Transport for London are giving the trade a run around with our tariff payment. TFL have stated they will not automatically be applying the cost index as in past years.
Please read the letter the LCDC Committee member, Micky Walker has written on behalf of the Trade and submitted to TFL.
Letter to TfL Finance Committee
Taxi Trade Tariff Team
October 2019
Letter to TfL Finance Committee
Taxi Trade Tariff Team
October 2019
Dear Committee,
We, the taxi trade tariff team, feel compelled to write to you with regard to the continued late implementation of tariff adjustments and further, to comment on your observations forwarded to us with regard to:
The Taxi Cost Index (TCI);
The balancing of taxi fares between fair remuneration for taxi drivers and affordability for customers;
The competitiveness of taxi fares.
LATE IMPLEMENTATION OF TARIFF ADJUSTMENTS
This tardiness is becoming systemic. We have been forced to write to Dan Maskell, the stakeholder relationship manager, on several occasions in this regard and the responses have been unsatisfactory. Instead of attempting to correct the situation, the response attempted to justify the situation by pointing out that there is no statutory duty on TFL to adjust fares annually.
However, traditionally fares have been adjusted annually since the mid 1980s, without fail, in early April. Indeed, TFLs own papers state that taxi fares are adjusted annually on the first Sunday of April unless this falls on Easter weekend, when adjustment is delayed for a week.
The last time TFL achieved this date was in 2016 and this has resulted in considerable cost to taxi drivers.
The taxi tariff annual increases were claimed by TFL to be 1.6% (2016); 3.8% (2017); 3.6% (2018); a proposed 3.4% (2019)
Although the 2016 adjustment was on time, it failed to include the significant decrease in Rate 3 and Rate 4 (the long distance rate). This far outweighed the 1.9% increase indicated by the TCI and thus fares were reduced overall in 2016.
The 2017 implementation, applied in June effectively reduced the increase by 25% to 2.55%.
The 2018 implementation was not applied until October and only then after an emergency "Chair Action". This effectively reduced the increase by 50% to 1.8%.
The 2019 implementation has yet to take place but on the assumption that another chair action will agree the proposed 3.4% increase, implementation is hoped to take place in December. In this case the 3.4% award will be reduced by 67% to 1.13%.
As a result, a total of 12% increase over four years, as indicated by the TCI, will have been reduced to just 5.48%, less than half the intended awards.
It is already known that the 2020 adjustment will be a minimum of four months late as it is no longer possible to make a tariff adjustment in less than a minimum of eight months after the amount of adjustment is calculated and the 2020 adjustment has yet to be calculated.
We have offered a solution to this situation, at some cost to taxi drivers, for 2021 onwards but TFL have yet to accept our proposal. It is unreasonable to expect the taxi trade to continue to suffer these annual delays.
We have reached an almost farcical point this week where we discussed the 2019 adjustment that has still to be confirmed, a provisional figure for the 2020 adjustment and proposals for the 2021 adjustment, all at the same meeting with TFL.
If a Chair Action were not allowed for this year’s adjustment and next year’s adjustment were to be on time, we would be asking for both adjustments at the same Finance Committee meeting in 2020.
THE TAXI COST INDEX (TCI)
The TCI is the bedrock of the taxi tariff. It is the sole reason there has been no dispute on fares between drivers and the regulators in the last 35 years. As such, the trade is extremely concerned that last year’s "Chair Action" stated that the TCI would not automatically be adhered to in the future.
Prior to the introduction of the TCI in the mid 1980s, taxi fare adjustments were on an ad hoc basis and this led to problems such as those in the late 1970s and early 1980s. During the late 1970s, the taxi tariff was not increased despite the 1978 oil crisis more than doubling the cost of diesel and high inflation almost doubling the price of a new taxi in the same period.
In order to redress this imbalance, after demonstrations in the streets by taxi drivers and drivers regularly refusing uneconomical fares, the tariff was raised by 52% in 1981. Such a situation was equally of no use to drivers or their customers. This was a primary reason for the introduction of the TCI.
The TCI is the taxi drivers’ RPI and makes a fair reflection to changes in the cost of running a taxi and driver remuneration and has worked very well for more than three decades. The taxi trade would be very much against the regulator moving away from this tried and tested method of tariff adjustment.
While it may be prudent to periodically review the contents of "the basket", the TCI itself provides the best method of ensuring that drivers are fairly compensated while customers fares are only raised to cover the inflationary increases of inputs.
The trade has worked with TFL to apply the increase indicated by the TCI differently across the tariff rates but to date, not moved away from the total indicated by the TCI. This has effectively lowered Rates 3 and 4 relative to rates 1 and 2. It is the ambition of the trade to continue to correct the imbalance between rates caused in the past by simply increasing the tariff across the four rates evenly.
THE BALANCING OF TAXI FARES BETWEEN DRIVER REMUNARATION AND CUSTOMER AFFORDABILITY
A perfect balance already exists as a result of using the TCI. TFL statisticians evaluate the rise in the cost of the basket of goods required by a taxi driver to carry out his business.
The rough split of taxi driver revenue is 40% costs (excluding labour cost) and 60% profit (income). In turn, the TCI is comprised in the same ratio. TFL statisticians annually review the increases in the basket of items in the TCI and national wage inflation. Added together, the TCI determines the amount that taxi fares have to rise to maintain, rather than increase, a driver’s real income.
Taxi fares only increase in nominal terms as a result. Therefore in real terms, an increase in taxi fares is only a real increase to a customer if said customers’ income has fallen in real terms in the same period. If this latter is the case, it is outside taxi drivers’ responsibility to redress any such imbalance.
Thus, if the original tariff set in the mid 1980s was deemed to be a fair balance between driver and customer, then that balance has been maintained in real terms to the current day. If it was unfair to driver or customer, the regulator has been responsible for an imbalance for the last three decades and more.
In any event, the whole basis of market economics is that the customer exercises choice. Based on the utility provided to the customer and the price of the service, the customer will decide whether or not to avail themselves of that service; in this case, our taxi service. In other words, the customer will decide if fares are too high or otherwise.
Normally, it may be argued that by raising price (fares), demand will fall. Conversely, if price (fares) falls, demand will increase. As a result, it may benefit both customers and drivers to restrict increases to below that indicated by the TCI.
However, this depends on an assumption that taxi fares are subject to a normal price elasticity of demand and that taxi drivers have the potential to reduce costs and/or increase efficiency. The reality is that neither condition applies to the London taxi driver.
The trade has contended for several years that taxi drivers face an inelastic demand. The recent investigation by SDG, commissioned by TFL, confirmed this opinion of inelastic demand. Therefore, a reduction in taxi fares would increase demand by too small an amount to maintain driver revenues. On the other hand, an increase in fares would result in a reduced demand but nevertheless increase driver revenues sufficiently to compensate for inflationary increases in costs.
With regard to costs, a driver is captive to costs imposed by the regulator, in the main. For example, a driver does not choose to operate a cheaper vehicle than the one currently offered by a monopolist producer as a result of regulations.TFL have the potential to reduce the costs of the taxi service by reducing regulatory costs but not the driver.
In most businesses, cost-cutting will involve reducing labour costs but this is not open to the taxi driver as the owner/driver is the only labour directly employed in running the business.
Equally, increased efficiency of the service depends largely on the road system being used by drivers. Again, the driver is hostage to TFL traffic planning and the reality of this is that year on year, average traffic speeds in Central London are reducing by 3-4%. Instead of increasing efficiency, this situation reduces efficiency and in so doing, increases taxi fares as a fare is comprised of three parts – hiring charge, distance and time elapsed.
It is in the gift of TFL to increase efficiency and reduce fares by allowing taxis greater access to roads and systems enjoyed by other public transport services, namely buses. However, a driver has no scope to make such efficiencies.
The corollary of all the foregoing is that a driver does not have the ability to reduce costs and thus, the only fair way to maintain a balance between driver income and customer fares is to apply the TCI automatically. If fares were increased above the amount indicated by the TCI, fares would be too high. If below that indicated by the TCI, the regulator would effectively be forcing a reduced income on drivers. Forcing a transfer of driver wage to reduce customers’ fares could hardly be called a fair balance.
COMPETITIVENESS OF TAXI FARES
The only useful way to evaluate competitiveness of a service is to compare it to similar alternative services. In the case of the London taxi service, the alternatives are any other way of travelling around London.
The cheapest fare on the tube for an adult is £2.40 unless using cash, when it is £4.90. Thus, it could often be cheaper for a cash customer travelling only one stop on the line, to use a taxi .For multiple people using a taxi, there is considerably more scope for a taxi to be cheaper. Six people using the tube pay a minimum of £14.40 (£29.40 if using cash), while the minimum fare in a taxi for six people is £3.00. Thus, at certain times of day a fully used taxi can often be cheaper.
The cheapest bus fare per person is £1.50; the minimum taxi fare is £3.00. Thus, there is some potential for a fully occupied taxi (six people)to be cheaper than some bus rides. Obviously, the tube and buses cannot be considered to be close substitutes for the taxi service and a comparison of fares is of little use.
The only other form of transport that can be considered a close substitute is the Private Hire (PH) service. However, in its intended form it may not be as close a substitute as many would consider. The taxi service is a privately-funded but nevertheless publicly-hired service, whereas the PH service is privately-hired.
In its form intended by the 1998 Act, a private Hire Vehicle (PHV) has to be booked in advance and in the early years after licensing this was how the PH service operated. As such, it was not a very close substitute for the immediate hire taxi service. However, it was a very close substitute for the pre-booked taxi service operated by taxi "circuits".
A much lower regulatory cost placed on PH had little effect on the immediate taxi hire service but it quickly decimated the pre-booked taxi service. In 2003 when PH licensing was complete, the largest PH operator, Addison Lee, enjoyed turnover that was only half of the largest taxi "circuit", Comcab. By 2009, Addison Lee’s turnover was greater than the three taxi "circuits" put together.
However, once TFL interpreted "pre-booked" to mean something other than "advance-booked", PH became a much closer substitute for taxis with the introduction of Satellite Offices which in practice were nothing less than PHV ranks for immediate hire.
With the arrival of "Apps" and particularly Uber, in 2014, much of the PH service has changed from an "advance – booked" service to an effectively "immediate hire" service, offering the same service as taxis.
The taxi trade assumes that when the Finance Committee refer to "competition" it is the PH service is it referring to. If so, there are a number of reasons why such a comparison is unfair but basically, the PH service represents unfair competition to the taxi service.
All regulation carries cost and PH are regulated much more lightly than the taxi service. The most glaring example of this is the vehicle used. Currently, the ubiquitous App PHV is the Prius. The only vehicle available to the taxi trade is that provided by a monopoly supplier, LEVC’s TXe. The TXe, even after the current grants are deducted, costs almost three times the cost of the Prius.
Thus, it is impossible for the taxi service to compete with PH Apps on price as the former faces hugely greater regulatory costs than do PH.
Another factor is supply. The taxi fleet has remained static or grown gradually over the last half century, although there is currently a worrying decline in the fleet. Meanwhile, when PH drivers were licenced in 2003 there were 24,000 drivers. As at 20th October 2019, there are now 107,674 (450% increase) PH drivers, an obvious over-supply. This over-supply of drivers enables PH operators to compel drivers to accept returns that more often than not oblige the driver to work unacceptably-long and possibly dangerous hours of driving.
Even then, many PH drivers are obliged to obtain in-work benefits to augment their income. These benefits are effectively a subsidy on PH fares that does not apply to taxi fares.
Further, current PH fares are unsustainable for the operators. Addison Lee operate a loss. In 2016 they made £10.5 million profit; in 2017, they made a £20.8 million loss.
The Apps fare worse. Uber have consistently lost money since they began trading. In 2017, the company’s losses grew by more than 60% to $4.5 billion and those losses continue to increase. The Uber model depends on predatory pricing to drive competition out of business and create a monopoly situation that will allow the opportunity to make supernormal profits in the future.
Even after that, taxi fares often compare well with PH. As an example, the minimum fare that could be obtained at time of writing for a peak time journey from New Fetter Lane, EC4 to Charing X Station was £17.00. A taxi fare will always be cheaper for the same journey. However, it is accepted that PH fares are generally lower than taxi fares, as regulatory costs dictate they should be.
In summary, it would be grossly unfair and unrealistic to compare the price of a taxi service with that of the PH service when the regulator places as much as three times the regulatory cost on the taxi service as it does on the PH service. In addition to that, PH drivers are working for fares that often require government subsidy via in work benefits and operators are charging fare rates that are unsustainable as the major operators are making huge losses.
In any event, if the spirit of the 1988 Private Hire Act was adhered to, rather than using shoddy wording to allow the regulator to legally misinterpret The Act, the two services would not be close enough substitutes as to make a comparison of fares a worthwhile exercise. The intention of The Act was that "pre-booked" meant "advance-booked" and that was the basis for applying lighter regulation to the PH service than that applied to the taxi service. By interpreting "pre-booked" to mean simply putting an operator between driver and customer, the regulator has allowed PH to offer an effective immediate demand service and destroyed the rational for the justification of dual regulation.
In summary, it would be grossly unfair to ask the taxi service to consider PH fare levels when setting its own fares, or more precisely it would be unfair for the regulator to make such consideration.
LETTER TO TFL FINANCE COMMITTEE
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