The Victorian Parliament has passed legislation that will introduce Australia's most open and competitive commercial passenger vehicle market. Changes will be gradually rolled out from October 2017.

Taxi, hire car and rideshare services will operate under an aligned set of rules. Licence fees for taxis or hire cars will no longer be a material barrier to entry. Restrictions on taxi fare setting will also be gradually removed in a later tranche of legislation.

There will be accreditation of all drivers including rideshare drivers, which involves police checks. There will also be a greater emphasis on operators being held to account for driver training and education.

A $1 per trip levy on vehicle operators will finance a transition package, as well as the ongoing provision of accessible point to point transport services.^

Comment by Warwick Davis, Frontier Economics transport team

Victoria’s reforms are indeed the most far-reaching of those adopted in Australia. By eliminating barriers to obtain either taxi licences or ride sharing licences, the reforms offer choice to operators of vehicles and allow the continuation of technological innovation in the non-taxi vehicle segment. Equally, they also allow for rapid expansion of taxi fleets. There are no longer ‘special protections’ for taxis, although there will continue be stronger regulatory requirements on taxis relating to livery and safety (e.g. cameras).

While the future success of low-cost ride sharing seems secure, the path for the improvement of Melbourne’s taxi services is much less clear. In our view, industry and government responses to two issues will determine the viability of the taxi industry.

The first is how well taxi operators can co-ordinate their fare setting. At face value, giving taxis the right to set their own fares seems reasonable, and necessary to compete effectively with other forms of transport. Taxi industry representatives have already flagged a surge pricing scheme to allow “differentiation” and to address price gouging by ride sharing competitors.

Giving taxis the freedom to set charges when they are sitting at ranks or hailed on the street is unlikely to lead to reasonable fares.# Where consumers face costs in finding a substitute, all rank and hail taxis will set high prices regardless of demand or the quality of their taxis. In turn, this will lead to large numbers of high cost, poor quality taxis on Melbourne’s streets.

One answer to this problem is to let taxi networks – which facilitate taxi booking – to act as a central fare setter. This would provide consumers with a low-cost means of gathering information and a means to avoid “rip offs” by individual taxis. Setting fares in this manner requires coordination between taxis, some of which may be considered illegal under the Competition and Consumer Act 2010 (Cth) because it involves agreements between potentially-competing taxi operators. Coordination on fares is no small challenge. There are thousands of taxi operators connected to the major taxi networks.

A second answer is to modify existing infrastructure which services taxis and their passengers to be more conducive to competition. Taxis have traditionally been procured in ways that are inherently non-competitive – through a ‘first in, first out’ taxi rank or hailed from the street.  The market for hails seems more likely to be competitive with consumers able to use apps to choose non-taxis. At ranks, however, there is little choice. Either consumers will have to be prepared to exercise choice at ranks, or the rank designs will have to change to facilitate choice and provide a reward to those taxis that offer lower prices or higher quality. Without changes, how long can taxis expect to retain privileged positions at facilities such as Melbourne Airport, Crown Casino and the CBD?

The next few years will be critical to determining whether there is a viable taxi industry, or whether – like the horse and buggy – traditional taxis will be swept away in a tide of cheaper and better transport options.

^ Frontier Economics advised the Department of Economic Development, Jobs, Transport and Resources on the economic implications of different licensing reforms in the taxi and small commercial passenger vehicle market.

# The Essential Service Commission’s 2016 review of taxi fares raised some of the issues with deregulating taxi fares. Frontier Economics advised the Commission on that review.

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