THERE WERE NEVER IN THE WORLD TWO OPINIONS ALIKE

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Saying that technology has outpaced the legal system is an understatement. Year-on-year we see innovations which challenge our regulations of everything from intellectual property to industrial relations. There is no better example of this than the share economy, led by its poster child Uber.

Born from a cocktail of innovative technology and a decentralised business model, Uber represents ‘the next step’ for the service sector to many people. The concept of being able to utilise a cheap taxi service through a smartphone app in a manner that enhances speed, safety and accountability is irrefutably appealing. Leading analyst for Morgan Stanley, Adam Jonas reported last year that “[Uber’s] shared mobility has profound implications… for growth and opportunity.”

It is no wonder then that Uber has attracted the praise of many from the Liberal side of politics. A customer focused, technologically innovative start-up disrupting a stagnated industry is usually an example of the free market working well. Western Australian Premier, Colin Barnett stated that ‘the taxi industry has to change. And the competition that Uber is bringing in will result in a higher standard right across the sector.’ New South Wales Minister for Finance, Dominic Perrottet, has even raised the prospect of outsourcing his state’s driving services to the ride-sharing company.

Despite the glowing praise from some analysts and public officials, taxi industries worldwide have prosecuted campaigns against the legal toleration of Uber. Whilst it is easy to write-off taxi operator objections as an example of vested interests seeking protection from competition, doing so shows a fundamental misunderstanding of the sector.

Taxi driving is heavily regulated. In New South Wales, the industry is governed by the 157 page Passenger Transport Act 1990, which sets copious safety, fee, accreditation and licensing requirements. This drives up insurance and compliance costs, most profoundly by forcing operators to purchase or lease one of a limited number of taxi license plates valued in the hundreds of thousands of dollars.

Despite the fact that they provide a near identical service, Über has refused to conform to these standards, arguing that its ride sharing business model excludes it from taxi regulations. This provides a convenient regulatory loop hole which has allowed the company to dodge the significant costs imposed by state governments on taxi operators.

It is thus due to regulatory exploitation, not market innovation, which allows Uber to charge such cheap fares relative to regular taxis. This anomaly gives it a massive systemic competitive advantage over incumbent operators who are restrained by regulation. The Australian taxi industry cannot simply ‘change’ its business model to compete with Uber – in doing so, it would inevitably break the law.

This lack of a level playing field has allowed Uber to cannibalise the sector. The company’s estimated share of the taxi market in Australia stood at twenty-two per cent at the end of last year, a seven-fold increase since the beginning of the year prior. This has eaten into the profits and wages of regular operators, many of whom bear massive financial liabilities as a result of taking out loans to pay for their licenses.

This situation is evidently unsustainable. Notwithstanding the long term impacts on the taxi industry itself, the toleration of Uber’s opaque legal status sends a signal which encourages rent-seeking behavior from the business community. It also naturally raises questions for investors and established firms as to whether or not long-standing regulatory frameworks of other industries will continue to be properly enforced.

Ultimately, state governments have two options to solve this problem and level the playing field. They can either force Uber drivers to abide by the taxi industry regulations and bear the burden of the associated insurance and compliance costs. Otherwise they can deregulate, buy back the taxi licenses and thus allow ordinary operators to bring their fares down to market competitive levels.

Unfortunately some politicians, such as New South Wales Labor’s Luke Foley, seem to think there’s a third ‘have your cake and eat it’ option. Foley has proposed legislation which would legitimise the legal vacuum Uber operates in. Such a policy would create a two-tiered structure of regulation for the taxi industry, providing preferential treatment to Uber’s ‘ride sharing’ business model and institutionalising their uncompetitive advantage. Whilst Foley may like the idea of giving voters cheap taxi fares without having to spend money buying back licenses, the long term implications of such a policy would exacerbate the potential issues of sovereign risk and systematically wipe-out traditional taxi operators.

Although there is a growing consensus that Uber is leading the way on customer focus and technological innovation, they are clearly a company with a dark side. With such a large portion of its success attributable to regulatory exploitation, it would be a mistake for its meteoric rise to be framed as an example of market liberalism done right. Instead, Über serves as a fantastic case study of how easy it is for government legislation to fail in the wake of a rapidly changing services sector.

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