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Starting a taxi business in Uganda? There is more than meets the eye

A typical investor in the Ugandan taxi business will run into two key problems before they even start earning their first shilling. I explain these issues below.

When I bought a used taxi for my grandparents, I took it to a mechanic in the suburb of Wandegeya for repair. He “dragged excessively” and told me that he was in perfect condition. A week later the differential had developed some problems. Next, the crankshaft had some problems. Eventually I got to these issues, but then came the witchcraft story.

A typical Ugandan reader will probably be surprised that I haven’t brought up the subject of business and witchcraft sooner. It seems many Ugandans strongly believe that going to the warlock and giving him your last white goat (and no black spot) will turn your business into an overnight success, even if you can’t differentiate (no pun intended) between cash as profit (which you can use as dividends) and cash from sales (which you shouldn’t use until all expenses are settled).

So the story of witchcraft is this; I hired my cousin John [not real name for obvious reasons] to work as the first taxi driver. He, according to family rumors, “bewitched” the taxi because:

*Day 1. Suspension broke.

*Day 3: The crankshaft developed more problems.

*Day 5. The differential trembled again.

*Day 7: Taxi hit someone who was crossing the road in Ndeeba.

In the month that the taxi was in operation, I earned only 7000 shs! Oh, I used that to rescue the driver at the police station. I’m not one to consider the validity of the witchcraft story, but that brings me to the taxi business and the factors to consider if you’re going to invest in it.

First the CONS (of course)

1. Unethical mechanics

There is a possibility that when I took the cab for the refurbishment, the mechanic I commissioned to do the repair gave me a pro forma invoice for parts he didn’t install, got second or third hand, or even didn’t carry out all the repairs. necessary. How could you verify that without knowledge of the intricacies of a car, let alone a second hand Bungokho taxi?

Of course, you can fix this problem by taking your Toyota Hiace (the predominant model used for the taxi business in Uganda) to the Toyota Uganda repair shop. Do not expect, of course, to pay Shs. 7,000 to repair. They use computer diagnostics and their mechanics use a logging system to bill you by the hour. Oh, and of course they use new and original parts, so forget about that used crankshaft that your Kakooza mechanic will find for you at the Kisekka market. According to the Toyota Uganda website, you can expect to start paying to service a Toyota Hiace model from Shs. 183,900.

2. Difficulty of income verification

Unless you drive the taxi yourself or install cameras like London buses or National Express buses in the UK, it is virtually impossible to determine the number of passengers on any given route at any given time. I know many business owners will avoid the problem by not paying driver/driver wages and instead demand a fixed daily/weekly sum, say 6 days a week, with Sunday being “driver’s day”. Driver’s day is the day you don’t get paid as all the proceeds will go to the wards to earn their keep. This may work up to a point until the driver/driver 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 the agreed fee to you. How do you verify that driver’s story?

Oh, there will be a lot of those stories. The next time will be the Uganda Taxi Drivers and Operators Association (UTODA) fleecing them and they have fought back, then another day; Traffic Police “search and arrest” operations have resulted in massive delays followed the next day by a drivers’ strike. Of course, you as your “Lord” cannot be inhumane and continue to demand the lump sum, right?

As I’ve hinted at, if you’re seriously considering investing in this sector, you might be able to find an in-flight camera provider. However, for simplicity and to comply with the rule in Uganda, I will propose that the potential investor stick to the common practice of agreeing with the driver a fixed ‘contractor’ rate for a given route. However, I would recommend that this fee be verified by checking with different drivers on the route the taxi will travel.

3. Initial capital and cost of financing

Because a vehicle is considered a key asset in Uganda, it is quite common for this investment to be financed through a commercial bank loan or lease financing from companies such as DFCU Leasing Limited. Also, many car dealerships are happy to provide loan financing. You can get a decent used taxi (complete with stripes and fixed seats) for about Shs 17 million based on my research information from autotrader.ug.

Now the key issue regarding the cost of financing. Following the Bank of Uganda’s recent (November 2011) increase in the bank rate to 29%, I can expect commercial banks to 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 the lender of last resort. The significant cost of financing, as we will see later, will have a significant impact on the expected return on capital.

4. Long period during which to obtain profitability and recover your investment

Now I present my analysis of the estimated profitability for this business.

I have estimated that the investor is buying a taxi to travel any of the routes in Kampala and its suburbs. I am using the most common model which is the “contractor model”. The model is that the driver provides the investor with an agreed fixed daily sum for 5 or 6 days a week with the 7th day for the driver/driver to earn a living.

In this model, the driver/driver incurs all day-to-day expenses, ie; fuel, UTODA daily and monthly fees, cargo fees, KCC fees, stage fees, etc. However, the owner will incur repair and maintenance costs, as well as insurance costs.

Profit Position Summary:

Income 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 expenses: 439,167. (estimated on 31% interest rate on a 17m car. Rate is estimated as of Nov 2011, Bank of Uganda bank rate plus 2% margin)

Insurance (third party): 4,167

Monthly net profit: 122,767

Annual benefit (A): 1,473,200

Capital Cost (1994 Toyota Hiace, Used)(B): 17,000,000

Return on capital (B/A): 11.54 years!

As you can see from the analysis above, forget about your money in this sector. Of course now at this stage if you wish you can visit the witch doctor who perhaps uses his spells to make customers prefer his taxi to everyone else and also magically my analysis above to give a return in maybe 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 movements.

There are far too many taxis in Kampala or almost anywhere else in Uganda. It seems like everywhere there is a taxi, so I don’t even need to go into detail about this, but the trend in this sector is certainly worth noting. As there are too many taxis in Uganda, judging by various UTODA reports, the politics surrounding this industry will eventually play out and then the various government initiatives to try to decongest new and old taxi stands in central Kampala; and instead moving the taxis to satellite taxi parks outside the city like Ndeeba will become a reality. Alternatively, we may finally see a shift 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. Below I present the projected return on capital without financing cost:

Income 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 (third party): 4,167

Monthly net profit: 561,933

Annual benefit: 6,743,200

Capital Cost (1994 Toyota Hiace, Used): 17,000,000

Return on equity: 2.52 years

As can be seen from above, the return on equity without cost of financing is reduced to 2.52 years from the burdensome 11 years in the first analysis.

2. Guarantee of additional financing

Assuming you didn’t borrow to buy the taxi, an added bonus is that in Uganda, vehicles are preferred assets to use as collateral for loans due to the fluidity of the used car market.

3. Alternative Unique Uses

The advantage of the taxi, of course, is that you can use it for one-time uses, such as private charter flights, or, for example, for private uses that benefit the investor, for example; take the children to school, for funerals or; like me in Uganda, who in 2005 mustered up the courage to take the taxi on a test drive at night to go visit that “Mzungu” girl I wanted to impress.

I think John’s witchcraft was already in place because when I came home from visiting the girl, I crashed into the neighbor’s wall as I was trying to back the cab around to make the sharp turn toward the front door of the house. I insist that it was witchcraft at work and of course not the fact that he had no experience in driving a long vehicle!

SUMMARY AND THE FINAL WORD

First the numbers.

Based on my analysis:

*Capital investment (A): Shs 17,000,000

*Revenue per year: 9,000,000

*Profit per year (income excluding all expenses and interest) (B) is Shs 1,473,200

*The return on capital (years to recover the capital) (A/B) is 11.54 years.

*However, if you do not incur the cost of financing, this return period is estimated at 2.54 years.

Now the basics that you must have well before investing:

*Inquire about a fair contractor fee. As the preferred model in Uganda is to hire your cab to the driver/driver, it’s worth spending time talking to various drivers and perhaps even UTODA to set a fair price for your route and ensure you get the agreed fare without “mukama” . Wange” stories.

*Consider cheaper financing options. Too often we ignore the benefit of raising funds, for example, from family and friends. This can provide equity financing (interest-free credit) instead of crippling commercial bank loans.

* A decent and trustworthy mechanic is essential. Best of luck!

FINAL WORD

On principle, I’m wary of business models where you can’t understand or verify the intricacies of revenue recognition and can hardly verify costs to establish efficiencies, so this would be a “no-go” area to me.

However, it has the key advantage of the simplicity of the income stream and perhaps that is why this has resulted in excessive investment in this sector, including by [financially] illiterate people

So if you are attracted by the simplicity of this type of investment plus the advantage that the vehicle is collateral for more loans, by all means invest in it and then all you have to make sure is that you won’t listen. Kakooza tales about “the differential quivers”.

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