Taxi industry cannot brake Uber’s run in an old, overregulated market

The fact that Uber is young, sexy, a bit libertine and taking a tilt at those Black and White and Yellow dowagers of the taxi trade, makes for a good story, but it’s only half a story.

The whole story isn’t about Uber, or taxis, it’s about us, consumers and road users. The story line also has to include the entire paratransit sector including hire cars and limousines as well as taxi and ride-share, rickshaws, and whatever else might come in the future.

And the story isn’t about regulation or deregulation. It is more nuanced. It is about appropriate regulation.

With the KAP advancing draft legislation this week to entrench this legacy industry in place in its current form, it is a story that we all need to understand better. Poor policy will make things worse for poorer Queenslanders, not better.

The taxi industry was founded just over 400 years ago with Hackney Coaches first deployed in London in 1605. It was first regulated in 1635, Cromwell established a trade union (fellowship) for it in 1654, and it seems to have been regulated on a more or less Stalinist basis almost everywhere else ever since.

So we are struggling with a system conceived before the invention of modern economics, or modern transit systems.

There are not many other industries I can think of where not only is the price still set by the government, but it limits supply as well.

Our current inefficient taxi system is a substantial cost to the economy. The Queensland Government’s Economic Policy Group says $20m per year, but taxi drivers themselves value it at $106m per year with a lump sum value of $1.77bn.

That is what you get when you multiply the asking price in 2014 for a taxi licence of $525,000, by the number of cabs, and allow a return of 6%. All taxi owners get for that licence is an oligopoly right to exploit their passengers, so the combined value of those licences should equal the value of the exploitation.

Since Uber has appeared, the value of those licences has reportedly dropped by more than two-thirds, making the informed industry assessments of the benefits of Uber to be a total $1.26bn, or $76m each year.

Competition is a wonderful thing.

The costs of restrictive licencing aren’t just monetary. Just about everyone loses.

It means the industry is smaller than it would otherwise be, poorer people are priced out of the market, unemployment is increased, and we have more domestic cars on the road than we should.

Undersupply of taxis probably even contributes to violence outside night clubs.

The industry will say that regulation is necessary to keep prices low and the service safe, and there are some cases that support this.

But evidence from Sweden, the UK and New Zealand, who all deregulated over 20 years ago, is that properly handled there are net benefits from loosening restrictions on licences.

Where deregulation has failed to make services cheaper and better it has generally been because the existing taxi companies have had such a dominant position they can exclude competitors. They also exploit a lack of price information available to users.

In Sweden and New Zealand there were smaller taxi companies, so competition did its work. In the UK there were more hire cars than taxis, so the competition was already there.

So deregulation could have been a problem in Queensland, at least in Brisbane, where there is a taxi cab duopoly that would have monstered everything else and where hire cars and limousines are relatively rare.

Uber changes all of that. It competes on price and service and makes information about what it offers transparent, giving the user much more power in the transaction.

That doesn’t mean there isn’t room for taxis, but cabbies need to adjust.

Removing restrictive licensing and price controls might mean their licences are worth less, but they took a commercial risk when they bought those licences.

Just as they weren’t volunteering to share the profits with the public last year, they can’t complain if the public doesn’t want to share the loss this year.

They are just the latest industry to go through the financial pain of a disruptive new age challenger, but you can’t live in the 17th Century for ever.

Regulatory reform of the sector will not only be good for consumers (that’s all of us) it will also be good for taxi owners in the long run.