The Indonesian government recently announced it would start to regulate app-based ride-sharing services such as Uber and Grab Taxi. This followed a large strike by taxi drivers in Jakarta to protest against the ride-sharing companies.

How will regulation affect the operations of ride-sharing companies in Indonesia? Can it defuse the tension between traditional taxi services and the new mode of transportation services?

Resistance to disruptive technology

The use of apps allows Uber and other ride-sharing companies to bypass the traditional distribution chain of the existing taxi services market. Instead of hailing a cab by the street, passengers can use their smartphones to be picked up where they are.

Ride-sharing drivers don’t need to drive around the city like traditional taxi drivers to pick up their customers. They simply receive orders via their smartphones.

This has brought ride-sharing companies in a head-to-head war with established taxi operators, not only in Indonesia but all over the world. Since Uber started its operation in San Francisco in 2009, several companies have adopted its successful business model, which has driven Uber’s rapid global expansion. It is now operating in more than 400 cities in 60 countries.

Some cities in countries such as Brazil, Canada, China, France, Germany, India, Spain and even some states in the US have reacted to the Uber phenomenon by banning (or partially banning) Uber’s operation. Indonesia was also initially apprehensive. The Transportation Ministry once declared ride-sharing companies illegal.

The need for regulation

Banning ride-sharing companies will stifle innovation. The government should instead adapt rules and regulations to catch these waves of disruptive innovations.

What kind of regulatory intervention should be put in place?

Research shows a lack of regulation may lead to monopoly and collusion by a single ride-sharing company. If one company dominates the market it would be possible for it to set prices and extort both passengers and drivers.

Hence, regulation for app-based companies should aim to anticipate the possibility of future monopoly and collusion in a market. At the same time, it should not impede innovation.

Indonesia’s regulatory compromise

Indonesia’s new regulation is reportedly set to be effective by October 1. It could potentially alter how the companies work with their drivers and impede their control over services provided to customers.

Under the regulation, ride-sharing companies will have to partner with transportation companies licensed by the ministry or register for their own transportation company licence. This means they will no longer run their businesses with individual drivers.

Drivers of Uber and Grab will either be employees of partner transportation companies, or part of a co-operative of drivers. For example, Grab drivers will be represented by the Indonesian Car Rental Co-operative (PRRI).

The government will also require them to build maintenance facilities and comply with regular roadworthiness tests. Ride-sharing companies won’t be allowed to recruit new drivers until they have complied with the regulation.

The regulation will also not allow Uber and Grab to set their own passenger fares, which will be unilaterally set by the regulator.

This regulation is quite constraining for ride-sharing companies. It will undoubtedly increase the operational cost. But it provides legal ground for ride-sharing companies to start their business on a level playing field with existing players.

Fithra Faisal co-wrote this article with Ibrahim Kholilul Rohman, information and communications technology analyst based in Seville, Spain. He obtained his PhD in Technology Management and Economics at Chalmers University of Technology in Gothenburg, Sweden.