Licensing metered taxis does more harm than good – South Africa should stop it

Using a metered taxi is a nuisance in most countries: just try to find a cab on a rainy afternoon in downtown Manhattan or London. New e-hailing services like Uber have vowed to revolutionise the transportation industry. But they have also left city officials scratching their heads about regulations, and traditional metered taxi drivers from Jakarta to Toronto and Nairobi to Casablanca fuming.

In South Africa, using a metered taxi can be a nightmare. There have been many reports of reckless drivers, defunct meters or drivers who take circuitous routes to push up the price. There are personal security risks, too.

The situation is exacerbated by unlicensed and unregistered metered taxis. Such drivers are often highly organised and, as everywhere around the world, act as cartels to prevent competition from branded metered taxis.

Both unregistered and registered metered taxis haven’t welcomed the advent of e-hailing services like Uber. Instead, some have resorted to scare tactics and even violence directed at their new competitors.

This escalation of violence has pushed South African policymakers to search for new and better ways to regulate the metered taxi industry. The law is likely to soon treat e-hailing companies as metered taxi companies. The bill, however, fails to account for the crucial differences between e-hailing and traditional metered taxi services. It is likely to cause more harm than good.

Regulatory environments differ around the world. We’d argue that in South Africa regulators should stop trying to apply yesteryear’s rules to new industries and services. They should tackle industry-specific challenges instead.

And we’d ask why taxi operators – whether meter cabs or e-riding services – should be licensed at all.
 

Innovation in the local transport sector

 

E-hailing services match consumers with independent service-providers using a smartphone app. A similar approach has been successfully applied to renting holiday apartments or hiring a bike.

Uber is currently the only major e-hailing service operating in South Africa. It has drivers in Cape Town, Durban, Port Elizabeth, Johannesburg and Pretoria. Drivers usually work on their own as independent contractors but are subject to city-specific requirements designed by Uber. They must pass a background check; their car needs to be in good order and it cannot be too old.

Uber and its smaller competitors are becoming more popular around the world. But meter taxi drivers are not among their fans. Part of the answer is the tight regulation.

In South Africa, city authorities screen meter taxi drivers and test cars; they set fixed rates per kilometre charged by the taxis. These regulations usually don’t apply to e-hailing companies, allowing them to operate at lower market prices.

Most importantly, meter taxi companies must buy licenses that allow them to provide their service. Meter taxi drivers have rightfully complained that there is no level playing field between themselves and Uber. And the licensing system seems to be the main battleground between meter taxi and Uber drivers.
 

Licenses control quantity, not quality

South African cities are interpreting the National Land Transportation Act differently to deal with licensing Uber drivers.

In Johannesburg, Uber drivers operate using charter service licenses. Cape Town created a new category of licences for e-hailing services. Meter taxi drivers are insisting that Uber drivers should become subject to standardised licensing rules rather than getting what some perceive as special treatment.

But why should any kinds of taxi operators be licensed at all?

It’s been claimed that licensing meter taxi drivers protect customers. Above all, licences restrict the supply of metered taxis. New taxi operators must buy a licence from current licence-holders or wait for new licences to be issued.

Restricting supply artificially ultimately implies higher prices. If demand for taxi services is constant, lower supply implies higher fares. In the case of transport services it also means longer waiting times. Another unintended consequence is the emergence of illegal taxis.

Licences act as a barrier to entry, too. They shield metered taxis from new entrants and reduce competition to those already in the market. This has two implications. First, without competition there is no pressure to innovate. Secondly, market participants are incentivised to defend their market position through lobbying.

In a 1984 report the US Federal Trade Commission wrote that entry restrictions in the taxi markets enable:

"… taxi firms in a number of cities to exercise market power … Restrictions on the number of taxis also limit the employment opportunities of less skilled workers." 
 

Assure quality differently

There are good aspects to licensing, too: like restricting the supply to commercial drivers and only licensing cars which fulfil certain quality standards.

Economists refer to taxis as credence goods. Customers are usually unable to assess the quality of the taxi and the driver’s skills before the ride. To prevent cheating or unjust behaviour, some quality control is needed. Cities could, for example, state formal requirements and issue operational allowances to all those who formally meet these requirements.

This is exactly how we regulate many transportation markets, long-distance buses and airlines among them, and other credence goods markets like restaurants and pharmaceutical drugs. There’s no reason the same approach can’t be applied to taxi drivers.

There is also no reason to treat all companies of one industry in equal measure. The rules and regulations for restaurants differ from the rules and regulation for food trucks and other mobile food vendors, for example.

E-hailing companies are not metered taxi companies. Regulators must resist the urge to regulate them in equal measure just because both offer a similar service. Their business model is different and the challenges both types of companies pose for regulators are different, too.
 

Customers come first

The other thing regulators must remember is that they ought to work with customers in mind. Customers demand change in a defunct industry and it’s to their demands – not those of the monopolists – that regulators must respond.

At the same time, regulators must not be blinded by Uber’s grandiose promises. They need to tackle the specific challenges Uber’s business model poses. How can drivers be protected from exploitative contracts with car owners? How can regulation encourage competition in the e-hailing sector?

And, most importantly, how can authorities ensure that drivers and car owners pay income tax?

The proposed regulatory framework, which would treat Uber as an ordinary metered taxi company, would not provide satisfactory answers to any of these problems.

Co-Pierre Georg, Senior Lecturer, African Institute for Financial Markets and Risk Management, University of Cape Town; and Michael E. Rose, PhD Candidate in Economics, University of Cape Town.
   

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