Thursday, May 19, 2016

Designing taxi regulations for the 21st century

App-based aggregators are disrupting the transportation business world-wide. Existing regulatory and policy frameworks were not designed for this new reality. This has resulted in some knee-jerk reactions globally to do something. 

Nearer home, this is exemplified by Delhi Government. On May 1, the State Chief Minister had tweeted a fresh warning after Uber resumed surge pricing: “…Surge not allowed under law. They are warned that strong action will be taken against them”. This was a replay of April 18; when the CM had threatened permit cancellation and impounding of taxis that charged fares beyond the government rates. US based Uber and homegrown Ola had then suspended surge pricing.

The tweet led ban is an example of rule of law being compromised. The State implicitly allows a gap between policies and accepted market practice. The government has let the aggregator market take shape under this incompatible legal regime instead of acknowledging the new technology by issuing new rules. This displeased neither the entrenched incumbents (fixed fare auto and taxis) nor the disruptors (Ola and Uber) – a stable equilibrium.

Depending on the political situation, the regulatory muddle allows the governments to either stay mum or wash its hands off and claim that this new market was always illegal. This attitude increases the cost of doing business and the State gets stuck in a stable low-level equilibrium.

Politicians and bureaucrats tend to miss the fundamental reason for regulation: Government should intervene to address market failures - when the competitive market outcomes are not satisfactory for the society as a whole.

Realising the policy gaps, the Indian central government has now constituted a Committee to prepare a policy framework for taxi and other transport operators.

Pratik Dutta & I have an article in Business Standard (May 18, 2016) discussing how should policy makers think about taxi regulation? What are the market failures?