Of taxis and smart phones: balancing innovation and regulation

hailing appSharon Masterson, International Transport Forum Corporate Partnership Board

Necessity is the mother of invention – or is it? It could be argued that the time-honoured adage only holds when we know what we want or need. But what if we don’t? “If I had asked people what they wanted”, Henry Ford famously quipped, “they would have said ‘faster horses’.”

While the car was a revolutionary innovation, it was not immediately disruptive. Early cars were expensive luxury items, so the market for horses and carts remained intact until the Ford Model T created a mass market by making the new technology affordable, thanks to more efficient production methods.

What the transport sector is facing today in many areas follows a similar pattern. True, this time around, innovations are not as disruptive to the eye as motor cars replacing horses. Instead, current disruptive forces in the mobility sector hide under the hood of largely familiar-looking vehicles and in the invisible “cloud” – for instance in the shape of autonomous driving, electric mobility or app-based transport services.

But there are parallels. Take ride-hailing via smart phones: The technology has been on the market for several years. Not even the leading players like Uber or Didi Chuxing, its Chinese rival, have come to dominate the provision of mobility. They are rapidly gaining ground against the traditional forms of moving about in a car, however, and within a decade or two could well become dominant. In a recent survey in China, 8 out of 10 respondents aged 18 to 35 said they had already used a car-hailing app.

The potential of app-based transport has certainly fired up investors: Uber recently received USD 3.5 billion from Saudi Arabia’s sovereign fund, and Didi Chuxing raised USD 7 billion from investors and lenders, including 1 billion from Apple. Today, Uber is the world’s most valuable start up, with a market capitalisation of USD 62.5 billion. Conversely, the Nasdaq-listed Medallion Financial, a huge provider of loans to buy taxi licenses, has lost well over 50% of its stock value since December 2014.

Policy makers in many countries have been caught somewhat off guard by the rapid rise of app-based ride-hailing platforms. In many countries, regulation has been lagging and policymakers struggle in balancing the need to ensure public safety, consumer protection and tax compliance with the potential benefits: higher efficiency of transport, better service, more transparency and the simple fact that consumers like the convenience of pushing a smartphone button to order a ride.

What has not been lagging is the response of those who could possibly to lose out. Legal action by traditional taxi operators has led to some app-based services being banned, operators fined, executives taken into custody, and even violence.

Against this backdrop, a reasoned debate about principles that can serve as a basis for regulators to set frameworks is urgently needed – and this is what we have been working for at the International Transport Forum with key actors. Uber and the International Road Transport Union (IRU, globally representing taxi drivers, among others) are both members of the ITF Corporate Partnership Board (CPB),  and we brought the two together at our 2015 summit of transport ministers. For the first time ever, Uber’s chief strategist David Plouffe and Umberto di Pretto, Secretary-General of the IRU, shared a stage to discuss what the rise of the shared economy means for transport. They agreed that new regulation was needed and just disagreed about how to move forward until that happened – demonstrating that constructive dialogue is possible, even invaluable in such a process.

As a next step, as part of the Corporate Partnership Board’s programme of work, a workshop was convened. Representatives from Uber and Lyft, the taxi industry, regulators, academics and other stakeholders came to Paris in November 2015 to seek points of consensus on regulation and identify persistent points of tension that need focused attention to resolve. The report emanating from that meeting, entitled App-Based Ride and Taxi Services: Principles for Regulation, will make fascinating reading for regulators. Among other things, it offers them four pieces of concrete advice:

  • Focus policy regarding for-hire transport on the needs of consumers and society. This will enable the development of innovative services which could contribute towards public policy objectives such as equitably improving mobility, safety, consumer welfare and sustainability.
  • Keep the regulation framework as simple and uniform as possible. Avoid creating different categories for regulating new mobility services. Regulators should seek to adapt frameworks to better deliver on policy objectives in innovative ways and not simply preserve the status quo.
  • Encourage innovative and more flexible regulation of for-hire transport services. Use data and the findings from data analysis for more timely intelligence to inform the policymaking process. Today’s data accuracy and availability mean that more than ever before, policymakers have tools at hand which enable them to take a more flexible approach to regulation and through monitoring, evaluate how these regulations are working, and adapt or streamline as necessary.
  • Work more closely with operators to achieve data-led regulation.. The emergence of digital connectivity and wireless communications has opened the possibility of new types of instruments that could allow better control of the efficiency and provision of services as well as giving authorities a completely new and transparent way of pursuing policy objectives.

The emphasis on the role of data here is particularly interesting. Do app-based transport services increase congestion or reduce it? Do they provide better mobility for people without cars or access to public transport, or not?  These questions, among the most hotly debated issues around the arrival of these services, can only be settled with enough relevant data. (“In God we trust, everyone else, bring data”, former New York City mayor Michael Bloomberg often said, quoting the eminent statistician W.E. Deming).

If regulators learn to work with those who have the data, and learn how to harness the power of this data, it will be for the benefit of businesses and citizens. We have also just published another report on data-driven transport policy. But – in the immortal words of Rudyard Kipling – that’s another story!

Useful links

The reports mentioned above are part of a series of Corporate Partnership Board reports. For more information, please contact either Programme Manager [email protected] or Project Manager [email protected]

Recent ITF reports:

The sharing economy and new models of service delivery

Ministers, the business community, civil society, labour and the Internet technical community will gather in Cancún, Mexico on 21-23 June for an OECD Ministerial Meeting on the Digital Economy: Innovation, Growth and Social Prosperity

The sharing economy and new models of service delivery

Digital economy ministerialMinisters, the business community, civil society, labour and the Internet technical community will gather in Cancún, Mexico on 21-23 June for an OECD Ministerial Meeting on the Digital Economy: Innovation, Growth and Social Prosperity. Today’s post is by Antonio Maudes, Director, Maria Sobrino, Head of Market Studies Unit, and Pedro Hinojo, executive adviser in the Advocacy Department of Spain’s National Authority for Markets and Competition (CNMC)

The June 2016 OECD Ministerial Meeting on the Digital Economy in Cancun, Mexico will feature high-level discussions that will help to shape the current debate and present new ideas and perspectives for the participants regarding online platforms. Opportunities coming from online platforms not only create innovative forms of production, consumption, collaboration and sharing between individuals and organisations,  but also promote economic benefits and employment opportunities thanks to the digital economy by creating a fast-moving business environment.

But, what is the “sharing economy”? Finding a precise definition is both challenging and controversial. The CNMC, the Spanish Competition Authority, has approached this phenomenon through a public consultation (launched on November 2014, with a first and a second stage), achieving some preliminary findings, which were submitted to public consultation too. The results of the latter consultation point out that competition authorities, regulators, consumer organizations and universities tend to perceive the sharing economy as an opportunity to improve social welfare, regulation and competition while unions and freelancers had a somewhat negative view.

After more than one year of intense work, the CNMC has gained knowledge about these new models of service delivery in the digital economy. One of the defining features of the sharing economy is the use of underutilised assets and goods, be it in exchange of other resources (money or other goods or services) or for free. But this is not new: houses, cars and other durable goods have always been exchanged and shared (among relatives, friends, colleagues…). The novelty is the scale of the current wave of sharing economy, overcoming transactions costs and informational asymmetries.

This has been made possible thanks to technological and social transformations, somehow intertwined:

  • On the technology side, the “21st century sharing economy” relies on internet platforms in multi-sided markets, which slash transaction costs by matching supply and demand more efficiently. The IT revolution, chiefly smartphones and apps, allows us to find new services or providers thereof very conveniently. Competition is not one ‘click’ away, it is even closer. Competition is actually one ‘swipe’ away. It is at our own hands, every day, every time.
  • On the social sphere, people are showing how they are willing to concede anonymity in order to enjoy the sense of belonging to a community and building trust among a wider network, thus sharing goods and services within platforms. The voluntary revelation online of the “real world” identity helps to reduce information asymmetries, facilitating markets and transactions.

This is, without a shadow of a doubt, a structural, unstoppable and disruptive revolution. A fourth sector is emerging, not falling under any of the traditional three classifications (primary-agriculture, secondary-industry, tertiary-services).

In this digital economy, the consumer is more empowered, with access to a wider variety of goods and services and higher quality at lower costs and more efficient prices. The user receives more information, more comparable and reliable, as shown by reputation mechanisms. And consumers can even be producers, offering their goods and assets as services. In a nutshell, a new economic agent is born: the “prosumer”, who can participate in both sides of the market. And this empowerment of the prosumer, along with market entry for new players, is the main reason why the CNMC, as a competition authority, welcomes these new models of service delivery within the sharing economy.

This “permissionless” innovation can foster competition by challenging the status quo in some sectors traditionally shielded from competition. The absence of competitive pressure was in many cases provoked by inefficient regulations which made entry more difficult (if not virtually impossible), as well as market failures such as information asymmetry. Paradoxically, new business models overcome technological obstacles while responding to these market failures more efficiently than traditional incumbents (for instance, through online reviews and reputation mechanisms), question the rationale for distortive regulation.

Other benefits of the sharing economy can be felt beyond the scope of competition:

  • Economic development, fostered by the innovative and technological dimension of these new business models.
  • Environmental sustainability, as the circular economy emphasizes access and service provision rather than at ownership and goods production. Indeed, one of the reasons behind the thriving of the sharing economy, apart from the technological and social transformations already mentioned, is increasing environmental awareness.
  • Redistribution of resources towards low-middle income citizens, which can monetise some illiquid under-utilised assets (in order to smooth their consumption over the cycle) while accessing some goods and services at lower prices.
  • Better contribution than traditional business models to other general goals, like consumer protection or tax compliance, due to the electronic tracking of transactions and, consequently, greater transparency.

Therefore, the role of public policy is to embrace these new models in order to increase general welfare. The CNMC preliminary findings on the new business models and the sharing economy” advise governments to take advantage of this opportunity to revise the existing sectoral regulation according to the efficient regulation principles (necessity, appropriateness, proportionality). The fact of dealing with multi-sided markets implies that the platform has to balance at the same time the interest of both producers and consumers. This reduces the risk of a “race to the bottom” in terms of quality standards given that if consumers don’t perceive adequate guarantees, they can switch to another platform or not fulfil the transaction. Reforms in horizontal regulation (for instance, in the areas of tax and labour compliance) might also be warranted in order to ensure its adaptation to a new and more flexible economic reality.

The OECD, with its rich history of dialogue and analysis, is the perfect setting to shape the digital economy and the future of the new services’ economy.

Useful links

OECD Digital Economy Outlook 2015

OECD work on Innovation in science, technology and industry

The Sharing Economy: How shared self-driving cars could change city traffic

Click to download the report
Click to download

Sharon Masterson, International Transport Forum Corporate Partnership Board

In 2011, TIME Magazine named collaborative consumption (or the sharing economy as it is often called) as one of the top 10 ideas that will change the world.

Four years on, this prediction seems to be holding true. The number of companies operating in the sharing economy is rising rapidly in the transport sector alone, and includes household names such as Uber, BlaBlaCar, Lyft, Zipcar, etc. The public seems to be embracing this phenomenon as we witness users flocking to join these platforms across the globe.

Given that a typical car lies idle some 23 hours a day, car owners are investing in something that they barely use, so this untapped potential is at the heart of the sharing economy in personal transportation. With automated, self-driving cars only around the corner (and some precursor components already in the market in the form of adaptive cruise control, lane assist and self-parking), we decided to look at how combining the shared economy aspect (shared vehicles) with developing technology (automated vehicles) can be applied today, by asking “What if all conventional cars in a city were replaced by a fleet of shared self-driving vehicles”?

The results of this exercise were very interesting.

We carried out a simulation on a representation of the street network of the city of Lisbon, using origin and destination data derived from a fine-grained database of trips on the basis of a detailed travel survey. Trips were allocated to different modes: walking, shared self-driving vehicles or high-capacity public transport. We set a constraint that all trips should take at most 5 minutes longer than today’s car trips take for all scenarios, and assumed all trips are done by shared vehicles and none by buses or private cars. We also modelled a scenario which included high-capacity public transport (Metro in the case of Lisbon).

We modelled two different car-sharing concepts, “TaxiBots”, a term we coined for self-driving vehicles shared simultaneously by several passengers (i.e. ride sharing), and “AutoVots”, cars which pick-up and drop-off single passengers sequentially (car sharing).

For the different scenarios we measured the number of cars, kilometres travelled, impacts on congestion and impacts on parking space.

The results indicate that shared self-driving fleets can deliver the same mobility as today with significantly fewer cars. In a city serviced by ride-sharing TaxiBots and a good underground system, 90% of cars could be removed from the city.

Even in the scenario that least reduces the number of cars (AutoVots without underground), nearly half of all cars could be removed without impacting the level of service. Note: TaxiBots replace more cars than AutoVots since the latter require more vehicles and much more re-positioning travel to deliver the same level of service.

Even at peak hours, only about one third (35%) of today’s cars would be on the roads (TaxiBots with underground), without reducing overall mobility.

No matter what the scenario, on-street parking spots could be totally removed with a fleet of shared self-driving cars, allowing in a medium-sized European city such as Lisbon, reallocating 1.5 million square metres to other public uses. This equates to almost 20% of the surface of kerb-to-kerb street area (or 210 football pitches!)

These findings suggest that shared self-driving fleets could significantly reduce congestion. In terms of environmental impact, only 2% more vehicles would be needed for a fleet of cleaner, electric, shared self-driving vehicles, to compensate for reduced range and battery charging time.

So what are the policy insights from this study?

  • The impact of self-driving shared fleets is significant but is sensitive to policy choices and deployment scenarios. Transport policies can influence the type and size of the fleet, the mix between traditional public transport and shared vehicles and, ultimately, the amount of car travel, congestion and emissions in the city. For small and medium-sized cities it is conceivable that a shared fleet of self-driving vehicles could completely obviate the need for traditional public transport.
  • Actively managing freed capacity and space is still necessary to lock in benefits. Shared vehicle fleets free up a significant amount of space in the city. However prior experience indicates that this space must be pro-actively managed in order to lock in benefits. Management strategies could include restricting access to this space by allocating it to bicycle tracks or enlarging sidewalks, or also to commercial or recreational uses, as well as to delivery bays. For example, freed-up space in off-street parking could be used for logistics distribution centres.
  • Road safety will likely improve; environmental benefits will depend on vehicle technology. Despite increases in overall levels of car travel, the deployment of large-scale self-driving vehicle fleets will likely reduce crashes and crash severity. At the same time, environmental impacts are still tied to per-kilometre emissions and thus will be dependent on the penetration of more fuel efficient and less polluting technologies.
  • Public transport, taxi operations and urban transport governance will have to adapt. The deployment of self-driving and shared fleets in an urban context will directly compete with the way in which taxi and public transport services are currently organised. These fleets might effectively become a new form of low capacity/high quality public transport. Labour issues will be significant but there is no reason why public transport operators or taxi companies could not take an active role in delivering these services.

Useful links

As well as this study, in the coming month we will be releasing a number of other reports by our Corporate Partnership Board, looking at Autonomous Driving: Regulatory Issues and Mobility Data: Changes and Opportunities

Autonomous vehicles will be one of the subjects discussed at the International Transport Forum’s Summit in Leipzig on May 27-29.

What is a taxi? Regulation and the sharing economy

sharing economyToday’s post is from Darcy Allen, Research Fellow at Melbourne-based free market think tank The Institute of Public Affairs, and recent author of a new report – “The sharing economy: how over-regulation could destroy an economic revolution”.

The ‘sharing economy’ has emerged because new technologies such as the internet have drastically reduced transaction costs.

Embracing these developments, budding young entrepreneurs have launched businesses that help individuals exchange resources.

Examples such as the ride-sharing Uber and the accommodation-sharing Airbnb are making exchange more efficient by helping to coordinate information about mutually beneficial transactions. These businesses make money by taking a fee for facilitating the trade.

Why has the sharing economy emerged? The underlying reason is transaction costs – the costs of coordinating an exchange. This includes the discovery, bargaining, and policing costs of exchange.

As these costs fall it becomes more feasible for consumers and producers to transact. Transaction costs have now fallen so low that buyers and sellers can exchange the excess capacity of their existing resources with ease and convenience. Hence the emergence of the ‘sharing economy’.

The phenomenon is not limited to cars and houses, there are also sharing economy models for finance (Zopa), investment (Kickstarter), everyday tasks (Airtasker), and household tools (Open Shed).

These companies do not sell the ‘resources’ mentioned above. Rather, they sell the software, the matching algorithms, and the reputation of their business. This package provides a service where private parties can discover, bargain and police their own transactions.

Private parties are fast flocking towards these new platforms because of their advantages over traditional exchange: more sustainable use of scare resources by utilising idle capacity; often lower costs for consumers because of decentralised transactions; the ability to customise the details of the exchange; and flexible employment opportunities particularly for the unemployed.

But the future of these benefits is all but smooth sailing. The debate involves regulators, governments and incumbent industries. This is expected with any disruptive innovation. Incumbent industries scramble to protect their valuable position using the political process.

The underlying question of these debates is not really over whether the sharing economy has economic benefits. The question is over who is more effective at regulating emerging markets – governments or civil society?

A recent report by the Melbourne-based free market think tank the Institute of Public Affairs, The sharing economy: how over-regulation could destroy an economic revolution, explores how misguided and heavy top-down regulations could crowd out the benefits of the sharing economy.

Much of the problem stems from a misunderstanding of the costs of government intervention on one hand, and the increasing ability for markets, businesses and consumers to self-regulate on the other.

To be sure, these debates over government imposed control and evolving self-regulation will continue. But it is not sufficient to approach each issue on a case-by-case basis; decisions must sit within a broader regulatory design framework that provides the flexibility and adaptability to future challenges.

This post provides three such design principles.

Regulation should not be by default; it should be the second alternative if bottom-up governance fails.

Regulators must avoid hasty regulation. Imposing rules on an emerging industry naively assumes that regulators understand the future of that industry. Rather, the reaction of regulators should be to encourage and enable the development of bottom-up, organic, self-regulating institutions.

Some may recognise this as Adam Thierer’s idea of Permissionless Innovation. Governments too often follow a ‘precautionary principle’ – that is, regulating against the possibility of hypothetical harm. This locks entrepreneurs into rigid rules that stifle innovative activity.

The sharing economy has a large potential for self-governance. This is an alternative to government control. It is common for sharing economy platforms to have reputation mechanisms and insurance systems that fill some of the void where government regulation is assumed to sit.

These solutions are often cheaper, quicker and more flexible than their government alternative, and over-regulation can destroy these complex structures. It is the nature of politics that regulation is rarely able to evolve as technologies and industries evolve.

Moving away from occupational licensing as a signal of quality.

Occupational licensing is government deciding who can supply what services in the market. Licensing is often justified on the basis that it signals quality and safety for consumers.

This is all well and good, but occupational licensing also has costs. It is widely recognised that government-imposed licenses create supernormal profits for insiders, and are highly inflexible to changes in industry structure.

The sharing economy has created significant tension around occupational licensing. This is because private parties can now easily provide services – like transport and accommodation – through unconventional and decentralised markets.

The solution is to encourage alternative approaches such as professional certification to signify quality. Certification does not legally prevent individuals from providing certain services; it allows the market to decide. The benefit is that private parties determine whether the benefits of the certification outweigh the additional costs of providing the good.

We must encourage the sharing economy to create, test and refine their own certification bodies. For example, AirtaskerPRO is an additional screening process including an ID check and an in-person interview to obtain a badge on the user profile. These need to be embraced.

Make regulation technology-neutral to avoid entrenching industry structure.

Technology-specific regulation only survives the test of time when there is little innovation. Yet traditional industry structures are continually being displaced. Creative destruction is a good thing.

However, when governments regulate an industry, these regulations by their nature define and determine the structure of the industry.

Many sharing economy regulatory contests come down to questions such as ‘what is a taxi?’ or ‘what is a bank?’ As industries shift and innovate, these definitions blur. But regulatory frameworks tend to be fixed, based on the assumptions built into the industry structure that they were original designed to govern.

If governments want to encourage the sharing economy, they need provide a reliable, predictable, technologically-neutral legal system that both keeps industry-specific regulation to a minimum and favours private solutions to regulatory problems over public ones.

Useful links

The sharing economy at OECD Forum 2014