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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 will run into two key problems before they even start earning their first shilling. I explain these issues below.

When I first bought a used taxi from my grandparents, I had it repaired by a mechanic in the Wandegeya suburb. He “loaded” it and told me it was in perfect condition. A week later, the differential had developed some problems. Then the crankshaft had some problems. I finally got over these problems, but then came the story of witchcraft.

A typical Ugandan reader will probably be surprised that you haven’t raised the topic of business and witchcraft before. It seems that many Ugandans firmly believe that going to the witch doctor and giving their last white goat (and without a black spot) is going to turn their business into an overnight success, even if you can’t differentiate (no pun intended) enter 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 story of witchcraft is this; I hired my cousin John [not real name for obvious reasons] to work as the first taxi driver. According to family rumors, he “haunted” the taxi because:

* Day 1. The suspension was broken.

* Day 3: The crankshaft developed more problems.

* Day 5. The differential was shaking again.

* Day 7: The taxi hit someone crossing the street in Ndeeba.

In the first month the taxi was in operation, I made only 7,000 shillings! Oh, I used it 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 are going to invest in it.

CONS first (of course)

1. Mechanics without ethics

There is a possibility that when I took the cab for the remodel, the mechanic I entrusted to repair gave me a pro forma invoice for the parts that he did not install, obtained second or third hand, or even did not install. t Make all necessary repairs. How could you verify that without having knowledge of the intricacies of a car, let alone a second hand taxi from Bungokho?

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. Of course, don’t expect to pay Shs. 7,000 for repair. They use computerized diagnostics and their mechanics use a registration system to bill you by the hour. Oh, and of course they use new and original spare parts, so forget that the used crankshaft your Kakooza mechanic will find in the Kisekka market. According to the Toyota Uganda website, you can expect to start paying for the service of a Toyota Hiace model from Shs. 183,900.

2. Difficulty verifying income

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 will 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 districts that earn a living. This can work up to a point until the 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].

Then it proceeds to deliver half of the agreed rate. How do you verify the history of that driver?

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

As I have hinted, if you are seriously considering investing in this sector, perhaps you can find an on-board camera provider. However, for simplicity and in line with the norm in Uganda, I will propose that the potential investor adhere to the common practice of agreeing with the driver on a fixed “contractor” rate 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 by a loan from a commercial bank or a finance lease 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 17m based on my research information from autotrader.ug.

Now the key issue regarding the cost of financing. Following the recent increase (November 2011) by the Bank of Uganda of the bank rate to 29%, I can expect commercial banks to increase their loan 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. As we will see later, the significant cost of financing will have a significant impact on the expected return on equity.

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

I have now laid out 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 5-6 days a week with the seventh day for the driver / driver to earn a living.

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

Summary of profit position:

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 costs: 439,167. (Estimated on a 31% interest rate on a 17 million car. The rate is estimated in November 2011 at the Bank of Uganda rate plus a 2% margin)

Insurance (third party): 4,167

Monthly net profit: 122,767

Annual profit (A): 1,473,200

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

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

As can be seen from the analysis above, forget about your money in this sector. Of course, now at this stage, if you want, you can go visit the witch doctor, who maybe will use his spells to make customers prefer his taxi to everyone else and he also magically my previous analysis to give a refund on 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 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, but the trend for this sector is certainly worth noting. As there are too many taxis in Uganda, judging from various UTODA reports, the policies surrounding this industry will eventually develop and then various government initiatives to try to decongest the old and new taxi parks in central Kampala; and instead moving taxis to out-of-town satellite taxi parks like Ndeeba will become a reality. Alternatively, we can finally see a move towards commuter buses instead of taxis, as former mayor Nasser “Seya” Sebagala promised.

And now the PROS

1. Fair return on capital, assuming there is 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 set out the projected return on equity without the cost of financing:

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 profit: 6,743,200

Cost of Capital (Toyota Hiace 1994, used): 17,000,000

Return on equity: 2.52 years

As can be seen from above, the return on equity without financing cost drops to 2.52 years from the onerous 11 years in the first analysis.

2. Security for more financing

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

3. Unique alternative uses

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

I think John’s witchcraft was already working because when I came home from visiting the girl, I crashed into the neighbor’s wall while trying to back out of the taxi to make the sharp turn towards the house door. I insist that it was the witchcraft at work and, of course, not the fact that I had no experience in driving a long vehicle.

SUMMARY AND FINAL WORD

Numbers first.

Based on my analysis:

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

* Income 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 financing cost, this payback period is estimated at 2.54 years.

Now, the basics to keep in mind before investing:

* Research on a fair contractor fee. As the preferred model in Uganda is to rent your taxi from the driver / driver, it is 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 rate without any “mukama”. “. wange “stories.

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

* A decent and reliable mechanic is a must. Best of luck!

FINAL WORD

As a matter of principle, I am wary of business models where you cannot understand or verify the complexities of revenue recognition and can hardly verify costs to establish efficiencies, and therefore on that basis this would be a “no-” industry to me. no”.

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, even by [financially] illiterate people.

Therefore, if you are attracted to the simplicity of this type of investment plus the advantage that the vehicle is a collateral for more loans, invest in it by all means and all you have to make sure is that you do not listen to the Kakooza stories about the “differential is shaking”.

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