<b>Ashish Aggarwal & Pratik Datta:</b> Lay down the ground rules of operation

The three-member committee set up by the Centre to suggest a policy framework for cab and other transport operators should identify market failures and then use the power of the state to draw up regul


Ashish AggarwalPratik Datta
The central government has finally set up a committee to suggest a policy framework for taxi and other transport operators. The world over, taxis are regulated for price and quality. Without regulation, each taxi ride would entail price negotiation and a series of checks: does the driver have a valid licence; is his behaviour acceptable; is the car in suitable condition, etc. The burden on each consumer to overcome these transaction costs would render the market unworkable. Regulations address these market failures.

The taxi aggregator model is disrupting the urban transportation market globally. This has raised fresh questions around taxi regulations. Uber and Ola use surge pricing, a technology solution that in real time matches waiting passengers with vacant taxis in an area to arrive at fares. When there are more customers, the fare surges. Surge pricing is incompatible with the Delhi City Taxi Scheme, 2015, that allows only fixed fares. Each time surge price exceeds the fixed fare, drivers violate the condition of the permit. Firms that enable the violation of rules by drivers (Uber, Ola) are gaining market share at the expense of firms that abide by them (for example, Meru). The Delhi chief minister has been periodically issuing warnings to taxi aggregators on Twitter. However, Uber and Ola continue to do business, albeit with occasional disturbances. The rule of law is violated. The committee constituted by the Ministry of Road Transport and Highways should address this state of legal confusion.

The legal confusion is exacerbated by concerns about the validity of fixed fares. Taxis are regulated under the Motor Vehicles Act, 1988. This gives state governments power to issue rules. The Delhi government has issued Delhi Motor Vehicles Rules, 1993. However, the fixed fare rates prescribed under the 2015 scheme claim to have been issued under Sections 93, 95 and 96 of the 1988 Act. None of these sections empowers the Delhi government to issue "schemes". The government is empowered only to prescribe "rules". Under Section 212 of the 1988 Act, such rules must be approved by the Delhi legislature. It is unclear if the 2015 scheme has been so approved.

How can we make progress away from this impasse? The committee needs to take three steps back, and replace the present patchwork with a sound regulatory system. The standard technique of public administration is to first identify the market failures and then use the power of the state to address some of them.

Regulation of taxi services is not an oddity of socialist India. Governments worldwide regulate firms that produce taxi services. Why? There are two market failures that need to be addressed.

The first market failure is that of market power. When a consumer is on a street where there is only one taxi, that taxi is a monopoly and can charge an excessive surge price. Regulation is required to curb this monopoly power. On a related note, taxi companies should not be able to misuse personal data. For example, if you were running late for a flight or for office, you might value a taxi more. Aggregators should not be able to use this flight data or office schedule to hike the price. These issues are particularly problematic in India, as we lack a privacy law. These issues need to be addressed by regulation of taxi companies.

The second market failure is that of asymmetric information. Customers cannot do a background check of drivers and their taxis. Taxi companies must be obliged to run a significant quality control system through which cars and drivers satisfy minimum quality standards.

What about pricing? One concern that has been expressed is about taxi companies building up market share by subsidising customers. Once a company has obtained a large market share, consumers will be able to rapidly obtain a ride by going to this company only: temporary subsidies are a tool for obtaining long-term monopoly power. This problem should be laid at the doorstep of the Competition Commission of India as part of its work on "predatory pricing". An investigation into subsidies being paid by Ola is believed to be underway. This issue need not feature in the regulation that is done at the level of the city government.

It is argued that surge pricing should be regulated during special situations, which spike demand. These could be emergencies such as earthquakes and terror attacks or government-created situations like the odd-even scheme. Some believe that banning surge pricing in such situations would help make things equal for all consumers. Suspending price surges during these situations only reduces the supply of taxis in the worst affected areas. Aggregators too, occasionally, turn off surge in such situations, anticipating reputation risk. During the Sydney terror attack in 2014, Uber drew a lot of flak for surge pricing. After the recent Brussels attacks, it turned off surge pricing voluntarily.

The key issues surrounding surge pricing lie in transparency and a level playing field. Firms like Uber and Ola that engage in such techniques should be obliged to reveal ample information about the orders and transactions that take place every day so that policymakers can detect and address the possibility of monopolistic pricing. In addition, there should be a level playing field where all taxi companies are able to utilise such methods.

Expert committees have played an important role in the evolution of economic policy in India. The committees sift through debates, analyse rival viewpoints, bring heretical ideas into the mainstream and work out implementation plans. The three-member committee should design a regulatory framework for the taxi industry of the 21st century. It should use sound public administration procedures of identifying market failures, clearly articulating interventions and their objectives, undertaking a cost-benefit analysis, and using adequate public consultation before proposing any regulation. These best practices are embedded in the draft Indian Financial Code, and Clause 16 of the draft Road Transport and Safety Bill, 2014. These best practices should guide the committee.

The authors are researchers at the National Institute of Public Finance and Policy in New Delhi
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper

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First Published: May 18 2016 | 9:47 PM IST

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