March 31, 1997
PUTTING CUSTOMERS FIRST
Taxicab Reform in the Greater Toronto Area (GTA)
Analysis of the Problems
Urban transportation is one of the last transport monopolies to confront the customer-driven challenges of a competitive marketplace. In most cities, the public’s flexibility to move freely on a competitive urban transit system has been compromised by the inefficiencies of the local government’s monopoly service provider, and by a complex regulatory framework that discourages innovation and prevents safe private sector alternatives.
Freedom of movement, and the freedom to pursue a respectable living in a chosen field, should be the right of every individual, yet these freedoms have been limited by self-interest and obliging government bureaucracies since the turn of the century. Authorized jitney transport, for example, has been all but banned in North America since the mid- to late 1920s. Jitneys are taxicabs that run on fixed routes and can be hailed by passengers. They often accommodate up to 10 people as opposed to the six that regular taxicabs are allowed to carry. Jitneys are so named because the fare was at one time a “jitney,” which was slang for a 5-cent piece. Jitneys operate today in at least one Canadian city, several small American cities and a number of European cities.(1)
Unfortunately, the regulatory process is gradually taking the freedom of movement and the right to pursue a respectable living away from society’s most vulnerable people, through restrictions in their choice and opportunity. W.T. Stanbury, an economist specializing in the impact of co-redistribution through regulation, estimates that approximately 20 per cent of Canada’s economic output, including taxicabs, is subject to some form of direct economic regulation.(2) For the United States, Inc. magazine points out that approximately 10 per cent of all jobs requires some form of licence, and that many of those jobs are low-skill, entry-level occupations such as taxicab driving, working as a street vendor, cosmetology, trash hauling, and recycling.(3) A similar analysis has not been done in Canada, but given our tendency to regulate coupled with the fact that all of the industries in Canada listed in the Inc. article are either regulated or government owned, it is reasonable to conclude that the number of regulations that are a barrier to low- income and unemployed Canadians is equal to, if not greater than, the number in the U.S. Nothing illustrates that point more than the taxicab business in Metropolitan Toronto and surrounding communities that, together, make up the Greater Toronto Area (GTA).
In most Canadian cities, a competitive taxicab industry remains a local or provincial government sanctioned illusion. The business, whose customers are disproportionately those less well off (because limited financial resources often prevent the ownership and operation of a motor vehicle), is one of the last transportation industries to be opened up to a deregulated environment. Tight control on taxicab supply and government-set tariffs have resulted in consumers paying an exaggerated price for a stale and uninspired service. In his 1982 paper, The Taxi Industry and Its Regulation in Canada, Benoit-Mario Papillon points out that most regulations governing the taxicab industry “pushes up the cost of taxi service in Canadian cities [studied] by 30 to 50 per cent.”(4)
By 1987, in Metropolitan Toronto specifically, taxicab regulation (which includes tight controls on supply and price) had resulted in a price for service approximately 25 per cent higher than if the market was unregulated.(5)
Taxicab regulation discriminates against single mothers, low- and fixed-income wage earners and the physically disadvantaged by reducing supply in their neighbourhoods and making the product uncompetitive and unaffordable. Taxi regulation also acts as a barrier for displaced workers, recently arrived immigrants, and people on welfare who would prefer a hand-up rather than a handout to become economically self-sufficient in an easy-entry, low-cost business. Although government is cutting back on the handout in the form of reduced unemployment insurance and welfare pay-outs, it is hindering the hand-up by retaining unnecessary regulations that only serve to absorb tax dollars and act as a barrier to individual entrepreneurship.
Finally, current restrictions on vehicle supply is limiting the number of opportunities that postsecondary students have in order to pay for rising tuition fees during a period of high youth unemployment and tighter control and eligibility requirements for student loans.
A truly competitive taxicab industry that promoted the use of jitneys and other alternative transportation services would give all members of society greater public transportation options and business opportunities in an age of slashed government budgets, urban transit service cuts, and congested city roads.
This study, while commenting on the economic effects of regulation on the taxicab industry in general, primarily focuses on the Greater Toronto Area (GTA), with particular emphasis being placed on the Corporation of Metropolitan Toronto and the proposed amalgamation of the five cities and one borough that will make up the new City of Toronto.
II. Evolution of taxi regulation
The taxicab is the most immediate and flexible of the so-called paratransit vehicles. Paratransit is a term given to small passenger transport vehicles that operate informally on a fare-paying basis. Paratransit vehicles represent the median between the personal convenience of the private automobile and the dedicated route structure of public transit.
In most cities, taxicabs cruised the streets in an unregulated, free market until the 1930s, when car prices and wages tumbled, and transit systems and established taxicab companies were confronted by cutthroat competition from struggling, unemployed workers who saw the low capital, easy-entry characteristics of taxicab driving as a way of maintaining a livelihood.
According to a report by the U.S. Federal Trade Commission, pressure to regulate the taxicab industry was not stimulated by the public interest, but by limited self-interests. “Pressure for restrictions on the taxi industry came from the American Transit Association, public transit firms, established taxi fleets, and the National Association of Taxicab Owners (which passed a resolution favouring entry and minimum fare controls).”(6) According to figures released by the Federal Trade Commission, an estimated 43 out of 93 U.S. cities with a population of more than 100,000 had restricted entry into the taxi industry by 1934.
Taxicab regulation in Toronto and other Canadian cities
In major Canadian centres, taxicab regulation has evolved much as in the United States. In the 1920s, privately owned streetcar companies, fearful of increased competition, successfully pressured Toronto city council to ban jitneys, arguing that such form of transportation would worsen congestion on already inadequate roads. Existing taxicab owners were also successful in eliminating competition from new entrants by convincing council to regulate the supply of taxicabs on city streets. Council said that regulation was necessary because taxicabs were a public service.
A proliferation of regulation took place in the 1930s and was based on the same economic and anticompetitive arguments. The Manitoba Legislature argued that taxi transport was a public service similar to electricity, telephone, and mass transit monopolies when it limited the supply of taxicabs in Winnipeg in 1935.(7)
In 1937, Montreal city council based the need for taxi regulation on congestion caused by an unnecessarily high number of taxis. Regulation would also address the low incomes of taxi operators, which city council believed was caused by excessive competition. But Montreal relaxed its restriction on supply in 1946, following complaints by taxi users “tired of being unable to obtain a taxi by telephone,” and a subsequent report by J.O. Asselin, chairman of the city’s executive committee, that disputed the earlier rationale. Asselin reported that complaints about an excessive number of taxis came “primarily from those working in the industry,” while low wages were a product of the Depression.(8)
Immediately after council relaxed regulations on supply, the number of Montreal taxicab licences exploded from 765 to 4,280. Council restored limits on taxicabs in 1952, and taxi regulation in Quebec became a provincial government responsibility in 1973.
Creation of the Metropolitan Licensing Commission
In 1956, the recently created Metropolitan Toronto regional government set up the Metropolitan Licensing Commission. The Commission has licensing authority over a wide range of local businesses, including local taxicab supply and tariffs.
The taxicab industry is a public service insofar as its function is to pick up members of the public at the customers’ point of convenience and transport them to their destination of choice in exchange for payment. Therefore, a limited amount of regulation is necessary to ensure the safety of the passenger, and to protect surrounding vehicular and pedestrian traffic. Such regulation should cover driver qualifications, vehicle insurance requirements, and vehicle maintenance standards (including compulsory equipment for the purpose of safety). A licensing commission must have the power to revoke a licence if a driver or taxi company is in violation of basic regulations. But most municipal and provincial (or U.S. state) licensing commissions have extended their authority by imposing regulations on taxicab supply, boundaries of operation, driver behaviour, and price.
Excessive regulation has benefitted existing participants in Canada’s taxicab industry. Fixed pricing, jurisdictional restrictions, and closed entry have resulted in a transfer of wealth from the customer to the producers in the industry.
III. Protecting a stale industry
The shape, size, and mechanics of the Toronto taxicab have altered significantly since the early 1900s when established taxi companies used a willing city council to discourage competition. Market potential — although weakened by the economic downturn of the early 1900s — has flourished over the last 10 years. Public awareness and tougher enforcement of drinking and driving legislation, higher automobile operating costs (including insurance), congestion, increased tourism (who, along with business travellers, make up the so-called “floating population”), and greater use of the taxicab as an intercity courier service by the business community have increased demand and created new opportunities for entrepreneurial cabbies prepared to seize the initiative. Little else, except for the fortunes of established taxi companies, has changed since the Metropolitan Licensing Commission took control of the industry in 1956. As a result, consumers are overpaying for an underperforming industry characterized by lengthy waits for unclean vehicles, operated by substandard drivers.
Commandeering a taxicab is a universal practice, where the customer is given three basic choices:
- To telephone an order;
- To secure a taxicab at a nearby taxi stand; or,
- To hail a cruising taxicab on the street.
The following describes the three options for securing a taxicab in the GTA, and how excessive regulation has severely compromised the distinct competitive advantages of each practice.
The telephone gives a customer the greatest advantage in terms of convenience, flexibility and competition. The vehicle is requested to show up at a precise location 24 hours a day. The customer has exclusive control over the company he will patronize. The percentage of on-time arrivals will vary according to the time of day, weather conditions, and location, but the option of cancelling an order and contacting a rival taxicab service rests with the customer.
The telephone order already gives a customer the convenience to preselect a taxicab based on personal criteria and past experience (on-time performance, knowledgeable drivers, cleanliness of vehicle), although service even among operators driving for a specific cab company is not consistent. Because of price controls, the telephone user is denied the added value of shopping the market on the basis of price.
Taxi stands originated in 17th-century London as spots where customers could find horse-drawn hansom cabs bidding for their business based on price and service. If competition at the stand was too fierce, the cabbie would patrol the streets of London for custom.
Properly managed, a taxi stand should be a model of efficiency in the taxicab business, resulting in fast turnarounds, with clean vehicles and price competitive rates attracting customers, and, to a certain extent, helping to set spot-market rates for nearby cruising cabs (see Cruising taxicabs). Instead, most taxi stands are a subsidized haven for the most inefficient taxicab operators.
There are three key reasons taxi stands in an overregulated and protected environment such as Metropolitan Toronto do not work:
Lack of incentive: Metropolitan Toronto provides arterial roadway to the taxi industry free of charge for the purpose of maintaining taxi stands. Unlike a private car owner who must pay a meter in advance of parking time estimated (and risks a fine if the time parked exceeds time available on the meter), the taxicab operator pays nothing for taxi stand space, thus eliminating the incentive for fast fare turnarounds. The City of Toronto has reserved three prime taxi stand locations (including the stand in front of Union Station, the city’s VIA and commute rail hub), for drivers who are veterans of the Second World War. These spots are now being used by drivers who did not serve in the Second World War, but maintain ownership of those spots through informal arrangements with veterans.
Industry intimidation and unwritten rules: Most customers approach a taxi stand under the misconception that they must take the first vehicle in line. In reality, customers may select any taxicab they chose, although the linear design and approach to the stand makes vehicle exiting difficult, and too many drivers are more interested in preserving an unwritten rule of first in, first out, through intimidation and outright refusal to transport a customer. Neither the industry nor the Metropolitan Licensing Commission that regulates it have shown much interest in protecting the customer’s right of choice through information and enforcement.
System weighted to promote inefficiency: The first two reasons have conspired to create a third; a network of inefficient taxicab operators who use the taxi stand as an opportunity to sit in their vehicles and wait for business to come to them. By encouraging such abuse, the current system of no charge taxi stands permits an oversupply of poor drivers, thus forcing more ambitious drivers, who would likely use a taxi stand as a competitive tool of business, out of the industry.
The cruising taxicab participates in a fluctuating market, in which the customer’s decision to take a cab is often impulsive, and in which the main concern (particularly when weather or time is a factor) is availability of supply rather than price, age, or cleanliness of the vehicle. Price regulation that enforces a flat fee fails to recognize the full asset value of a service at certain times of the day. Regulatory authorities such as the Metropolitan Licensing Commission claim that unregulated tariffs will lead to price gouging, and to congested city streets cluttered with taxicabs and customers bartering and arguing over fares. The criticism is reminiscent of earlier claims that city streets were not wide enough to support jitney traffic.
Cruising, which has been banned in several North American cities, has also become something of a red herring by opponents of taxicab deregulation in general, and unregulated pricing in particular. Many economists who specialize in price regulation dismiss the prospect of fare reductions, since customers who hail taxicabs tend to take the first available vehicle, meaning that drivers who discount fares are cutting into the revenues unnecessarily.(9)
Both criticisms reflect conventional thinking on the part of the taxicab industry and its regulators. There are, however, innovative methods to introducing price competition while giving customers upfront pricing information and guaranteed discounts. Such voluntary innovations could include posting a standard rate on the side of the door (compulsory in cities such as Washington, New York, and others), using a system of roof lights to indicate when standard, discounted, or premium pricing are in effect, and upgrading the taxi meter to allow the driver to enter an agreed upon per kilometre tariff or flat fare. In a deregulated market, such suggestions should be implemented at the discretion of the taxicab or fleet owner to attract new business.
For two legitimate reasons, the bulk of the taxicab industry (fleet owners and independent taxicab operators) opposed open entry and increased competition; price controls have artificially shrunk the market below its full potential and inflated the value of the licence (referred to in this study as the plate) that authorize a holder to provide a taxicab service.
The Metropolitan Licensing Commission charges $4,500 for a plate, which has a current open market value of approximately $85,000. The open market value of the plate reflects the conditions of the market compared with the number of licensed taxicabs on the road. In 1979, for example, the market value for a Metro plate was $30,000, compared with a market value for that same plate in 1987 (the height of 1980s mass consumption and consumerism) of $105,000.
For a first time applicant and potential entrepreneur who wants to invest time and money in the Metropolitan Toronto taxi industry, the average waiting period for a plate is approximately nine years. A successful applicant must purchase any additional plates on the open market.
Taxicabs, as previously noted, should be a low-cost, easy-entry business. But because of control on supply and the resulting waiting list, the potential entrepreneur is left with two immediate options:
- To rent a vehicle, thereby increasing the capital value of a plate for the cartel of current owners; or,
- To purchase a plate on the open market.
The rental of a vehicle further demonstrates the inconsistency of price regulation, and how fleet owners and lessees stand to benefit from regulation. While Metro sets tariffs, it has no corresponding regulation on what an owner may charge an operator to rent his vehicle, thereby ensuring that what limited deregulation exists in the industry benefits the taxicab owner at the expense of both the vehicle contractor and the customer. (Although this study identified Metropolitan Toronto’s uneven pricing structure of regulated pricing versus unregulated vehicle leasing charges as a problem for both the customer and the lessee under current market conditions, it does not recommend that the Metropolitan Licensing Commission should attempt to adjust the imbalance by introducing price caps on what a lessor may charge for his vehicle.)
Drivers who purchase a plate on the open market do so with the approval of the Metropolitan Licensing Commission (which makes an additional $4,500 per transfer). These drivers are investing in an artificial market where a capital gain (in addition to the estimated annual return of 15 per cent on the value of a plate) relies on the issuance of new plates not keeping pace with increases in the fixed and floating population (tourists, business travellers, and so on), and other changes in the marketplace. Price and supply restrictions mean that prosperity in the industry can only come from substandard and costly service to the customer.
If Metro were to switch to an open-entry system, the open market value of the plate would disappear almost overnight, resulting in financial hardship for those who had purchased a plate on the open market as a consequence to the licensing commission’s control over supply.
In any attempt to change the status of the GTA from a closed market to an open-entry system, the plate and the compensation for owners will be the biggest obstacle. The issue must be discussed thoroughly and handled appropriately to ensure a smooth overnight transition.
The plate is, in fact, the property of Metropolitan Toronto, and the Metropolitan Licensing Commission reserves the right to revoke it. Those who purchase a plate on the open market, do so with the knowledge that possession does not equal ownership in this instance. But because of controlled entry, the plate has evolved into a necessary business investment for many taxicab owners, similar to capital assets in a fixed business location.
By controlling supply while allowing for an open market resale of existing plates, the Metropolitan Licensing Commission has developed an uneven playing field among plate holders that greatly benefits owners who purchase their plate from the commission, while exposing those purchasing plates on the open market to great risk. Based on a $4,500 licence fee and a current open market value of $85,000, a taxicab owner who purchases a plate from the commission has a no-risk opportunity to realize a 1,800 per cent return on his asset if he sells the plate at market value after an obligatory three-year holding period. The owner who purchases that same plate on the open market, assumes all the risk since control of the market and ownership of the plate rests exclusively in the hands of the Metropolitan Licensing Commission.
In a normal business environment, risk would often be assumed by the investor. But regulation has made the taxicab industry anything but normal, and control over supply has created an environment where exposure to high risk over the plate is unavoidable if the owner wants to be in business or expand his business to include more vehicles. The commission can decide to increase vehicle supply, introduce an open-entry policy (as is being recommended in this study), or ban the practice of open market resale without compensating the investment made by the open market plate holder.
Most Toronto plate owners bought their plates in good faith based on rules established by the Metropolitan Licensing Commission, and with the confidence that the current system would at least protect the value of their investment. For many owners, the value of the plate is security for retirement. It would be unfair for the City of Toronto to implement any new system that would significantly devalue the worth of a plate without offering appropriate compensation.
V. Discrimination through regulation
Canada’s overregulated taxicab system discriminates against women (who are frequent users of taxicabs as a safety precaution when travelling alone), the poor, and entry-level entrepreneurs who lack investment capital or a formal education. The regulations favour those with the most influence, in this case the taxi fleet owners and brokers. In his paper, The Economic Effects of the Direct Regulation of the Taxicab Industry in Metropolitan Toronto, Professor D. Wayne Taylor describes Metro’s regulated environment as a “producer protection hypothesis.”
“The producer protection hypothesis,” Professor Taylor wrote, “calls for regulation to be provided either to offset or prevent the effects of a competitive market situation, or to redistribute income from consumers to producers. The expected effects of this hypothesis are controlled or closed entry, inflated prices above marginal cost, price discrimination, lower quantities of goods produced, production inefficiencies and economic profits.”(10)
Because the Metropolitan Licensing Commission artificially limits the supply of taxicabs through a controlled-entry policy, consumers paid an estimated 13.5 per cent more for services in 1977 than they should have in an open-entry market. That represents a transfer of $8.1 million from the consumer to the producer. Ten years later, the situation worsened for the consumer. Metro taxicab users were paying 24.8 per cent, or $39.1 million, more than was necessary because of controlled entry. Had Metropolitan Toronto not controlled entry in 1987, a standard trip would have cost $4.90 instead of $6.52, and an additional 730 taxicabs would have been competing for business.(11)
Because low-income households often lack the resources to support a private automobile, they spend a larger proportion of their disposable income on taxis than high-income households, thereby bearing the brunt of the inflated price and the lower availability of vehicles. The underprivileged in Canada’s urban population are becoming increasingly dependent on taxicabs as cities sprawl and urban transit systems such as the Toronto Transit Commission (TTC) scale back operations in the downtown core to spread limited resources across a broader area.(12)
The traditional taxicab fare meter has been designed primarily for price-regulated markets where the tariff is set by the distance travelled. In Metropolitan Toronto, as with most jurisdictions, drivers are only permitted to negotiate a flat fare on trips that take them where the vehicle is licensed outside the Metro area, or to the airport. Once outside the licensed jurisdiction, drivers cannot legally pick up fares. The meter is a licensing authority’s preferred method of securing a price for service, and enforcing pre-set pricing regulations.
Metropolitan Toronto cannot have a competitive cruising market because there are not enough taxicabs to hail. Three thousand four hundred taxicabs, or approximately 1.6 vehicles per 1,000 residents, ply Metro streets.
U.S. experiences in taxicab deregulation show that cities with open entry have more than three times the number of cabs per capital than regulated cities.(13) And supply helps to control cost to the customer. For example, in New York City the number of so-called medallion cabs is limited to approximately 1.7 vehicles per 1,000 residents. The medallion refers to the metal numbered shield that is attached to the outside of each of New York City’s landmark, the yellow taxicab. (In Canada, the medallion is referred to as the licence.) An average four-mile fare in a licensed New York City cab costs approximately US$5.70. In Washington, D.C., where there is unrestricted market entry and approximately 13 taxicabs per 1,000 residents (the highest ratio in the country), the average four-mile fare costs approximately US$3.30.
New York City restricted open entry in 1937, but did not increase the original supply of 11,737 medallioned cabs for another 59 years. New York’s Taxi and Limousine Commission auctioned off 400 new medallions in 1996 as part of regulatory reforms that included a fare increase of 20 per cent (the first since 1990), and the banning of second-hand vehicles (wiping out the benefit of the increase for many New York City cabbies). As a result of demand greatly outstripping supply, a thriving, underground gypsy cab industry developed in the 1940s. The commission was forced to officially recognize gypsy cabs in 1987, as legitimate vehicles for hire. In theory, vehicles for hire cannot cruise for hailers, must rely solely on the radio dispatch, and cannot place taxi signs on the car roof except in Staten Island. But as writer Thomas G. Donland observes in Barron’s, rules governing vehicles for hire are observed mostly in the breach.(14)
Drivers of vehicles for hire can negotiate fares with the passenger, which makes them a favourite source of transportation for the telephone market and street smart, frequent cab users searching for the lowest price.
Ignoring the environment
Taxicab regulation too often works at cross-purposes from the environmental and conservation interests that various governments claim to support and promote. While governments encourage the use of car pools to reduce vehicle emissions and relieve pressure on crowded roads and highways, they refuse to re-introduce the car pool concept to taxicabs by allowing for shared-ride services. A shared ride allows a driver to realize greater efficiencies in his vehicle by picking up and dropping off passengers along a loosely defined route. Passengers willing to share a taxicab and accommodate a slight deviation from their route to drop off customers would benefit from a lower fare than if they used a taxicab exclusively. During the Second World War, drivers in Washington, D.C., created a hybrid between the exclusive cab and the jitney by displaying destination signs in their front window for passengers to hail a cab that was going in their direction.
In Metropolitan Toronto, the shared-ride concept is available for the disabled and seniors who qualify through the Toronto Transit Commission’s (TTC) Wheel-Trans service. But the curb to curb Wheel-Trans service, with its high labour and capital costs, is being reduced through government budget cuts at the same time that demand is increasing. Experiments in the U.S. have demonstrated that shared-ride taxicab service with vouchers for the disabled and low-income users (including seniors) will result in more people being transported at a lower cost.(15)
A shared-ride policy would also promote local transit and intercity commuter systems by feeding passengers into railway and subway stations and main bus lines — ironic, given that in the 1930s, private streetcar operators and public transit commissions pressured city councils to ban jitneys and shared-ride services. The shared-ride service also relieves peak demand on local transit systems. Not surprisingly, neither the TTC nor GO Transit have conducted studies into how their monopoly approach to service cutbacks could be softened by encouraging a more efficient and competitive taxicab industry in the GTA.
A second regulatory cause of vehicle inefficiency with an unnecessary consequence to the environment are jurisdictional boundaries that only permit a driver to transport a passenger from one city to another. The driver is prevented from picking up passengers while making the return trip, resulting in an empty vehicle releasing emissions into the environment, occupying road space, and resulting in a personal cost to the driver.
In Metropolitan Toronto, the biggest promoter of waste through jurisdictional restriction has been Lester B. Pearson International Airport, which is located in the City of Mississauga, but whose licences for fare pickups at Terminals One, Two, and Three (privately operated) have traditionally been issued by Transport Canada. Metro’s taxicabs can take fares into the airport, but cannot bring fares back into the city without risking a $100 fine. There are, however, no restrictions on airport licensed taxicabs (which are limousines) that transport passengers in and out of the airport.
The airport system, which encourages inefficiency through its taxi stand approach to business, serves neither the non-Transport Canada licensed taxicab operator, nor the airline passenger. The increase in licensed vehicles at Canada’s busiest airport has not kept pace with the increase in passenger volume. In cases where airport ground transportation managers (commissionaires) are confronted by a shortage of airport licensed vehicles, calls for non-airport licensed cabs are largely ignored because those vehicles must join the taxi stand queue and are forced to yield their place in line to any airport licensed cab that shows up.(16)
VI. The impact of proposed Metro amalgamation and the GTA
The January 1996 Report of the GTA Task Force (Golden Report) and the Ontario government’s proposal to amalgamate the five cities and one borough that form the Metropolitan Toronto Corporation will negatively affect urban transportation if reform is not a part of the amalgamation package.
The Report of the GTA Task Force has failed in areas such as urban transportation to recommend a market-driven model to break the supply and price barriers that presently separate the customer from competitive local transportation options. For example, the report recommends the consolidation of taxicab licensing by recommending that licensing for taxicabs, limousines, and tow trucks be assigned to a Greater Toronto Area council representing 29 cities and regions in the GTA.
If, as appears likely, the provincial government follows the recommendation of the Golden Report and appoints an unelected Greater Toronto Area council to coordinate services across the broader Greater Toronto Area, and that the council becomes responsible for taxicab licensing without the deregulation of entry and price, three things will occur:
- The inefficient jurisdictional barriers outlined in this study will have been eliminated, except for cities and regions outside of the GTA;
- Consumers in cities that neighbour Metro will start to see a decline in taxicab service levels; and,
- Approximately 3,400 Metropolitan Toronto taxicab plate holders will see a combined $170 million investment in plates (based on all available plates realizing full value at current market prices) diluted almost overnight by the increase in supply from neighbour-ing GTA vehicles. Open entry would wipe out the market value of the plate entirely.
Without an increase in vehicle supply, a Greater Toronto Area council would try to meet the public transportation requirements of 4.5 million people with a single pool of GTA taxicabs. From a driver-customer standpoint, the benefits are apparent. A Burlington taxicab driver transporting a fare to Scarborough (which is expected to become part of the amalgamated City of Toronto as of January 1, 1998) will not have to make the return trip empty. Instead, the operators can pick up and drop off fares over a wider territory.
Unfortunately, without reforms that end jurisdictional territory altogether, the same Burlington operator who transports a fare to neighbouring Hamilton will have to either continue to make the return trip with an empty vehicle or break the law to cover the extra cost of transporting a passenger across jurisdictional lines.
Increase in taxicab vehicles within the amalgamated City of Toronto
Because communities in the GTA outside of Metro are both low density and heavy users of personal motor vehicles, taxicab drivers in cities such as Mississauga, Brampton, Markham, and so on, will be inclined to desert their home market for high density areas such as downtown Toronto.
While the segment of the Toronto market that hails taxicabs would immediately benefit from an increased supply of vehicles, the overall benefit will be limited if price deregulation is not part of a reform package. (Taxicabs in the GTA, but outside of the Metropolitan Toronto boundaries, are unlikely to join a Metro-based dispatch service. What is more likely, is that existing dispatch services in Metro and surrounding communities will be expanded to cover the entire GTA area.)
Immediate devaluation of taxicab licences
Even without free entry, the elimination of jurisdictional boundaries will result in a substantial depreciation of the $170 million in plate value of Metropolitan Toronto licence holders. As previously noted, the open market value of a taxicab plate in Metropolitan Toronto is approximately $85,000 (20 times the administrative cost for the region to have issued the original plate). By comparison, the open market value of a taxicab plate in neighbouring Mississauga is approximately $12,000 and will likely see the market value of the plate increase to reflect market and supply. The increase in a Mississauga plate, however, will be limited by the downward pressure coming from increased competition by taxicab owners in smaller communities. In its final report, the GTA Task Force entirely ignored the financial hardship that a recommendation to amalgamate taxicab and limousine licensing would have on the owners of vehicles.
PUTTING CUSTOMERS FIRST
Taxicab Reform in the Greater Toronto Area (GTA)
The current laws regulating the taxicab industry have overtaken the delivery of a convenient cost-efficient service to the public. Metropolitan Toronto’s city mayors, elected representatives, and the Metropolitan Licensing Commission only appear interested in finding solutions to the region’s transportation challenges within the existing regulatory and bureaucratic framework and, in accordance to the interests of public funded services, within the monopoly of urban transit and intercity commuter service providers. Governments and government agencies are not prepared to improve transportation service to the public at large, or increase the quality of life for low-income households, recipients of government programs, and other dependents on taxicabs if those improvements will result in the reduction or removal of government influence in certain areas of the urban transportation industry.
A province-wide, deregulated taxicab industry would transfer the cost advantage from the producer to the customer where it belongs, by increasing supply, reducing fares, and improving service. A truly competitive industry would also create new opportunities, particularly in niche markets such as low-income users and intercity commuters who could take advantage of shared-ride services across previously restricted jurisdictions.
Deregulation, a U.S. experience
Taxicab competition creates new inner-city jobs. A study by the U.S. Department of Transportation has found that taxicab restrictions cost consumers nearly US$800 million a year. Also, removing those restrictions would also create 38,000 new jobs in the taxi industry.(17)
Unlike the recent Canadian practice of using publicly funded infrastructure projects for short-term job creation, taxi jobs would likely be permanent additions to the labour force, offering the independent owners or drivers new opportunities in a previously depressed and underserviced industry.
In U.S. cities that have deregulated the taxicab industry to allow open entry, the size of the industry has grown between 18 and 33 per cent with substantial industry turnover among small companies and independent drivers, slight turnover among medium and large companies and no detectable turnover inside the largest taxicab firms.(18)
The City of Indianapolis deregulated its taxicab industry in May 1994 as part of the city’s comprehensive deregulation effort. “Bad local regulations hinder job creation, stifle healthy neighbourhood development, and chill business expansion,” said Mayor Stephen Goldsmith after announcing a Regulatory Study Commission to eliminate unnecessary and bad local regulation. “In nearly every survey of local businesses, regulation appears at the top of the list of barriers to growth.”(19)
Prior to deregulation, it was illegal for a cab driver to cruise the streets or for a customer to hail a cab, resulting in waits of up to 90 minutes for telephone orders. The Indianapolis Department of Metropolitan Development benefitted established taxicab owners by allowing only 392 taxi licences in this city, the 12th largest in the U.S.
By eliminating most taxicab regulations (a driver still requires a licence, a US$100,000 insurance policy, a photograph, and a US$102 licence fee), the number of Indianapolis taxi companies has almost doubled from 28 to 52. Fares have dropped nearly 7 per cent and waiting times have fallen dramatically. All of the new companies are owned either by minorities or women, and an industry that was legendary for its poor service and large volume of customer complaints has not had a single customer complaint registered since deregulation.(20)
Where open entry has not resulted in improved service and lower fares (or increases no greater than the Consumer Price Index), the culprit is often a dependence on first in, first out taxi stands and airport queues by new drivers and owners without radios. As long as a municipality or airport operator does not seek time-based compensation for taxi stands, and measures are not introduced to free the customer from the industry imposed first in, first out rule, those features of the taxicab industry will preserve inefficiency, poor service, and artificially high prices.
II. Benefits of taxicab deregulation
As noted in the previous section, if deregulation had been in place in Metropolitan Toronto in 1987, the fare, at the time, on a standard trip would have been $1.62 lower (resulting in a $39.1-million transfer of wealth from the producer to the customer), and there would have been an additional 730 taxicabs on the streets.
The telephone gives a customer the greatest advantage in terms of convenience and flexibility. Because of price regulation, however, the telephone user is denied an opportunity to shop the market on the basis of price. If the Metropolitan Licensing Commission did not control price, operators would likely stimulate the market and provide the customer with added information through promotions such as printing tariff schedules (including discount periods), or by taking out ads in newspapers and on billboards.
Customers could telephone in advance and get the best price on a specific trip. Dispatchers could relay the price over the radio network and return to the customer with a confirmation number from the driver who was willing to accept the business. The convenience that computers and management systems have brought to the service industry (guaranteed delivery times by Pizza Pizza and Swiss Chalet or frequent flyer points or customer rewards by Air Canada and Zellers) are missing in the taxicab industry because the Metropolitan Licensing Commission has built protective barriers around the suppliers that exclude benefits to the customers.
There are concerns, for example, based on interviews with the Metropolitan Licensing Commission that the City of Toronto (which would become the geographic core of the proposed amalgamated city) is evolving into a hail or taxi stand industry because of changing demographics and customer attitude, and a growing realization among drivers that “a live customer on the sidewalk is a bird in hand (while a dispatch order may turn into a wild goose chase).”(21) The current trend to a dedicated hail or taxi stand approach to the marketplace would result in inconvenience and hardship for seniors, and the physically disabled, who are less capable of going onto the street to commandeer a vehicle. In contrast, increased competition through open entry would preserve and enhance the telephone market as a niche service.
The taxicab industry would become more efficient and offer customers a higher level of service at a competitive price if cities such as Toronto were to organize taxi stands on a user-pay basis, either by selling existing and new taxi stands to private operators (the preferred option), or by having municipal parking authorities install parking meters. User-pay taxi stands would encourage drivers to attract business while increasing revenue to the city from a direct sale of taxi stands or revenue from the meter.
The advantages of a price-deregulated taxicab industry are best illustrated by the cruising segment of the market. As with long distance telephone services, a driver’s rates should reflect demand. For example, drivers could charge premium fares during times of shortages such as periods of inclement weather, peak rush hour, and the late evening, and lower fares at other times. Cruising in a price-deregulated market requires trust between the driver and the passenger. Both are obligated to honour the fare already negotiated (much the same way that the customer is obligated to pay the amount that appears on the meter at the end of a trip).
Deregulation of the taxicab industry will result in new investment in additional vehicles to increase supply and to lower the price, and in improvement to industry staples such as the taxi meter. For example, in a deregulated industry, tariffs negotiated on the spot between a driver and a customer could be secured through an upgrade in meter technology. A driver would either program an agreed upon per kilometre rate into the meter, or set a fixed rate and issue a receipt that the passenger would pay in full upon arrival at his destination.
III. Conclusion and recommendations
Abolition of all restrictions on the taxicab industry, except for those that govern public safety and environmental standards, will result in an immediate increase in taxicab supply, an overall reduction in taxi fares, and improved service, while reducing pressure on urban transit systems, and creating new business and employment opportunities in a low-cost, easy-entry industry.
With an increased market for taxi services, the use of private automobiles would decrease, alleviating traffic congestion and air pollution while contributing to a smoother functioning economy. While almost all citizens would benefit from these reforms, they would especially benefit those less well off (low-skilled entrants and consumers who cannot afford an automobile), students looking for employment, and women who use taxi services the most.
But the road to revitalizing urban and intercity transportation through taxicab reform is an all-or-nothing proposition. Metropolitan Toronto cannot afford to do nothing. Open entry will not work without price deregulation. And price deregulation (and other customer service benefits) would be ineffective if the existing inadequate supply of taxicabs in Metropolitan Toronto and the surrounding area was preserved. It is therefore recommended that the province and local governments take immediate steps to develop a safe, competitive, cost-efficient, and environmentally responsible urban and intercity transportation policy by:
1. Creating an open market for taxicab operators
The government of Ontario should immediately create a province-wide open market for the taxi industry by ending price controls, restrictions on taxicab supply and on shared-ride services, and jurisdictional boundaries. Open jurisdiction would include airports owned either by local airport authorities such as the Greater Toronto Airport Authority or Transport Canada.
2. The return of competitive jitney services
The amalgamated City of Toronto and surrounding GTA communities should end restrictions on shared rides and jitney services. Owners of multipassenger vans and minibuses with safety certificates should be able to provide local and intercity transportation services in competition with transit companies (TAC) and GO Transit.
3. Taxicab driver re-testing
To ensure the safety of the passenger, and to protect surrounding vehicular and pedestrian traffic, the Ministry of Transportation should require that a driver must hold a chauffeur’s licence to operate a taxicab. The ministry should also make regular driver re-testing compulsory.
4. Ensuring safety and environmental standards through vehicle certification
Each taxicab or multipassenger van used for taxi purposes should be subject to an annual inspection by a certified agent of the Ministry of Transportation. The cost of vehicle certification would be paid for by the vehicle owners.
5. Greater efficiency through user-pay taxi stands
Municipalities should set up taxi stands on a user-pay basis either by selling stands to private operators or setting up meters. Transit companies and hoteliers would be able to sell or lease space in front of subway stations, bus stops, and hotels. Airports could charge for space allotted to the taxi pool.
6. Compensation for plate holders
Municipalities should develop criteria to compensate plate holders.
1. The Economic Effects of the Direct Regulations of the Taxicab Industry (Logistics and Transportation Review, Vol. 25, No. 2, September 1989), p. 181.
2. Studies on Regulation in Canada, Executive Summary (Logistics and Transportation Review, Vol. 15, No. 1), p. 2.
4. The Taxi Industry and Its Regulation in Canada (Economic Council of Canada, March 1982), p. 85.
5. The Economic Effects of the Direct Regulation of the Taxicab Industry in Metropolitan Toronto (D. Wayne Taylor, Logistics and Transportation Review, Vol. 25, September 1989), p. 169.
6. An Economic Analysis of Taxicab Regulation (Federal Trade Commission Bureau of Economics Staff Report, May 1984), p. 75.
7. The Taxi Industry and Its Regulation in Canada (Economic Council of Canada, Working Paper No. 30, March 1982), p. 21.
8. The Taxi Industry and Its Regulation in Canada (Economic Council of Canada, Working Paper No. 30, March 1982), p. 22.
9. Call a Taxi: Cab Drivers in Pursuit of Liberty and Profit (Barron’s, July 12, 1993).
10. Logistics and Transportation Review, (Vol. 25, September 1989), p. 173.
11. The Economic Effects of the Direct Regulation of the Taxicab Industry (Logistics and Transportation Review, Vol. 25, No. 2, September 1989) p. 179.
12. The Taxi Industry and Its Regulation in Canada (Economic Council of Canada, March 1982), p. 31.
13. Private Innovations in Public Transit (John C. Weicher, American Enterprise Institute for Public Policy Research, Washington, D.C., 1988), p. 73.
14. Call a Taxi. Cab Drivers in Pursuit of Liberty and Profit (Barron’s, July 12, 1993).
15. Revitalizing Urban Transit (Robert Cervero, American Enterprise Institute for Public Policy Research, Washington, D.C., 1988), p. 75.
16. Okay, You’re a Taxi (Metropolitan Toronto Business Journal, July/August 1989), p. 22.
17. Wall Street Journal, February 1, 1993.
18. Impact of Taxicab Deregulation in the USA (R.F. Teal and M. Berglund), p. 40.
19. Proposal 72 Would Free the Cabs, Help the City (Indianapolis Business Journal, April 18-24, 1994).
20. Revolution at the Roots: Making Our Government Smaller, Better, and Closer to Home (William D. Eggers and John O’Leary, Free Press, New York, New York, 1995).
21. Okay, You’re a Taxi (Metropolitan Toronto Business Journal, July/August 1989), p. 21.