Opinionista Ivo Vegter 19 January 2015

Uber permits as protectionist central planning

Cape Town made world headlines a couple of weeks ago, when police impounded over 30 driver-owned vehicles operating under the Uber ride-sharing brand. At issue, supposedly, were taxi operator permits required by the Western Cape government.

When you make headlines in Bloomberg, the Wall Street Journal and Slashdot, you know you’ve hit a nerve. That is what happened earlier this month when police officers in Cape Town impounded over thirty Uber vehicles and fined their owners thousands of rands each.

Their crime? Operating a ride-sharing service armed only with a professional driver’s permit, commercial insurance, official roadworthy and an operator card from Uber. What they lacked – besides guns (I’ll explain later) – was a metered taxi operating licence.

Uber calls itself a ride-sharing service, but it’s better understood as a peer-to-peer network for private cab rides. Customers signal the Uber network that they wish to be collected, and the network matches them with drivers willing to offer the service at the going rate.

Drivers are not Uber employees. Although they are vetted by Uber, they are private individuals using their own vehicles. In most countries, drivers earn 80% of the fare, but in some highly competitive markets, that share can be as high as 95%.

The Uber fare system is based on a classic supply and demand model, managed by computer. If it’s quiet, fares are low, and many drivers are inactive. If there are more requests for rides than available vehicles, the price rises, attracting inactive drivers onto the network. As a result, off-peak fares can be very competitive, but hailing a ride can become remarkably expensive at peak times, such as after a major sporting event or on New Year’s Eve.

This high-tech fine-tuning of supply-and-demand is absolutely crushed the moment government gets involved.

An Uber driver is supposed to apply for a taxi operating permit, which a provincial regulating entity (sorry, but that’s what the law calls it) must evaluate. The bureaucrats get to decide whether the driver’s business plan is sound, and whether there is a need for the proposed service. If they think not, sorry, no permit for you.

(As an aside, one wonders if a driver whose business fails is entitled to sue the government for recklessly lulling them into a false sense of security.)

It appears that some Uber drivers have not obtained the required permits. That may well be because Cape Town instituted a moratorium on issuing new operator licences in mid-2013, which was only lifted in December last year. Durban – which has also impounded some Uber vehicles – has a moratorium that is still in force. In both cases, the moratorium was motivated by the requirements of the National Land Transport Act of 2009 (NLTA) and its regulations, under which cities must rationalise taxi operating licences pending the development of an “Integrated Transport Plan”.

So effectively, if you wanted to become an Uber driver in these cities, at any time since the company entered the South African market in October in 2013, it was impossible to do so legally. So much for foreign investment and job creation.

Uber isn’t the only would-be operator in the peer-to-peer passenger transport space. It has a major American competitor in Lyft. (A driver for both has an interesting comparison). A Brazilian startup, Easy Taxi, has made an aggressive move into Africa via Nigeria recently. There’s local competition from the likes of SnappCab. Alternatives to ordinary motor vehicles are also becoming more common. Examples are the semi-electric pedi-cabs of Franschhoek-based MellowCabs, and three-wheeled tuk-tuks.

Most of these fast-moving operators are being hobbled by slow-moving bureaucracy and legal obstacles, not only in South Africa, but around the world.

Johannesburg’s tuk-tuks were the cause of a similar controversy two years ago, when Gauteng’s MEC for transport, Ismail Vadi, described them as “unhealthy competition” to minibus taxis, metered taxis and buses. The province, he claimed, had to ensure that these startups did not encroach on the “legal routes” of other public transport operators.

That competition is harmful to anyone other than established producers hoping to profit off you without too much effort, is outrageous. Yet such is the level of economic thinking among many of our bureaucrats. That private taxis should have their own “legal routes” on public roads is equally fantastic. Yet such is the level of protectionism in South Africa’s transport sector.

A great deal of legislation designed to protect producers is passed under the guise of protecting consumers. However, reputation is often a far stronger motive for private organisations with a global brand. Uber has tens of thousands of drivers around the world, but when a few break the law, the stories become global headline news, implicating the brand each time. At the same time, stories of heinous crimes committed by traditional licenced taxi drivers are humdrum fillers for the local papers.

According to Brett Herron, mayoral committee member for transport in the City of Cape Town, any transport service provided for reward needs to have an operating licence. Therefore, any such service has to fall into one of the categories set out in the transport regulations: long distance services (including tourist transport), minibus taxis, metered taxis, chartered vehicles, lift clubs or tuk-tuks.

Online ride-share services like Uber fall into none of these categories. In Johannesburg, Uber drivers are expected to operate as chartered vehicles, and that city has had few problems. However, in Cape Town and Durban, local governments advised would-be Uber drivers to apply for a metered taxi permit, which they wouldn’t issue thanks to their moratoria.

Donald Grant, the Western Cape’s MEC for transport and public works, told me: “We do not want to regulate what commercial industry does.”

Clearly, what the provincial government claims to want and what it does are two very different things.

Herron explains: “The legislation is national, and it clearly indicates that before an authority can support a licence application, they have to demonstrate that there is additional need.”

“It’s our function to regulate the number of licences that are in circulation,” agrees Grant. “The City takes these applications, and evaluates the routes. Uber is an anomaly, because it doesn’t operate like traditional metered taxis, and there are no specified routes. The metered taxi industry operates from a base. Uber drivers operate in a radius. Once you look at all of them, you can soon see whether there is an over-concentration of drivers.”

Yet Uber’s peer-to-peer business model – with independent drivers who choose their own operating times and areas, decentralised online hailing, and dynamic pricing – exists for the very reason that you can’t “soon see” any of this. Uber’s model may be controversial, with legal challenges and unhappiness from some customers about surge pricing in peak times, but it relies on very basic economic principles: that the price mechanism is the only way to balance supply with demand, and that the business owner is the only person who can take that risk.

Uber driver Neville Zikhali understands this rather better than the government does. Quoted in the Sunday Times, he said: “If you don’t master where demand is greatest and the times when demand peaks, then you’ll find there is no business.”

Conversely, it is impossible to demonstrate who your customers will be if the service you hope to provide doesn’t yet exist. Startups – including ride-sharing firms – fail all the time because they mis-estimated some aspect of customer demand.

According to Grant, there is a range of issues that affect whether or not a new taxi operator licence ought to be issued. Among them, he lists a city’s integrated transport plan, existing minibus taxi services, contract transport licences, and the need to encourage people to use public transport rather than private vehicles.

To have bureaucrats make decisions on these issues goes against the very constitution of the Democratic Alliance, the incumbent party in both the Western Cape Government and the City of Cape Town. The party’s politicians routinely say they believe in “the open opportunity society”.

Their constitution reads: “The force behind the growing prosperity of any society is a socially and environmentally responsible free enterprise economy driven by choices, risks and hard work. Without the growth in prosperity created through the exercise of the market economy there can be no opportunity, freedom loses its purpose and choices become increasingly limited.”

In other words, the DA will nanny you if you’re a shameless polluter or a disturber of the peace and public welfare, but beyond that, it’s free enterprise all the way.

Except for Uber drivers.

Granted, the DA’s contradictory position on Uber has been long in the making. It could not have effectively opposed the NLTA even if it had wanted to. On the other hand, it has on more than one occasion spoken favourably in Parliament about aspects of the law and the need to implement its provisions speedily.

How you square the grandiose central planning of “integrated transport plans” with free enterprise is beyond me, but the Uber story – like the tuk-tuks flap in Johannesburg two years ago – shows that even reluctant planners can force entrepreneurs to toe their line.

As always when a government raises surprisingly high regulatory barriers, the ultimate motivation is to protect favoured industries. Grant mentioned a couple of them: minibus taxis and public transport. Alon Lits, Uber’s general manager for South Africa, told the Wall Street Journal he thought traditional metered taxi companies were behind the pressure on Cape Town authorities to make life difficult for Uber drivers.

Herron was quite clear about the protectionist intent of the transport law: “If you look at the transport sector, it’s a very volatile sector. A lot of the violence that happens is because of route invasion.”

So one group of producers – minibus taxi operators – threatened violence. The government responded by writing an entire 52-page law (with 92 pages of regulations) dedicated to protecting them from competition.

This truly is sad, because violence towards competitors is a grave mark against an otherwise inspiring free enterprise story. Instead of suppressing criminal turf wars over taxi routes, the government caved in and rewarded violence. As I hinted early on, what the Uber drivers lack most of all is the belief that they are entitled to use guns against competitors.

If you ever wanted an example of government and organised crime working hand-in-glove, the National Land Transport Act is it.

“The Act does protect existing operators,” Herron says, though he doesn’t sound very happy about it. “I’ve got a process underway with the minibus taxi operators to find a new way to approach this, within the law. I agree the Act makes things much too difficult. We’re trying to fill the gaps and shortcomings in national legislation with local policy.”

At least the expectation of central planning weighs uncomfortably on the minds of some bureaucrats. Sadly, that may not be enough to save South Africa’s consumers from the weight of statist, protectionist legislation hijacked by powerful special interests. DM



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