Tuesday, 23 August 2016

Uber legal in Victoria, but "mum-and-dad" investors should be up in arms

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Today's announcement that Victoria will follow other states and territories in allowing Uber to operate may be good news for consumers. But taxi licence owners, many who are "mum-and-dad" investors, have had the value of their investments destroyed by populist policy and poor foresight by state governments.

NSW recently announced a $1 levy per taxi or Uber ride to fund compensation for taxi licence owners and those suffering severe financial hardship as a result of the regulatory changes. The total package for NSW is $250m.

Victoria's package is more generous, with a $2 levy proposed to provide compensation in the order of $378m for a buy-back scheme. There is also an allocation from the levy for $78m as part of a "fairness fund" for those hit hardest by the reforms.

The compensation funds represent a typical policy response to liberalising long-established regulated monopolies, but the amounts are far from "fair" and the process has been poorly implemented.

In Sydney, taxi licences peaked at about $425k in 2011, and have been in decline since. Licence owners can expect to receive $20k in compensation per licence, with multiple licence owners receiving a maximum of $40k.

In Melbourne, recent market values were in the order of $150k, down from around $500k in 2010-11. Victoria's buy-back scheme will provide for a maximum of two licences with $100k offered for the first licence and $50k for the second licence.

News media reports suggest that consumers are upset about the levy, especially in Victoria, which will add significantly to the cost of using taxi and Uber services. Consumers tend to be happy about moves by Uber to bring competition to the decades-old monopolies in each state. And while the taxi industry is one of the last regulated monopolies to be liberalised in Australia, the transition has been handled rather poorly by state governments.

Taxi licence owners have been mostly kept in the dark about taxi industry reform in Victoria. As late as 19 August, taxi operators in Melbourne had no idea what would be in the reform package announced today. And Victoria's comparatively generous package might make Sydney and Brisbane operators wonder why the differences in the compensation packages should be so dramatic.

Uber users are sure to be happy about the new competitive landscape, but there is more at risk than simply improving taxi prices and services. Investor and voter confidence in state governments' ability to regulate effectively has been diminished for three main reasons.

First, Uber has effectively broken the law and used its capital to force the end of the old monopoly, allegedly paying drivers fines while lobbying governments with media-grabbing publicity stunts. Rather than encourage a proper transition strategy, even the Prime Minister applauded Uber for its "agile" business model. Uber made the policy, not the elected representatives.

Second, taxi operators have been bound by the rules of the regulated monopoly. They played by the rules established under the rule of law. Uber didn't, and, backed by popular sentiment, have cleverly manipulated the taxi industry. State governments continued to regulate taxis but were powerless to enforce their own laws where Uber was concerned.

Third, state government have been slow to act and adequately transition the formerly regulated monopolies. Reform of the taxi industry was decades overdue. This has effectively destroyed the value created under the rules of the regulatory monopoly. While consumers may be unconcerned, the taxi industry did not create itself - it was created as a regulated monopoly by state governments.

If we consider that Melbourne an Sydney alone are serviced by over 8,000 taxi licences, once valued at up to $500k, then significant investment value has been destroyed. Not by competition, but by a company that broke the law, by consumers who readily supported cheaper prices, and then by state governments who restructured the market by implementing rapid, populist policies.

As it stands, "mum-and-dad" investors are paying the price so consumers can obtain cheaper fares. If the same was done to the Australian share market, the economic consequences would be disastrous.

Had state governments transitioned the taxi industry appropriately, then licence owners could have had adequate time to prepare. It is not their fault that state governments were slow to act.

Uber has won, and there will be much rejoicing by consumers. But the way the transition has occurred verges on the unethical, and licence owners are footing the bill. To make matters worse, some commentators are blaming the taxi industry.  This is inherently unfair. In a regulated monopoly, the regulated players have little impact on the rules.

But many "mum-and dad" investors may never trust governments again. And rightly so.

The damage done by populist policy and poor regulatory oversight in the taxi industry is a far cry from the slow, unnatural death of the Australian automotive manufacturing industry. In fact, automotive manufacturers are still protected by tariffs even though the industry is set to end very soon. It is obvious that the "mum and dad" investors in the taxi industry lack the political clout of the automotive industry multinationals.

The "fairness funds" are hardly fair compensation, and, as I have argued elsewhere, the cheaper prices will hardly be worth the cost. Mums and dads are paying for it now.

It is clear that multinationals can manipulate state governments by adopting Uber's approach. All you need is plenty of money, a plan to introduce cheaper prices for consumers, and the boldness to flaunt the law. As we have seen, state governments will then roll over.

Let us now hope that your retirement savings are not next in line.



Creative Commons License Except where indicated otherwise, Le Flâneur Politique by Michael de Percy is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 2.5 Australia License. Based on a work at politicalscience.com.au. Background image ©Depositphotos.com/ @redshinestudio