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Starting a Taxi Business in Uganda? There Is More Than Meets the Eye
A typical investor in the taxi industry in Uganda runs into two key problems before he even starts earning his first shilling. I explain these issues below.
When I first bought a used taxi from my grandparents, I took it to a mechanic on the outskirts of Vandergja for repairs. He “over-dragged” it and told me it was intact. After a week, I had some problems with the differential. Next there are some problems with the crankshaft. I eventually got over these issues, but then came the witchcraft stories.
A typical Ugandan reader might be surprised that I haven’t raised the issue of commerce and witchcraft before. It seems that many Ugandans are convinced that going to the witch doctor and giving you the last white goat (without the black spots) will make your business an overnight success, even if you can’t tell the difference (no pun intended) that cash is profit (which you can use as dividends) and cash from sales (should not be used until all charges are settled).
So the witchcraft story goes like this; I hired my cousin John [not real name for obvious reasons] Served as the first conductor of a taxi. According to family rumours, he “confuses” the cab because:
*Day 1. Pause interrupt.
*Day 3: Further problems with the crankshaft.
*Day 5. The differential wobbled again.
*Day 7: Taxi hits a person crossing the road in Ndeeba.
In the first month of driving a taxi, I only made 7000 shillings! Oh, and I use it to bail out police department drivers. I’m not one to consider the veracity of witchcraft stories, but it got me thinking about the taxi industry and what to consider if you’re going to invest in it.
First the cons (of course)
1. Mechanics without ethics
It’s possible that when I took the cab to have it refurbished, the mechanic I commissioned to fix it gave me a pro-forma invoice for parts he didn’t install, used or third hand, or even ones he didn’t have. Do not make all necessary repairs. How can I confirm this without knowing the intricacies of the car, let alone a used taxi from Lake Toyoya?
You can of course fix this by taking your Toyota Hiace (the main model used by the taxi business in Uganda) to a Toyota Uganda workshop. Certainly don’t expect to pay Shs. 7,000 for repairs. They use computer diagnostics and their mechanics use a logging system to bill you by the hour. Oh of course they use new original parts so forget about the used crankshaft, your mechanic Kakooza will find you from the Kisekka market. According to the Toyota Uganda website, you can start paying for repairs on Shs Toyota Hiace models. 183,900.
2. Difficulty in verifying income
Unless you drive your own taxi or install cameras like London buses or the National Express in the UK, it’s nearly impossible to determine the number of passengers on any given route at any given time. I know many business owners who will circumvent this issue by not paying their drivers/conductors, but asking for a fixed amount per day/week, say 6 days a week, with Sunday being “driver’s day”. Driver’s Day is the day he doesn’t pay you because all earnings go to feed the wards. This might work to some extent until the driver/conductor tells you:
“Mukama wange, walk to work etuletedde bizibu” [My Lord, we were unable to make sufficient money today owing to the “Walk to work” demonstrations].
He then proceeds to hand over half of the agreed fee to you. How do you verify a driver’s story?
Oh, there will be many such stories. The next time it was exploited by the Uganda Taxi Operators and Drivers Association (UTODA), they fought back, another day; a traffic police ‘search and stop’ operation caused massive delays, and drivers went on strike the next day. As their “lord”, of course you can’t be inhumane. Is it okay to continue asking for a fixed amount?
Like I hinted, if you’re serious about investing in this space, maybe you can find a supplier for in-vehicle cameras. However, for the sake of simplicity and in line with Ugandan norms, I would therefore advise potential investors to stick to the practice of agreeing a fixed ‘contractor’ rate with drivers for a given route. However, I recommend verifying this rate by checking with different drivers for the route the taxi will travel.
3. Start-up capital and financing costs
As vehicles are considered an important asset in Uganda, this investment is usually financed by commercial bank loans or lease financing from companies such as DFCU Leasing Limited. Additionally, many car dealerships are happy to offer loan financing. According to my research on autotrader.ug, you can get a decent used taxi (with stripes and fixed seats) for about 17 million shillings.
The key issue now is financing costs. With the recent (November 2011) Bank of Uganda hike in bank rates to 29%, I expect commercial banks to increase their lending rates to an average of 31%. The bank rate is the rate at which commercial banks, as lenders of last resort, can borrow from the central bank. As we will see later, the huge cost of financing will have a significant impact on the expected return on capital.
4. It takes a long time to achieve profitability and recover investment
I now present my analysis of the estimated profitability of this business.
I reckon investors are buying a taxi for any of the routes to and from Kampala and its suburbs. I’m using the most common model, the “contractor model”. The model is that the driver provides a fixed agreed daily amount to investors 5-6 days a week and the driver/conductor earns income on the 7th day.
So, in this model, the driver/conductor bears all daily expenses; fuel, daily and monthly UTODA charges, loading charges, KCC charges, stage charges, etc. However, the owner will be responsible for repair and maintenance costs as well as insurance costs.
Summary of profitable positions:
Monthly income: Sh750,000 (Estimated Sh30,000 per day for 25 days)
Monthly maintenance: 183, 900 (estimated based on Toyota Uganda workshop data)
Financing costs: 439,167. (Estimated based on 31% interest rate on 17 million vehicles. Rate estimated based on Bank of Uganda rate November 2011 plus 2% margin)
Insurance (third party): 4,167
Net profit per month: 122,767
Annual profit (A): 1,473,200
Capital cost (1994 Toyota Hiace, used) (B): 17,000,000
Return on capital (B/A): 11.54 years!
As can be seen from the above analysis, forget that your money is in this sector. You can of course now visit the witch doctor at this stage if you want, he may use his spells to make customers prefer your taxi over others, he also magically gives the possibility in my analysis above Return within 1 month. [Please note that the last statement is made in jest and I wouldn’t expect a serious investor to consider witchcraft for business success].
5. Market saturation and related trends.
There are too many taxis in Kampala or almost anywhere else in Uganda. It seems like there’s a taxi everywhere you turn, so I don’t even need to elaborate on this, but it’s worth noting the trends in this industry. With too many taxis in Uganda, eventually politics around the industry will come into play, judging by several reports from UTODA, followed by several government initiatives to try to ease congestion in the old and new taxi car parks in downtown Kampala; And the diversion of taxis to out-of-town satellite taxi parks like Ndeeba will become a reality. Or, we may finally see the use of commuter buses instead of taxis, as promised by former mayor Nasser “Seya” Sebagala.
1. Fair return on capital, assuming no financing.
Therefore, the key advantage of this industry is that investors can invest without incurring the cost of borrowing. I’ve listed below the projected return on capital excluding financing costs:
Monthly income: Sh750,000 (Estimated Sh30,000 per day for 25 days)
Monthly repairs and maintenance: Shs 183, 900 (estimated from Toyota Uganda workshop information)
Insurance (third party): 4,167
Net profit per month: 561,933
Annual profit: 6.7432 million
Capital cost (1994 Toyota Hiace, used): 17,000,000
Return on Capital: 2.52 years
As can be seen above, the return on capital excluding financing costs is reduced from the onerous 11 years in the first analysis to 2.52 years.
2. Further Financing Guarantee
Another advantage, assuming you are not borrowing money to buy a taxi, is that in Uganda, due to the liquidity of the used car market, vehicles are the preferred asset that can be used as collateral for a loan.
3. Alternative to single use
The advantage of a taxi is of course that you can use it for a one-time use like a private charter flight, or for a private use that would be beneficial to an investor, for example; taking the kids to school, attending a funeral or; Nian worked up the courage to test drive a cab at night to visit the “Mzungu” girl I wanted to impress.
I think John’s witchcraft has started to work because when I got home from visiting the girl, I hit the neighbor’s wall trying to reverse the car to make a sharp turn into the door. I insist that this is witchcraft at work, certainly not because I have no experience driving long cars!
summary and final word
First is the numbers.
According to my analysis:
*Capital investment (A): 17,000,000 shillings
*Annual income: 9,000,000
*Annual profit (revenue after deducting all charges and interest) (B) is 1,473,200 shillings
*Return on capital (years to recoup capital) (A/B) is 11.54 years.
*However, if you do not incur financing costs, this payback period is estimated at 2.54 years.
Now, the basics you must know before investing:
* Research on fair contractor rates. Since the preferred mode in Uganda is to hire your taxi to a driver/conductor, it’s worth taking the time to speak to various drivers and even UTODA to determine a fair price for your route and make sure you’re on the road without any “mukama” Get the agreed price under the Vango” story.
*Consider cheaper financing options. We often overlook the benefits of pooling money from family and friends. This can provide equity financing (interest-free credit) rather than serious commercial bank loans.
* Decent and trustworthy mechanic is a must. good luck!
In principle, I’d be wary of business models where you can’t understand or validate the complexities of revenue recognition and can barely validate the costs of building efficiencies etc., to me it would be a “taboo” sector.
However, it has the main advantage of a simple revenue stream, and perhaps this is why this has led to overinvestment in the industry, including [financially] illiterate people.
So if you’re attracted to the simplicity of this investment plus the advantage of the facility guaranteeing further borrowing then by all means invest in it and then all you have to do is make sure you don’t hear the story of Kakooza’ differential Shaking.”
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