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On October 15th, I participated on a round table discussion at MDI Gurgaon on regulating the Sharing Economy, with a specific focus on cab aggregators. Unfortunately, the discussion appeared to focus far too much on the past and the present, and even less on fundamental changes required in how we actually view segments that are being transformed by technology, which is what I was trying to address. My notes (with additions based on some comments at the session):

1. The problems that the sharing economy solves:

  • Impossible for traditional, heavily regulated players to meet demand: What we’ve seen here in India, and across the globe, is that supply of regulated services has failed to keep up with demand. A chart that Garrett Kinsman submitted to the TRAI regarding demand-supply issues for provisioning of the Internet is applicable to transport, energy, banking and many other domains as well:garrett-kinsman-demand-supply

    Each has had its own set of issues, but the reason Ola and Uber, and even Meru, have seen substantial growth in India is that they meet the need for predictable, reliable, transparent and comfortable transport better than traditional suppliers of travel options. Yes, public transport is far more efficient, but that has failed us miserably, and to solve this issue we need multiple solutions to exist and grow simultaneously. The gap between demand and supply of easy transport options has contributed to people choosing, especially in cities like Delhi, to purchase their own vehicles. The fact that taxi aggregators have added 500,000 to 600,000 cabs on Indian roads (a data point which was mentioned during the discussion), should be indicative of the gap.

  • Abuse of oligopolistic power: Regulated businesses buy monopoly access; as much as telecom operators complain about high spectrum costs, they will be willing to pay a high price as long as it creates a barrier to entry. The same applies to suppliers of power and energy, auto rickshaw and taxi licenses, hotels, among others. In effect, this is akin to giving exclusive access to means of production, or the right to produce. This leads to artificially inflated costs (or inefficient value chains dominated by middlemen). Low competition invariably leads to exploitation of consumers. It could be overcharging customers at airports when they don’t have any other means of transport, three of the largest telecom operators simultaneously increasing rates because they have 69% of the active mobile user base in India, a private utility company supplying power to your area increasing rates, or an auto driver refusing to go to a destination in Bangalore unless you pay 1.5 times the meter.The Sharing Economy disrupts this by creating alternatives to regulated oligopolies: Tesla’s Powerwall democratises production of electricity, the Business Correspondents + Payments Banks + Wallets model, if it is allowed to flourish, should democratise access to banking and payments services, the TRAI Chairman’s idea of having a WiFi hotspot in every street corner should democratise access to Internet.
  • Utilisation of idle capacity, creation of capacity: An empty seat in your car is a waste of capacity, just as an empty room in your house is, just as a rooftop without a solar panel supplying power to a grid might be. Aggregators such as AirBnB and BlaBlaCar help create an economic incentive structure for utilisation of this capacity, and create an additional source of income for many, by also leading to the creation of capacity to address that gap between demand and supply. Now, in India, this is not pervasive, because it requires a behavioral change. Thus, most options on an Airbnb in India are likely to be existing, registered Bed-and-breakfast options, just as a majority of the cabs aggregated by Ola and Uber in India are driven by professional drivers, rather than someone who’s just driving his/her Uber for a couple of hours in an area to earn an extra buck. Hence the complaints about such aggregators increasing traffic congestion in cities instead of reducing it.

2. The problems that the sharing economy creates:

  • The compliance gap between regulated and unregulated players: The regulated economy has to pay for creating barriers to entry, and conform to restrictions placed on them by regulators. For example, telecom operators in India have to integrate with the Centralised Monitoring System to allow the government to snoop on their customers, and pay annually, a portion of their revenue to the government. Taxi cabs in Delhi are forced to park only in designated taxi stands (of which there are few). Governments do this to address their own inefficiency (such as fiscal deficit, ineffective intelligence setup), but also to ensure that there is compliance based on what consumers might need. Hence, the institution of Maximum Retail Price and ISI quality compliance for products, regulated pricing and taxi meters on cabs. The compliance gap between regulated and unregulated players is argued by the regulated players in a manner that is now fairly standard playbook, which we had detailed here:
    • Loss of employment: ignoring that sharing economy creates employment and entrepreneurship, just not the regulated kind.
    • Taking revenue away from local businesses: particularly evident in case of arguments against Ecommerce, ignoring that local, neighbourhood monopolies often don’t meet demand.
    • Quality concerns related to aggregators (because unregulated and unmonitored). Of course, it’s not as if most traditional players are providing higher quality services.
    • Security concerns
    • Demand for a regulatory “Level playing field”: Because aggregators operate on a different model altogether, wherein they act (or are supposed to act) as intermediaries, and merely connect buyer with seller, they transfer much of onus of regulatory compliance on merchants, and the governments are often incapable of ensuring compliance from merchants: this is why they turn towards regulation of aggregators, for, in a manner of speaking, trickle-down-compliance.

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  • The biggest challenge is of price regulation: remember that in a regulated economy, the government regulates prices to prevent exploitation of customers, in exchange for exclusivity. Now enforcement is a major issue here, and while taxis and auto rickshaws have regulated pricing, they rarely follow the rules. In telecom, pricing is left to the market, and that has led to innovation: telecom operators offer a variety of pricing, customised for each circle, if not for each district. This is meant to ensure that the demand-supply gap is minimal. Surge pricing is, in effect, supposed to address this very problem: it can be used to ensure that cabs go to a particular location when there aren’t enough cabs to meet demand. Note that this real-time assessment of demand and supply is only possible with the technology that we have today. Even today, during peak hours, there often isn’t sufficient supply to meet demand. However, the regulatory challenge is that the algorithms are opaque.
  • The issue of another kind of monopolisation: aggregators work on the principle of creating fragmentation (and supply), and then monetizing aggregation. The danger is if these businesses create unregulated monopolistic structures by themselves. They are well capitalised, and in a position to create supply for now, but that also increases dependency. For example: right now, both drivers and customers are in a position to choose between Ola and Uber, but market dynamics are such that they mostly have Ola and Uber. At scale, the market can perhaps only support one or two players. The monopolisation, so to speak, shifts from access to supply to access to demand: the aggregator becomes the primary means of accessing the customer. Lets not forget that this situation is often earned, but quite often, also bought. What happens then is the exploitation of both customers and sellers, in the absence of a viable or available alternative. Think of what telecom operators did in case of Mobile VAS, where only a few vendors were allowed, and customers were cheated on a regular basis. Think of Amazon arm-twisting book-sellers, and its feud with Hatchette a couple of years ago. Think of the Facebook Newsfeed and its changing of algorithm to reduce reach.
  • There’s a regulatory gap between the responsibility and accountability of aggregators and intermediaries: Customers trust aggregators more than they trust merchants. You buy from a merchant via Flipkart because you expect products sold via (and not on) Flipkart to meet certain quality standards. You book a cab using Uber because you expect a certain quality of service and behaviour. However, while aggregators are responsible, they’re not necessarily liable. They are, legally speaking, intermediaries. If you book a ride via BlaBlaCar, for a shared taxi across cities, should BlaBlaCar be held accountable for the actions of a private individual? How is it even possible for them to ensure compliance? More on this issue here.

3. What should regulators do? I haven’t quite thought this through, but here are some ideas, and please feel free to share your suggestions as well:

  • Treat aggregators separately from traditional players, because they are aggregators and intermediaries, not merchants. If they don’t operate as marketplaces, allowing buyers to pick merchants (Uber and Ola don’t), they should be treated as traditional suppliers.
  • Have guidelines for compliance for merchants who work with aggregators that are in line with those for traditional suppliers, so that there is regulatory parity between them. Norms should be such that every house should be able to become a BNB, and every car should be able to become a cab. In a similar vein, every home owner should be in a position to provide electricity to a grid.
  • Reduce regulatory compliance norms for traditional players, and get rid of archaic rules which prevent or reduce competition between old and new modes of production. Let competition and policy review address most challenges. What we have to do is address the regulatory imbalance here by easing regulation for traditional suppliers, and not by increasing it for new players.
  • Ensure that there isn’t cartelization among aggregators and/or traditional players, and that there is sufficient competition in the market to allow easy entry of new players. From a transport perspective, customers should have a choice between public transport, auto rickshaws, cycle-rickshaws, buses, private shuttles, bike-taxis, or just sharing a ride with someone else.