Tussle between Uber-Ola services and Delhi government: Why the problem is with regulations

Govt’s fare ceiling doesn’t apply to them, say cab aggregators like Uber and Ola. Blame the newness of a business model that has flourished in a legal vacuum.

Written by Udit Misra | Updated: April 27, 2016 9:23 am
delhi surge pricing, cab surge pricing, delhi odd even, delhi uber, ola, ola surge pricing, uber surge pricing, delhi uber ola, delhi news, india news Uber and Ola drivers stand next to their cars as they gathered to protest outside the Delhi Secretariat after ban of Taxi services in New Delhi on June 4th 2015. (Source: Express Photo by Ravi Kanojia/FILE)

Delhi’s odd-even traffic scheme will end in three days but the tussle between the state government and cab hailing services such as Uber and Ola will continue. At the heart of the row is not “surge pricing” — dynamic pricing by which taxi fares could jump several fold depending on localised demand and supply — which the government banned early in the 15-day scheme. The larger issue is the gap in the regulatory architecture.

Since the technology and business model used by cab aggregators like Uber are unprecedented in India, these companies have ended up working in a legal vacuum — there are no clear guidelines on how much they can charge. As a result, the Delhi government is of the view that, under the given rules and regulations, it is “illegal” for an Uber, an Ola, or any such aggregator to charge above government mandated ceilings.

Delhi government officials say “surge pricing” per se is not a problem — as long as fares remain within the ceilings. Depending on the size and facilities of the vehicle and, crucially, the category of commercial permit the driver or the cab company has, there are three levels of rates: Rs 12.50/km, Rs 16/km and Rs 23/km. So, if an Uber is allowed to charge the highest rate and charges only Rs 7/km, a 3X surge is okay because the fare will still be within the ceiling.

The key gap in the regulatory framework that provides the scope for disagreement is this: drivers are not “employed” by the cab aggregator companies, nor are the cabs “owned by the company”. The companies, thus, argue that their fares should not be put under any caps.

The government, on the other hand, insists that irrespective of how fares are calculated (including surge prices), they must adhere to government ceilings — essentially because all drivers got their commercial licences with the clear understanding that no taxis driven by them would charge more than the prices set by the government.

The cab companies present themselves as just an app-based marketplace where drivers and customers come together to trade, and the company gets a fixed commission on each ride — which, in the case of Uber, is 20% of the bill, according to Ruchica Tomar, the spokesperson for Uber India.

“We don’t employ drivers, we don’t own any cars and we are not a taxi company,” Tomar says. “The aggregator sector is new. We are like e-bay. That is why Transport Minister Nitin Gadkari issued guidelines last year in October that there must be sector-specific regulations,” she says.

But transport is a state subject — and Karnataka came out this month with specific guidelines for aggregators, which include price caps. “They (Karnataka) too have price restrictions, and we are opposing it because we don’t want price restrictions,” says Tomar.

The Delhi government too is in the process of framing new rules, but until that happens, the problem will continue. That’s because cab aggregators work on a dynamic pricing model, wherein prices are determined on the basis of real-time demand and supply in a locality, and can jump several times the regular rate either when demand is too high or supply is too low. At least on paper, such pricing freedom is the best way to ensure that all demand for cabs is met by signalling to drivers, those already on the road as well as those not yet driving, to hit the road and increase supply. Complaining about such pricing won’t help, and clamping down on prices or impounding cars — as the Delhi government has been doing — will only result in reducing supply, not in satisfying demand.

However, there are studies, such as the one done by Nicholas Diakopoulos, an assistant professor in the College of Journalism at the University of Maryland, College Park, which shows that “surge pricing doesn’t seem to bring more drivers out on the roads, but rather pushes drivers already on the job toward neighbourhoods with more demand, and higher surge pricing. As a result, some neighbourhoods are left with higher waiting times for a car”.

In a 2015 article for The Washington Post, Diakopoulos wrote, “My analysis suggests that rather than motivating a fresh supply of drivers, surge pricing instead re-distributes drivers already on the road.”

The study was based on US Uber data, which is significantly different from Indian data because only commercial drivers are part of Uber’s scheme in India. As a result, as against the US, the supply of drivers is more restricted. In any case, seen this way, surge pricing will essentially allow the richest people to buy taxi services while the poorer lot would have to wait for more affordable public transport.

Does this mean governments in India are justified in clamping down on such taxi services? While agreeing that dynamic pricing is a justified business method, Jyotirmoy Bhattacharya, assistant professor in the School of Liberal Studies, Ambedkar University, says that any democratic government — or people — would be within their rights to decide what rules govern their society. Also, in Bhattacharya’s view, “while most people understand the need to pay more in rush hour, it is the unpredictability of the surge, and the occasions at which it reaches absurdly high levels, that create the most opposition”.

A simple solution, Bhattacharya says, might be for Uber to delink the price it pays to drivers from what it charges customers on a ride-by-ride basis. So, “when a temporary or local scarcity leads to a spike in the price required to attract drivers, instead to increasing the surge multiplier equally sharply, Uber can choose to absorb most of the spike itself. A small increase in the base rate applied to all rides can compensate Uber for this, and ensure that it remains profitable”. According to Bhattacharya, many customers would prefer to pay a somewhat higher base price in return for not having to face the possibility of an extreme surge.

To be sure, Uber Technologies, which now handles over 5 million trips daily in about 70 countries, does seem to have the capability to ensure huge savings for consumers. According to a recent report by the Grattan Institute, an independent think tank focused on Australian public policy, “Uber can cut more than $ 500 million from Australian taxi bills,” which are reported to add up to $ 5.5 billion each year.

The disruptive potential of the Uber model has triggered protests and controversy the world over, involving both traditional taxi organisations and consumers. Many governments have had to grapple with questions of legality. While such concerns are being debated and settled, in the US, the country where it all started in 2009, Uber has faced a very different problem — that of Uber drivers asking to be recognised as “employees”. On April 22, Uber settled a class action suit with drivers after paying $ 100 million just so that the company could keep these drivers from being called its “employees”.

Actions of the Delhi and Karnataka governments suggest that the regulatory tussle between governments apparently trying to protect the interests of consumers, cab service providers, as well as Uber-type aggregators has only just started in India.

CONTROVERSIAL

US: In California and Massachusetts, drivers have protested falling fares and filed a class action suit for not being treated as employees, which Uber has settled for $ 100 mn. The San Francisco and Los Angeles cities have sued over excessive claims about driver quality and safety checks; Uber has settled for $ 25 mn.

London: TfL, which regulates taxi fares, banned apps showing available cars on a map, but dropped it subsequently. Uber claimed victory.

Jakarta: After violent protests against Uber not being registered as a taxi service, the government is contemplating a ban.

Italy: Protesting taxi drivers have forced Prime Minister Matteo Renzi to hold off liberalising the cab market.

South Africa: Uber drivers have protested falling fares.

ABOUT SURGE PRICING

All fares have three components: base fare, per km charge (from Rs 6-8 per km), and per minute charge (Re 1/min). When demand exceeds supply, prices start increasing. Uber has not explained how the rate of increase in prices is related to the rate of increase in demand (vis-à-vis supply). All territory is divided into ‘geo-fences’. Prices surge based on demand and supply within a geo-fence. Uber does not say how these geo-fences are demarcated. As such, it is entirely possible to have regular prices on one side of the road and 5X across the road. Theoretically, as fares start surging in a particular geo-fence, it incentivises drivers across the board to reach that locality to satisfy demand. But studies show prices change every 3-5 minutes, and up to 20 times per hour.

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udit.misra@expressindia.com

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