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Transport Regulation: If This Were Finance Uber Would Be Behind Bars

I wanted to write a piece on transport after this exchange with Marc Andreesen, Steve Randy Waldman and Isomorphismes on twitter about regulation and rent-seeking. The twitter block link is below:

Rent-seeking and stealing or breaking the law or regulations can be two sides of same coin. Say a regulation is imposed which is, in aggregate Pareto terms, welfare destroying. For example, say you did something like restricting the number of taxi licenses arbitrarily providing an endowment and rents to those who own them. To return that benefit you have two options: break the law / interpret the law as you deem appropriate (run a “gypsy” cab or start Uber) or try to get the law overturned. Couch it in whatever language you will (“freedom fighting!” “Transport choice!” “Trust buster!”) but if you want to get that excess rent removed that is legislated then you either break the law or change the law. To that end I’ve pulled up the data on the cost of Taxis in Sydney from this report and compared it to a hypothetical Uberx vehicle that does not pay plate costs or “network costs” or “operator margin” but does pay 20% of revenues to Uber:

taxi costs and surplus

Uber is a great product but I think the original genius move here is pretty simple: saying “screw you” to regulators and their exorbitant and socially worthless plate lease costs and radio network requirements and raking a good 56% of the value generated. The products are the same – transport on demand – and there are some cost savings through using smartphones instead of radios but lets not joke around about where the value creation is here: its in telling regulators where to go and getting away with it.

There are other services out there that provide smartphone bookings to Taxis and do not flount the law: IngogoGocatch, Hailo and others. The problem is that at this point in time not breaking the law is a major competitive disadvantage due to the numbers above and regulators seem to be in Uber’s sweet spot of being too gutless or incompetent to regulate similar businesses in a similar way by getting rid of exorbitant rents, ensuring whatever safety / quality of concerns they have are addressed and then letting the market sort itself out. The confused response of the NSW state government to Uber adopting a Lyft like model is case in point.

It will be very sad if regulators cannot see the forest for the trees here and do the right thing – it will set a precedent of telling regulators to get stuffed, getting away with it and being handsomely remunerated. I run an asset management business: I am guessing that if I decided I didn’t want to file reports because I thought the filings were poorly formatted, arbitrary and of marginal value to regulators (they often are) then that would not go down too well even if I was right and made sensible suggestions about how “this would all be way better with my new API”. Why is the regulation of finance so deadly serious and transport such a joke? To that end Transport regulators need to answer a few questions:

1. Do you consider it your job to uphold the law? (I hope yes – FYI, right now, you really aren’t.)

2. Do you consider it your job to formulate coherent legislation to the benefit of your electorate? (I would hope yes, but if you have decided to be a corrupt and wholly captured by vested interests then by all means keep up the work!)

3. Do you think similar businesses should be regulated in a similar manner? (I would assume yes).

4. Then seriously, WTF are you guys smoking when it comes to taxi legislation? (I don’t know but it must be good and/or come from Cabcharge or Uber).

Comments like this from the latest set of taxi fare determinations are a farce and show just how far regulators have moved away form any principles based approach to regulating this industry:

We are making our recommendations for 2014/15 in the context of a 25%reduction in licence lease costs by 2017/18. After carefully considering the objectives of our review and the submissions from stakeholders, we still consider that releasing enough licences and setting fares at a level that results in 25% real reduction over 5 years from 2012/13 is an appropriate balance between better outcomes for passengers, drivers and operators, while still avoiding unreasonable impacts on existing licence holders.

Since when did protection of excess rents created by fiat of government and increased by lobbying over decades become a key policy objective? Why should “operators” who own the plates and earn excess rents come into this equation at all?

Lets start with a few principles for regulation as if we started this industry with a blank slate:

1. Customers want rides -> should make rides easy to access and prices competitive.

2. Drivers want jobs -> should do as above. Ultimately, this is a two sided market problem and Jean Tirole is worth having a read on that basis. Original paper is here.

3. There are some overarching regulatory objectives – you want cars with proper insurance, you don’t want axe murderers driving cabs late at night, etc etc. You want vehicles to pass some kind of criteria tests for safety.

So – you’d want to have a range of competitive booking networks that compete for business a lot like stock exchanges. You would likely have a few very large ones in each geographical market but they would be priced competitively. 20% off the top would likely not be the outcome for revenue share, more likely a fixed booking or lower booking charge the likes Hailo, Ingogo and Gocatch charge.

You would then require drivers have some sort of camera or other security features and some background checks, likely covered by an annual or fixed licensing fee. Metering would be done via GPS and booking networks would have to comply with some kind of data retention rules for metering data. Fares could be very variable – its all a question of ensuring the market clears. Vehicles would be subject to checks. No doubt some consultancy type services by security companies or the like might pop up to bundle these services but they need not be integrated with booking services and they should be able to compete on price.

Why is this seemingly so hard for Gladys Berejiklian and the like to achieve? The problem is that partial reform will just slow the death of the industry and leave it in the hands of Uber whereas a big bang could lead to a massive improvement in consumer and driver welfare. Just who does the government service in this area?

 

 

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7 replies »

  1. I liked Steve Waldman’s comment about “rent-seekers”. Too often it is a term thrown around by disrupters or new competitors to disparage incumbents. It is obviously true in the case of Cabcharge, and you make a very good point that bureaucrats might deregulate the cab industry just enough to deliver it into the cold, dead hands of Uber.

    You made a good point in a previous post about rent-seeking: “The patrimonies of today look a lot like those of the 19th century”. Which suggests to me that Picketty is right and this is the steady-state of mature capitalism. We are all inherently rent-seekers, just the capital isn’t equally distributed. Creatures of leisure want a risk-free income stream.

    Would love to see an exchange model for loyalty points, too. Bitcoin is staring these stewards of obfuscatory systems in the face.

    So many people can’t see a future where we rent everything, where the concept of cars sitting idle all day would be ridiculous.

  2. This is all literally blather.

    Regulation is Pollution. We can accept some pollution, it is a necessary cost, but it is a negative thing that has to be optimize for the lest harm.

    If you don’t get this, accept this, and work within this frame, you are “other” and have nothing to add.

    That is all.

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