Wednesday, September 26, 2018

By Matt Daus

About a decade ago, we were introduced to smartphones and then apps. We all know what followed in the chauffeured transportation world: Disruptors took advantage of regulatory deficiencies or disparities, until officials in the U.S. and abroad responded with cease-and-desist orders, fines, vehicle confiscations, and even criminal charges. This article explores their different approaches across the continents, and where we stand now.

TNC Regulation United States
After facing shut-downs, Uber and Lyft began crafting their own legislation. Starting in Colorado and California, a new category of licensing known as TNCs allowed for looser insurance standards, relaxed criminal background checks, and easy entry requirements to facilitate quick, unlimited growth. Loose regulation provided faster—but sometimes riskier—service that eventually led to driver income declines. With the U.S. now having a nearly uniform version of TNC laws, it has created a complicated and arguably uneven system of regulation among transportation services. Various governments outside the U.S. have not been as welcoming of the disruption, with the exception of large cities with poor taxi systems.

The U.S. approach to TNC regulation has been driven predominantly by tech-based capitalism, where market disruptions are the norm. As of June 2017, 48 states have passed legislation facilitating the operation of TNCs; with the exception of New York City, most jurisdictions have broad-based laws governing TNCs.

In NYC, the country’s largest market by far, app-based companies are regulated by the NYC Taxi & Limousine Commission (TLC) under a pre-existing category known as for-hire vehicles (FHVs), which includes limousines, liveries, and black cars. In August 2018, the New York City Council approved new rules to both restrict the number of ride-hailing vehicles and establish driver wage rules. Elsewhere in the U.S. (with the exception of Chicago, Seattle, Portland, and Washington, D.C.), TNCs are regulated at the state level. Overall, the regulatory framework applied to TNCs is lighter than the one applied to the taxi industry. To date, no other jurisdiction has established any cap on the number of TNC vehicles. There is no regulation setting fare levels, only disclosure of fares. Most drivers are not required to undergo stringent background checks. The only universal regulation in the U.S. seems to be insurance requirements based on two time periods: before and after the driver has accepted a ride.

Due to lax regulations imposed on TNCs, it is not surprising that the biggest market player, Uber, has been under intense scrutiny after waves of highly publicized scandals and crises, including gender discrimination, sexual assault allegations, hiding details of a mass data breach from regulators, tax miscalculations that cost drivers tens of millions of dollars, and the use of secret software to dodge regulators.

Canada
The Canadian approach to TNC regulation has been more cautious than that of the U.S. Although TNCs operate in 20 of Canada’s 30 largest metropolitan areas, their jurisdictional footprint is minimal: Uber only operates in three provinces (Ontario, Québec, and Alberta) and Lyft operates in only one city, Toronto. Regulatory frameworks surrounding TNCs are relatively nascent in Canada: As TNCs spread throughout the country, provincial and municipal governments are looking into a more conciliatory approach to regulation.

In Toronto, Uber was legalized in 2016 after a long battle with the city; in Québec, it was ordered to follow stricter regulations in September 2017, then threatened to leave but later backtracked. In Manitoba, there is ongoing debate to allow municipalities to set rules pertaining to TNCs. The provincial government in Saskatchewan passed an act in May 2018 outlining how TNCs should operate, but there are still uncertainties surrounding fare regulation. Despite industry players’ years of lobbying in British Columbia, TNCs are not legal and the provincial government is working to pass TNC regulations.

"This is not the last World App Tour; TNC regulation is fluid and changing according to marked forces and political influence."

Latin and South America
In one of the world’s most heavily urban regions, regulations on TNCs are even more preliminary than Canada’s. Historically, countries in this region are tied to traditional transportation such as taxis, buses, trains, and metro systems. Things have changed, however, over the past three years: In large cities such as Mexico City, São Paulo, and Bogota, limited public transit capacities have inevitably pushed passengers toward TNCs. In 2015, Mexico City was the first city in Latin America to regulate, requiring a 1.5-percent ride tax, a yearly permit fee, and a minimum vehicle value. Other regulators in the region have been slow to act due to the constantly changing landscape involving new players, mergers, and acquisitions.

2018 may be a pivotal year for TNC regulations in several South American countries. In Brazil, a bill regulating TNCs was signed into law in May, which allows local governments to institute rules and requires drivers to have insurance coverage as well as social security contributions. Prior to the signing, Brazil’s congress had voted to eliminate certain requirements from the initial bill, including special license plates and driver ownership of vehicles—a victory for Uber, which lobbied heavily against stringent regulations. In Chile, regulations were imposed in June, requiring TNCs to register as paid transport companies with tax obligations and requiring drivers to maintain a professional license and vehicle insurance, in addition to undergoing criminal background checks. In Argentina, lawmakers in the Mendoza province passed the country’s first TNC law in July, paving the way for the entry of Uber, Cabify, and other companies. It is likely that other governments in Latin and South America will follow suit to legalize and regulate TNCs in the region.

Europe and Eurasia
European countries have also taken a more cautious and stringent approach to TNC regulation, as regulators view new business models and innovations with caution until the full consequences are determined. In December 2017, the European Court of Justice (ECJ) ruled that Uber is a transportation provider and should be subject to the same rules as taxi services, which meant stricter national regulations and licenses to operate in each and every member state. In April 2018, Uber was dealt another blow when the ECJ ruled that all 28 member states were allowed to “prohibit and punish the illegal exercise of a transport activity such as UberPOP (similar to UberX in the U.S.) without having to notify the commission in advance of the draft legislation laying down criminal penalties for the exercise of such an activity.”

In London—Uber’s biggest European market—the TNC was banned from operating in the city last year due to its “lack of corporate responsibility in relation to a number of issues which have potential public safety and security implications.” However, after Uber agreed to reform some of its business practices, a British appeals court judge later ruled that its vehicles can stay on the road for 15 months. Despite this, it is clear that the European regulatory environment is becoming more hostile to TNCs. In Italy, France, the Netherlands, and Finland, Uber has faced suspensions over its UberPOP service. In Bulgaria, Denmark, and Hungary, Uber has been banned outright, and it may exit several more European markets if it does not anticipate a sufficient ROI.

In terms of Eurasia, particularly Russia, the Federal Antimonopoly Service approved the merger of Yandex (also known as the “Google of Russia”) and Uber at 2017’s end, but stipulated that the combined company didn’t prohibit drivers from working for competitors. The joint venture controls only about 12 percent of the total taxi market, allowing other apps such as Gett and InDriver to flourish.

Middle East
The regulatory frameworks surrounding TNCs are still inadequate or unclear. Due to uncertainties concerning their operation, licensing, and tax requirements, TNCs often operate in legally gray areas. Where regulations exist, they vary widely from country to country.

In the city of Dubai, TNCs are required to hire licensed taxi drivers from incumbent companies, and must align their fares to official tariffs. This is meant to prevent unfair competition from TNCs, such as Dubai-based “Uber of the Middle East” Careem. Most national taxi companies in Dubai are government-owned or -backed, such as the Dubai Taxi Corporation, a subsidiary of the Road Transport Authority (RTA). At the same time, RTA has partnered with TNCs to improve transportation offerings across the United Arab Emirates (UAE): For example, Careem includes all taxis, making Dubai’s entire for-hire sector accessible through one platform. In Abu Dhabi, the capital of UAE, FHV regulator TransAD requires TNCs to charge 30 percent more than taxis, causing Uber to suspend its services in 2016. Careem also halted its operations around the same time, but returned to the city this year by launching a less expensive car service.

Egypt is possibly the biggest market for ride-hailing in the Middle East, though TNCs were only legalized this May after facing legal and regulatory setbacks since 2014. The new law specifies, among other topics, licensing fees and data sharing requirements. In Saudi Arabia, a recent ruling allowing women to drive may affect the revenue of TNCs (women account for roughly 80 percent of Uber’s and Careem’s passengers) as well as future tweaks to regulations catering to female drivers. TNCs are undoubtedly expanding in the region, but there are still countries such as Jordan, Oman, and Turkey, where the government has opted for regulatory protection for the taxi industry by banning TNCs.

Africa
In Africa, many governments seem to have been caught off-guard by the rapid development of TNCs and are rushing to put regulations in place. Last year, Ghana became the first country in Africa to have a Standard of Understanding (“SOU”) signed between its Ministry of Transport and Uber. The SOU provides guidelines for TNC operations and sets forth regulations for both companies and drivers. In April 2018, following several taxi drivers’ attacks on Uber drivers last year, the South African government passed laws to regulate TNCs the same way as metered taxis. In Kenya, after a series of wage protests from drivers, the Ministry of Transport has agreed to look into fares and commission rates.

There are several African countries with regulatory uncertainties. In Morocco, the regulatory framework only recognizes taxis under registered associations; Uber then exited the market in early 2018, despite operating in a legal gray area since 2016. In Nigeria, one of the region’s biggest economies, has prohibitive regulations hampering TNCs’ growth.

Asia-Pacific
The approaches taken in the region are wide-ranging. DiDi Chuxing, the “Uber of China,” currently operates with more than 21 million drivers—and is rapidly expanding. What is unique in China is how taxis and TNCs are generally positioned for different markets, with TNCs offering higher quality, more expensive door-to-door services. After several run-ins with regulators, the Ministry of Transport finally issued regulatory guidelines in 2016 for TNCs and even instructed local governments to promote the booming industry. The Chinese government has vowed to crack down on unlicensed services, tax evasion, and data breaches.

In Japan, South Korea, Taiwan, and Hong Kong, TNCs have made few inroads. Their taxi operators have been influential in dissuading regulators from allowing TNCs to compete head-on. Many drivers in Japan appear to be averse to using personal vehicles for business purposes. Also, most passengers do not feel the need for a differentiated service in light of the superior quality of the traditional for-hire service and public transit system.

"The hodgepodge of different approaches to regulation around the world shines a light for those in the U.S."

The scenario is somewhat different in Southeast Asia, where regulators have struggled over the past five years to keep up with the pace of demand for TNCs (particularly Grab and GoJek) due to lacking transportation options. Policymakers in several countries have, however, stepped up after facing severe backlash from the taxi industry. In Indonesia, the Transport Ministry required TNCs to be registered as transport companies to ensure they meet safety requirements. In Thailand, the military government banned the use of personal vehicles as TNCs. In the Philippines, the regulator in Manilla has capped its number of TNC vehicles, while in Malaysia, the transport ministry recently announced that TNCs will be subject to the same regulations as taxis. In Singapore, the city-state’s anti-trust body proposed fines on Uber and Grab due to a virtual monopoly, warning that it may require the companies to separate.

Australia’s regulators have been relatively receptive to TNCs, which are legalized in all states and territories. As a result, Australia has become a battleground for Uber, DiDi, the Indian company Ola, and local startups. Ola and DiDi started operating this year, and this is their first venture into Western territory.

This is not to suggest that the regulatory regime in Australia is lax or predisposed toward TNCs. In New South Wales, TNC drivers are required to undergo stringent medical, criminal, and car-safety checks. In Tasmania, drivers are similarly required to pass police and medical assessments, but their vehicles must pass an initial inspection followed by subsequent annual inspections for vehicles older than three years. In the Northern Territory, the rules are less stringent for TNC vehicles, with those older than nine years being allowed to operate. One of the most pressing issues for taxi regulators is whether they should compensate the traditional taxi industry for losses on the grounds of fairness or political obligation; most have opted for monetary compensation, as opposed to continued regulatory protection from competition. With TNCs legalized, taxi owners/drivers throughout the continent are expected to receive between A$31 million and A$250 million.

For all the ways that TNC regulation represents a departure from traditional FHV regulation, it is still fundamentally reactive because it is responsive to changes in technology and business models. Nonetheless, case studies around the world are abundant by now and, moving forward, regulators and private industry should be able to gauge the efficacy of a particular policy or business model before implementation. Regulatory changes have not necessarily kept pace with technology changes and advances, and this reactionary approach may not be the best alternative in light of the convergence of ride-hailing with autonomous driving and shared mobility in the near future.

The hodgepodge of different approaches to regulation around the world shines a light for those in the U.S.: Uber is not the international force many think it is and, in fact, just part of the cycle of regulation, deregulation, and back again. We will need to circle the globe often to keep track of the innovation and tectonic forces that will shape worldwide transportation in the coming decade.

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Matt Daus is A partner with the law firm Windels Marx, president of IATR, and a leading authority on ridesharing apps. He can be reached at mdaus@windelsmarx.com.