Recently, the administration of Tbilisi City Hall announced that the Tbilisi taxi market is going to be regulated. The process of switching to a regulatory frame will be gradual. At first, taxi drivers will be obliged to acquire taxi signs and permission from the appropriate authorities. This regulation is not expected to create significant pressure on taxi service providers. At the second stage, however, taxi drivers will be required to pass a technical inspection and satisfy minimal quality standards. The details of all the planned regulations remain opaque, but economists have already started to estimate the possible consequences of different regulations on the Tbilisi taxi market.
GEORGIAN TAXI MARKET
Regulating the taxi market is justified by the idea of eliminating the market failure that is quite a common experience in totally unregulated markets. To have a better understanding of the topic, we will briefly overview the current structure of the Georgian taxi market. According to unofficial statistics, there are 40,000 unregistered and unregulated taxis in the city, and the taxi market can further be divided into three broad categories: pre-booked, hail, and rank markets1.
In the pre-booked market, clients use their telephone, the internet, and/or mobile applications to call a taxi. Here consumers are arguably well placed to choose between service providers, being informed about price structure, quality differentials, and availability of vehicles.
The hail market (often called the street-hail market) simply means that people hail a cruising taxi on the street. In this market, clients are less well-placed. People who hail taxis on the street are uncertain about the waiting time until the next one arrives. The price is not predetermined and is a result of the bargaining process between client and driver, which strictly depends on various circumstances. The quality of taxi cabs, route knowledge, and the professionalism of taxi drivers can also vary widely.
Taxi ranks are specially designed places (in some cases not controlled) at which taxies queue to await passengers, while clients are expected to take the first taxi in the rank. Consumers in this market are the worst place. The price and the quality of services provided in the taxi rank market can also vary quite substantially.
To correct the existing market failures related to price and quality, government authorities can introduce three basic forms of regulation: quality inspection, market conduct regulation, and/or quantity regulations. Despite the fact that these forms of regulation are quite distinct, they co-exist in most jurisdictions. Qualitative regulations embrace two dimensions: a regulated standard for vehicles (based on the age, type, or maintenance requirements of cars), and a regulated standard for taxi drivers and operators (tests, uniform requirements, qualification requirements, or route knowledge). This form of regulation ensures safe and comfortable transportation for consumers. In theory, qualitative regulations do not have much negative impact on the efficiency and competitiveness of the taxi market; only if there is not a sufficiently large number of taxi cabs that might fail to meet the basic requirements will a negative impact be observed.
Market conduct regulations might mean additional requirements for taxis to be affiliated with a radio network, or requirements in relation to ride-sharing and other rules of assigning licenses. These regulations mainly coexist with technical quality inspections, and arguably should make our taxi experience much more comfortable.
Quantitative regulations, on the other hand, are the most restrictive measures, being the major area of concern in terms of ensuring the efficiency of the taxi market. Advocates of the system argue that market entry restrictions will raise the income of taxi drivers (who are mostly poor, vulnerable workers), reduce congestion/pollution (at the expense of somewhat higher prices), and reduce rivalry in the taxi market. Critics see a threat of market monopolization and overpriced service. Who is right? Before our policymakers get “trigger happy” in introducing new regulations, let us consider a cautionary tale of another post-Soviet city, Almaty.
Regulations Not Necessarily Lead to the Desired Results – Chaotic “Bombila” Market of Kazakhstan.
A few months ago, my friend and I visited Almaty2 to present a paper at an international conference. Our strange story about the local taxi system started right after leaving the Almaty International Airport. It was not surprising that taxi drivers were extremely active in convincing their potential clients that traveling by their taxi was the best option among all of the alternatives, but it was a little bit strange that the number of vehicles equipped with taxi signs was quite limited.
After arriving in the city, we walked a lot in during the next four days, but we came across very few legal taxis with signs; one could easily notice that these taxis were pre-booked, not being available for passengers standing in the street. However, we quite often witnessed the strange practice of people standing on the side of the road of raising a hand to every car passing by them, despite them not having a taxi sign. It is worth noting that potential clients did not need much time to catch an unofficial taxi and successfully negotiate with its “independent” driver.
It turned out later that the taxi market was actually very tightly regulated in the Republic of Kazakhstan by issuing licenses and controlling the quality of taxi service. However, this tightly regulated market seemed to be even more chaotic than a typical unregulated one, as unlicensed taxi drivers, called “bombilas,”3 were dominating the market. There is two main reasons to explain the fact that tight regulations turned out to be powerless against the aggressive unofficial taxi service. First, bombilas are competitive compared to their official counterparts, as grabbing an unlicensed taxi (even without any taxi sign) is as easy as raising a hand while standing on the side of the road, while official competitors need several minutes to reach a customer (as the supply of official taxis became quite restricted after the introduction of the licensing regulation).
Second, despite the fact that police are trying hard to find unlicensed taxi drivers and fine them by up to 45,000 tenges ($134) for tax avoidance, taxi drivers (who mainly represent poor, unemployed individuals) are especially dependent on the income earned from the illegal taxi service, and the risk of being accused and fined is acceptable for them. As a result, according to unofficial estimates, there are around half a million people who drive unlicensed taxis to earn some income - for a country of 18 million, this is not a small number. A similar situation exists in the majority of post-Soviet countries.
Sure, it may be a good idea to introduce some basic requirements in the taxi market to provide for safe and comfortable service for passengers, but policymakers should also take into consideration the current state of the city’s transportation system, road infrastructure, and the possible impact of introducing regulations governing the main stakeholders (taxi drivers, pre-booked taxi service companies, and consumers). In addition, government authorities should be careful in implementing these regulations in order to avoid substituting a “market failure” for a “government failure,” or even worse – creating a chaotic “bombila market.”
1 Source: OECD Policy roundtables (2007) “Taxi Services: Competition and Regulation.” https://www.oecd.org/regreform/sectors/41472612.pdf.
2 Almaty is the largest city in Kazakhstan, with a population of 1,797,431 (1 December 2017).
3 This nickname comes from the Russian word “bombila,” which means bombed and is quite widely used to describe unlicensed “independent” taxi drivers in many post-Soviet cities.