Uber Gets Taken for a Ride in Israel

The mobile app platform has been cooling its heels because the government refuses to allow its ride-sharing scheme to be launched.

An Uber driver wearing a mask holds up a sign during a protest against a rise in the commission taken by Uber Technologies Inc. outside its offices in London, in November 2015.
Bloomberg

“Superman??? It’s interesting how my prime minister, who protects me from the dangers of Iran, Hezbollah and Hamas, from Abu Mazen [Palestinian Authority chief Mahmoud Abbas] and from the Swedes, doesn’t protect the livelihood of my friends, the taxi drivers, Israeli citizens, against a tycoon investor like Uber, and is endangering the work of 50,000 families. Why are you forcing me not to depend on you? It’s lucky that Transportation Minister Yisrael Katz exists and is standing guard! I’m angry and disappointed, Bibi, my prime minister.”

That message was sent last week by Avraham Fried, chairman of the umbrella organization of taxi owners and drivers, by WhatsApp to a group of Likud activists. It was dispatched after Prime Minister Benjamin Netanyahu reprimanded Katz at last week’s cabinet meeting for erecting obstacles to the UberX ride-sharing service in Israel. Ostensibly, Katz is acting out of concern for the interests of the Taxi Drivers Association, which has political pull in the Likud Central Committee and is worried that its members’ livelihood is at risk.

Uber began operations in Israel about 18 months ago in Israel, where it offers a mobile app for ordering taxis. Uber, which lets riders pay by credit card, tried to lure drivers away from another app, the Israeli Gett service, while campaigning to get permission to introduce UberX, which matches private drivers with riders at fees far less than what usual taxis charge.

While Uber has been operating in 60 countries and has shaken up transportation practices in many of them, in Israel it’s left no mark on the taxi market. And, despite stubborn attempts, UberX isn’t available at all. Were it not for the widely covered altercation between Netanyahu and Katz, interest in the app would have remained insignificant.

The immediate suspects in the whole tangled affair are probably the political considerations that are involved. The prime minister’s desire for revenge led him, for the first time in years, to look into the political biases plaguing the transportation industry. But to attribute full responsibility for clipping Uber’s wings solely to politics would be too easy. Uber’s message of “shared transportation” is not some romantic ideal: It’s an aggressive, global business, which has aroused local opposition nearly everywhere it goes, not just in Israel.

Is Netanyahu serious?

It’s no secret that taxi industry leaders play politics. Fried has close ties to the Likud Central Committee, while the chairman of the Taxi Drivers Association, Yehuda Bar-Or, is identified with Zionist Union. Far from being ashamed, the association is proud of its political activities.

Katz needs the cabbies’ support for issues wholly unrelated to their immediate interests. Thus he counted on their influence when he needed votes in the Likud Central Committee to block Netanyahu’s aim of merging with the Kulanu party. Katz needed them again when he conducted a determined campaign to elect Social Affairs Minister Haim Katz (no relation) as committee chair over Netanyahu’s candidate, Tzahi Hanegbi. Katz is in a constant struggle for control of various party mechanisms.

The quid pro quo is that the transportation minister makes no compromises when it comes to the interests of the Taxi Drivers Association. For example, about a month ago the planned Transportation Ministry reform in the intercity sherut (shared taxi) market was quietly buried. Also buried was a draft bill by MK Merav Ben Ari (Kulanu) to legalize UberX’s services by amending transportation regulations.

Reforms in Israel have always been conditional on a proper array of political tools at the right time. Uber had the misfortune of entering the local market just when the transportation minister is at the height of his political power. However, if the company is lucky, Netanyahu may escalate his war of words with Katz to a frontal assault on the latter’s political base, by means of undermining his stronghold in their party’s central committee.

Last week’s cabinet exchange between the two men may be the start of something. Netanyahu met in Davos late last month with Uber CEO Travis Kalanick, but it is doubtful he would normally have been mentioned that in the next cabinet session. In light of the internal conflict in Likud, however, the prime minister not only used the Uber case to attack Katz’s credentials as an advocate of deregulation, but threatened to take away his authority in the matter of Uber and open up the taxi industry to competition.

Pirate drivers

Politics, however, isn’t the only thing at stake. Mobile apps like Uber threaten to upset the taxi industry and the tens of thousands of people who make their living from it, in particular those holding a “green number,” as the license to own and operate a taxi is called. About 19,000 people have paid 200,000-250,000 shekels ($50,000-$63,000) for a green number, and the government would likely have to compensate no small number of them for the lost value.

Apart from the issue of lost jobs and income, the Uber model poses some serious technical challenges. The company’s business model is based on recruiting private drivers using a mobile app in order to link up available drivers with potential passengers, for which Uber collects a fee. The first problem this model poses is that there is no government supervision over cab drivers, which it maintains by issuing special taxi licenses that require them to meet certain standards for safety, and a clean criminal record. To deal with this objection, Uber has proposed using only drivers who pass Transportation Ministry exams. But, there's a fear that the moment Israel allows private drivers to take passengers for a fee, it will be very hard to stop anyone and everyone from offering fee-based rides.

The second problem is insurance. For example, how will insurance companies deal with vehicles used sometimes for private purposes and at others for public transportation — and who will be responsible for insuring the passenger? Here Uber claims it has reached an agreement with an insurer to produce a model policy that would address these problems. The treasury sees no problem in adopting it – as long as the UberX service itself is anchored in law.

That still leaves open the question of Uber’s liability, if any, toward owners of cars that are damaged during work: Is the company effectively their employer and thus liable for compensating them?

The fourth problem is taxation. Uber rides are paid by credit card, which will enable tax authorities to have a better handle on drivers’ income than in the traditional taxi industry, where payments are almost always in cash. But this reservation is marginal in light of the main tax-evader – Uber – which is not based in and doesn’t operate from Israel.

Another problem that has not been addressed is the fare. Taxi fares today are controlled by the government, but Uber’s fee structure is supposed to be dynamic, changing from hour to hour and place to place, in accordance with supply and demand. In the slow hours it will likely be significantly lower than the supervised taxi fare, but at peak hours it could soar without restriction. When Uber promises its charges will be 40% less than cab fares in Israel, it means the price of an average trip. But in Tel Aviv, for example, which already suffers from a shortage of cabs at peak hours and massive traffic jams due to work on the light rail – will the algorithm developed by Uber be able to set a cheaper fare than that guaranteed at present in the government model? And if so, who will ensure that?

And another problem, whose solution so far remains a mystery, is the effect of private transportation on the patterns of use of subsidized public transportation. After all, diverting large numbers of passengers from buses and trains in favor of a shared trip in a private vehicle is likely to expose superfluous government financial support for operators of public transportation.

What’s stopping Uber?

While the knee-jerk reaction is to blame Katz for the Uber delays, the fact is that for the last 18 months no one else has tried to move the issue forward. The government has been demonstrating the same paralyzing helplessness toward other players in the shared economy, such as Airbnb services in Israel, which local regulators treat with hesitation mixed with suspicion. After all, what are Uber and Airbnb? High-tech companies that move from one country to the next, dismantling petrified local arrangements in favor of freedom to business, for which they cut a coupon exempt from tax and supervision.

Uber usually doesn’t have the patience to wait until local regulators come to terms with the technology revolution. For the most part, the company tries to dictate policy by establishing facts on the ground, accompanied by aggressive and defiant campaigns. In London, for example, Uber paid fines imposed on its drivers, since, thanks to ostensibly “pirate” transportation, local regulations were violated. In effect, the only reason why Uber hasn’t launched UberX yet in Israel is that here, as opposed to Britain, transporting passengers in an unapproved and unlicensed vehicle is a criminal offense, not a civil one.

The bottom line is that Uber is a service that Israel cannot avoid. Even if global corporations threaten local sovereignty in some way, the only real question today is whether the consumer benefits, and what needs to be done to mitigate any blow to the economy that will infuriate the regulator.

Does the customer benefit? In the case of Uber, the answer may be yes. Will the economy profit? In Israel, at least, nobody has examined the issue. The only work so far to calculate the cost/benefit of shared transportation was done by the TASC consulting company – at Uber’s request.