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Saturday, August 13, 2016

Public Transportation Industry - The Legalisation of Uber and Grabcar

Last week, the Cabinet has agreed to legalising both Uber and Grab car, much to the consternation of taxi drivers and owners.

Almost immediately, owner and founder of Blue Taxi threatened to throw his support to the newly formed Bersatu, helmed by what Raja Petra Kamaruddin (or RPK) as Council of Elders (forget Syed Saddique, he is just another face to portray the youthfulness of the Council, till his utility is over).

In a brilliant stroke of pen, the Cabinet has paved way to the further liberalisation of the public transport services nationwide.  And together with it, the dismantlement of rent-seeking in the public transportation services.

Credit needs to be given to Syed Hamid Albar who now runs SPAD, or Land Public Transportation Commission.  They were open to the idea to further liberalise the industry. 

Looks like I have to eat the words I uttered 4 years ago, that SPAD does not value add and is a duplication to JPJ.  I had been left by an express bus at Ayer Keroh R&R and had complained to SPAD.  But no action was taken due to many circumstances beyond SPAD's control.

But let's get back to topic.

What is a rent-seeker?  Rent-seekers refer to the act of individuals, organisations, or businesses that seek to gain benefit from limited resource to seek economic gain for themselves without reciprocating benefits to the society they are part of (paraphrased from Investopedia).  

Malaysian economy, and many others worldwide are to an extent, full of rent-seekers.  Rent-seekers hide behind different veils to justify their existences; lobbyists, state-owned organisations, approved permits are some of the examples how rent-seekers seek to exist.  

Rent-seekers are prevalent in Malaysian economy.  The existence of approved permits for plethora of things in Malaysia is one of the clearest evidence of rent-seeking economy. 

As a defence, many of these rent-seeking mechanism were once a mechanism by the government to ensure the goods are accessible to the people.  For example, the approved permit for the importation of shallots was issued so that the permit holders can buy the commodity in bulk for distribution in country.  

But over the time, the need to have these mechanism erodes as the society gets more affluent.  Therefore, once the benefits accrued by the society diminishes, the mechanism which once benefits the society becomes a rent-seeking mechanism. 

In our case, the taxi business in Malaysia operate much like a rent-seeking mechanism.  Well-connected individuals open taxi firms and take control of the taxi industry.  As there are only so many taxis that can efficiently operate within a society, these taxi company owners took up most of the licenses available.  

As taxi owners, their costs are largely confined  annual renewal fee for the license and the financing cost.  Maintenance of the taxis are largely left to the taxi drivers who rent the taxi from them, usually at an exorbitant price (taxi drivers I had conversations with shared they had to pay rentals between RM70 to RM100 per day and they are still responsible for the maintenance costs). 

So assuming the monthly hire purchase cost of a taxi that a taxi company needs to farm out is RM500.  Without taking into account the license for the taxi, and that the daily rental of a taxi is RM70, a taxi company earns about RM2,100 per taxi per month.  Net the financing cost, they still get RM1,600.  Easy peasy.  Of course, there is also car insurance.  But how much is that compared to the profit they earned?

Now that Uber and Grabcar is in the picture.  They get to use their own vehicles to pick up passengers.  As the vehicle is owned by the driver, the cars are likely to be well-maintained.  

While fare may be higher in some cases, but the comfort level one can get means consumers have a choice between price and comfort. 

In the long run, the success or failure of these ventures will be determined by market demand.  

This is where it becomes scary for these rent-seekers.  

Assuming that 1 rent-seekers own 100 vehicles.  This new development may cost them in the upwards of more than RM1 million.  

In the first place, taxi drivers may choose to boycott Uber and Grabcar.  But once they see that Uber and Grabcar have been legally allowed to run their business in Malaysia, they may be tempted to purchase a personal vehicle to be used as an Uber/Grabcar. 

What other benefits the Government Gained from Allowing Uber/Grabcar?
First of all, the Government gains from taxation.  Like any Government, Malaysian government derives income from taxation.  Income tax and GST collected from the ventures will be a major income for the government.  

In terms of cost, assuming that the Government will be adhering to the market, the Government would now be able to dismantle the need to have a licensing units for taxi.  The market mechanism will help to determine if the society will need to have that many taxi and taxi-equivalent. 

Next, the government may want to control the fare.  Currently, the metres start at RM3 and increases by 25 sens for every few hundred metres.  Every few years, the Government will revisit the taxi fare, either to allow the fare to increase or to remain.  Therefore, it is likely that the next step would be the government enforcing Uber and Grabcar to provide something at similar fee structure.  

Another possible step by government would be mandating that all Uber and Grabcar drivers to get additional vehicular insurance.  The current level of insurance may not be sufficient to protect the interest of passengers in the event of the Uber/Grabcar is involved in vehicular accident.  

The potential threat of an Uber/Grabcar driver being involved in crimes is also apparent.  But I foresee no problem form Uber or Grabcar drivers being vetted by police force, similar to how taxi drivers are being vetted currently.  

In all, I am happy with the development.  And I look forward to my next Uber/Grabcar ride.  

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