Uber's 'innovation' may be coming at the cost of consumers, drivers when regulation is weak

If the contracts between drivers and radio cab companies like Uber, Ola and TaxiForSure are put under the microscope, they could show that companies may be benefiting at the cost of both drivers and consumers

K Yatish Rajawat December 13, 2014 13:48:10 IST
Uber's 'innovation' may be coming at the cost of consumers, drivers when regulation is weak

The kneejerk bans imposed by some states on Uber's taxi operations following the rape of a 27-year-old woman by a cab driver last week also bring forth an important point: that these companies were effectively operating in a grey area of the law. It is not surprising that so many private equity or venture capital funds have pumped millions of dollars into radio taxi companies, for they love grey areas in regulation where margins can be higher and markets can be captured with smart technology alone.

The real scams involving radio taxi services like Uber, Ola and TaxiForSure may lie in the details of their standard-operating procedures, through which they may be exploiting both ill-educated drivers and uninformed consumers and ensuring that they don't pay for any of the costs when things go wrong.

For example, in the case of the Uber rape, the driver may go on trial and end up in jail for life, the consumer has suffered physical and psychological trauma with no recompense, but the only cost Uber may pay is in terms of bad publicity. Even if the consumer chooses to sue Uber, the process will probably tire her more than a well-funded Uber.

It is not as if governments were entirely in the dark when radio taxies entered the picture some time back. Every state motor vehicles department (a.k.a. known as RTOs) has regulations for registering and licensing taxis in a city. In big cities, lotteries are held for offering licences to new black-and-yellow cabs. It is alleged that these lotteries are often rigged, as the demand for kaali-peeli taxi licences is very high. The question is: did it require a genius to learn that the new radio taxi company service was invented to meet the mushrooming demand for private taxies by bypassing the lottery system? The fact that many of them were "foreign-owned" and driven by strong PR only served to emphasise that they were offering something much, much better in terms of customer services.

Now, though, it is clear that apart from having better technology for matching taxi demand with supply, these companies were not substantially better and were clearly operating in the grey areas of regulation. The Uber rape has come as a timely reminder that regulation (and its implementation) needs change.

Let's start with what is now on offer, and how they are regulated. There are several kinds of taxi companies and services.

  1. Point-to-point taxi services inside a city compete directly against black-and-yellow cabs and are the most profitable in a competitive market.
  2. Airport taxi services that offer to and fro services from city airports to the city. They have fixed routes and high prices. Here also the competition is pretty tough as plying the airport route is profitable.
  3. Intra-city services offer longer commutes between two major cities - like the Mumbai-Pune route - and they compete against luxury bus services and fleet operators.
  4. Fixed-time rental services are offered by taxi service providers who offer cars without drivers with a fixed time period payment system within a city.
  5. Time-and-distance packages. There are other small operators who offer a mix of time-and-distance packages (8 hours/80 km, etc). They are largely in the unorganised sector, and often work with companies to ferry their employees from home and work. When not working for companies, they also offer retail services to general customers. Some do only the latter. These operators are worst hit by branded taxi companies offering app-based services.

The first two categories have almost the same kind of competition, but require approvals at airports for parking and access, and hence have been differentiated.

The issue of regulation is as follows: it is not just about drivers, their track records and registration. The RTOs have very strict guidelines about licensing. Whether the Uber, Ola, Meru and TaxiForSure operations go through these same processes and licensing requirements is open to question. These companies have a lot to answer.

The bigger issue is the kind of regulation that these services need. Since banning is not a solution, they clearly need better regulation. Among the things to ponder are the following:

  1. Drivers: How are the drivers licensed to operate these taxis? Their driving skills, police record, and understanding of city and traffic regulations are key considerations here.
  2. Contracts: What are the contractual terms between the drivers and these taxi companies? This is the biggest area of concern and could uncover a potential scam covering lakhs of drivers across the country. A close look at these contracts, whether written or orally made, may show that these taxi companies may have promised daily, weekly or monthly revenues to these drivers. They take upfront payments from ill-educated drivers and promise them regular incomes. Drivers tend to believe that they are almost employees but they are not. This is probably the biggest scam in the system. Driver sink capital costs by buying cars that are masked as lease payments which are deducted from the payments to be made to them. Few drivers may be aware of their rights and obligations as these contracts are largely one-sided.
  3. Employees or Entrepreneurs: Taxi companies mask the contracts with drivers without telling them about it. These drivers are tied up with these companies and may actually be funding these companies - a situation very similar to multi-level marketing schemes. Besides the known brands, there are several other such companies that have mushroomed in almost every city. These companies have worked out financing schemes with banks and auto companies to make drivers the borrowers. Such pass-through financing schemes are also suspect as companies are known to take cuts from both the auto company and the finance company. Some of these taxi companies are nothing but unregulated finance companies.
  4. No protection: Drivers do not have any protection from these companies. They can be thrown out without citing any cause, as they are not employees, not contractual labour or people covered under any law. They are not organised either, so taxi companies literally take them for a ride.
  5. But is even the consumer protected? What kind of protection does a consumer have in case of conflict, fraud, crime, or accident while using any of these taxis? Can the consumer take the taxi companies to court for loss of life or limb in case of an accident? If a little investigation is done on this issue we may find that most of these companies have passed on this liability to the driver and the consumer is worse off. Especially, if a taxi company is funded by private equity and they have built all kinds of protections. So the consumer can go to hell. New regulations need to define the liabilities of both the taxi company and the driver in case they arise from the consumer end for any reason. The Uber rape incident indicates that it is the driver who will get indicted while the taxi company will just write off the incident as bad publicity costs - to be overcome with more PR spends, like offering free rides to journalists for Rs 50 with coupons and sending them fancy cars for pick-ups just to change perceptions.
  6. Who will check monopolies? Generally, the Competition Commission of India does not look into cases involving the unorganised sector when one big competitor can pump in huge resources and gains an unfair advantage. Uber had raised $1.2 billion in its recent round of funding for entry into Asia. The CCI should be looking into the impact of competition on small entrepreneurs, consumers and individual taxi drivers.

While the demand for stronger regulation will be hotly contested by a vociferous community of evangelists who see it as throttling innovation, the fact is unprotected consumers and quasi-employees are paying for this "innovation." The innovation is about aggregating supply and demand, not about anything else.

Yatish Rajawat is a senior journalist based in Delhi, he tweets @yatishrajawat

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