An uber-headache may help consumers win

by Jim Minifie

Published by Australian Financial Review, Sunday 9 August

Less than three years after setting up in Australia, Uber is giving governments an uber­-headache.

The ride service has taken the ATO to court over whether even occasional drivers must register for GST. The fact that UberX drivers – usually driving their own car without a taxi or hire­ car registration – operate illegally is also forcing state governments to crack down on Uber or legalise it. The taxi industry is gearing up to defend its market.

The industry is right that UberX drivers win customers with low prices enabled by avoiding regulation and tax. But even if these drivers comply with regulations and pay GST as taxis do (Uber hiked prices last Friday to cover GST), many customers will still choose Uber’s smartphone service unless taxi service improves. Customers report that UberX drivers arrive reliably, payment is convenient and the smartphone enables two-­way feedback that makes them feel safe. NSW, South Australia and the ACT have set up reviews to figure out how to respond to Uber’s arrival; other states will follow. What should they do?

The vexed issue is taxi licences: they trade for up to half a million dollars in big cities and contribute to excess fares of almost half a billion dollars each year. If the consumer is to win, licence holders will probably lose (though drivers and operators may not). But governments should embrace ride sourcing by adapting rules in five areas.

First, safety​: most states mandate criminal checks on taxi drivers, and mechanical checks, cameras, GPS and emergency call buttons in their taxis. Governments should retain stricter laws for the anonymous rank and hail business while ensuring that all UberX drivers pass criminal and vehicle checks. Other safeguards may not be needed. Electronic booking of rides means that driver and passenger know their IDs are linked and each can see the other’s feedback from previous trips, improving safety.

Second, insurance​: UberX drivers may not hold third­-party property insurance that covers commercial driving. In some states they may also hold insufficient compulsory third-party injury insurance. Uber says it provides coverage if personal policies are insufficient but has not made a regulated insurance contract available. Governments can expect that once drivers are legal, insurers will create flexible (for example, per­ kilometre) coverage. They already do in other markets.


Third, community service and disability:​ most states subsidise wheelchair-­accessible taxis. Such subsidies and provisions for geographic coverage can be extended to cover ride­sourcing. Coverage for people without smartphones may need to be arranged if taxis really become endangered.

Fourth, fares​: governments usually limit taxi fares, in part to avert shouting matches at taxi ranks. But few governments regulate hire­ car fares because customers can compare fares before booking. Ride­-sourcing apps also display fees so the case to regulate them is not strong. There is a risk that Uber or another platform will gain and misuse market power. Dominant platforms may try to prevent their drivers from using competing services. Last year, Uber and its competitor Lyft accused each other of making then cancelling disruptive “phantom bookings”. Regulators have the armory of competition law to ensure the market remains open to a wide range of entrants.

Fifth, licence prices​: states should let ride-­sourcing drivers operate without large fees. Hire ­car license fees and taxi license quotas should be liberalised and regulated fares should be cut. That will benefit consumers by around $2.50 for an average trip and help taxi operators remain viable. The rank and hail market would remain the preserve of taxis; they will retain more conservative customers and win others by innovating. Even if governments do not remove licence quotas (Victoria has done so already) or cut annual fees, perpetual licence values will probably fall. Governments will face calls for compensation. There is probably no case for widespread compensation ­­and at least some states have been careful to exclude that in legislation, and many owners have benefited handsomely from decades of licence rental returns. But there may be a strong case to compensate individuals facing hardship. To date, state governments have largely closed their eyes to Uber’s arrival. They should update regulation so consumers can enjoy the benefits of new and cheaper ways to get around.