As Uber battles Taxis & Toronto the real question is: why regulate cabs at all?

Toronto's taxis face an existential battle with Uber. But the real question is: why do we regulate cabs in the first place?

In Toronto,
First things first.  Uber claims it isn’t a taxi company: it owns no cars, pays no drivers, etc.  It argues the Uber app simply helps connect  “people who want to share a ride” with drivers “who are willing to provide rides.”  It also facilitates the exchange of value (credit card).  This sounds good, but is splitting hairs.

In Toronto, the taxi industry is divided into many components.  There are drivers, who (unsurprisingly) drive cabs.  There are cabs which are either owned by the drivers (Ambassador cabs must be driven by the owner) or someone else (standard cabs).  The taxi plates on standard cabs are often “owned” (registered to) someone who has nothing to do with the cab business except sub-leasing the plates to a driver/brokerage/etc.

And, there are brokerages.  The brokerage is what most people think of, when they think of a “taxi company.”  These are companies, including Beck Taxi, Co-op Cabs, Diamond Taxi, etc. that build brand recognition with consumers, receive calls or “ride requests” from customers and dispatch cabs to provide the ride.  For this service, they receive a fee from the drivers.  They may or may not own the cars painted in their brand colours.  In this respect, brokerages are essentially doing what Uber does, i.e. connecting people who want to share a ride with drivers who are willing to provide rides.

All of this to say, Uber and taxi brokerages, provide basically the same service – but taxi brokerages must be licensed and are heavily regulated by the city.  So are taxi drivers and taxi car owners.  Uber drivers and car owners, not so much.

Why the fuss?

When I worked in the Mayor’s Office in Toronto, the taxi file was one I couldn’t avoid being dragged into.  It was (and remains) a mess.  The industry is highly politicized, very active and sharply divided.

There are two types of legal taxis in Toronto: standard cabs and Ambassador cabs and the city strictly controls the number of licenses issued.  The city stopped issuing new standard cab licences in 1998 when it introduced the Ambassador cab license.  As of today, the city has issued 3,451 standard cab licenses and 1,313 Ambassador cab licenses.  (There are also 85 licensed “Accessible Cabs” under contract to the Toronto Transit Commission.)  Standard cab licenses come with fewer restrictions than Ambassador licenses, so they are much more valuable.

Standard cab licenses are transferrable, and standard cabs can be owned by one person and driven by one (or many) others.  (I should point out that, technically the licenses are owned by the City of Toronto, but precedent has established in law that the rights of the person to whom the license is registered are, de facto, those of an owner.)  Because the license is transferrable on the advice of the”owner,” they can essentially be bought and sold privately.  Because the license is essential to operate a standard taxi in Toronto, and because there is a fixed number of licenses in existence, the licenses can sell for a lot of money – up to $350,000 each.

“Owners” of standard cab licenses can therefore accrue equity value in their licenses and may own dozens of them – bought cheap and now worth a fortune.  This means they can, and do, get rich holding and selling these licenses.  Those who’ve bought them recently, may have borrowed the money they used to buy them, secured by the resale value of the license.  In essence, the city has created (by accident) an equity security that has market value.

The more licenses that exist in the market, or the less revenue each licensed taxi can generate, the less the market value of the license.  Standard license owners, therefore have a very real, very tangible interest in how many taxis are licensed – or allowed to operate unlicensed in Toronto.

Ambassador drivers, on the other hand, hold non-transferrable licenses that require the license-holder to own the car and drive it.  This limits their ability to generate revenue; even the most diligent driver/owner must sleep some time.  Their licenses allow them to work slave-labour hours for barely more than subsistence earnings and have no value to be sold when they’re done.  When the city feels more cabs are needed, it issues these zero-equity licenses.  But, they don’t issue a lot more, because each time they do, they force the market to be divided amongst more cars, diluting the revenue opportunity (and value) of each existing license.

Then comes Uber, flooding the market with unlicensed cars eating into the market share of existing, licensed taxis.  None of them are happy about it.  The drivers are in an industry where it’s almost essential to drive 16 plus hours per day in order to earn enough after-expense income to raise a family.  They can’t afford to be losing business to Uber’s hobby drivers.  The taxi brokerages are owned by people who may also own a number of valuable standard-cab licenses.  If Uber eats significantly into their market share, their nest eggs lose value.

Why regulate at all?

The real question that must be answered as litigation proceeds between the City of Toronto and Uber, is why does the city regulate and license taxis in the first place?

Back in 2012, I asked city staff to begin its taxi industry review by going back to first principles:  why do we regulate the taxi industry in the first place?  What’s the public good?  I felt that if we articulated this clearly, and got City Council to adopt those principles it would make the resulting review much cleaner and easier.  Sadly, this never happened.  Staff didn’t do it, so Council didn’t see it.  As a result, the industry and the file remain a mess.

But, back to those first principles.  In that meeting, I asked what would happen if we didn’t regulate the taxi industry?  Predictably, we identified a number of potential issues:

  • There might be an explosion of taxis in the city.  This could add significantly to congestion on our streets.
  • The quality of taxi vehicles and drivers may drop. This could create a public safety hazard.  City regulations stipulate the make and age of vehicles and the maintenance required to be licensed.  Likewise, the qualifications, vetting and training of taxi drivers is mandated by the city and the city runs its own training centre.
  • Prices would rise and fall with the market.  On busy nights, drivers could charge whatever the market would bear.  Conversely, some drivers may undercut prices on other nights to get business, making it impossible for some drivers to earn a living – or maintain their vehicles safely.
  • The city’s reputation could be damaged.  If the customer service experience in Toronto taxis seriously deteriorated from dirty, ill-maintained cars, untrained, rude or dangerous drivers, ridiculous or unpredictable pricing, etc. then that could reflect badly on Toronto, hurting our ability to attract business, investment and residents.

From this discussion, I suggested that there are good reasons for regulating some or all aspects of the taxi industry, and that those would be linked to these concerns.  I asked staff to create a list of “reasons to regulate” and proposed this list might start with:

  • To ensure public safety.  To reduce the risk of accidents, injuries, criminal activity etc. to passengers, pedestrians, taxi drivers and other drivers.
  • To protect the city’s reputation. To ensure the Toronto taxi experience reflects well on Toronto as a global city attractive to visitors, investors and residents.
  • To achieve the city’s strategic goals.  For example, I proposed the taxi system should be viewed as part of the city’s (so far non-existent) transportation strategy.  It might make sense to encourage people to use taxis for “last mile” access to/from the public rapid transit system, to reduce private vehicle traffic, etc.  For this to work, the city would want to ensure there are enough cabs to meet demand in a timely manner – and to affect pricing to encourage customer adoption.

There may be other principles, but I left it with City staff to consider and report back.  Had they done so, and had City Council adopted a statement of “regulatory purpose” for the taxi industry, we may have a very different taxi industry today.

More on what using a strategic approach founded on clear regulatory purposes might look like in Part 2.