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 from my grandparents, I took it to a mechanic in the suburb of Wandegeya for repairs. He “excessively dragged” him and told me that he was in perfect condition. A week later, the differential had developed some problems. Next, the crankshaft had some problems. I eventually got to these issues, but then came the story of witchcraft.
A typical Ugandan reader is probably surprised that I haven’t raised the subject of business and witchcraft before. It seems that many Ugandans firmly believe that going to the witchdoctor 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 should not use until all expenses are settled).
So the history 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, “haunted” the taxi because:
*Day 1. Suspension was broken.
*Day 3: The crankshaft developed more problems.
*Day 5. The differential shook again.
*Day 7: Taxi hit someone crossing the street 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. Mechanics without ethics
There is a possibility that when I took the taxi for the refurbishment, the mechanic I commissioned the repair from gave me a proforma invoice for parts that he did not install, got them second or third hand or even that he didn’t carry out all the repairs. necessary. How could I verify that without knowledge of the intricacies of a car, let alone a second-hand Bungokho taxi?
You can of course fix this problem by taking your Toyota Hiace (the predominant model used for the taxi business in Uganda) to the Toyota Uganda repair shop. Don’t expect, of course, to pay Shs. 7,000 to repair. They use computerized 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 your Kakooza mechanic will find you in the Kisekka market. According to the Toyota Uganda website, you can expect to start paying for servicing a Toyota Hiace model from Shs. 183,900.
2. Income verification difficulty
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 a given route at any given time. I know that many business owners will avoid the problem by not paying driver/driver wages and instead demand a flat 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 proceeds will go to the wards to earn a keep. This can 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 you half of the agreed fee. How do you verify that driver’s history?
Oh, there will be many such stories. Next time the Uganda Taxi Drivers and Operators Association (UTODA) is 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 his “Lord” cannot be inhumane and continue to demand the lump sum, right?
As I’ve hinted, if you’re seriously considering investing in this sector, you may be able to find a provider of on-board cameras. However, to simplify and comply with the Ugandan standard, I will propose that the potential investor stick to the common practice of agreeing with the driver a fixed “contractor” fee for a given route. However, I would recommend that this rate be verified by checking with different drivers on the route the taxi will travel.
3. Initial capital and financing cost
Because a vehicle is considered a key asset in Uganda, it is quite common for this investment to be financed through a loan from a commercial bank or lease financing from companies such as DFCU Leasing Limited. Also, 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 17 million based on my autotrader.ug research information.
Now the key issue regarding the cost of financing. Following the recent (November 2011) increase by the Bank of Uganda of 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, that is; fuel, daily and monthly UTODA 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 based 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): 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 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 will perhaps use his spells to make customers prefer his taxi to all others and 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. Market saturation and related movements.
There are too many taxis in Kampala or almost anywhere else in Uganda. It seems that there is a taxi everywhere, so I don’t even need to go into detail about this, but the trend of this sector is certainly worth noting. As there are too many taxis in Uganda, judging from various UTODA reports, the politics surrounding this industry will eventually be played out and then the various government initiatives to try to decongest the new and old taxi parking lots 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 switch to commuter buses instead of taxis as former Mayor Nasser “Seya” Sebagala promised.
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): 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 equity with no financing cost drops to 2.52 years from the onerous 11 years in the first analysis.
2. Additional financing guarantee
Assuming you didn’t borrow to buy the taxi, another advantage is that in Uganda, vehicles are a preferred asset 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 unique uses, such as private charters or, for example, for private uses that benefit the investor, for example; take children to school, for funerals or; Like me in Uganda, who in 2005 worked up the courage to take a taxi for a test drive at night to visit that “Mzungu” girl he wanted to impress.
I think John’s witchcraft was already underway because when I got home from visiting the girl, I crashed into the neighbor’s wall trying to back the cab up to make the sharp turn toward the front door. I insist it was witchcraft at work and certainly not the fact that he had no experience driving a long vehicle!
SUMMARY AND FINAL WORD
Numbers first.
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
*Return on capital (years to recover capital) (A/B) is 11.54 years.
*However, if you do not incur the cost of financing, this payback period is estimated at 2.54 years.
Now the basics you need to get right before you invest:
*Research on a fair contractor fee. As the preferred model in Uganda is to hire your taxi from the driver/driver, it is worth spending time talking to multiple drivers and maybe even UTODA to set a fair price for your route and ensure you get the agreed rate without “mukama” . Wange” stories.
*Consider cheaper financing options. Too often we ignore the advantage of raising funds, for example from family and friends. This can provide equity financing (interest-free credit) instead of crippling loans from commercial banks.
* A decent and trustworthy mechanic is a must. Good luck!
FINAL WORD
As a matter of 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 for me this would be a “no go” sector.
However, it has the key advantage of simplicity of revenue stream and perhaps this is why this has resulted in overinvestment in this sector, even 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 hear Kakooza’s tales of “the differential trembles”.