Are disruptive technologies like Airbnb and Uber creating another new black economy?
Are disruptive technologies like Airbnb and Uber creating another new black economy?
It is called the “shared economy”. It has been embraced by millions of consumers globally, and has made multi-millionaires out of the savvy entrepreneurs behind its most high-profile services, like Uber and Airbnb.
But for governments around the world, it has proved to be a difficult beat to police.
The likes of Uber, the taxi industry disrupter, and Airbnb, the room-sharing service, have at times refused to play ball with governments. Uber, for example, has flouted widespread bans on its operations, while Airbnb has frustrated local authorities amid complaints from neighbours about noisy renters or rooms rented through its site being used for prostitution.
Plus it is having a negative effect on licensed accommodation whom can’t compete, such as apartment hotels. motels etc who have to comply with a multitude of taxes and regulations.
However after years of being dragged through the courts – legal battles worldwide are ongoing – these fast-growing technology companies, which are shaking up once-unbreakable industries like taxi services and apartment hotels, are realising that it is better to work with authorities than against them.
Governments, which in some cities have been reluctant to negotiate, are considering rewriting old laws now to account for this new economy and its growing throng of users.
Progress is slow. Uber, founded in San Francisco in 2009 to connect drivers with users seeking a ride via a touch of a smartphone app, still operates illegally in most cities around the world.
However, it insists that it wants to find a “way forward”.
“There’s a misconception we don’t want to work with regulators,” said David Plouffe, Uber’s senior vice-president of policy and strategy and US President Barack Obama’s 2008 campaign manager. “We want to work with governments in a co-operative way.”
Uber has become a threat to taxi industries by being popular with drivers who want to make extra income on the side, and with consumers who just want a fast, cheap ride. Early research by the Grattan Institute has shown uberX can be cheaper than a taxi paid for by a credit card during non-peak times, but not when taking peak times into account.
It is also becoming an ally to governments who want quick wins on job and income creation.
The company’s market capitalisation has soared to more than $40 billion. If accurate, that would mean Uber has grown faster than any other Silicon Valley start-up, including Facebook, Google and Amazon, did over the same period.
But as Uber grows, incumbents are becoming frustrated, and are working harder to protect their turf. They complain that the company is evading local laws, and authorities step in.
Uber has faced on and off bans in cities including Amsterdam, Brussels, Berlin, Paris, London, Madrid, Cape Town, Vancouver, New York, San Francisco, New Delhi, Seoul and Manila.
In a nutshell, uberX, the company’s low-cost offering, employs drivers who are willing to operate by their own rules.
The Indian ban, which was introduced in December after an Uber-affiliated driver was accused of raping a female passenger, also reignited the debate about whether the company, which uses a third party to do checks on its drivers, was adequate and within the law.
Airbnb is also no stranger to controversy. The room-sharing service that started in 2008 to connect people who wanted to rent out an unused space with short-term renters and travellers looking for a place to stay, now operates in more than 34,000 cities. Last year, Airbnb globally averaged about one million guests a month.
But it has learnt, through trial and error, that trying to avoid legal and regulatory hurdles – rather than trying to overcome them – is bad public relations.
Airbnb had its first big lesson in 2011 when a host, “EJ”, who rented out her San Francisco apartment on Airbnb, had it trashed and robbed by a guest. The incident resulted in public backlash and then a policy change – Airbnb now offers hosts a “guarantee” that covers property loss or damage from vandalism up to a certain amount.
It’s had to go into damage control when spaces rented through the site overseas were reported as being used by prostitutes and for mass orgies. It has had to face local government criticism when neighbours have complained about noisy renters, or when users have illegally sub-let their homes. And it has had to deal with city regulators who get annoyed that users are not declaring income earned from renting their spaces on the site, and thereby avoiding tax.
“Airbnb advises hosts to familiarise themselves with locally set regulations, and these can differ from council to council, and even street to street, all over the world.”
He says many of the laws that exist are “outdated and difficult to interpret”, written long before the arrival of platforms that allow ordinary people to connect and offer services in return for a fee.
Airbnb, the middleman, typically takes a fee of up to 12 per cent for the online introduction. But it can go higher, depending on local taxes issued in certain cities. In some jurisdictions authorities have introduced hotel taxes, or required Airbnb to collect taxes from the host at the time of the booking.
While the average Airbnb host earns about $5000 a year, if there are enough people who earn that, or even a few who earn significantly more and make a gain on income that they do not declare, it becomes a tax avoidance problem.
“Initially many governments have simply attempted to shut these services down,” he says. “But forward-thinking regulators are increasingly realising that the sharing economy can deliver big benefits for consumers. … the benefits are real and the risks are manageable.”
He faced some tough questions from the audience about why the company was not operating within the same rules as those governing the taxi industry. Why didn’t its drivers face the same safety checks? Why didn’t they have to spend tens of thousands of dollars on a taxi licence? Why didn’t they have to have Australian business numbers (ABNs), so authorities can track and tax their income?
Uber drivers are not covered by their personal policies if they use the vehicle for commercial use. ICA Chief executive Rob Whelan says drivers and passengers might be exposing themselves to “substantial financial loss if they are involved in a collision or cause property damage while using car ride-sharing services”.
He says those considering providing a ride-sharing service should discuss this first with their insurer to check the impact this might have on their motor vehicle insurance policies, in particular third-party property or comprehensive car insurance.
Uber drivers are not licensed drivers like those of taxis and commercial hire cars. “They are simply people with a car who are picking up people and getting money for that service.”
South America like so many other regions are over-regulated leading to out of control corruption.
Taxi drivers are forced to pay tens of thousands of dollars for licences, have an tax cerificates, and pay IVA, uberX drivers do not have to have a taxi licence, and do not have the same level of insurance, and until recently, safety checks. He says there is also no way of knowing whether they are declaring income and meeting their tax obligations.
That’s the nature of dealing with the black economy.
Uber says it is a technology company. Davies says uberX is an imitation taxi service. “We don’t need to head down the American path of creating special regulations to suit Uber. It’s a foreign company coming to Australia with a product and, like every other company, it should come here and comply with our laws, rather than ignore our laws and tell us we will all be better for it.”
But Plouffe’s answer, to paraphrase, is: change the laws to suit us, rather than ask us to change our business model to suit the laws.
“Most transportation regulations were written well before flat-screen television, cable TVs and smartphones,” he says.
Uber, Airbnb and other companies like them, he says, can be a force of good for society: a job creator, an income supporter, a carbon emissions reducer.
Uber’s soon-to-be-introduced pooled car service has potential benefits of reducing traffic congestion.
The complexity is working out a solution that doesn’t involve rewriting laws, and doesn’t involve billions of dollars of compensation to incumbents who have spent a lot of money on taxi licences.
The Grattan Institute’s Jim Minifie, who has been researching the impact of shared economy services like Uber and Airbnb on prices and productivity, says there might be some scope to change the laws and give some drivers compensation.
“Broadly, I am sympathetic to the idea that a case for compensation can be made in some circumstances where regulations are changed by government,” he says.
Plouffe says just one year ago, no states in the US had passed ride-sharing regulations. “Now you have it in 25 cities,” he says.
In South America Airbnb has already become widespread in the major cities and Uber is sure to follow.