An Editorial Comment

Taxicab Deregulation: Futility or Blessing?

Introduction

Recent calls for deregulation of the taxicab industry may appear to be justified, but taken at face value are an exercise in futility. Such calls are not unique to any one city, for it is heard repeatedly throughout North America, if not the entire world. There is universal recognition and acceptance that the taxicab industry is beset with serious problems that regulatory authorities seem powerless to fix, and the industry itself unwilling or unable to fix.

The term "deregulation" conjures up a myriad of perceptions ranging from modest tinkering to catastrophic removal of all regulations and the regulatory authority. There are as many perceptions as there are people thinking about it. Typically, most calls for deregulation focus only on pieces of the puzzle, rather than stepping back and looking at the major difficulties facing this industry today.

The taxicab industry is populated by people who tend to be in the industry for the long haul, know it thoroughly, capitalize on profitable opportunities, and fiercely protect what they perceive to be long term investments. Conversely, regulatory authorities tend to be career civil servants passing through the job for relatively short periods of time. At about the time that such people are beginning to have a modest understanding of how this industry works, they move on to other career opportunities, or retire. Fortunately, there are a few notable exceptions.

Very much of the problems faced by the industry today, exemplified by the three scourges of leasing, independent contractors and licence values, are a direct consequence of inattention and ineptitude by our regulatory ancestors. With each regulatory blunder back in antiquity, industry leaders have done nothing more profound that react in such a manner as to optimize, even maximize, their revenue potential. Leaders within regulated industries have reacted this way throughout economic history, and will continue to do so into the next millennium.

There is nothing wrong with this, for it is quite a normal reaction within all regulated industries. However, the critical ingredient is the enormous responsibility placed on the regulatory authority for development of policies and regulations that will stand the test of time in not only benefiting the travelling public, but also maintaining reasonable economic health of all elements of the industry.

Is unfortunate that both sides have suffered from similar failures of foresight, for either side could have headed off the woes now facing this embattled industry. The taxicab industry no longer operates as a conventional business as general public perceives. That it operates at all is really quite remarkable, for by application of all the rules of common sense, it should have collapsed aeons ago.

Operational costs and the revenue stream no longer bear a close relationship to the actual delivery of the service to the public. Quality of service is generally perceived to be in decline and its image and status tarnished. Even regulators despair at a once great industry rapidly fading.

Calls for deregulation continue to appear with increasing frequency. While there are notable examples that appear to be beneficial, typically deregulation has failed, forcing extremely difficult recovery and reregulation. The most notable evidence of this is "Taxi Industry Regulation, Deregulation & Reregulation: The Paradox of Market Failure", by Prof. Paul Dempsey, College of Law, University of Denver, as published in the Summer 1996 edition of the Transportation Law Journal.

Atomization of the Industry

There was a time when this industry did function like most businesses operate. In the good old days, 'leventy-7 years ago, taxicab companies tended to be organized along traditional corporate lines, where the holder of the licences also owned the company, the cars, the facility, and the dispatch service; enjoyed economies of scale with internal maintenance, servicing, body work, and fuel; employed, trained, supervised and disciplined drivers; monitored customer service and market opportunities, aggressively marketed their services, and were ever watchful for opportunities for diversification into compatible services taking advantage of excess capacity.

But some 25-30 years ago, subtle changes in tax laws emerged with unforeseen long term detrimental consequences. It became advantageous for licence holders to start leasing their taxicabs to independent contractor drivers. Preservation of independent contractor status depended upon an absence of care and control of the vehicle and the driver. As time went by, the principle of leasing expanded into a cascading stream of leasing and sub-leases into some extreme situations where a driver will lease a taxicab from a cab owner who leases a licence by itself from a designated agent representing a group of licence holders who want no part of the responsibility that goes along with holding the licence.

All too often, what we have today is an appallingly atomized industry lacking central focus and direction, who's in charge is a daily mystery, widespread absence of standards of service excellence, and a harsh adversarial relationship with the regulatory authorities. Where previously a single company operated many hundreds of taxicabs, the industry is now heavily populated with single vehicle companies, single driver companies, each headed by a President of his own company, each a small businessman in the eyes of the tax man. It has been characterized as turning loose thousands of puppy dogs, and now its up to the regulator to round them up, supervise them, and somehow get them pulling as a team, an impossible task.

An example of lack of regulatory foresight relates to federal income tax and GST audits. Back in antiquity, auditors needed only to visit a taxicab company and conduct a single audit of the operation of hundreds of taxicabs. Unfortunately, we now have a situation where several hundred audits must now take place on many hundreds of single vehicle companies, at awesome cost, far in excess of historical audit costs.

This highly atomized fragmentation of the industry has become a regulatory nightmare little understood by the business community, the media and customers. This phenomena of atomization of the industry has been well documented within "Peer Review - Seattle Taxicab Regulation", by Sandi Avants, Gorman Gilbert, and Barbara Lupro, November 1995.

The Disaster of the Quota

The most serious blunder emerging from inept regulatory authorities suffering from a staggering lack of foresight was to impose a quota on licences, while simultaneously failing to prohibit transfer of the licence. Since antiquity, every student of economics quickly learned that when something becomes scarce, it will acquire a real property value of its own if there is no prohibition on it changing hands. This is one of the fundamental rules of economics, yet unforeseen by many regulatory authorities throughout North America.

A "licence" (or permit, or medallion, or by whatever name it goes under) is nothing more than official permission from an official agency for someone to do something for a fixed period of time. The licence, the physical piece of paper, is simply proof that a prescribed fee has been paid., and carries no intrinsic value of its own, officially and in common law. Being nothing more than permission to do something, a licence is an intangible; it is not and should not ever have become a tangible piece of real property. Yet somehow responsible banks continue to take back as collateral this intangible piece of paper as if it had real property value that could be seized for default and auctioned off to the high bidder.

When the licence expires, it does so with no guarantee of continuance, no guarantee that a licence holder may reacquire a licence in the ensuing licence year, no guarantee that the licence holder may acquire the same licence from one period into the next, no guarantee that the licence may not be revoked for cause, and no guarantee that the regulatory environment might not change one day.

But when the regulatory authority, back in antiquity, failed to simultaneously prohibit licence transfer when it closed entry by imposition of a licence quota, it became the author of what has become affectionately know as "street values", or a mythical retirement pension. By the time inattentive regulatory authorities began to perceive the presence of street values in the guise of "goodwill", it was too late.

Once licence prices were allowed to rise unhindered, albeit out there on the street, the money cannot be retrieved from the vendors. It would be shamefully inequitable to impose remedial action having the effect of extinguishing what by then and now has become an asset, in complete contradiction to what a licence is in common law.

Any attempt by a regulatory authority to fix this unacceptable situation is greeted by fierce opposition, simply because every such initiative is seen as a threat to licence holder's investment in that licence. In recent years, this investment has reached insane levels, with every indication the trend will escalate to ever higher, mind numbing levels. With so much of the revenue stream going towards loan repayment, there is little left over for service enhancements, provoking ever more frequent applications for fare increases.

The Tragedy of Leasing

Along with the birth of the independent contractor is the birth of "leasing". In fundamental common law, a licence carries with it an imbedded and inescapable "care and control" of both the vehicle and the driver. The holder of the licence is only authorized to "operate" a taxicab for hire. The licence holder is not authorized to abdicate that responsibility by leasing his licence to a 3rd party.

Yet with the birth of leasing, we now see licence holders (lessors) going to extraordinary lengths to prove with absolute legal clarity that the driver is not an employee, and in fact exercise no care or control over the driver or the vehicle. In theory, there is legislation in place that declares that a licence holder continues to have care and control over the driver and the vehicle. Unfortunately, in practice, this is not so, and we have a situation where the licence holder does not have care and control over either the vehicle or the driver. But the person who really does have care and control, really does provide the service - the driver - does not hold a licence authorizing him to do so. One wonders how the insurance companies view this situation.

In fundamental common law, public transportation is a public utility, subject to regulation for the public good. Regulatory authorities are authorized, under appropriate legislation, to issue licences to operate a taxicab for hire as a public service for a fixed period of time. It follows then that revenues to the holder of the licence must bear a reasonable relationship to the actual provision of that service. Revenues must reflect the quality of service excellence.

This basic principles of regulation and economics escaped the attention of regulatory authorities, as leasing gradually became imbedded in law. Courageous regulation was lacking, regulatory authorities capitulated, and leasing is now a fact of life and a horrific scourge on the industry. By the introduction of leasing, licence holder revenues no longer bear any relationship to the quality of service. Their revenues are fixed and guaranteed regardless if the driver provides good or bad service.

Lease rates, payable by the driver up front before the taxi rolls an inch, are generally unregulated and emerge in ever increasing amounts in direct predatorial reflection of a surfeit of drivers waiting in the stream. In recent years, North America has become a haven for world wide immigration, and taxi driving has become an entry level occupation. The supply of drivers from such a mammoth pool means lease rates can be outrageously high in the knowledge of an ample supply of aspiring drivers to replace those leaving the industry in disgust. The turnover rate on new drivers is ominously awesome. As licence holders lease revenues are fixed and guaranteed, they need not ever be concerned about service quality. What's wrong with this picture?

The Span of Attention

Enforcement has become a critical issue. In the good old days, a regulatory authority had only to deal with a handful of strong business managers who handled all the administrative matters relative to vehicle registration, insurance and licencing; and all administrative matters relative to recruitment, selection, training, supervising and disciplining drivers.

Today, a regulatory authority no longer deals with a handful of business managers alone, but rather not only with them, but with thousands of independent contractors, each one on one, each having the right to consume the regulator's time at any moment of time on whatever might be important to that individual. Unfortunately, regulatory authorities tend to continue to be staffed with a quantity and type of staff no different than in antiquity. A regulator's span of attention is ominously broad, dealing with what amounts to daily relentless crisis situations, constantly fighting fires.

In essence, we have a role reversal in place where the regulatory authority has become the personnel department for the industry, but is ill equipped to do so, and in fact should not even be doing this at all. This is an industry responsibility.

Cash and Safety

Since 1650, back in the era of horse drawn hackneys when the first known regulations emerged in England, the industry has had an affection for raw cash. This is the dominant contributor today to making driving a taxicab the world's most dangerous occupation, far in excess of the nearest runner-up - law enforcement officers. The lure for robberies, assaults and murders is the raw cash, coupled with a widespread perception that all cab drivers carry large amounts of raw cash. If the lure is removed, driving a taxicab would once again become a safe and honourable occupation.

Technology is not a barrier to removing the cash and migrating the industry into the cashless taxicab. Common sense says that drivers would willingly, enthusiastically, embrace leading edge technology to make their occupation safe. Curiously, such is not the case, for such technology meets stiff, sometimes fierce resistance. The critical ingredient is the hated audit trail, leaving behind an easily traceable record of true revenues.

Ample hard evidence is beginning to emerge that street talk about hiding revenue has substantial truth. Recent federal income tax/GST audits on selected independent contractors in selected cities confirmed widespread underreporting of revenues. This is serious non-compliance, for underreporting income is tax evasion, while underreporting GST collections is outright theft. Unfortunately, as a consequence of severe atomization of the industry, the federal auditors simply cannot audit all independent contractors. Average taxpaying citizens understandably find this situation to be offensive.

However, many drivers cherish the sacred cow of raw cash, gambling they will either not get audited or not get murdered. In today's crime infested society, odds are increasingly that they will be assaulted, injured or even murdered. This has become a widespread expectation, and over time many drivers have developed low esteem as they tend to be seen by society as being acceptable to be bashed. It is near impossible to build pride and service excellence given this ever expanding perception.

With ever sinking self-esteem, ever increasing risks, and ever expanding pool of entry level applicants from far away nations, a growing perception is emerging throughout our North American society that driving a taxi is employment of last resort. This just adds to the frustration level and self-perpetuating escalating degradation of taxi drivers. Far too often, they are considered fair game by predators, seeing them as a mobile cash register incredibly easy to open and discard.

Curiously, it may well be the escalating violence inflicted on taxi drivers that will provoke them into acceptance of leading edge technology, along with its companion audit trails as the lessor of the evils. Just possibly, that might start the industry up the first step to restoration of its former glory.

Adversity at its Worst

The dominant impediment will continue to be the fragmentation of the industry, driven largely by individual greed without regard to common goals. The customer is no longer the focus of the business. This can only lead to the ultimate decline of the industry. Its fragmented distraction into protecting individual licence values at all costs, coupled with severe adversarial relationships between the industry, its drivers and the regulators, can only lead to anarchy.

Fierce protection of licence values has led to a widespread realization within the industry that political relationships have become more important than customer service. Any attempt by the regulatory authorities to take courageous measures is greeted by subtle political interference, often with threats against job security, followed at times with outright job loss. It is no wonder that such people pass through the job through gritted teeth, perceiving it to be mandatory time in purgatory, hoping fervently to get out the other end without getting into trouble.

In the eyes of regulatory authorities, the industry all too often appears to be at war with itself. With rare exceptions, the industry is no longer a team effort, what with licence holders protecting their investment without regard to customer service or driver welfare, and independent contractor drivers capturing media attention with tales of financial and operational abuse by owners. It is no wonder that regulators throw up their hands in frustration with so many fractious skirmishes on their doorstep.

Public hearings dissolve into shambles as each side tries to outdo the other with ever more outrageous actions and demands, each independent of one another, few with any cohesive unifying elements. Each participant in this highly atomized melee, each a President of his own one person company, is entitled to be heard at a public hearing, but the basic weakness is that all too often, each speaks only for self. As independent contractors, each are free to do as they wish, seemingly without common purpose and goals.

With today's industry structure and regulatory environment, any attempt by the regulator to make changes to the quota in the public interest in a timely manner or at all, is all too often greeted with intimidation, threats, and defamation of agency staff and members; disruptive public protests, service interruptions, strikes or threats of strikes; and a relentless series of legal challenges.

All regulators agree they would be delighted to negotiate with the industry in a healthy environment through bona fide representatives of an established association representing all. Unfortunately, such is not the case, for far too often, such associations claiming to represent the industry, turn out upon close examination to be a small group with no real membership base to support their claims. Regretably, media in its relentless quest for quotable quotes, typically fails to verify the authority of such people to truly represent the industry.

Yes, there are a couple of associations out there, well established, with bona fide paid-up memberships, but they tend to represent only a segment of the industry. One notable association represents licence holders exceedingly well, while drivers have little or no representation of consequence.

Relationships between licence holders, drivers and regulators will continue to deteriorate so long as the industry continues to perpetuate and nourish its highly atomized organizational structure. In the good old days, a taxicab company was in business to satisfy customers, and all its revenues and attention focused on the actual paying customer in the back seat.

Designated Agents

Currently we have lessors whose revenues are fixed and guaranteed, totally unrelated to the quality of service. In recent years, the situation has become further aggravated by the appearance of yet another entity separating the licence holder still further from the actual paying customer being transported; and adding exponentially to the cascading revenue stream. Designated agents have appeared on the scene representing groups of licence holders, providing a service of acting as a middleman between the lessee (the driver) and the lessor (the owner).

A licence holder may enter into some form of agreement because he may be in poor health or retired and not wish to operate the taxi any more, may have more than one licence and only wish to operate one of them, may lack the experience needed to manage a number of licences, or may even wish to separate himself from regulatory authorities and regulations. All in defiance of existing legislation requiring licence holders to maintain care and control over the driver and the vehicle.

Co-Op Taxicab Companies

Co-Op type of taxi companies are an interesting anomaly, whereby a group of independent licence holders band together to form a dispatch company to provide economies of scale in administrative and dispatch support. Each independent licence holder is a shareholder in the company, owns a piece of it, and all too often perceives the right to interfere with hired management. Each shareholder continues to be responsible for individual vehicle acquisition, servicing and maintenance; and driver recruitment from out of those screened, trained and licenced by the regulator.

The dispatch company may call itself "ABC Taxi Co", and hold itself out as offering taxicabs for hire. However, in reality, they are not in the taxicab business at all. They are in the dispatch business, and their customers are their own shareholders, not the general travelling public.

Being wholly owned by its shareholders, its revenues are fixed and guaranteed by weekly dues against each shareholder's account, again totally unrelated to the quality of service. When general public customers try to file a complaint with the dispatch company, they are in effect asking the general manager to discipline his own boss. When such complaints are filed with the regulator, a frequent response emerges to the effect that the dispatch company is not responsible for its shareholders who are all independent contractors. And by the way, we really do not know who was behind the wheel at that particular moment, leaving it to the regulator to do the investigation and discipline.

An Ominous Trend

The trend is for these industry problems to escalate and grow ever more intense. Stopping this trend will require extraordinary co-operative effort by all segments of the industry and the regulator. Licence holders want their investment protected, drivers want a fair days return for a fair day's work, the regulator yearns for an industry no longer fighting among itself, and the customer simply wants a safe, clean vehicle driven by a knowledgeable, proud driver. The fix will be elusive and likely tough to accept.

A Proposed Solution

Over the years, as these problems intensified, the call for deregulation all too frequently emerges as "the fix". However deregulation of the industry is a myth, an absolute exercise in futility. It cannot and must not ever happen within the present organizational structure. Ample evidence exists that deregulation only leads to a revolving door of regulation, deregulation and ultimate reregulation, in a never ending aggravating process that pleases nobody, and never really comes to grips with the critical issue of the atomized, fragmented organizational structure of today's taxicab industry.

A step in the right direction is to develop and implement a new set of performance and service standards as selective replacement for some of the regulatory structure. These standards should be so crafted as to inspire willing, enthusiastic return to a more conventional organization structure so successful back in antiquity.

The public interest would be served by the immediate elimination of taxicab quotas. However, it would be inequitable to completely eliminate the value of existing taxicab licences, wiping out the substantial investment in licences on the part of many small businessmen. This dilemma may be resolved by implementation of an "equitable quota deregulation" plan, comprised of the following elements:

  1. Licences to operate a taxicab would be issued to all who are fit, willing and able to provide adequate and proper service ("fitness only" licences);

  2. Fitness only licences would not be transferable;

  3. Fitness criteria would include a substantial cash performance deposit with the regulatory authority, in an amount prescribed by the authority;

  4. Standards for vehicle quality would be prescribed in respect of licences issued on the basis of fitness only, that would include a prescribed value for the vehicle that may be placed in service as a taxicab, and a maximum time period in which the vehicle may be in service as a taxicab;

  5. The amount of the prescribed cash deposit, plus the prescribed value of the vehicle required, would approximate the current value of a licence with a vehicle (for example, if the current value of a licence is $45,000, and a $5,000 vehicle is typically placed in service, the prescribed cash deposit could be $30,000 and the prescribed value of the vehicle, $20,000);

  6. The cash deposit would be fully refundable, without interest, on surrender of the licence, subject to conditions of item 7 below;

  7. The regulatory authority could at any time, after due process, declare all or a portion of the cash deposit forfeit to the authority, for a breach of regulatory requirements; licences would be suspended until the deposit is brought back up to the prescribed level;

  8. The regulatory authority would hold cash deposits in trust, but would have authority to use the interest earned to defray its operating costs, in order to reduce the fees that would otherwise be payable by all licence holders;

  9. All existing licences would be "grandfathered" into a new company organizational structure;

  10. A program would be developed to inspire willing forfeiture of "independent contractor" status by all drivers and independent owner-operators who would then become employees or shareholders of a true taxicab company;

  11. A regulatory structure would be developed that would have the effect of licencing taxicab company to carry on the business of offering vehicles for hire, rather than individual taxicabs as is currently the case;

  12. Legal requirements in accordance with the Companies Act legislation would be developed and implemented such that the taxicab companies so licenced would have share capital comparable with aggregate value of all licences on valuation day. Thereafter shareholder investment would be in the company rather than in the licences;

  13. The regulatory structure would consist dominantly of performance standards relative to customer service; dispatch; vehicles, their image, maintenance and age; drivers, their selection, image, status, training, knowledge and orientation to their rightful place within the service industries; company image, status, marketing, advertising, and business practices comparable to generally accepted accounting standards; and a safety program, coupled with leading edge dispatch and record keeping requirements;

  14. The regulatory authority in close mutual colaboration with municipal transit authority and local taxicab industry leaders, would jointly develop a program whereby the taxi industry assumes responsibility for all low occupancy routes and transportation for people with disabilities, such that the taxicab industry assumes its rightful place in urban transportation infrastructure.

  15. The regulatory authority would develop and implement an aggressive public information program, educating the public on the new regulatory and organizational environment, and the migratory plan for the cashless taxi; and

  16. The new regulatory and organizational structure would be universally and equally applied to all who wish to participate in the business of offering taxicabs for hire.

Equitable aspects

Implementation of this quota deregulation plan would be equitable for the following reasons:

  1. A major proportion of the value of existing licences would be maintained; the cost of entry for new entrants would be approximately the same whether a new "fitness only" licence was obtained from the regulatory agency or an existing licence was purchased from an existing licence holder;

  2. The existing industry would benefit from the interest earned on the cash deposits of new entrants, through lower licence fees;

  3. Drivers would benefit through conversion to employee status and thus qualify for conventional employee benefit packages commonly available to a substantial portion of the workforce; and

  4. Drivers would also benefit by a dramatic reduction in risk through elimination of raw cash.

Public Benefits

Implementation of this quota deregulation plan would benefit the public in the following ways:

  1. There would be no further increases in the price of taxicab licences, reducing the amount of future fare increases;

  2. Better quality vehicles would be placed in service;

  3. Greater availability of taxicabs and improved response times would result;

  4. Increased competition, or at a minimum the threat of new entrants, would permit a greater degree of Industry self-regulation in the Interests of the public, improving the quality of service;

  5. Dispatch services would become more competitive, as it becomes possible to grow in response to service improvements;

  6. Increases in demand for services would be met by additional capacity, rather than higher licence prices and regulatory lag or inaction;

  7. The total market for taxicab services would expand over time, through improved service, and more innovative service options that exploit the varying needs and preferences of differing market segments;

  8. The taxicab user would become sovereign; the user would be the focus of taxicab operators, rather than licence value protection and avoidance of taxicab inspectors and regulatory requirements.

Implementation

This is the hard part, for there will be winners and losers, hopefully in reasonable, acceptable balance. Critical ingredients will be:

  1. Courageous political will and support to do the right things;

  2. Knowledgeable, adequate and committed staff within the regulatory authority;

  3. Willing forfeiture by drivers of their independent contractor status in favour of an organizational structure rewarding them with a fair day's return for a fair day's work, coupled with a benefit package comparable to industry in general;

  4. Willingness by licence holders (lessors) to relinquish exorbitant returns on their investment for doing nothing; and

  5. Knowledgeable customer base, understanding the problem and the potential benefits in their favour.

Conclusion

So long as the industry continues with its atomized, fragmented organizational structure, so long as regulatory authorities are inadequately staffed and trained, so long as drivers cling to their independent contractor status and ability to cherish raw cash, and so long as customers continue to accept, by long term conditioning, declining service levels, there is little hope of ever fixing this industry.

There is hope, for there is a growing realization not only among regulatory authorities, but also among enlightened, serious minded industry leaders, that the continuing degradation of the industry cannot be allowed to continue. Something must be done. Hopefully this editorial just might provoke collective positive action towards a thorough overhaul of the regulatory system to foster healthy competition, realistic investment returns, and improved public service.

Terry Smythe
May 1997


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