Government U-turn?  (21/7/2004)

Opinion:  The Government's response to the OFT was encouraging for plateless taxi drivers, but the more recent evidence is less positive.

While the Government's fudged and contradictory response to the Office of Fair Trading's de-limitation recommendation was always difficult to analyse in terms of its intent, the more recent evidence arguably points towards maintaining the status quo.

To recap, while the Government ultimately left the decisions on whether to operate restricted number policies to local authorities, at the same time it appeared to give a fairly clear signal that it did not like these policies and would like to see them dismantled.  Two of the signal passages in the Government's OFT response were:

"The Government agrees that consumers should enjoy the benefits of competition in the taxi market and considers that it is detrimental to those seeking entry to a market if it is restricted. The Government is therefore strongly encouraging all those local authorities who still maintain quantity restrictions to remove restrictions as soon as possible."

"The Government itself will review in association with the OFT the extent of quantity controls in three years' time to monitor progress towards the lifting of controls. If necessary, the Government will then explore further options through the RRO or legislative process if insufficient progress has been made."

Thus, although the Government's stance on quantity controls seemed to somewhat contradict its decision to allow local authorities to implement or maintain them, in a nutshell the message seemed to be, de-limit or else we'll do it for you.

However, there is some evidence that the Government's push for de-restriction may not in fact be as concrete as the above passages seem to suggest.

First, a point which may be of little relevance at all, is that the DfT's letter to local authorities on the Government's Action Plan did not reiterate the detriment to 'those seeking entry to the market', which the Government had in fact expressed in slightly stronger terms in its response to the Transport Committee's report:

"The Government...considers that it is detrimental to to those seeking entry to a market (in this case would-be taxi license holders) if it restricted without justification that is apparent to all."

"The Government considers that it is wrong in principle to restrict entry into a market and refuse a taxi license to those who can meet all the local requirements to hold such a license."

While this omission may be insignificant (and, indeed, the text of the Government's Action Plan is included as an appendix to the letter), it is slightly disappointing that this issue has not been highlighted, since our own personal anathema to restricted numbers policies was born of personal detriment, although we do of course appreciate the consumer perspective as well.

More disappointing was the Parliamentary debate on the issue, where Transport Minister Tony McNulty did not really make the Government's case against restricted numbers in the way that the highlighted statements above might have suggested he would.  Although our conclusion in this regard relates more to he general tenor of the House of Commons exchanges rather than any particular statement by Mr McNulty, a couple of examples may serve to lend weight to our analysis.

For example, in response to a suggestion by ex-London taxi driver Mr Clive Efford that the Government should have asked unrestricted councils whether they should restrict taxi numbers, Mr McNulty replied that that would not have been within the remit of its response to the OFT report, but why didn't he say that the Government disagreed with the policy in principle, which after all it did say in its response?

Most disappointing of all is Mr McNulty's description of the process that has taken place in Brighton as 'exemplary'.  Even laying aside the point that this assumes that restricting numbers is acceptable in principle, to describe the Brighton process in this way seems a tad optimistic.  For example, despite misleading claims by the T&G about regular surveys, none had not in fact been conducted for over a decade until a couple of years ago - indeed, no survey at all had been conducted since Brighton and Hove councils amalgamated in 1997.

Moreover, the DfT's letter says that high plate values would seem to indicate that there is significant unmet demand, whereas the relatively small numbers issued in Brighton subsequent to the survey appear to have done little more than check plate premium growth in the city, which while not the highest in the country, should surely be categorized as 'high' at pushing £40,000, up perhaps £5,000 since prior to the survey and the OFT process.

Has any survey ever resulted in a significant impact on plate premiums?  Probably not, with even the apparent policy in Manchester of issuing new licenses in excess of that required to satisfy unmet demand resulting in nothing more than ballooning plate premiums.

Thus if the old-style surveys of the type conducted in Brighton are all that are required to satisfy the Government then this should have little impact on plate values, thus somewhat contradicting the DfT's position on how premiums relate to unmet demand.

As we have claimed in the past, these surveys seem to do little more than endorse the status quo in relation to taxi numbers, and the huge growth in private hire numbers in Brighton appear to confirm this - they have largely responded to growth in the market meaning that when surveys are conducted any unmet demand found is insignificant.

Thus the market becomes progressively more distorted; since taxi and PHV conditions in Brighton are largely similar, and to that extent there would be little in the way of a PH sector there at all but for restricted taxi numbers, symptomatic of the distortion is that PH and taxi numbers are now broadly similar, with PH numbers having more than doubled in the last decade and a half or so, with taxi numbers largely static.

Another point is that high fare levels can be used to mitigate unmet demand by stifling customer demand and making it more attractive for journeymen drivers, who in turn pay inflated rentals which feed through to plate premiums.  In this regard it is interesting that despite being a reasonable distance from the capital and in the main allowing the trade to run cheap saloon cars, Brighton affords the trade fare levels similar to those in London - no wonder plate premiums are so high.

The debate again demonstrated the the limited knowledge of the trade possessed by MPs, and while Gwyneth Dunwoody (for example) spent a lot of time excoriating the contents of the OFT report, her own evidence and that of other MPs could certainly be characterized as 'dodgy', but more 'back of the envelope' than 'dossier'.  While a full analysis of the debate would be pointless, a handful of examples should suffice to illustrate the point.

Mrs Dundwoody made great play of the fact that taxi firms in Crewe that previously provided a 24-hour service on 'an equal basis' did not do so after de-limitation.  But what exactly is being provided post-delimitation is unclear.  And what is meant by 'on an equal basis'?  The same number of taxis operating 24 hours a day?  This would be preposterous.  In fact what Mrs Dunwoody describes post-de-restriction is probably the norm throughout the country, with or without restricted numbers:  "...following the issuing of large numbers of taxi licenses, the emphasis was on providing lots of taxis at the times when there were lots of people available, but not on an equal basis right across the 24-hour period.  So, if someone required a taxi late on Friday, Saturday or Sunday night form one of the well known centres of entertainment, there would probably be a large number of taxis available...However, those services were not necessarily being provided at unpopular hours."

So de-limitation in Crewe has resulted in a 24-hour service disappearing?  Well, Mrs Dunwoody doesn't actually say that, but if that is the case then our experiences suggest that this issue is not really related to quantity controls.

However, Mrs Dunwoody's analysis does seem to contradict some of the claims made by the vested interests in the trade about a lack of availability at times of peak demand that would follow from de-limitation.

Also interesting were comments by Plymouth MP Linda Gilroy, who outlined the plight of private hire drivers in the city.  This was because of fleet operators putting people through driving schools when there is no work for them.

Ms Gilroy is right to point this out, but isn't this exactly how the taxi trade works?  In our experience taxi owners (whether fleet or individual or restricted or not) will collectively take on any number of drivers who want to work for them, with numbers and thus earnings effectively decided when the saturation level described by Ms Gilroy is reached.  That restricted numbers boosts the earnings of taxi owners does not mean that plateless drivers are any better off, and the fact that many prefer to drive their own PHV rather than jockey a taxi is symptomatic of this.

Indeed, as we have again pointed out previously, there are plenty of cases of taxi plate holders attempting to make it easier for drivers to gain taxi badges, thus driving down wages, but in turn helping to eradicate any unmet demand and thus maintaining restricted numbers.  Brighton is again instructive, with past attempts to water down the knowledge test to suck in more drivers to the trade, like the private hire sector in Plymouth, and indeed throughout the country.

Of course, the complaints from Ms Gilroy's constituent may well be the usual self-serving nonsense spouted by those who, when they get a badge and/or plate, then try to close the doors to anyone else; the figures contained in the constituent's letter certainly look very suspect: "...in two years I have lost between £250-£300 per week...".  This cannot mean that the driver is making losses of such magnitude each week, so does it mean a drop in takings of this order?  If so then presumably there is a significant causal factor that was not disclosed.

Ms Gilroy also quotes from a Financial Times article by John Kay published subsequent to the OFT's report, which she seems to use to justify the continuation of restricted numbers.  She quoted from the article as follows:

The potential profit a taxi driver might derive from restrictive licensing through higher fares and fuller cabs is absorbed in the costs of servicing the loan needed to acquire the licence. Today's taxi drivers are no better off than if restrictions on numbers of cabs had never been introduced. [...] If drivers do not gain, and passengers lose, who does benefit from quantity licensing? The gains go to the people who were in the business when the restrictions were introduced, or started to bite.

This seems a rather superficial view, however.  For a start, it seems to assume that all licenses in restricted areas have been acquired for a premium, which is obviously not the case.  It also seems to say that, for example, someone who bought a plate for £5,000 in an area where plates are currently worth £40,000 has gained nothing, and that the only gains were made by the individual who received the plate for nothing then sold it for the £5,000.

Indeed, Mr Kay seemed to contradict himself in this regard when he said that in New York as the market became more distorted the original medallions holders made capital gains, but why should subsequent purchasers not make such gains, as outlined above, since there is nothing to stop further 'excess profits' accruing subsequent to the original license holder selling it on.  Indeed, as we all know, UK plate holders are still making substantial real terms gains irrespective of whether they have received the license gratis, or a substantial time ago for a relatively small sum, or fairly recently for a substantial sum, the hiatus during the OFT uncertainty excepted.

Another fundamental point is that even assuming that in excess profit terms the market remains static, that is not to say that purchasers at the full price do not gain.  Returns on plates are high, presumably to reflect the uncertain nature of the arrangement, and to that extent anyone investing in a plate will be 'quids in' unless the plug is pulled on restricted numbers within a relatively short period.

Indeed, this is presumably what was alluded to in a 2000 article in the Irish Times by John Fingleton, chairman of Ireland's Competition Authority, who has studied the Dublin taxi market in great depth:

"First, anybody who has owned a licence for more than five years has had the potential of bumper returns by virtue of the constant queues of passengers."

"Second, those who purchased a licence in the past five years clearly knew the risk because new entry was likely. In effect, they placed a bet on a horse called monopoly, and the State should not pay out on losing bets."

Mr Kay's article was particularly interesting in that it was the only press comment by an academic economist during the OFT process that we are aware of.

But, apart from the above, his article did seem to demonstrate a certain pro-restricted numbers bias.  For example, he seems to imply that de-restriction is effectively impossible, but of course while there may be arguments against this in terms of fairness, legally there is nothing to stop de-restriction in the UK, as many local authorities have and continue to demonstrate.  And why should those who have recently bought a plate at values greater than those pertaining before OFT be allowed to view this as a one-way bet, when the Government's OFT statement clearly heralded a period of great uncertainty?

My Kay also mentioned the past Dublin plan to give an additional plate to incumbent license holders, but failed to say that numbers in Dublin were in fact de-restricted eventually.

However, Mr Kay did at least conclude that these policies should never have been introduced in the first place, which should at least give Mr Efford and Ms Gilroy food for thought.

But while these more technical arguments are obviously of great import, the immediate issue is clearly the direction of Government thinking on restricted numbers and how its Action Plan will influence current practice.

While the process should result in restricting authorities at least meeting their minimum legal obligations, if the Brighton scenario is being held out as a model then in terms of numbers and plate premiums little should change except the 'managed growth' in plate premiums, and the tone of the Commons exchanges suggest that the Government's threat to legislate on the issue was little more than sabre rattling.

Of course, our interpretation of this could be completely wrong, particularly since discerning a U-turn or even a slight change of course is difficult when even the initial direction of travel was unclear.

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