TAKEN FOR A $1 BILLION TAXI RIDE

by Terence Corcoran
Columnist
Toronto Globe and Mail
5 April 1997

No city in Canada is exempt from the shambles created by the ancient regulatory regimes that govern our taxi industries. In the name of levelling the playing field and making taxis safe and cheap for everyone, our licencing agencies have created a bumpy road patrolled by overpriced taxis operated by undertrained drivers of unsafe vehicles. Any lessons learned? Apparently not.

Parts of the national taxi mess explode locally from time to time, sending city officials scrambling to clean things up. In this routine, everbody works up a pet theory about the cause of the problem - too many taxis, not enough regulations, incompetent licencing boards, greedy owners, immigrant drivers, whatever - but nobody ever seems to land on the real solution: deregulation.

Economists have been working over the taxi industry for decades, finding the obvious economic problem. David Carr, a transport analyst for the Consumer Policy Institute, cites two studies that point to the high cost and distortions of taxi regulation. An Economic Council of Canada study from 1982 concluded that the licencing and price controls imposed by governments push up "the cost of taxi service in Canadian cities by 30 to 50 per cent."

Another study of the economic effects of Tbronto taxi regulation concluded that consumers pay the price for regulation wbile producers are protected. Tbe policies limit the supply of taxis, inflate prices, lower the quality of service, and cause inefficiencies and higher profits. Despite powerful economic analysis, the push for more regulation still dominates debate.

A taxi uproar is under way in Metro Toronto, stirred by the Board of Trade, based on the fact that an inordinate proportion of the area's taxi fleet is made up of ancient, unsafe and unclean vehicles. Drivers don't appear to be in much better shape than the cars. All of this is bad for Toronto's image and tourism. The solutions offered in Toronto, however, appear to be limited to mandatory hosing down of both cars and drivers, removing old cars from the road and tightening some of the licencing rules.

None of which will work, because these regulatory solutions merely avoid the core problem. Like most cities across Canada, Metro Toronto controls the supp]y of taxis by limiting the number of medallions. These medallions, or plates, are government-created pieces of paper that nominally represent the right to operate a taxi. In practice, however, they become like share certificates or bonds, putting a capital value on the shortage of taxis.

At current market rates, according to my sources, a Toronto taxi plate is worth maybe $80,000 on the market. The total current market value of Toronto's 3,400 plates, therefore, is about $270-million. In other cities, apparently, the value of each plate can be even higher: $110,000 in Vancouver, $95,000 in Ottawa. A national tally of the total market value of taxi plates could approach $1-billion.

All taxi passengers are therefore being taken for a $1-billion ride by the taxi licencing agencies. A significant portion of each fare goes to pay the owner of the taxi plate a decent return on investment. Indeed, the value of the plates fluctuates with market conditions and interest rates, much like a bond. When interest rates were high a few years ago, and business slow, Toronto's plates were much cheaper, apparently as low as $40,000.

These market values are for an artificial shortage of taxis created by a government that restricts supply. Private sector executives can go to jail for doing this. Instead of fares paying for better cars or better wages to drivers, the money is going to owners of taxi plates.

If a plate owner controls 60 plates, his investment is worth $5-million at current market prices. Plate owners do not typically own the cars themselves; the actua] taxis are usually owned by somebody else. At current rates, obviously, the $80,000 plate is worth three, four or five times the value of the taxi. The cars and plates are then rented aut on a shift basis to itinerant drivers, who must hustle for long hours to make up the cost of the regulatory apparatus before they get paid themselves.

The longer these regimes are in place, the deeper the rot and the more difficult deregulation becomes. Easy though it may be to dismiss the plate owners as greedy absentee landlords, the system is not their creation. The owners were actually fulfilling a useful and logical service under the circumstances.

One solution in Toronto, treating the owners fairly, is to buy them out. But at $270-million current market value, that option is clearly out of the question. A better solution would be to phase out the transferable plate system. In many U.S. cities, plates cannot be sold or controlled by anyone other than a driver. When the driver dies or quits, the plate returns to the city and a new driver gets the licence. But that's a makeshift plan that doesn't solve the problem.

The best solution of all is deregulation of supply and fares. As with restaurants, governments could licence for safety and driver knowledge, leaving the number of taxis and the prices to market forces. The result, would be lower fares and better service.


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