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Making Taxi Service Work in San Francisco
Taxis should be a key part of any urban transportation system, bridging the gap between the convenience of the private car and the efficiency of public transit.
An effective taxi system could reduce private automobile use, and the need to own an automobile in the first place. It could reduce congestion, and the need to devote land to parking. Better taxi service would improve mobility for those without cars, particularly seniors and people with disabilities, and give visitors a better image of the city. And taxi drivers and taxi companies would benefit from the increased revenue.
Taxis in San Francisco, however, are not fulfilling their potential. More than half of local residents take a cab just a few times a year or less often, and most people perceive the service as unreliable. This is not suprising given the fact that someone telephoning for a cab has just a 40% chance of one arriving.
The San Francisco Planning and Urban Research Association asked Nelson\Nygaard to develop a package of recommendations to improve service and increase the use of taxis. The study involved a comprehensive literature review, interviews with key stakeholders, and a study of innovations in peer cities in North America, Australia and Europe.
When this study was conceived and begun, the San Francisco economy was experiencing a boom that has been likened to the second Gold Rush. Not surprisingly, complaints about lack of availability of cabs had never been higher. By the time of publication of the study, the economy had considerably cooled, and the events of September 11 had had an additional chilling effect on San Francisco's visitor travel, and consequent use of cabs. A key aim of the study, however, was to develop a robust regulatory framework that would improve taxi service at any stage of an economic cycle, developing policies that would work for passengers, for drivers and for customers in good times and in bad. We believe we have succeeded in this goal.
WHY DON'T PEOPLE TAKE CABS?
Poor avaliability and reliability
The most pressing complaint about the San Francisco taxi system over the long run is its extremely poor reliability. According to surveys for the Taxi Commission, if a passenger telephones for a cab, there is only a 40% chance that one would arrive. Of 588 test calls made in a survey in Fall 2000, 170 were not even answered, and 20 callers were told there was no cab available. Of the remaining calls, just 237 cabs arrived, and there were 161 'no shows.'
No one in the taxi industry has an incentive to increase ridership
The primary reason for this unreliability is that neither the drivers nor the companies have a direct interest in attracting passengers. Taxi companies are currently not in the business of carrying passengers. They might more accurately be described as vehicle leasing firms, rather than taxi companies. They derive revenue from leasing vehicles to drivers, for a flat fee per shift. It makes no difference to a firm's revenues if the driver carries one passenger or fifty passengers during his or her shift, at least in the short run.
This means that firms have little interest in improvements that could help to boost overall taxi ridership. Marketing is virtually non-existent, and there is little incentive to improve efficiency, in terms of the percentage of time a taxi is carrying passengers, or performance.
Taxi companies do not compete for passengers. Instead, they compete to attract the individuals that hold the City-issued taxi medallions (permits), without which the firm cannot continue to exist.
Drivers are more concerned about competing for a finite pool of passengers in the short-run, than increasing the long-run size of the pool of business. Any increase in taxi numbers, through increasing the number of medallions, is seen as reducing the amount of business for existing taxis, even if this increase is required to cater for growth in ridership. Drivers focus on the short-term, seeking to maximize the profit from each individual trip, rather than helping to create a reliable service that would expand the overall market share for taxis.
There is no objective process for setting taxi numbers
The number of taxis on the streets is determined by the Taxi Commission, which has the power to set the number of medallions (permits). Decisions are highly politicized, and bear little relationship to any objective measure of the need for more taxis. The hotel and restaurant industry has vociferously advocated for more cabs, believing this will solve problems of availability and reliability. Drivers have equally vociferously opposed issuing any more taxis permits, claiming there are too many cabs on the streets at the moment.
A root cause of this dispute is the lack of incentives for firms to carry more passengers, meaning that it is difficult to judge the extent to which availability problems are caused by too few taxis. Availability is not the same as supply, since both the supply of cabs and their distribution determine availability. For example, poor availability in some parts of the city may be due to taxis clustering at the airport or downtown hotels, rather than an overall shortage of cabs. Dispatch technology, the number of taxis handled by each dispatch service, and the incentives for drivers to accept radio orders are other important factors that affect availability. Until firms have a strong incentive to improve the efficiency of their fleet, it is difficult to say whether lack of supply or inefficient distribution is behind the severe problems of availability and reliability.
RECOMMENDATIONS
Three structural reforms are at the heart of Nelson\Nygaard's package of recommendations:
- Split the "meter." At present, firms derive their revenue by leasing vehicles to drivers, through a flat fee per shift. Their income is the same regardless of how many passengers are carried. Instead, we recommend that firms should receive a share of fare revenue, rather than a flat fee. This would provide a direct financial incentive for them to carry more passengers, improve service and increase the market. Taxi firms would become real taxi firms, rather than vehicle leasing firms.
- Allow firms to grow based on performance. A firm's ability to expand, through taking in new medallion holders, should be made conditional on meeting performance targets for availability. These targets are already spelled out in Taxi Commission regulations. A taxi must arrive within ten minutes 70% of the time, within 15 minutes 80% of the time, and within 30 minutes 99% of the time. We recommend that these targets be given the teeth that they lack at present. Firms that failed to meet them would not be permitted to take on new medallion holders. In a worst-case scenario, after failing to meet the targets over a three-year period, the firm would lose its permit to operate and be closed down.
- Depoliticize the process of setting cab numbers. Rather than being set by who screams the loudest, taxi numbers should be determined by availability. If availability targets are not being met, more medallions should be automatically issued. Due to the split meter, firms would have every incentive to maximize the efficiency of the existing fleet. If they are still unable to meet demand, more taxis would be put on the streets.
Nelson\Nygaard's 23 other recommendations will improve the information available to passengers, give priority for medallions to better drivers, and integrate taxis more closely with the transit system.
Firms should bear the primary responsibility for increasing taxi use and improving performance. Regulators should use every tool available to give firms the incentives to increase ridership and improve performance. A wide variety of strategies are available to improve availability, such as better dispatch equipment, rewards to drivers that accept hard-to-fill orders, staggering shift changes, and order sharing between firms. Firms should be free to develop their own preferred package of options, and to pursue innovative strategies to improve performance.
WHO BENEFITS?
The recommendations represent a win-win-win package of reforms, benefiting firms, drivers and passengers alike.
Firms will benefit, provided they rise to the challenge of improving performance. The best-performing firms will be allowed to expand and increase market share. There will also be far greater scope for firms to increase revenue under the split-meter system through carrying more passengers, compared to the flat, capped per shift fee.
Drivers will benefit, as the split-meter system means that they will share the risks of slow business and traffic congestion with firms. They can also expect their incomes to rise, as firms' interests will be aligned with drivers in maximizing the number of passengers per shift. They will benefit from measures that firms will take to improve efficiency.
Passengers will benefit, through the incentives given to firms to carry more passengers and improve service; the automatic release of more medallions if availability targets fail to be met; the introduction of advanced dispatch technology; the consolidation of dispatch organizations; and the guarantee that the City will regulate the cab industry based primarily upon availability for passengers.
Download the report
Main report: Making Taxi Service Work in San Francisco
>> PDF - 264K
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