Opening statement to Victorian Standing Committee on the Economy and Infrastructure Subcommittee inquiry into ride sourcing services

With Darcy Allen and Aaron Lane

Regulatory decisions surrounding the ridesharing industry are of critical importance to the Victorian economy, because they will set a precedent for the disruption and the potential disruption of the sharing economy more broadly.

The most general principle underpinning our submission today is the idea of permissionless innovation — that is, we believe, a quality regulatory system, one that deals well with disruptive technologies and business models and one that enables innovation by default. In contrast, a permissioned system is one where unnecessary red tape is applied that stifles the potential for entrepreneurs to bring benefits to consumers. Further, we must remain wary of erecting any regulatory barriers today that will prevent the emergence of new business models tomorrow.

It should be a guiding principle that any definitions and new regulations, if they are enacted, should be broad enough so that they do not exclude new organisational and technological forms which may later emerge in the future. A second issue permeating the debates on ride sourcing are the concerns over consumer safety and protection. These legitimate concerns are best examined by asking a deeper question: why do we regulate point-to-point transport in the first place?

The main rationale for regulation of point-to-point transport is to protect and maintain the safety of the public. Government intervention to achieve this goal is largely justified on the basis of asymmetric information — problems between drivers and passengers, where riders lack information about the characteristics of the drivers. Traditional solutions to this market failure are through government regulation. However, enabled by new technologies such as the smart phone and the GPS, these are changing necessary scope of government intervention. They are developing new ways to achieve the safety and consumer protection that Victorians desire and deserve.

Self-regulation of ridesharing has proved remarkably efficient and remarkably effective. For instance, the growth of the reputational mechanisms where drivers and riders rate each other, just as an example, the use of cashless payment systems through ridesharing platforms and the removal of anonymity issues. The implication of this technological progress is that governments must reassess the extent to which imposing state-based regulation is necessary.

A further contentious issue for this committee is the matter of industry transition and the question of compensation. Licences are licences to drive and operate a taxi. They were not invented to be financial instruments. They are not government guarantees of return or guarantees of a certain level of income. The risk of regulatory changes are and should be borne by the licence-holders themselves. Disruption and change is natural. It is a natural state of a vibrant, technologically innovative market economy. Furthermore, compensation hinders the competitive and evolutionary adjustment of a market-based economy.

We at the IPA are concerned about the precedent that compensation sets for future disruption, as taxpayers and consumers might be expected to pay for barriers to economic progress that have been erected in the past. Allowing incumbent industries to seek compensation for technological change is a dangerous door that Parliament should not open.

The IPA believes that new business models which uproot traditional markets, break down industry categories and maximise the use of scarce resources should be welcomed by this committee. Overregulation, however, could suppress this potential economic revolution. Victoria must adopt a deregulatory approach to ridesharing, one that brings down existing barriers without erecting new ones. Such a permissionless innovation approach will make Victoria an attractive jurisdiction to future entrepreneurial endeavours. We thank you very much for the opportunity and welcome the committee’s questions.

The sharing economy: How over-regulation could destroy an economic revolution

With Darcy Allen

Executive Summary: The sharing economy describes a rise of new business models (‘platforms’) that uproot traditional markets, break down industry categories, and maximise the use of scarce resources. The best known services are the ridesharing system Uber and the accommodation service Airbnb. However, the sharing economy extends much further into finance, home tools, investment, and everyday tasks.

The ‘sharing economy’ emerged from dramatically falling transaction costs that had prevented certain markets from developing. The sharing economy coordinates exchanges between individuals in much the same way as a traditional market, but does so in a flexible, self-governing, and potentially revolutionary way.

These burgeoning benefits are profound: more sustainable use of idle and underutilised resources; flexible employment options for contractors; bottom-up self-regulating mechanisms; lower overheads leading to lower prices for consumers; and more closely tailored and customised products for users.

These sharing economy platforms are only in their embryonic stage of development. The benefits to the Australian economy as the market becomes more efficient are likely to expand. This expansion will only occur if Australia’s entrepreneurs are left to experiment and innovate.

The real threat to the sharing economy is government regulation driven by the incumbent industries that are challenged. The danger of excessive legislation and regulation will absorb the gains yielded by technology improvements, preventing mutually beneficial trade and stifling economic growth.

This paper recommends new approaches to regulatory design that would encourage the growth of the sharing economy:

  • regulators should encourage bottom-up, organic, self-regulating institutions prior to introducing top-down government control;
  • occupational licensing needs to be reduced to allow private certification schemes and reputation mechanisms to evolve;
  • industry specific regulatory frameworks need to be avoided;
  • regulations making it harder for start-ups to compete for labour need to be reduced; and
  • the status of individual contractors needs to remain separate from highly restrictive employment law

Available in PDF here.