Cabcharge casualty in taxi revamp

The Victorian government has created a template for national reform of the taxi industry with its response to the inquiry that it asked Professor Allan Fels to head.

It is also making changes that threaten the listed taxi payment processor Cabcharge, as the 15.3 per cent slide in Cabcharge's share price on Tuesday after the government's announcement underlines.

The 10 per cent fee that Cabcharge levies for processing card payments in taxis will be halved to 5 per cent in Victoria, creating another potential national precedent as the Reserve Bank and credit card companies bear down on third-party card processing fees.

Almost all of the 139 recommendations the Fels inquiry made last December were accepted entirely or in part by the Victorian government, and there will be significant reform of the industry in the state as a result.

Victorian taxi drivers will see their share of taxi cab revenue boosted to at least 55 per cent but also face tougher driver qualification tests, and the rationing of licences in the state will end, although a new industry regulator might intervene if a glut of cabs is in prospect.

In an important deviation from the Fels report, the government has decided that the cost of new licences will be indexed, at slightly less than the rate of inflation.

Perpetual licences will be replaced by annual licences, significantly reducing the initial financial barrier to entry to the taxi industry, and the government has opted to charge $22,000 a year for city plates, $2000 more than the Fels inquiry recommended. Annual licence fees for outer suburban, regional and country plates will also be slightly higher than suggested.

The decision to index the fee by an amount tied to the consumer price index minus 0.5 per cent means that the cost of licences will rise steadily over time. Indexation was not recommended by the inquiry, and it will change the value of a taxi licence in today's dollars, be it one of the permanent licences already in circulation or one of the new licences that is renewed every year.

It depends on the inflation rate, but could add about $200,000 of value, which is enough to underpin the trading value of about $350,000 on existing perpetual licences as the government intends, but perhaps enough to also lead to licence value inflation.

Fels gave the government's response only qualified support on Tuesday.

He said that most of his inquiry's recommendations had been accepted and said the new, annual licence fee was an important initiative that "may lead to some new entrants in the industry in the short term".

He argued, however, that the decision to not permanently fix the price of new licences as recommended would trigger "escalating licence values" instead of a steady decline in values that encourages entry to the industry. If he is correct, the decision to index licence fees may need to be reviewed in future.

The Fels inquiry also envisaged that the new licences would be issued into an unrestricted market. The government has decided instead that a new overarching taxi industry regulator, the Taxi Services Commission, will have the power "to assess the impact of the release of new licences in metropolitan and urban zones on industry participants". It will also monitor service levels and consumer benefits, and "respond accordingly to ensure that the interests of the public continue to be met", the government says.

The new commission will be headed by Graeme Samuel. He replaced Fels in 2003 as chairman of the the nation's competition enforcer, the Australian Competition and Consumer Commission, and held the position until 2011. His role with the new commission is a non-executive one, but he is scaling back his post-ACCC role with corporate advisory firm Greenhill to a consultancy arrangement as he prepares to take on the new position.

Samuel is by inclination pro-market and anti-intervention, as his curriculum vitae suggests, but it remains to be seen how the new commission operates.

It will be able to limit the supply of licences if it believes the industry is in danger of being swamped by new entrants, but presumably it will also be watching closely and advising the government about whether Fels' prediction that indexation will produce higher licence values is being borne out.

If it is, indexation may be difficult to remove. It is expected to be legislated as part of the industry reform package, and if so would need to be legislated away if it turned out to be counterproductive.

There will be no other way to axe it, and that is one reason Fels is disappointed that his idea of a flat fee that progressively reduces the real cost of joining the taxi industry has not been picked up.

mmaiden@fairfaxmedia.com.au