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Ridesharing vs. Traditional Taxis: What are Municipalities to do?

Cab operators protest during rush hour in Toronto at the corner of Bay Street and Queen Street, December, 9th 2015.

By Thomas Barakat, Policy & AdvocacyOGRA

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The 2008 financial crisis left many highly educated and skilled millennials struggling to find meaningful employment. Many of them resorted to entrepreneurship as a mean of survival, but also as a way of utilizing their skillset to engage in meaningful work. Mobile technology as part of the broader knowledge economy allowed this group to develop new business models for their start-ups. Some of these start-ups have successfully reached scale and are now revolutionizing and challenging many aspects of the traditional economy. The highly-publicized success of start-ups such as Uber, Airbnb, and TaskRabbit have inspired many new technology entrepreneurs to mimic this type of business model and has brought into the mainstream what has now been dubbed “the shared economy”.

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The shared economy has been defined as a socio-economic ecosystem built around the sharing of human and physical resources. It includes the shared creation, production, distribution, trade and consumption of goods and services by different people and organizations.1 The shared economy has always existed, but recent advancements in technology have allowed it to rapidly proliferate. The disruptive potential of technology enterprises operating in the shared economy, or what we’ll call

Shared Economy Facilitators (SEFs), have caught many traditional service providers (TSPs) like deer in the headlights. Municipal governments in Ontario and across the globe are no exception.

SEFs such as Uber and Airbnb have become popular as a result of their convenience and low cost when compared to TSPs in the taxi and hotel industries. However, TSPs have argued that costs are lower for SEFs as a result of the largely unregulated environment in which they operate and are thus not competing on an even playing field. SEFs have been able to skirt bylaws thus far by arguing that they are technology providers and not the direct providers of services themselves. Municipal governments are now being forced to try and reconcile the popularity of these SEFs on the one hand and the uneven economic playing field for TSPs on the other. It seems that the logical solution would be a free market one: allow SEFs and TSPs to compete on a level playing field and let consumers decide which is superior. However, a multitude of

other factors including public safety, insurance, taxes, and the skirting of bylaws complicate this process.Economist Joseph Schumpeter once spoke of “a process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” This was known as creative destruction. Schumpeter argued that creative destruction is “the essential fact about capitalism.” It is easy to view the SEF vs. TSP battle through this lens: if municipal leaders are able to do so, they will not attempt to reconcile the two industries through incessant overregulation. In fact, it can be argued that overregulation has been the leading factor in the stagnation of TSPs which in turn made them extremely vulnerable to new ideas, new technology, and new business models. The way forward should be one which allows innovation, competition, and an even playing field – while also bringing the rule of law to the Wild West environment that SEFs are operating in.

Ridesharing vs. Traditional Taxis

Ridesharing services such as Uber have disrupted the traditional municipally-regulated taxi industry. Traditional taxi drivers have been visibly upset and have staged protests and rallies as their ability to earn a living is jeopardized. Although one can sympathize with an individual losing their primary source of income, the various taxi systems across the province were far from perfect prior to the introduction of ride-sharing services such as Uber. Most were (and continue to be) highly regulated municipally-backed monopolies. As a result of the lack of true competition, service suffered. This has allowed Uber to become popular very quickly. Perhaps traditional taxi drivers should not be directing their anger at Uber drivers, but at the heavily-regulated municipally-backed taxi system instead. It should not be discounted that the entry of a technology-based ridesharing mobile app operating in a grey area is the primary reason that the traditional taxi industry is even considering reform.

Ridesharing services such as Uber have disrupted the traditional municipally-regulated taxi industry. Traditional taxi drivers have been visibly upset and have staged protests and rallies as their ability to earn a living is jeopardized.

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Consumers make decisions on a number of factors, with price being one of them. If they felt they were receiving a superior experience in a traditional taxi, then a higher fare could be justified. However, many Uber users argue that they receive a superior experience in an UberX car at a lower cost.

Monika, a young professional who lives in Toronto’s Liberty Village calls Uber a godsend. “I Uber everywhere, I don’t even buy a (TTC) Metropass anymore. It’s so much cheaper and more convenient than a normal cab. I can order an Uber through my phone, watch it as it approaches on my screen, and I don’t have to worry about payments since my credit card is already on file,” said Monika.

In terms of cost, an easy first step for municipalities could be to reduce the base cost of a taxi fare. The City of Toronto has recently done so by reducing the base fare by $1.00. Yet many continue to prefer Uber as it is more convenient and provides an overall superior customer service experience.

Traditional taxi drivers argue that most municipalities have bylaws that force them to pay for licensing, commercial insurance, and vehicle inspection, while Uber drivers don’t. Furthermore, Uber drivers don’t pay taxes (Uber drivers are considered independent contractors and thus only pay taxes if they earn more than $30,000 in a calendar quarter and over the last four consecutive calendar quarters). Thus, the traditional taxi driver argument that the playing field is not equal is completely justified.

Although traditional taxi drivers are hamstrung in their ability to compete with ridesharing services such as Uber, they do control many aspects of the quality of a ride. Some interesting observations have been recorded from taxi passenger complaint data in New York. The number of complaints per taxi trip has declined since the proliferation of Uber in the city. A chart2 from The Technology Policy Institute’s Scott Wallsten demonstrates this. Additionally, data from Chicago has indicated that complaints about air conditioning, “broken” credit card machines and rude drivers has also declined.3 It seems as if the newfound competition has forced traditional taxi drivers to deliver a better customer service experience. Robert, a Toronto area taxi driver for over thirty years, said that what upsets most traditional taxi drivers is the fact that a group of unlicensed workers are entering the market illegally while they must continue to follow municipal bylaws as they always have. “If a group of unlicensed accountants or doctors began offering services through a mobile app, would that be legal? Probably not. Standards, rules, regulations, and licenses

are put in place to protect the public, so why are Uber drivers allowed to bypass them? It also jeopardizes the ability of people who are abiding by the rules to make a living. How is that fair?” In the pre-Uber era, drivers who picked up passengers for a fare, but were not municipally licensed, were referred to as bandit taxis and were illegal. Many have argued that Uber drivers are basically technology-enabled bandit taxis and should be treated as such.

The highly regulated traditional taxi industry not only benefitted taxi companies, but municipalities as well. Until the market disruption by Uber, municipalities had been happy to collect revenues from the taxi industry for driver licensing, owner licensing, and brokerage licensing. The limited number of plates issued by municipalities also led to plates being sold for tens of thousands of dollars – even hundreds of thousands in Toronto – which meant that average taxi drivers (most of whom are new Canadians) could never dream of actually buying one. Those who were so lucky are now seeing the value of their investment plummet. Many had invested in these plates as their retirement plan, as traditional taxi drivers don’t receive a company pension. As the old system unravels, municipal leaders must ensure that whatever it is replaced with is much more competitive, but with an even playing field.Federal Commissioner of Competition John Pecman has urged municipal governments to relax regulations on taxis rather than crack down on ridesharing services such as Uber. After having consulted with municipal governments, The Competition Bureau issued a white paper questioning why some regulators are attempting to stifle a shakeup in the $1.2 billion taxi industry. Instead, the Bureau has argued for an even playing field between the traditional taxi industry and the newer ridesharing industry. More specifically, Pecman has called for an end to oppressive taxi regulations, including strict pricing structures and licensing systems, to give the traditional taxi industry the flexibility required to compete with ridesharing services. To counterbalance, he has suggested that Uber drivers be allowed to pick up street passengers, while

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taxis be able to adopt something similar to Uber’s controversial surge pricing, which raises prices when demand is higher.

Provincial Intervention?

The provincial government has been cautious in its approach to the issues surrounding the shared economy, perhaps in an

attempt to allow municipalities to handle matters within their own jurisdiction. However, Tim Hudak, MPP (Niagara West – Glanbrook) has introduced a private member’s bill, Bill 131, Opportunity in the Sharing Economy Act, 2015, that would allow ride-sharing, home-sharing, and parking-sharing services to operate legally.

Hudak has argued that these services give consumers more choice and empowers Ontarians to earn extra income off of assets they already own. Although many of these services, Uber in particular, have prompted some fierce debates in municipalities, under the terms of Bill 131, municipalities would not be able to ban SEFs. Instead, this Bill seeks to end city-by-city battles against SEFs by legalizing them all at once, province-wide.

If successful, this Bill would eliminate the patchwork of municipal bylaw regulations by creating a new class of business called “transportation network companies” (ridesharing companies). Each municipality would continue to

“The Competitive Effects of the Sharing Economy: How is Uber Changing Taxis?” by Scott Wallsten

Tim Hudak, MPP (Niagara West – Glanbrook) has introduced a private member’s bill, Bill 131, Opportunity in the Sharing Economy Act, 2015, that would allow ride-sharing, home-sharing, and parking-sharing services to operate legally.

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have the power to license transportation network companies (such as Uber), but would no longer be able to prohibit them from operating.

The Bill would seem to respond to some of the criticism from traditional taxi drivers with regard to the lack of regulation for ridesharing drivers. If passed, ridesharing drivers would be required to have an operating permit issued by the ridesharing company. These drivers would also need to have a valid motor vehicle licence, valid automobile insurance, and no criminal record. The ridesharing company would have the ability to impose conditions on operating permits that it issues and can revoke or suspend them, without any hearing, if it had reasonable grounds to believe that the driver contravened the Act or the regulations. Furthermore, anyone caught driving a ridesharing vehicle without an operating permit would receive six demerit points, the same penalty for driving a traditional taxicab without a municipal licence, thus bringing some uniformity to the industry.

Hudak has also called on Ontario Finance Minister Charles Sousa to develop an “affordable, comprehensive insurance” specific to ridesharing services like Uber. Currently, all taxi and limo drivers who carry passengers for compensation in Ontario must carry the OPCF 6A insurance endorsement; no professional is allowed to drive without it. Hudak also added that some major insurers in the United States have already developed new products to cover companies and drivers that offer ridesharing services and that it’s time for Ontario to do the same. “The Minister needs to direct the Financial Services Commission of Ontario to act now. There are over a million rides per month and growing in Ontario. If the Americans can do it, why can’t we? Let’s ensure adequate coverage for everyone from the moment they sign onto a ridesharing app until the passenger is dropped off,” said Hudak.

On January 6th, 2016, Aviva Canada announced that it will be launching coverage for drivers that carry paying passengers in their own vehicles. In a statement, Aviva stated that it was “Responding to the growing use of ride-sharing services and the need to protect both passengers and drivers.” What differentiates this new type of coverage from the OPCF 6A endorsement is that it is only available for those who spend up to 20 hours a week participating in ride-sharing.

Looking Ahead

It is unclear whether or not the Opportunity in the Sharing Economy Act, 2015, will ever become law as it will require support from the government benches. However, what is clear is that the shared economy is here to stay. With regard to

ridesharing vs. traditional taxis, it is in the best interest of both parties to meet somewhere half way. Municipalities must loosen restrictions and deregulate the near monopolies now enjoyed by most traditional taxi companies in order to better allow them to compete fairly with ridesharing companies. Conversely, some rules and regulations must be established for ridesharing companies in order to bring order to the Wild West-like environment in which it currently operates. Capitalism works best when healthy competition exists: creating an even and open playing field will allow the traditional taxi industry to reform itself to compete with ridesharing companies who are currently offering the innovation and jolt that the industry so badly needed.

1 Matofska, Benita: “What is the Sharing Economy?” http://www.thepeoplewhoshare.com/blog/what-is-the-sharing-economy/

2 Wallsten, Scott: The Competitive Effects of the Sharing Economy: How is Uber Changing Taxis? https://www.ftc.gov/system/files/documents/public_comments/2015/06/01912-96334.pdf

3 Badger, Emily: “Why taxi drivers are suddenly getting nicer” https://www.washingtonpost.com/news/wonk/wp/2016/01/05/why-taxi-drivers-are-suddenly-getting-nicer/