(This essay was published in South China Morning Post on 2 September 2015.)

 

Passengers’ outpouring of dissatisfaction with taxi services erupted after police made a high profile arrest of Uber staff for alleged violation of regulations governing the operation of commercial vehicles.

 

Many comments in the media were spot on about the problem of an over-regulated industry that has completely stifled competition for too long. Current regulations work in the interest of taxi license holders (valued at $7 million a piece), but not taxi drivers, not passengers, and not even the general public.

 

The government’s framework for regulating commercial transportation seeks to satisfy multiple goals, including meeting the different demands of passengers, avoiding excessive congestion on the roads, ensuring standards of safety are met and prices are reasonably affordable by passengers, and providing choice between transportation modes. This is not an easy task and one should not belittle its accomplishments despite some obvious flaws.

 

However, one flaw is that we have ended up with a taxi industry that provides a homogeneous, low-quality service that fails to satisfy customer demand.

 

There are two kinds of dissatisfaction. First, customer preference for higher value added service, for which they are willing to pay a higher fare, has not been met. Second, existing taxi services often fail to meet the basic standards set by regulators, resulting in overcharging, refusing rides, poor quality driving, and so on. Customer complaints against taxi drivers have been rising year on year.

 

Why have we come to this?

 

Three regulations drive the industry to behave as a uniform monopolized service. First, the number of taxi licenses has been fixed at 18,138 since 1998 and no new licenses have been issued. Second, the fare is also fixed and only periodically adjusted, which means there is no price competition. Third, taxi vehicles have to be painted in the same uniform colors, which makes it practically impossible to compete on branding and product differentiation.

 

In practice, over 90% of the taxis are primarily managed by four taxi companies, creating a quasi-monopolistic industry.

 

With fare competition illegal, the best business model is to provide the lowest tolerable service quality the market can bear. This is a winning business strategy because there are 218,617 drivers – outnumbering taxis by more than six times per shift on average – which keeps wages fully competitive all the time.

 

The entry of Uber and other mobile apps like HKTaxi, GoGoTaxi, Easy Taxi and Kuaidi is changing the landscape. Uber has introduced fare competition and also brought in new outside drivers. The other apps are primarily platforms for taxi drivers and feed business to them.

 

Taxi groups recently indicated they would launch their own car-hailing mobile app and a credit system for drivers to help improve service quality in the face of the new competition. This is to be welcomed, but if they aim to make theirs the exclusive app, it would once again stifle competition. Product differentiation through online competition would end.

 

The government is also reported to be pondering whether to permit a more luxurious taxi service. This would only set back market innovation – better to let service improvements be driven by competition online.

 

Is there any way to implement these changes while minimizing disruption to the industry and existing stakeholders?

 

A moderate approach could require all online car-hailing apps, including Uber, to use licensed taxis and licensed taxi drivers. Apps companies could add value by hiring, firing, and managing taxi drivers in their service. Drivers could simultaneously work for themselves and for multiple app companies. Fares on rides booked through apps could be deregulated and free, but taxis hailed down on the streets and boarded at taxi stands could be regulated as they are now.

 

Taxi license holders could be allowed freedom to provide a greater variety of vehicle models, including the physical appearance, to meet market demand. They could also lease out their taxi licenses to app companies altogether, to be stocked with their own vehicles. Licensed taxi drivers could in principle hire-purchase their own vehicles, or sign up to work for apps companies with taxi licenses to rent.

 

Legislator Michael Tien has announced a similar proposal. The basic underlying regulatory framework would be unchanged except to allow for product differentiation through the branding secured through apps. Taxi license holders’ interests would be preserved but shared. Since this is a value-added service, tariff deregulation would be permissible.

 

A more progressive approach is to obviate the need to require apps companies to use only licensed taxis. This will bring even greater benefits to society by tapping into the full potential of innovation and better resource utilization.

 

We should ask which approach will better fit in with an appropriately proactive government: Is it the moderate, or progressive approach, or maintaining the status quo?

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