Draft Policy Memo - Edmund Lee

Memorandum (Draft)

TO:                        Deputy Director, Taxi Services, Land Transport Authority of Singapore
FROM:                 Edmund Lee
SUBJECT:           Addressing Safety Concerns Arising from Use of Third-Party Taxi Booking Applications
DATE:                 November 9^th, 2014

Issue Brief 

Recent new innovations have provided new channels by which taxi services may be provided. This has taken the traditional cab model by storm. In particular, the disruptive technologies provide relatively easy means of enabling a driver with a private car become a taxi driver, and equally easy means for commuters to engage the services of such a driver. Some of the most widely known players in this emerging market include Uber and Lyft, where they are actively engaging both drivers and passengers alike in an effort to promote obtain a greater market share and attain economies of scale.

However, ridesharing is strictly forbidden by the Singaporean authorities. This has not deterred players in coming up with solutions that accede to local regulations. Companies have been able to do so by promoting their application as an easy way to matching passengers to taxi drivers. Uber is one such company, but there are other local incumbents such as GrabTaxi and Easy Taxi aiming for the lion's share of the pie.

Regardless of the players in the burgeoning market, the fundamental premise of the interaction between taxi drivers and the player’s platform is the same – a mobile application. Safety concerns have been raised regarding the use of these applications, ranging from taxi drivers focusing on using the application on the road, to unlicensed drivers using the application to pick up passengers. This policy analysis hopes to shed light on what actions, if any, should be taken by Singapore's Land Transport Authority to address taxi fare pricing concerns arising from the use of third-party taxi booking applications, especially as these platforms grow unabated in the absence of existing regulation.

Client

Singapore’s Land Transport Authority (LTA). LTA is "responsible for planning, operating, and maintaining Singapore’s land transport infrastructure and systems." Taxis are one mode of land transport which comes under LTA's jurisdiction. The Taxi Service division particularly looks at transport policies and regulations related to taxi usage, and is the direct client for this policy analysis paper.

Background Information

It is largely accepted that there are two predominant ways in which taxi companies make money: the first model would be that the taxi company obtains a cut of the driver's earnings; the second model would be that the taxi company leases out the taxi for a fixed daily rate. Taxi companies in Singapore largely operate on the latter model, which tends to be more lucrative with adequate economies of scale [1].

Taxi companies therefore compete with one another based on their ability to offer the lowest leases - which would enable a taxi driver to take home a larger share of their daily revenue. Alternatively, some taxi companies pride themselves on reputation for good screening of drivers and impeccable customer service, which may allow a taxi driver to take home more earnings if the cab is hired more often. Other taxi companies offer an efficient call booking system exclusive only to the company - allowing taxi drivers to pick up passengers who offer a premium for such booking services.

With the introduction of third party taxi booking applications, the traditional means of differentiation between taxi companies is eroded. Taxi drivers now tend towards companies who simply offer the lowest lease - because the application simply matches passengers to taxi drivers and is agnostic as to which taxi company offers the service. This has the potential effect of driving fares lower than before, while not affecting the take home pay of the taxi driver in anyway.

Such applications reduce friction in the price mechanism in the form of transaction costs (refer Coase, 1937) and enables efficient knowledge flows between passengers and drivers (ref Hayek, 1945). Existing legislation and policies that regulate fare pricing may be outdated with the introduction of such market-driven applications.

Policy Options

Option 1: Status Quo

The key piece of legislation that currently exists pertaining to taxi usage is the Road Traffic Act of Singapore (Chapter 276 of the Singapore Statutes). The Road Traffic Act is an umbrella legislation that encompasses “the regulation of road traffic and the use of vehicles and the user of roads and for other purposes connected therewith.” Enshrined within are various details pertaining to taxis – of relevance would be the licensing requirements of taxis and the adherence to certain set quality standards.

Effectiveness
Pro: Competition amongst applications will spur them to think of better ways to serve both taxi drivers and passengers alike.
Con: Uncertainty affects progress of application developers - developers may be afraid of trying new features should their resources go to waste based on an arbitrary 'judgment' by LTA.

Efficiency
Pro: Very efficient from the government's perspective, because government does not put in any resources in this option. But from the society's perspective, may not be as efficient.
Con: Uncertainty affects the rate of innovation of these service providers. For example, Grab Taxi, one of the earliest players in the local market, initially offered a function on their platform to allow passengers to tip drivers – and allow drivers a cherry-picking of passengers during peak hour timings. The Land Transport Authority requested that the function be removed, but did not, or was unable to, provide regulatory justification. The effort that the company put forth to develop the function went to waste – a sign of inefficiency.

Equity
Pro: Not expanding any existing regulations could mean further growth in these applications, possibly further leveling the market. By leveling the market, passengers may benefit from more competitive fares because large taxi companies which previously leveraged on economies of scales to offer better taxi booking services now have that competitive advantage eroded.
Cons: Taxi booking applications seem to be gaining all the benefits from providing their services, but because regulation does not exist for them to bear responsibility for their services, there is inequity in the incidence of responsibility. For example, Easy Taxi, an application with a growing clientele, raised the following question when speaking to the media, “When a consumer books via Easy Taxi and boards a Comfort cab, who should he contact if there is any dispute with driver during the ride?” Again, because regulations does not mandate a requirement for taxi booking application providers to provide support in such disputes, the economic impact of dispute resolution seems to rest unfairly on the taxi leasing companies, which is the existing dispute handler.

Ease of Political Acceptability
Pros: Taking no action could be a win for liberals who believe that government regulation is impeding innovation.
Cons: Another segment of the population could see that a lack of regulation in this area potentially has an effect on fares by exacerbating inequality, especially if it is seen that during periods of high demand, those that are willing and able to fork out a larger sum of money can secure the use of a taxi.

Option 2: Additional Regulatory Framework

Ultimately, it must be recognized that while these applications are currently offering the service for free to both taxi drivers and passengers alike, there comes a time where the application will need to monetize the application and reap economic benefit from their investment. An additional regulatory framework can be introduced by the Land Transport Authority that delineates the means by which monetary transactions take place via the mobile application platform.

Effectiveness
Pro: Clarity will ensure that there are rules that are open known that applications know that they have to abide by. By providing clarity in rules, the use of these applications can propagate, allowing passengers and drivers alike from better fare rates.
Con: Regulation could stifle innovation and the carving out of niche markets for various applications. Novel avenues for applications to monetize could be snuffed out to the detriment of users. This is because this option is that this requires great foresight on LTA’s part to foresee how companies can choose to monetize their respective platforms. So long as passengers are satisfied with the service provided by the application, some might take the view that economic forces provides the greatest societal benefit, and governmental intervention is actually detrimental.

Efficiency
Pro: A good regulatory framework could enhance efficiency because it ensures that there is good accountability in the financial transactions, as well as properly defining areas of responsibilities.
Cons: May not be the most efficient outcome if regulatory framework ends up shoehorning these platforms into a tight and competitive space that prevents a healthy competition of ideas that put the passengers and drivers in the position to pick and choose from the most suitable platform for their needs.

Equity
Pros: By properly defining areas of responsibilities, a baseline level of protection in various scenarios can be ensured, thereby ensuring that everyone is aware of the taxi industry’s new normal and make the appropriate economic decisions. Additionally, by providing clarity on the boundary markers on how applications will eventually choose to monetize, while ensuring that commuters are not held captive once smaller players are forced out of the market. This ensures that in the long term, everyone benefits from the use of these applications, rather than merely for the short term.
Cons: Again, if regulatory framework is too restrictive, the killing of competition could end up in a lock-in scenario that does not bode well for either passengers or drivers as the platform abuses its monopolistic position.

Ease of Political Acceptability
Pros: The institutions (per Douglass North’s definition, 1991) in Singapore is such that there is a strong leaning towards governmental intervention in all aspects of society. Therefore, a strong signal of governmental intervention is likely to be seen as politically acceptable.
Cons: Not everyone favors political intervention – especially if the public sees intervention as unnecessary or overly restrictive; academics and observers may see it as a negative sign towards acceptability of new and potentially disruptive innovations.

Third Option: Cut Existing Regulations 

Existing regulations were established in the era of ‘pirate taxis’ where unlicensed taxi drivers could be criminals pouncing on unsuspecting victim. Now, with the advent of new technology, the credibility of drivers within the ridesharing community is built up over time and their identities verified through online profiles. Ride sharing could be a great way to ease tight traffic conditions in Singapore. The cutting of existing regulations could spawn an entirely new industry – people could see that while there are associated risks using unlicensed drivers, but if they are willing to pay for a cheaper ride, then there is no role for the authority to step in and affect the uptake of an alternative form of taxi service by commuters.

Effectiveness
Pros: Fare prices could plummet across the board - and the lease prices by the taxi companies could fall as well. Passengers could benefit in general.
Cons: Licensing regimes existed for a reason – while arguably it could be said to be outmoded by the power of social media in producing a self-policing ecosystem, there could still be problems that arise.

Efficiency
Pros: From a pure cost efficiency point of view, this is potentially more efficient as licensing regimes are torn down and no longer have to be enforced. From a passenger’s point of view, the increased availability of taxis for hire and lowered fare prices could be seen as increased efficiency as well. Ridesharing could help to cut down on peak hour traffic snarls and general congestion.
Cons: The potential rise in crime committed by unlicensed drivers could be a very inefficient societal outcome. Unlicensed drivers tarnish the image of the taxi industry in general, especially with news reports in other countries of such drivers causing accidents, having criminal records and the like. The negative externality could be so large so as to outweigh any forms of efficiency gains from choosing such an option.

Equity
Pros: General increased availability of taxis due to more competitive fares offered by a new budding industry.
Cons: Existing tax drivers could lose out significantly.

Ease of Political Acceptability
Pros: Should the public see the potential benefits in such a system, it might be deemed to be acceptable.
Cons: From the current ruling party’s perspective, this would certainly not be in line with their societal policies. Singapore tends to be seen as something that is ruled not by informal institutions, but by formal ones. The relaxation of control over taxi licensing may not be seen favorably.

References:
http://yourbusiness.azcentral.com/taxicab-companies-make-money-12180.html
https://www.techinasia.com/grabtaxi-eat-comforts-lunch/
http://sgtaxidrivers.blogspot.com/
http://cabby65.blogspot.com/2014/11/singapore-booming-taxi-booking-apps.html
http://mypaper.sg/top-stories/grabtaxi-abolish-tips-cabbies-20131230