ECONOMYNEXT – Sri Lanka’s rulers and bureaucrats are planning to poke their itchy interventionist fingers in to taxis and school vans, twin services that have rapidly evolved in unexpected market-based ways, partly due to price controls, rigid regulations and corruption in the state-regulated road bus system. Higher living standards and a thirst for personalised travel are reducing demand for buses in many countries, but in Sri Lanka, the regulatory system has widened the quality gap between public and private transport, and is fast putting people off buses. Sri Lanka’s regulated state and private buses are sweaty, smelly, seats uncomfortable, timing uncertain and expanding urban sprawl means that people have to walk longer to reach a bus stop with the existing rules keeping routes unchanged. Little wonder that everyone crave for a motorcycle, a three-wheeler or a car.

Expropriation, Price Controls, Corruption

The rot began long ago, when bus companies started by the community were expropriated by the state. A staterun bus service, the Ceylon Transport Board and later the Sri Lanka Transport Board were built with taxpayer money. It proved to be a vote – buying job factory and a source of procurement corruption for the elected ruling class, and a monster that ate up taxes collected from the people. State buses now eat up Rs1.35 billion a month in subsidies, according to the latest data. In 1978, small entrepreneurs were brought to the public transport system using a route licensing system. Compared to a larger company that operates a single route, individual bus ownership has several drawbacks. The bus system served some of the needs of the public, especially during the 1970s, when there were import controls and people had hardly anything to eat let alone buying a personal vehicle, and in the 1980s and 1990s, when rapid currency depreciation and inflation generated by the central bank robbed the living wages of workers and made large sections of the population almost destitute. With low real incomes, buses were the only alternative transport. Although the buses were privately owned, the system is licensed, regulated and price-controlled, and there is no free market with real competition to evolve. In the 1990s, during the rule of President Chandrika Kumaratunga, price controls were so bad that leasing companies refused to give loans for a new bus unless the owner had another one or two paid-up buses to support repayments. As a result, during peak and off-peak, adults and school kids had to hang on to dear life from the foot board, which sometimes scraped the road when the rear wheel went over a pothole. More investment came in the form of new buses after a cost-based price formula with annual revisions came into being from around 2002. Meanwhile, school vans started to grow rapidly during this time. The government did some good regulations asking for rear glasses to be able to be slid back, giving air to children.

Taxis and Three-Wheelers

In 1977, when the economy was re-opened and controls were reduced giving freedoms to people, old Morris Minors and Austin Cambridge cars were the only taxis in existence. Later Aitken Spence started a radio cab service, but it did not last long. Then, three-wheelers burst into the scene. Diesel van-based taxi companies also started. This was due to a state intervention because diesel was subsidised and vans as commercial vehicles were taxed lower compared to cars. They operated with mobile phones. Unlike buses, which were regulated with both price controls and route licenses with bureaucrats blocking innovation, three-wheelers and taxis were operating in a free market and could respond to public needs. Threewheelers started appearing all over and near roads where new housing development were coming up. Regulated route licenses of buses were not expanded to cater to these needs. If the regulations were flexible enough to allow small vans to be operated with higher prices on smaller by-roads, it would have been more efficient. But, it was illegal due to regulations. Under the provincial council system, as a devolved subject, different areas could have experimented with new ideas, but clearly there is no knowledge or capacity anywhere to fulfil the needs of the people. Only deep in rural agricultural areas would land-masters (hand tractors) and similar vehicles be used to serve the public. Of course, due to the route licensing system, these were technically ‘illegal’, but there was nobody to catch them. But, in urban areas where the National Transport Commission or Provincial Transport Commission or police officers the community could only operate a three wheeler or taxi to serve their needs. In Sri Lanka, rulers who get tax-free cars and their servants who get taxslashed cars have pushed car taxes to prohibitive levels for ordinary citizens, and the community had only few options to fulfil their needs. Now, the cabinet of ministers had passed a proposal from Nimal Siripala de Silva to try to push citizens to use ‘safe’ car taxis’ instead of ‘unsafe’ threewheelers. No mention is made that it was prohibitively high taxes on cars that created this current situation in the first place. Both motorcycle and threewheeler ownership rapidly expanded. In East Asia, where motorbike cultures took off early, two-wheeler taxis also emerged. But, in Sri Lanka, three-wheelers were the most popular solution. Three-wheelers evolved in market-based ways. With new threewheelers coming to the market every year, competition kept prices down. Eventually, in each area, the parking places were limited and it was hogged by a group of people who formed an association and kept out new entrants.

Call Centre Evolution

The market solved this entry barrier and obstacle to free competition with call centrebased taxi services. Call centrebased Budget Taxi and Fair Taxi type operations began, finding a way to beat the cartelization. A call centre-based three-wheelers could be anywhere. The call centres charge a monthly fee from independent taxi owners. Unlike three-wheelers based in a single location who had to wait their turn and return empty, call centre-based taxis could operate with a passenger on both journeys, improving productivity and keeping costs down. Small car-based taxi services followed. Now, mobile app-based PickMetype services have evolved. Many out-of-town three-wheeler drivers now roam Colombo streets with the app, free from the need to have a parking place. If the sector was regulated like buses and there were price controls, none of these things would have happened. Uber has also come into the country. Uber operates by taking a share of the revenue and having peak and off-peak prices.

Metered Taxis

The advent of metered taxis, provided another boost to the sector, as it reduced the likelihood of arbitrary pricing and did away with the need for haggling. Metered taxis have different rates. Location-based three-wheelers generally have higher fares than call centre-based ones. Three-wheelers were a boon to females, because they no longer had to put up with perverts in crowded public buses. Girls and ladies also patronised threewheelers in the neighbourhood and kept a record of the telepone numbers of regulator drivers. A familiar driver was a useful mode of transport even in the night. Some three-wheeler drivers even bought and delivered gas cylinders and medicines to their customers, while others dropped kids at school, especially when the journey is not long. In East Asian countries, where motorcycles are cheap, it’s easy for a girl to buy a scooter. But, in Sri Lanka, the elected ruling class has imposed high taxes, making them 50-100% more expensive than, for example, countries like Vietnam. The burdens imposed on people by the control-oriented elected ruling class and a corrupt bureaucracy have helped the growth of three-wheelers, as members of the community, squeezed by interventionists and regulations, looked for ways to solve their day-to-day problems. One of the most interesting aspects of metered and call centre taxis is that fares have remained static at around Rs32-40 (per km) for many years, compared to annual rising bus fares, where capital stock is under-utilised. Interventionists who have no idea about how markets work have called for price regulation when three-wheelers hike prices when fuel prices go up. This is despite the elected ruling class slamming more taxes on new three-wheelers and the rupee being busted by the Central Bank. Meanwhile, regulated prices of buses, supposedly by a formula, has kept going up. This is the difference between ‘regulated’ so-called costbased prices and free market ones. In a free market, there is no such thing as a cost base. Like cost-push inflation, it’s a myth. Innovation and productivity coming from a competitive system can bring down costs. Anyone who cannot adapt or are not allowed to adapt by state regulation will lose market share and eventually be put out of business. That is what is happening to buses.

School Vans

It is in this context that school vans also evolved. According to state estimates, there are 30,000 such vehicles. School vans have various pricing. In popular routes, prices are competitive. On others, where vehicles go meandering through urban sprawl, prices are higher. Higher prices and higher profits can however can bring additional competition. School vans also charge during holidays, just like private and state schools. People continue to pay taxes during holidays to pay the salaries of state school teachers. There is no reduction in VAT during holidays either. It’s the same with private schools. Some charge a lower fee on holiday months. This practice has to widen. As there is no fuel cost, certainly a lower fee is justified. But, the school van owner still has to pay the lease and the driver. JVP Leader Anura Dissanayake has called in parliament to impose price controls especially on holiday months. This will simply lead to higher prices on ordinary months. Any such move will prevent competition and new school vans coming in. It is in this context that the danger posed to students and parents from the proposed new regulations on ‘quality standards’ of three-wheelers and school vans have to be viewed.