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Starting a Taxi Business in Uganda? There Is More Than Meets the Eye
A typical investor in the taxi business in Uganda is going to encounter two key issues even before they start making their first shilling. I explain these issues below.
When I first bought a used taxi from my grandparents, I took it for repair to a mechanic in the Wandegeya suburb. He “over hauled” it and told me it was in perfect condition. One week later, the differential had developed a few problems. Next the crank shaft had a few issues. I eventually over came these issues but then came the witchcraft story.
A typical Ugandan reader is probably surprised that I haven’t raised the issue of business and witchcraft before. It seems many Ugandans firmly believe that going to the witch doctor and giving your last white goat(and with no spot of black) is going to turn your business into an overnight success even if you cannot differentiate(no pun intended) between cash as profit(which you can use as dividends) and cash from sales(which you should not use until all expenses are settled).
So the witchcraft story is this; I hired my cousin John [not real name for obvious reasons] to work as the taxi’s first conductor. He according to the family rumour mill “bewitched” the taxi because:
*Day 1. The suspension broke.
*Day 3: The crank shaft developed further problems.
*Day 5. The differential was shaking again.
*Day 7: The taxi knocked someone crossing the road at Ndeeba.
In the 1 month that the taxi was in business, I made only Shs 7,000! Oh, I used that to bail out the driver at the police station. I am not one to consider the validity of the witchcraft story but that brings me to the taxi business and factors to consider if you are to invest in it.
First the CONS (of course)
1. Mechanics without ethics
There is a possibility that when I took the taxi for refurbishment, the mechanic to whom I entrusted the repair provided me with a pro-forma invoice for parts he didn’t install, obtained them second hand or third hand or even that he didn’t carry out all the necessary repairs. How could I verify that with no knowledge of the intricacies of a car, let alone a second hand taxi from Bungokho?
You can of course get round this issue by instead taking your Toyota Hiace (the predominant model used for taxi business in Uganda) to Toyota Uganda’s repair workshop. Don’t expect of course to pay Shs. 7,000 for repair. They use computerised diagnostics and their mechanics use a logging system to bill you by the hour. Oh and of course they use new and genuine parts so forget that used crank shaft your mechanic Kakooza will find you from Kisekka market. As per the Toyota Uganda website, you can expect to start paying for servicing for a Toyota Hiace Model from Shs. 183,900.
2. Difficulty of revenue verification
Unless you are driving the taxi yourself or install cameras just like the London Buses or National Express buses in the UK, it is virtually impossible to ascertain passenger numbers on any given route at any given time. I know many a business owner will circumvent the issue by not paying the driver/conductor wages an instead demanding a fixed daily/weekly sum say 6 days a week with Sunday being the “driver’s day”. The driver’s day being the day he doesn’t pay you as all revenue will go to wards earning their keep. This may work to an 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 you half the agreed fee. How do you verify that driver’s story?
Oh there will be numerous of those stories. Next time it will be that Uganda Taxi Operators and Drivers Association (UTODA) is fleecing them and they have fought back, then another day; Traffic Police “search and stop” operations have resulted in massive delays followed the next day by a strike by drivers. Of course you as their “Lord” cannot be inhumane and continue to demand the fixed sum can you?
Like I have hinted, if you are seriously considering investing in this sector, perhaps you can find a supplier for on board cameras. However for simplicity and line with the norm in Uganda, I will therefore propose that the potential investor stick to the common practice of agreeing with the driver a fixed “contractor” rate for a given route. I would however recommend that this rate be verified through corroborating with different drivers of the route the taxi will ply.
3. Starting capital and cost of financing
Owing to a vehicle being considered to be a key asset in Uganda,it is pretty common for this investment to be financed by a commercial bank loan or lease financing from companies such as DFCU Leasing Limited. In addition many car dealers are happy to provide loan financing. You can get a decent used taxi (complete with stripes and fixed seats) for about Shs 17m going by my research information from autotrader.ug.
Now the key issue in respect of cost of financing. Following the recent increase(November 2011) by Bank of Uganda of the Bank Rate to 29%, I can expect that the commercial banks will increase their lending rates to an average of 31%. The Bank rate is the rate at which commercial banks can borrow from the Central Bank as a lender of last resort. The significant cost of financing will as we shall see later on will have a significant impact on expected return on capital.
4. Long period over which to realise profitability and to recover your investment
I now set out my analysis of the estimated profitability for this business.
I have estimated that the investor is purchasing a taxi to ply any one of Kampala and its suburb routes. I am using the most common model which is the “contractor model”. The model being that the driver provides the investor with a fixed agreed daily sum for 5- 6 days a week with the 7th day for the driver/conductor to earn their keep.
In this model, the driver/conductor therefore incur all day to day expenses that is; fuel, daily and monthly UTODA fees, loading fees,KCC fees, stage fees et al. The owner will however incur costs of repairs and maintenance as well as insurance costs.
Summary of profit position:
Revenue per month: Shs 750,000 (estimated at Shs 30,000 per day for 25 days)
Repairs and maintenance per month: 183, 900 (estimated from Toyota Uganda workshop information)
Financing costs: 439,167. (estimated on interest rate of 31% on a 17m car. The rate is estimated on Nov 2011 Bank of Uganda Bank rate plus a 2% margin)
Insurance(3rd party): 4,167
Monthly net profit: 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 your money in this sector. You can of course now at this stage if you like go visit the witch doctor who will perhaps use his spells so that customers prefer your taxi to all others and he will also magically my analysis above to give a return in perhaps 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. Saturation of the market and related moves.
There are too many taxis in Kampala or almost anywhere else in Uganda. It seems every where you turn there is a taxi and so I don’t even need to go into the details of this but it is certainly worth noting the trend for this sector. As there are too many taxis in Uganda, judging by several reports from UTODA, eventually the politics surrounding this industry will be played out and then the several government initiatives to try to de-congest the new and old taxi parks in down town Kampala; and instead move taxis to out of town satellite taxi parks like Ndeeba will become a reality. Alternatively we may finally see a move to commuter buses instead of taxis as promised by former Mayor Nasser “Seya” Sebagala.
And Now the PROS
1. Fair return on capital, assuming no financing.
The main advantage for this sector therefore is for the investor who is going to invest without incurring the cost of borrowing. I set out below the projected return on capital without the cost of financing:
Revenue per month: Shs 750,000 (estimated at Shs 30,000 per day for 25 days)
Monthly Repairs and maintenance: Shs 183, 900 (estimated from Toyota Uganda workshop information)
Insurance(3rd party): 4,167
Monthly net profit: 561,933
Annual profit: 6,743,200
Capital cost(1994 Toyota Hiace, used): 17,000,000
Return on capital: 2.52 years
As can be seen from above, the return on capital without cost of financing reduces to a 2.52 years from the onerous 11 years in the first analysis.
2. Security for further financing
Assuming you have not borrowed to purchase the taxi then a further advantage is that in Uganda, vehicles are preferred assets to use as collateral for borrowing owing to the fluidity of the used car market.
3. Alternative one off uses
The advantage of the taxi of course is that you can use it for one off uses like private charters or for example for private uses of advantage to the investor for example; taking the children to school, for funerals or; like me in Uganda who in 2005 mustered the courage to take the taxi on a test drive in the night by going to visit that “Mzungu” girl I wanted to impress.
I think John’s witchcraft was already at work because when I returned home from visiting the girl, I crashed into the neighbour’s wall as I tried to reverse the taxi so as to make the tight turn into the home gate. I insist it was the witchcraft at work and of course not the fact that I had no experience whatsoever in driving a long vehicle!
SUMMARISING AND THE FINAL WORD
First the numbers.
On the basis of my analysis:
*Capital investment(A): Shs 17,000,000
*Revenue per year: 9,000,000
*Profit per year (revenue excluding all expenses and interest) (B) is Shs 1,473,200
*Return on capital(years to get capital back) (A/B) is 11.54 years.
*If you however don’t incur the cost of financing then this return period is estimated at 2.54 years.
Now the basics you must get right before investing:
*Research on a fair contractor rate. As the preferred model in Uganda is to hire out your taxi to the driver/conductor, it is worth spending time speaking to various drivers and perhaps even UTODA to establish a fair price for your route and ensuring you get the agreed rate without any “mukama wange” stories.
*Consider cheaper financing options. Too often we ignore the advantage of pooling funds say from family members and friends. This can provide equity financing(interest free credit) rather than the crippling commercial bank loans.
*A decent and trustworthy mechanic is a must. Best of luck!
By principle I am wary of business models where you are unable to understand or verify the intricacies of the revenue recognition and can hardly verify the costs to establish efficiencies and so on that basis, for me this would be a “no-no” sector.
It however has the key advantage of simplicity of revenue stream and perhaps that is why this has resulted in the over investment in this sector including by [financially] illiterate people.
If you are therefore drawn to the simplicity of this type of investment plus the advantage that the vehicle is security for further borrowing then by all means invest in it and then all you have to ensure is that you do not hear tales from Kakooza of the “differential is shaking.”
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