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Turning statutory regulation into private regulation for the UK's taxi industry

  •  Over the past two years, there has been a worldwide regulatory backlash against new smartphone-app-based Private Hire Vehicle (PHV) operators, with Uber probably being the most emblematic one. While a few regulatory clarifications can be justified, the vast majority of measures have been transparent attempts to obstruct the growth of this sector, in order to protect the interests of politically well-organised, competition-averse incumbents.

  • Until the advent of smartphones, apps and GPS systems, there was a rigid distinction between taxis on the one hand, and PHVs on the other hand. Only taxis could be hailed on the street, ply for hire and wait for customers at ranks, while PHVs had to be pre-booked. This distinction created two quite different sub-sectors, with limited overlap. People would turn to the PHV sector for trips that could be planned in advance and to the taxi sector for spontaneous trips. However, now that ‘pre-booking’ via smartphone apps has effectively become an electronic form of hailing, the distinction between the two sectors has become blurred. PHVs have become much closer substitutes for taxis.

  • This would not be a problem were it not for a fundamental difference between the two markets. While PHV markets tend to be relatively open and competitive, taxi markets tend to be heavily protected, with the number of taxi licenses either explicitly capped, or held low in other ways. Licences therefore accrue a scarcity value: in recent years, they have been traded for over €200,000 in Paris, for over AU$250,000 in various Australian markets, and for nearly $1m in New York City. But if app-based PHVs become near-taxi substitutes, and if the PHV-sector is not entry-controlled, then the licensing system is undermined.

  •  This development should be welcomed, because quantity restrictions should never have existed in the first place. There was never a sound economic justification for them and they owe their existence purely to lobbying efforts. Where they have been abolished – such as in New Zealand, Ireland and parts of the UK – consumers have generally benefitted from shorter waiting times, lower fares, higher quality and a greater diversification of the taxi market. Rather than trying to suppress the growth of new business models in the PHV sector, we should derestrict the taxi market.

  • In recent years, smartphone-enabled applications such as Uber have gone a long way to resolve the market imperfections which gave rise to taxi regulation in the past. GPS technology and Big Data have spurred market innovations which reduce informational asymmetries, facilitating transactions between passengers and drivers.

  • App-based transport services form part of the so-called ‘sharing economy,’ which involves the reduction of transaction costs to make more efficient use of assets. In particular, sharing economy providers add value by providing information in a timely and searchable way, outsourcing trust on behalf of users, and consummating transactions in a reliable and immediate fashion.

  • Contrary to conventional wisdom, smartphone-enabled apps have not created an ‘unregulated’ private transport sector – on the contrary, they have fostered the emergence of regulatory brands. Organisations such as Uber do not just offer transport services, they also offer a set of rules and regulations under which these services are provided. This is regulation – but it is private regulation, or regulation by the market, as opposed to statutory regulation. The scope for competition has also been broadened as drivers compete with each other for custom; passengers compete for rides; and apps compete for users on both sides of the transaction. As with other Internet-based innovations, transport apps have increased economies of scale in private transport.

  • Recent market innovations make reform of taxi regulation urgent. The principles of such reform should be decentralisation, to facilitate trialand-error and fitness for local conditions; a one-tier system of regulation, as the old separation between taxis and private hire is obsolete; technology neutrality; and a preference for private governance, which has proven so successful in app-based services.

  •  London provides a suitable setting for reform. The milestones to be achieved include the abolition of taxi privileges and the equal treatment of black cabs and private hire operators. The London Taxi Drivers’ Association (LTDA) would be granted powers to regulate the quantity of black cab drivers and the fares to be charged (similar to how Uber and private hire firms oversee their own drivers and vehicles). It is important to note that the LTDA would not be given a monopoly – black cab drivers could over time decide to form competing brands and associations within the trade.

  • Statutory regulations would be limited to criminal background checks; the monitoring of fraud and illegal behaviour; and a periodic review of the state of competition in the market. These tasks could be conducted by Transport for London (TfL), with the assistance of the Competition and Markets Authority in the latter function.

This report featured in The Telegraph.

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Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

Policy Analyst at the Cato Institute's Center for Monetary and Financial Alternatives

Diego was educated at McGill University and Keble College, Oxford, from which he holds degrees in economics and finance. His policy interests are mainly in consumer finance and banking, capital markets regulation, and multi-sided markets. However, he has written on a range of economic issues including the taxation of capital income, the regulation of online platforms and the reform of electricity markets after Brexit. Diego’s articles have featured in UK and foreign outlets such as Newsweek, City AM, CapX and L’Opinion. He is also a frequent speaker on broadcast media and at public events, as well as a lecturer at the University of Buckingham.