To licence or to not licence

To licence or to not licence, that is the question the NSW government seems to have asked itself according to todays SMH. And at least for some professions the government seems to have concluded “why bother”.

Under the bill, expected to be debated in the upper house today, pre-purchase property inspectors, kit-home suppliers, lift mechanics and floor finishers and coverers will no longer be required to be licensed in NSW.

The Greens are upset.

“Licensing is an important mechanism to protect the public from dodgy operators,” the Greens MP John Kaye said. “It makes it easier to obtain redress for poor quality work. It is the first line of consumer protection.”

Perhaps. I operated in business for 10 years in an unlicensed profession (IT professional) and I’m far from convinced that licensing has much to offer either to consumers or to practitioners.  I’m inclined to see licensing as mostly just an added cost of business which is ultimately paid for by consumers. If consumers want licensed operators there are in any case voluntary professional associations that do much the same thing in terms of certifying credentials and the like.

But maybe I’m just biased. What should be a much easier cost benefit analysis, in regards to licensing reform, is the taxi industry. Even if we kept licensing for taxis the cost of obtaining a government taxi license* should not cost more than constructing a new house. Perhaps the government and the Greens could take a look at that regulatory stuff up. There is no public policy defense for taxi licences being so expensive.

* $390,000 for NSW in Feb 2008 – http://www.dpi.wa.gov.au/taxis/19458.asp

24 thoughts on “To licence or to not licence

  1. The experience of taxi reform in the Northern Territory and in New Zealand outlined in the following article are informative.

    http://www.taxi-library.org/ncc01.htm

    The article is dated however it suggests that buying back taxi licences in NSW would cost $1.3 billion. It also suggests that the cost of leasing a licence absorbs about 1/3 of the revenue that operators raise through fares. It would seem to me that an easy initial reform option would be for the government to buy back the licences at market value and rent them out to operators for a monthly fee.

  2. Licensing is just an excuse to protect those already in the industry and drive up the prices of cabs. I don’t understand why taxis even have to be licensed, it is not exactly a job where you need specialised knowledge. Abolishing licenses would probably end up both driving the price of taxi hire down and giving more money to the actual drivers themselves.

    (I’m reminded of Walter Block’s chapter on gypsy cabs in Defending the Undefendable.)

  3. “Licensing is just an excuse to protect those already in the industry and drive up the prices of cabs. I don’t understand why taxis even have to be licensed, it is not exactly a job where you need specialised knowledge.”

    No, see my remarks on the area here. That doesn’t go into the even better approach that TerjeP identified with “If consumers want licensed operators there are in any case voluntary professional associations that do much the same thing in terms of certifying credentials and the like”; however that isn’t quite correct as it stands. Sometimes, those associations aren’t or weren’t around quite when needed, or have been crowded out by regulatory bodies. The latter means state systems need careful phasing out to allow voluntary systems to come back without creating an uncovered gap.

  4. Hong Kong has 18138 taxis and population of 7.02 million.

    378 people per every taxi. I think Australian towns ans cities can be as bad as 2000 people per taxi.

    Yet we have high structural unemployment. People would work if only they were allowed to do so.

    Another thing – workers are generally paid better if the industry is more competitive, or at least open to competition. Incomes are likely to rise. Returns to owners are likely to increase if we cut taxes and encourage economies of scale.

  5. “Careful” or more to the point “protracted” phase out plans don’t seem to work that often. A minister could implement rapid reform as follows:-

    1. Buy back taxi licences at the market price.
    2. Charge a monthly government fee for new taxi licences at roughly the old lease rate (ie a taxi tax) and issue licences to all that will pay.

    Then over time the debt on the buy back should be paid down and the new taxi tax should be decreased.

    Note that taxi licences are different to taxi drivers licences. The former is for the plate that allows a car to operate as a taxi whilst the latter certifies the driver.

  6. No, TerjeP, that would miss the point of a proper transition. It wouldn’t have the taxi drivers’ professional associations stepping in to take up the slack by providing their own certification of safe (i.e. not opportunistic mugger) drivers – before the old system ended.

    Your note in that last paragraph identifies one of the areas in which the authorities have lost the plot and are using licensing for other purposes (revenue) than the public purpose originally supplied.

  7. I operated in business for 10 years in an unlicensed profession (IT professional) and I’m far from convinced that licensing has much to offer either to consumers or to practitioners

    Yes, but in IT we also have things like certification. I found it difficult to get work without an MSCE (I’m more of a *NIX person), though I suppose that’s the difference between a private certification and a state licensing system

  8. “I suppose that’s the difference between a private certification and a state licensing system”

    Yes, that’s the whole point. If people want accredited taxi drivers/cars then the market can provide it, just like it provides MCSE certificates. The government’s enforced requirement for taxi licencing has created shortages of taxi services all over the place. Try going out in Newcastle or Fremantle and getting a taxi home late at night. I still have the business card of a black market taxi I’ve used when I’ve been in Newy. In Sydney it’s bad enough as well – I’ve walked to North Sydney multiple times in the middle of the night to get a taxi home because there were people everywhere competing for the few taxis driving around in the city.

  9. “1. Buy back taxi licences at the market price.”

    How would this price be determined precisely?

    I’d be tempted to announce that unlicenced taxis will be allowed to compete with licenced ones after a certain date and let the market discount the licence value (a lot of people would prefer to use currently licenced taxis to new ones so the licence price wouldn’t go to zero, at least in the short term.)

    “2. Charge a monthly government fee for new taxi licences at roughly the old lease rate (ie a taxi tax) and issue licences to all that will pay.”

    What’s the old lease rate? Why wouldn’t we get rid of licencing altogether? I agree with P.M Lawrence – professional certification is sufficient and would step in to fill the gap.

  10. “I agree with P.M Lawrence – professional certification is sufficient and would step in to fill the gap”.

    That’s not what I meant at all. Rather, although that would come in and eventually do a better job, it’s not a good idea just to end the old system and let that happen any more than it’s a good idea for a diver who has been too deep too long to get out of the water as fast as possible. What’s needed is the kind of phasing out that brings in the new approach before the old one stops providing coverage, so that there is no gap.

    Of course, a lot of these systems are structured the way they are to produce just that locking in, from the problems of stopping them. But that doesn’t mean the problems aren’t real.

  11. “That’s not what I meant at all.”

    Fine, then I don’t agree with you then. 😉
    Perhaps we agree on the desired final regulatory state but not the path on getting there.

    “What’s needed is the kind of phasing out that brings in the new approach before the old one stops providing coverage, so that there is no gap.”

    What is your suggestion then? My suggestion is market-based – that is, remove restrictions on entry into the taxi market (ie, remove the need for licencing) and let certification institutions come in if there’s demand for them. It sounds like that you are assuming that certification is what the market wants and thus would base your transition on waiting until that situation materialises – but there’s no way of knowing that until the market is left to work itself out.

  12. PML – taxi licencing has nothing to do with the provision of “safe” drivers. The licencing of taxi drivers is a different matter entirely and may provide some of that. However licencing of taxi drivers is quite different to the taxi plate system. The licencing of taxis (ie the vehicle plate system) is purely a restrictive trade practice. It is like if the government suddenly said you can’t register a concrete truck unless you pay $390000. It would not make drivers safer or concrete work more professional.

    The point of my reform would be to remove the third party political incentives that work to maintain the system. My proposal socialises the cost of past policy mistakes. By buying back the existing licences (at say $390000) and then issueing new licences at the current lease rate (say $400 per week) there are then no industry players with a vested interest in protecting the racket. In fact the industry would turn it’s attention to lobbying for a reduction in what is now a tax, especially given that fares are regulated and they would in the short term pick up any gains from a reduction in the tax.

    There is of course a good case for a broader deregulation process that reviews the licensing of drivers, the setting of fares, the quality rules relating to cars and that sort of thing, however the elephant in the room is the plate system and we ought to deal with the elephant irrespective of the other details.

  13. In these days of GPS, why does anyone need ‘The knowledge’ (as it is called in Britain)? The only licence should be road-worthiness, same as for all vehicles.

  14. I dont see the need to buy back the plates. All investments carry some risk. Taxpayers shouldn’t have to prop up the speculators when their house of cards comes tumbling down.

    It’s not even like it’s a necessity to win votes, I don’t think there’s a lot of sympathy out there in the general public for Taxi plate owners at this point.

  15. Yobbo, would you favour compulsory public theft of superannuation savings by government?

    The cost of buying back licences will need to be borne by taxpayers on moral if not legal grounds. People have invested their life savings in these licences on the grounds that the exclusivity of arrangements will persist.

    Australia wide the cost would be around $6.5 billion at current prices.

    The evidence on the benefits from taxi deregulation is surprisingly rather mixed. The case for deregulation looks like a ‘no brainer’ but the New Zealand experience isn’t, for example, that wonderful.

    The issue is whether the deadweight losses you avoid and the efficiency gains you might expect to get are worth $6.5b. As a matter of simple theory the DWLs avoided won’t be enough but you might expect some efficiency gains with more innovation in a deregulated industry.

  16. Harry – it would seems pretty clear that if you axe the need for taxi licences (the plate system) operators will instantly be better off by the amount they currently pay to lease plates. This will soon translate to more operators and more taxis for those that want them. Ideally it would also come with a reduction in regulated fares. It’s hard to see this delivering less utility than the status quo.

  17. “The case for deregulation looks like a ‘no brainer’ but the New Zealand experience isn’t, for example, that wonderful.”

    The benefits exceed the cost? Yes or no?

  18. hc — I disagree that because a person makes an investment, that consequently the government has an obligation to make sure they don’t lose any money from their investment.

    And I disagree that it is moral to take money from innocent consumers, and force other innocent would-be workers out of a job, in order to give higher profits to businessmen who have taken a risk. Indeed, I think that is immoral.

    I agree it would be politically difficult. But if those crazy kiwis can do it, then perhaps we could at least think about it. Or maybe even a phase out.

  19. It is hard in blogging to get your message across. If I had to start again would I have a regulated taxi industry? Definitely no!

    But we have had one for decades and over that period taxi owners have put their savings into licences. It is not a matter of guaranteeing an investment John. Welching on the licence agreement would be a breach of promise by the State.

    My point was simply the empirical one that the gains would need to be huge to cover the deregulatory cost. It was not support for a move to a deregulated system if this change can be made costlessly.

  20. Harry, haven’t you heard of regulatory risk? And surely anyone spending hundreds of thousands of dollars would get some financial advice that would include an explanation of that risk? And if they didn’t, isn’t that their own fault?

    That’s why I think a buyback at market value is too generous. Fairness dictates taxi-plate investors get some recompense – after all, it’s not a movement in the market that threatens their investment, it’s deliberate govt policy – but I’d favour a sliding scale depending on how long they’ve had the plate.

  21. Harry says:
    But we have had one for decades and over that period taxi owners have put their savings into licences. It is not a matter of guaranteeing an investment John. Welching on the licence agreement would be a breach of promise by the State.

    How is that altogether different from removing tariffs and subsidies, Harry? Your example of “welching” would serve the interests of those who benefit from that form of state largesse if taken to the logical conclusion.

    Furthermore there is no state promise to maintain a license in the industry to perpetuity.

    I don’t see your argument washing on shore at all. Not one bit.

  22. It would be far more honest of you, Harry, if you actually came out and said this is your true preference rather than coming up with silly reasons why deregulation is er not so good.

    This what you say, right?

    Increased user charges on vehicles and increases in carbon-based fuel prices might have long-term effects of reducing private car ownership and use

    This is your preference all along and if it isn’t you should try and explain why I have gained the wrong impression.

    You also have this to say:

    My instincts here are that although the industry acting cohesively as a whole does have monopoly power that there is enough competition within the industry to keep prices at reasonable levels. Under the bailment arrangements currently in place – inefficient arrangements in my view* – drivers have incentives to act as sales-maximisers and will generally favour prices lower than a monopolist would seek to negotiate with regulators. Overall there is some differentiation in the market and the structure looks to me more like regulated monopolistic competition than a regulated monopoly.

    So I guess you think state sanctioned monopolies can work just fine if there is more than one player? Umm, really? We have seen great evidence of that in say the car industry over the last 50 years?

    Personal question:

    I presume you drive your own car and have at least 2 cars in the family, right?

  23. jarrah:

    From time to time state governments sell licenses when cash strapped to raise money, which of course has a dilutionary effect. So it’s not as though the number of licenses is carved in stone.

  24. JH

    one way of getting around the issue of removing the licenses is to simply issue them to whoever wants one and meets very limited criteria.

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