A taxing question

Taxi booking services such as Uber, Gett, GrabTaxi and Ola have been growing in popularity all over the world.  These apps attract commuters – predominantly in major cities – by providing a third-party taxi booking service that connects them with drivers typically through a smartphone app.  When a commuter makes a booking, drivers in the proximity would be informed of the potential booking.  Drivers then decide whether or not to accept the booking.

There are a variety of business models.  Some companies such as Gett focus solely on bookings of licensed taxis whilst others such as Uber and GrabTaxi offer both licensed taxi bookings (UberTaxi or GrabTaxi) and chauffeured service in a private car (Uber or GrabCar).  Often, companies differentiate their service according to the type of vehicle hired for the trip.  UberX, for instance, is Uber’s lowest cost option, offering sub-compact sedans (that seat four passengers) and up, with vehicles being up to ten years old, while UberLux rounds off the other end of the scale and offers booking of the fleet’s finest vehicles.  There are also companies that focus on niche market segments such as offering chauffeured private car services for disabled people or people with special needs who may need drivers that are trained to help, or for people travelling with pets.

The draw

The attraction of these services is that they provide a taxi booking service that is superior to what was available previously.   Traditional taxi booking services were often limited to a small fleet, resulting in waiting times or being told ‘to try again in 10 minutes’ if no driver was available.  Customers might have had to try a number of taxi firms to get a ride.  The new services by contrast offer a much larger fleet by aggregating across a range of taxi companies and individual drivers.

In Singapore, Comfort Del Gro (CDG) has the largest fleet of taxis – over 16,700 taxis or 60% of the total number of taxis in Singapore. Its next largest competitor (Trans-Cab) owns just over 4,700 taxis, roughly a quarter of CDG’s fleet. Pre-Uber-GrabTaxi days, commuters who needed to book a taxi are likely to turn to CDG (via phone or CDG’s in-house booking app) rather than its competitors (Transcab and SMRT also have their respective in-house booking apps), as the probability of getting a taxi sooner was higher given the comparatively larger size of CDG’s fleet. In fact, CDG was so popular that there was a constant waitlist to become a CDG driver. Over-subscription for CDG’s taxis means that CDG could charge drivers higher rentals for CDG vehicles. With the entry of taxi booking apps such as GrabTaxi and Uber however, commuters and drivers no longer have to rely on CDG arrange a ride – one CDG driver interviewed last year said he got more than ten jobs a day from GrabTaxi compared with only two from CDG’s in-house booking system. GrabTaxi also ranked first (ahead of CDG’s in-house app) in a poll last year on commuters’ taxi booking app of choice.

Rather than standing by the side of the road and trying to hail a cab for example, commuters may now book their ride from the comforts of indoors without necessarily incurring greater waiting times that were typical for traditional taxi booking services – a benefit that increases substantially in bad weather conditions.  Commuters also have a greater range of choice: they can pick licenced taxis or chauffeured services in a private car, choose between different types of vehicles, and get services that meet special needs.  With some services operating globally, the same app may give users access to taxi services when travelling abroad without the need to find a local taxi booking services.

Often, booking a ride has not only become easier, but also cheaper.  Using a private chauffeured service instead of a licensed taxi means that fares may be much lower than those set by regulation.   Aggregation across taxi firms also removes some of the asymmetries from different fleet sizes that could hamper competition (see box).

From the perspective of drivers, they benefit from knowing where the customer wishes to go before accepting a booking.  This may allow them to plan and manage their jobs for the shift more effectively, reducing the search costs incurred in seeking out a potential passenger and increasing the driver’s efficiency.

The fact that these third-party booking apps have attracted a large user base within a relatively short period of time clearly indicates that commuters and drivers alike value the services they provide.  The increasing reach of firms like Uber (presently operating in 63 countries) and the ease with which they find funding1 suggest that the growth potential for such services is far from exhausted.

What is the downside?

Customers have benefitted from lower prices, greater scope of services, higher transactional volumes and an improved quality of service of pre-booking rides.  Taxi drivers themselves are likely to benefit from more control over the jobs they accept, and perhaps greater efficiency in terms of managing their shifts.  Yet, the new services have faced difficulties in many places and opposition from established providers.

In London, drivers of black cabs have been on a number of strikes and go-slow protests, causing traffic to come to a standstill, in order to protest against the lack of regulation of these new services.  In Paris in June this year, taxi drivers decided to take matters into their own hands by blocking roads to the Paris airport and physically attacking UberPop-cars.  Similar protests in cities around the world have resulted in a full or partial ban of such third-party booking services or a decision of the providers to suspend services.  Uber is a good example, as the figure below shows.  In mid 2015, Uber has been banned or is fighting bans in almost as many cities as it operates.

The reasons for the bans are linked to claims that consumer protection is insufficient in particular when using chauffeured services in private cars.

One concern is that companies such as Uber do not conduct thorough enough background checks on their drivers, putting passengers who use their services potentially at risk.  And there have clearly been incidents that show these dangers.  For example, an Uber driver has recently been convicted of raping a female passenger in Delhi last year.  In the United States, sexual assaults on passengers from Uber drivers have been reported in Boston, Washington, D.C., Chicago, Oklahoma, Los Angeles, and Orlando.

There are also concerns that private cars may not be easily identifiable by potential passengers, thus posing a safety risk particularly in cities or neighbourhoods that are less safe, and in relation to adequate insurance cover carried by drivers of private cars offering chauffeured services.  For instance, in Alberta, Canada, the Insurance Bureau of Canada reported in July this year that some of Uber’s drivers did not have adequate insurance coverage.  Add to this that drivers are not professionally trained and may be unfamiliar with routes, potentially making for a rather mixed passenger experience.

All of these criticisms hark back to the point that the internal policies on vehicle and driver standards, credentials and insurance cover may be inadequate and that there is no regulatory control that would set, and enforce compliance with, minimum standards.  These companies are not regulated in the same manner as traditional taxi companies, nor do their drivers need to pass the same background checks and meet the same requirements as licenced taxi drivers.

To regulate or not and how?

Both the growing popularity of these services with customers (and at least some drivers) and the vehement opposition from established taxi services show that they increase competition and bring innovation and lower prices.  At the same time, there are well-founded concerns that may need to be addressed through appropriate forms of regulation.

However, simply subjecting new services to the same regulatory oversight as traditional taxis misses the point.  In the age of the ubiquitous satellite navigation system, requiring drivers to possess extensive local knowledge seems arcane – though obviously a requirement that drivers are safe and capable of making use of the technology to get their passengers from A to B in the most efficient manner would still be required.  To a large extent, it should be possible to leave this to market forces and rely on reputational mechanisms to ensure that companies such as Uber undertake the checks and monitor their drivers.  The risk of substantial damage to the brand name that might otherwise occur and the impact of poor reviews a driver might receive from users on his potential income should provide powerful incentives.

Whilst a passenger may be willing to put up with a service that has a reputation for its drivers being less familiar with directions to the intended destination if the ride costs say 20% less than taking a black cab, the issue is quite different when it comes down to drivers’ trustworthiness.  Only the very hard-nosed would argue that factors such as adequate insurance cover or drivers’ characters could be left entirely to market forces.  This is because these factors are very difficult for passengers to assess, and the cost of repeated incidents that reveal the shortcomings of particular services might be considered unacceptable.  This would suggest a case for regulatory oversight that guarantees a basic level of safety and protection when using the likes of Uber.

A handful of regulators around the world have recently introduced frameworks or are currently consulting on how to regulate chauffeured services, with more or less success in focussing on what might need to be controlled and what could be left to the market.

In May of this year, the Philippines became the first country in Asia to create a new category of service (not taxis) known as Transportation Network Vehicle Service.  The framework imposes requirements on the type of vehicles that companies like Uber should use in their fleet, the age of the vehicles, insurance requirements and requirements to issue e-receipts to passengers.

In Singapore, third-party taxi booking companies operating a fleet of twenty or more vehicles are now required to register and obtain a licence from the Land Transport Authority.  The new framework governs the customer service these companies should provide and requires licensees to differentiate between taxi and non-taxi booking options (where applicable), present clear information about fares to commuters upfront and disallow pre-trip bidding or tipping for taxis and not charging commuters a booking fee higher than that charged by the taxi companies.  The Singaporean regulation thus covers service quality aspects that could not be safely left to the market place.

In London, Transport for London (TfL) launched a consultation towards the end of October this year on a series of proposed regulatory measures for chauffeured services in private cars including:  stricter insurance requirements, requiring that drivers undergo an English language test, conducting a full Disclosure and Barring Service checks on all employees who come in contact with passengers, providing a telephone support number, imposing a five minute minimum duration between a commuter making a booking and the driver commencing a journey and not allowing operators to show vehicles available for hire either visibly or virtually via an app in order to reduce the risk of “touting” and illegal cab activity.  These proposed regulations are a mix between issues that might need to be addressed to protect customers, and others that are less obviously in the interest of customers or could not be used for service differentiation.

These frameworks or proposed frameworks clearly show that regulators see a need to regulate third-party booking services, though it is less obvious that they adequately reflect the ill effects of over-regulation on stifling competition and potentially inhibiting investments and innovation.  In particular, regulators should be wary that some regulatory measures put forward purportedly for consumer protection may have anti-competitive effects.   The measures currently consulted on by the TfL for instance seem to go far beyond what might be justifiable as a measure of protecting customers.  The five minute minimum duration that the TfL is considering imposing for instance, has been proposed on grounds that it would allow the driver to arrange/plan the pick up with the commuter in order to minimise the risk that the passenger would board the wrong vehicle.  However, such a measure could reduce the efficiency of the near-instant services that the likes of Uber provide, and potentially make such services artificially less attractive to consumers.  The clear winners would be black cabs, which can be hailed in much less than five minutes (at least on a good day).  On the other hand the frameworks in Philippines and Singapore do not seem to require any specifics on background checks that should be conducted on drivers.

Overall, it is important that the regulatory framework ensures that commuters are protected but that the impact on competition from the measures proposed should be limited as far as possible so as to allow market forces to drive innovation and change.  A fine balance no doubt, but one that is crucial to achieve – and certainly not one that could be achieved on the basis of technicalities that might differentiate services in the eye of the law:  Although the recent decision in the London High Court in favour of Uber might have brought much-sought legal clarity to the question whether Uber’s app is the same as a taximeter, which then would affect whether Uber’s vehicles where operating in contravention of the Private Hire Vehicles (London) Act 19982 – but it probably has not added much transparency to customer awareness about the difference in terms of regulatory oversight between black cabs, licensed minicabs, and Uber’s private chauffeured services, or increased the level of customer protection when using the latter.

 

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Footnotes

  1. Uber for instance is reported to have raised US$2.7billion in funding since its inception from investors including BlackRock, Google Ventures and Fidelity. []
  2. The Court decided that the app is not a taximeter because the computation of fares (based on distance and time in the vehicle) is not done by a device fixed to the vehicle, but rather takes place on Uber’s servers. []

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