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A Tip of the Hat to Uber’s Challenge to Taxicab Industry

July 08, 2015
Brent DowDall
Senior Manager, Research and Business Development
Forecasting and Analysis

Uber is everywhere. While it is not yet in all communities, it is at the forefront of the minds of travellers. Uber—which connects potential passengers with private drivers through the use of a digital app—has done more than just offer cheap transportation fares; it poses perhaps the most substantial disruption yet to the entrenched system that governs the taxi industry. It is a system that, in my experience, has to be seen to be believed.

During my previous career as a journalist in a small town outside of Ottawa, the municipal government saw a shakeup in its small taxicab industry. Having received more applications for licences than legally allowed (based on the number of licences available per 1,000 population), the town administration and council was stumped about how to allocate the licences. At a council meeting, the town hurriedly tried a novel resolution: it had the mayor draw names out of a hat.

That’s right, the town used the equivalent of a secret Santa gift draw to determine whether or not people could start or expand a private, for-profit business—a service that was needed, especially in a town with no public transit. Needless to say, there were winners and losers, but it had nothing to do with their abilities to drive a taxicab effectively, safely, and affordably.

Thing is, I don’t blame the town. Councillors were just as flummoxed and frustrated by the system as those prospective taxi owners. It was absurd, but, under the law, did anyone have a better idea?

This is an extreme but logical outcome of the prevailing governance model for taxicabs, which The Conference Board of Canada addressed in a 2013 briefing, We Have Been Here Before: Supply Management in Transportation. In their present incarnation, taxicabs represent a supply-managed industry. In their operations and regulations, taxis are virtually the same as the supply-managed sectors of Canadian agriculture, such as dairy, poultry, and eggs. Government controls production licences (via awarding taxicab “plates” or permits). It sets prices—including the “drop” (the starting fare), the distance charge, and the waiting charge. And the system imposes trade barriers, setting out where cabs can and cannot pick up customers. Both these systems raise prices and reduce choices for consumers.

Such restrictions make a taxi licence extremely valuable. In 10 Canadian cities, the cumulative value of taxicab licences was over $2.2 billion, based on 2007 data. In the United States, the Washington Post reported last year that the growth in the value of a taxi “medallion” has outperformed even the Standard & Poor’s 500 stock index.

This is the system that Uber is upsetting. Taxi drivers, not surprisingly, are staging protests in cities across the world, including violent confrontations in Paris. In Toronto, Montréal, Ottawa, and Edmonton, drivers direct blame at Uber for hurting their business—or local governments for what they feel is lax enforcement of the existing regime. Moreover, in addition to competition for fares, the value of taxi plates in Toronto has plummeted in recent years.

The traditional taxi industry has made much of its case against Uber on the basis of passenger safety, driver screening and training, and liability insurance. All are legitimate concerns; when it comes to the safety of both passengers and drivers, a race-to-the-bottom standard is unacceptable. The objective of policy-makers, however, should be to impose effective standards on all service providers, rather than attempt to keep disruptive forces out of the industry.

There is even a blueprint for reform in the transportation sector: the for-hire trucking industry. Since Canada liberalized its trucking sector in 1987, prices have fallen (in real terms) while productivity increased.1 To be sure, two players were big losers—the established owners of the certificates (licences), and the members of the Teamsters Union. However, the total number of firms operating in the industry grew from approximately 7,000 in 1990 to over 10,000 in 2004. Total revenues increased from about $9 billion to nearly $30 billion (in nominal terms).

Uber has challenged the entrenched players. The traditional taxi industry is right to say that it should not have to work within stringent restrictions if others do not. The question is: why should anyone have to work this way? In all industries, new players develop disruptive technology. Uber’s business model has the merit to be that innovative challenger to the status quo. Governments and regulators should be prepared to reform the system governing taxicabs in favour of customer choice and more competition. Without reform, consumers will continue to feel that taxis are a draw from a hat.

1    From 1986 to 2003, trucking industry total factor productivity increased by an average 1.7 per cent per year. Meanwhile, prices increased by just 0.8 per cent per year on average in nominal terms. Productivity gains from increased competition were passed through to customers in the form of lower prices.

 


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