Uber and Taxi Industry Reform: Is the price worth the cost?

Like it or not, the sharing economy is upon us. With app-led businesses such as Airbnb contributing some $214 million to Sydney's economy without building a single new hotel, it is only a matter of time before a number of industries face a shake-up from non-traditional competitors. With Uber hoping to start up in Canberra in October, it looks like Canberra Elite Taxis is in for a rough time. 

The Chief Minister announced the ACT Taxi Industry Innovation Review in January and submissions were invited from 16 May until 29 June 2015. Minister assisting the Chief Minister on Transport Reform Shane Rattenbury stated: "Canberrans want to be able to access a range of convenient transport options, and we need to consider how to facilitate entrepreneurial operators entering the market so that they can operate safely and equitably".

In the ACT, Uber appears to be taking a more measured approach that may well pay off. Consequently, the ACT Government's approach to Uber is considered whereas other jurisdictions like Queensland have been fining Uber's drivers (Uber pays the drivers' fines). It would seem that both governments and new entrants to the taxi industry have settled in to the routine of reform.

And in the ACT, it's good timing: Uber's chief suggests the company will provide Capital Metro's last mile. And the ACT Government's acknowledgement that the "taxi industry is evolving" is in line with Professor Ian Harper's recent Competition Policy Review which has identified the taxi industry as a priority area for reform (see section 10.2).

The view is that the current taxi industry structure prevents competition from ride-sharing companies, particularly Uber. The Harper Review suggested that one way to establish a level-playing field was to remove the community service obligations from current taxi operators. Funding these separately would enable taxi fares to reflect the cost of providing standard services rather than cross-subsidising the required CSOs.

Much of this makes good economic sense and it extends the program of market reforms which began in the 1980s. The biggest problem is that operators in the taxi industry have invested in the existing system which has been mandated by government. According to Professor Harper, "there's no doubt that if people have invested in good faith in assets, and then government comes along and reduces value of those assets to zero, it would strike many Australians as unfair".

That is not to say that government cannot change the rules without compensation, but it is not uncommon for transitional arrangements to be made to reduce the disruption created by institutional change. It is clear that national market reforms will be politically difficult and may not happen in the near future. But there is nothing stopping states and territories from reforming their taxi industries.

Indeed, Uber's popularity has fixed reform of the taxi industry on the policy radar in Victoria (due to report this month), NSW, Western Australia, South Australia,and the ACT. With Queensland's Taxi Strategic Plan up for review next year, it is only a matter of time before there are changes throughout the nation.

But Uber still has many hoops to jump through. Recent global protests against Uber by taxi drivers will take some time to settle. It is difficult to see how reform can be achieved without compensation. Nonetheless, WA Premier Colin Barnett has ruled out taxpayer-funded compensation for those who have invested in taxi registration plates if the reform agenda goes ahead in the near future.

Major reforms to allow Uber to operate appear to be focused on creating a level playing field. This might be through reducing or removing limits on taxi registration plates (or removing these altogether), separately funding taxi operators' CSOs, and unravelling the existing barriers for new entrants to the industry. This might also mean regulations to target Uber's safety standards and other professional standards such as driver qualification, English language proficiency, security camera protection and so on. Either way, it is unlikely that the regulated monopoly that taxi operators have enjoyed for decades will remain the unchanged.

While many tout the benefits of the so-called sharing economy, the sole focus on lower consumer prices overlooks other serious issues. For one thing, taxis currently enable users to travel anonymously, whereas Uber's users' details, including travel time, route and destination, are all tracked. Privacy concerns that Deputy Prime Minister and Infrastructure Minister Warren Truss recently raised about using technology to reduce road congestion must surely apply to Uber, too.

US "software freedom activist" Richard Stallman provides a long list of reasons not to use Uber. Along with user privacy, Stallman brings to the fore the thing that most concerns taxi drivers: pay and conditions. Stallman says that a more accurate term for the "sharing economy" is the "piecework subcontractor economy". Business Insider agrees, and after reviewing a number of Uber's claims and evidence about how much drivers can expect to earn, suggests that: "If you want to make a living off of Uber, you’re going to have to drive an insane number of hours".

To test Uber's claims, Philadelphia Citypaper's Emily Guendelsberger went undercover. Her new driver orientation consisted of a 13-minute Youtube video. Drivers and riders rate each other, and drivers can lose their jobs if their rating drops below a certain level. Sounds a lot like teaching.

As it turns out, the US$74,000 per year Uber claims that drivers can earn appears to defy the evidence. Guendelsberger cites competition from Lyft (another ride-sharing app) tends to reduce Uber's rates. The Washington Post reports that Uber is no longer making these claims as it would now require a driver to work 80 hours per week to earn US$74,000 at the claimed rate of US$19 per hour.

So for a typical 40 hour week, (by extrapolation) a driver in San Francisco could expect to earn about US$37,000 per year. And that's before you cover fuel, repairs and maintenance, insurance, depreciation, an iPhone (or you rent one from Uber). In Australia, you will also have to register for GST. Then there are accountants fees, recording keeping costs and so on. And depending on the length of each paid trip, you may actually earn less the more you work.

But in California last month, the Labor Commission ruled that Uber drivers are employees, not contractors. This will significantly increase Uber's costs. But that's not all. Uber's insurance only covers drivers from the time they pick up a passenger until the passenger leaves the vehicle. Uber has insisted that drivers' require their own commercial car insurance to cover them for non-passenger trips. 

Indeed, insurance companies insist that as soon as a driver turns on the app, they are operating their private cars as commercial vehicles. Sadly, when a six-year old girl was killed in San Francisco by an Uber driver who was not carrying a passenger, Uber insisted that: "the company is not liable for any damages, as its drivers are freelance operators, not employees". However, the girl's family are suing Uber on the basis that the driver 'was using the Uber app “and was as such an agent and/or employee and/or partner of Uber”'.

The Uber driver was using his phone illegally while driving. He lost his "job" (his Uber account was deactivated shortly after the death of the young girl). According to the San Francisco Cab Drivers Association, companies like Uber should have the same insurance requirements as taxis: "“Uber, though touting itself as the future of transportation endangers public safety and has thrown transportation back into the wild-west era”.

The road ahead is not so clear for Uber, with many issues to be resolved before the "sharing economy" can provide a safe, reliable service that does not exploit its workers. But what is clear is that the taxi industry will not be the same again. The forthcoming reviews promise that something will have to give.

Guendelsberger says it best: "Driving for UberX isn't the worst-paying job I've ever had. I made less scooping ice cream as a 15-year-old, if you don't adjust for inflation. If I worked 10 hours a day, six days a week with one week off, I'd net almost $30,000 a year before taxes".

While innovation and technology can certainly bring benefits to consumers (and even Guendelsberger thinks Uber is great for users), citizens will need to consider whether the costs outweigh the benefits. Externalities such as privacy, safety and fair work conditions must be captured, otherwise Uber's business model is little more than a new way to make a profit by passing the externalities on drivers, taxpayers and pedestrians.

While something of an unorthodox figure, Richard Stallman might be asking us an important question: Are the many social costs of Uber's business model worth the few dollars that users save by not taking a taxi? Markets work, but only when the true cost of providing a service is captured in the price. Until Uber's business model is properly regulated, it would seem that taxpayers, by default, are funding the externalities that help make a larger profit for Uber at the expense of all of us.