values were as low as $20,000 in
1995 but had risen rapidly by 1998. Subsequent data indicates that these values have fallen back
substantially leaving the 1998-9 values to be seen as peaks that are at odds with the longer term
trend in values. Thus, selecting a time period that incorporates these values was always an
approach that was bound to over-state market values.

In the circumstances described above, there was never any real possibility of significant entry
occurring, even disregarding the failure to gazette the new fee until January 2004 (i.e. twenty
months after the announcement of the reforms).

By contrast, review of the average values at which licences were traded on a monthly basis
indicates that the market price of licences has risen to meet the current fixed price in recent
months. This has meant that it is now potentially attractive to purchase a licence at the fixed price,
whereas this was not previously the case.

Implications for future entry

The observation of a small number of applications for licences at the current issue price in recent
months raises the question of whether this price is potentially consistent with the Government’s
objective of ensuring that there is increased competition in the industry. Submissions to this
review provided little information regarding the factors driving demand in the industry, although
the importance of certainty and stability was emphasised. However, no information was provided
on the specific issue of the reasons for the apparent recent increases in the market price of hire car
licences.

It can be speculated that the gazettal of the fee has itself had the effect of increasing the market
price, providing a perceived floor by indicating that Government is prepared to support or validate
such a market value. To the extent that this is a factor in the recent increase in licence values, it is
likely to be a transitory one. In the longer term, the fact that industry participants who do not
receive sufficient flows of revenue to underpin such a price will lead to it falling away to a level in
line with its true value.
Alternatively, it is possible that other, demand based factors, have supported the observed recent
rises in licence values. Again, no evidence is available to this review as to the nature, or indeed the
existence, of any such factors. This renders it impossible to predict with any confidence whether
such increased values would be likely to be maintained in the medium term. However, review of
the evolution of licence values over the medium term indicates that there is significant volatility,
but little evidence of a clear and sustained upward trend. This being so, there must be significant
doubt that the market value would, in the absence of changes to the existing new licence issue
price, remain above $66,000 in the medium term.

In sum, both of the potential explanations of the recently observed rise in licence values discussed
above are potentially transitory in nature. To the extent that they are transitory, and the price again
dips below $66,000, it is expected that new entry – which in any case has scarcely begun – would
probably cease.

Is goodwill reflected in licence values?

The Commission raised the issue of the small number of licence trades occurring in the secondary
market at prices above the $66,000 issue fee in its Issues Paper and, in particular, posed the
question of whether such trades tend to demonstrate that an element of goodwill is priced into
licence values. A limited number of submissions addressed this question and generally argued in
the negative. It was stated that few businesses were able to obtain a value in respect of goodwill on
sale, due to the nature of the industry, but that where such a value was received; it was generally
accounted for separately from the licence purchase price in the sale arrangements. For example,
the submission of the VHCA to the Issues Paper stated:

       “Existing licences are sold as a licence only. The goodwill/client base of a particular
       business is sold separately in addition to the value of the licence. [but]…few operators
       are able to build secure business in order to onsell their goodwill.”

However, while these submissions rejected the suggestion that goodwill formed part of the licence
price, they did not advance any alternative explanation for the observation of people paying more
in the secondary market for a licence than they would be required to pay to the regulator for the
purchase of an identical product. In two cases, the premium paid for a licence (over the gazetted
issue price) reached $9,000, or 13.6 per cent.

The Commission has conducted closer scrutiny of the licence transfer data and notes that it shows
that both of these transfers at $75,000 occurred in January 2004, while the two transfers that
occurred at $70,000 occurred in February 2004. This seems to suggest that the premium arose
because the trades occurred either prior to the gazettal of the fee or prior to industry participants
becoming aware of that gazettal. In this context, it is noted that several submissions to this review
indicated that VTTD had not informed them of the gazettal of the fee until March 2004, when they
were also required to inform them of the commencement of the current review. Thus, it is
probable that the observation of licence trades at prices above the regulated fee reflected a lack of
information regarding the availability of licences from the regulator at that fee level, rather than
goodwill, as previously hypothesised.
APPENDIX 4 REVIEW PROCESS AND KEY DATES

The terms of reference required the Commission submit its report to the Minister for Transport by
1 August 2004. Following the consultation on the Draft Report, the Commission wrote to the
Minister and requested a one month extension to the review. The process for completion of the
Final Report was as follows:

Notification of Terms of Reference to stakeholders                     9 March 2004

Release of Issues Paper                                                7 April 2004

Final Date for Submissions to Issues Paper                             30 April 2004

Release of Draft Report                                                21 June 2004

Final Date for Submissions to Draft Report                             12 July 2004

Submission of Final Report to Minister                                 1 September 2004

				
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