How should a city administration respond to the shared cab phenomenon?

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Smartphone apps are bringing massive changes to the taxi industry in ways that urban transport has not seen in a long while. From the US to China and Latin America (Bogota, Mexico), taxi alternative services have attained an impressive level of penetration in a short amount of time, often with great controversy. Indeed, many cities across the world are struggling with what to make of these services and how to regulate them.

While we have not been significantly involved with such services thus far, a recently appointed mobility secretary in a big Latin American city has asked us for support on developing an approach to the shared taxi industry, as part of a "Smart Mobility" strategy for the city. In that context, we wanted to start a conversation on optimal strategies for cities to be able to welcome and foster such innovations, while still capitalizing on the opportunity to create value for its citizens.

 
The popularity and rapid penetration of taxi-matching services send a strong message about the value they are creating for users
 

• Safe, timely and reliable services. Getting safe, timely, reliable taxi service should be easier than it is in many cities across the world. Service is often difficult and patchy outside the center and outside peak times. In Latin American cities, personal security has also been a significant problem, especially due to kidnappings by fake taxi drivers. Many city administrations have yet to find ways to guarantee that a taxi flagged on the street is legal, safe and reliable. In this environment, companies like EasyTaxi or MyCab play a valuable role thanks to a thorough driver verification process. We had a chance to interact with a MyCab driver in Mexico, who told us about the extensive verification process he had to undergo, including investigators visiting his house and neighborhood, and verifying he had a formal bank account.
• Fare structure and services that respond to demand. Recent innovations in the industry open the possibility for users to share rides and split fares under certain circumstances. This means taxi-alternative services could potentially operate as on-demand public transport in thin markets and in off-peak settings, which could play an important role in serving the bottom of the pyramid.
• Reputation as the new quality regulator. Most services and businesses with an online presence can now be easily reviewed and graded by users. For taxi-alternative services, online reputation (along with word of mouth?) could therefore become a powerful quality assurance tool that does not require any government intervention.

 
What is the city government’s interest in the shared cab industry? How should it respond to the phenomenon?

Government has an interest in regulating three important dimensions of the “traditional” taxi industry:
 

• Ensuring the safety, security and well-being of passengers, especially by screening potential drivers.
• Managing supply by restricting the number of permits to operate a taxicab (or “medallions”). When taxi fares and demand for services are high enough, and the number of available licenses is limited, taxi medallions can have significant economic value, some of it paid to the government as a fee. Limiting the number of taxis – and empty kilometers driven — can also help manage congestion and local pollution.
• Enforcing fare transparency (some would say in setting fares as well).

As far as taxi-alternative services are concerned, we mentioned earlier that sharing-economy entrepreneurs appear to be doing a good job at screening drivers/cars for passenger security, and provide transparency on fares. Therefore, it  seems that the key remaining public interest has to do with congestion, i.e. ensuring that new taxis are paying the external costs of the congestion they are causing. Instead, in most settings, the public debate is being driven by the interests of the ‘traditional’ taxi industry - whose grievances are certainly legitimate since they have paid a medallion fee in exchange for an expectation of exclusivity. However, from a transport planner’s perspective this is really is an issue of one-time contracts that should not distract us from thinking about the long-term public interest.

Given the public interest in managing congestion, perhaps the most important public intervention with taxi-matching services such as Uber and MyCab would be to require service providers to share with government detailed real-time data on speeds and rides:
 

• Firstly, such data are extremely valuable in themselves. Getting speed data for the road system is essential for transport planners as well as for road users who rely on journey planners and other navigation systems. But those data are not easy for government to collect.
• Secondly, it would allow government to track and tax empty kilometers driven by Uber or Mycab taxis, which generate substantial externalities in the city such as increased emissions and congestion.
• Thirdly, real-time data would allow city governments to manage congestion more efficiently by charging taxis a fee for using public ways at certain times and in certain locations, depending on the congestion they cause. 

Work will need to be done to define efficient and socially acceptable fee schedules – without compromising the ability of taxi-matching services to price according to demand, which is paramount to their business model innovation. But in the long run, such fees could have the potential to generate revenue for the government to replace the revenue lost by medallion fees and, more importantly, provide the right incentives for transparent, competitive and sustainable innovation.

What are your thoughts?  What have we missed or not considered?