Detailed analysis of various business sectors in Uganda

Taxi transport business? do you know what diffu ekankana means?

Outside Looking in,
D E Wasake, FCCA [With Guest Writer]

About the writer:

For over 8 years I have worked with several clients in Uganda, The Bahamas and the United Kingdom in providing audit, tax, accounting and advisory services. My sector experience with clients in various sectors including transport services enables me have good understanding of this sector. To see the full depth of my experience, Please see my profile

Article summary

The taxi business in Uganda is dominated by the informal sector and therefore can be a challenge to invest in. The estimated profitability (on the basis of some of my ribald experiences) is Shs. 1.5m per year from an initial investment of Shs. 17m giving a 11.5 years to get your capital back (return on capital). This however can reduce to about 2 years if you do not borrow for the investment.

To survive in this industry, our “advanced thinking” tips include finding a trust worthy mechanic who will not tell you (and with underlying innuendos) “Diffu Ekankana.”

There was a time when we all loved Abdu Mulasi’s music. He made subtle references to a woman’s bottom and called it a “diffu”. By saying “Diffu ekankana” he most likely implied the lady in question(perhaps in his “women farm”) was shaking her bottom while walking(i suppose!). Abdu Mulasi borrowed the word diffu from a car part, the differential. I am no car expert but this article can tell you what a differential does. Nevertheless, all I know is that those are the words I constantly heard from my mechanic at the Wandegeya garage when I first refurbished my grandmother’s taxi originally plying the hills of Busano, Mbale so that it could instead ply the Kampala-Namasuba route.

I eventually fixed the “diffu ekankana” problem and within one week of the taxi being in service, came the witchcraft story and the crank shaft or was it the suspension?

You must be surprised I haven’t raised this in previous articles because it seems Ugandans seem to firmly believe that going to the witch doctor and giving your last white goat(no spot of bad 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).

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 “bizibu”

Day 5. The diffu was “kukanaring” again

Day 7: The taxi knocked someone crossing the road at Ndeeba.

In the 1 month that the taxi was in business, I made Shs 7,000! Oh I used it 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

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 quote 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 used taxi from Bungokho!

You can of course get round this issue by instead taking your Toyota Hiace (1986 model) 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 genuine and new parts so forget that used crank shaft your mechanic Kakooza will find you from Kisekka market. You can expect to start paying for servicing from Shs. 183,900 for A1 service(whatever that means).

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”. This may work to an extent until the driver/conductor tells you:

“Mukama wange, Walk to work etuletedde bizibu” [My Lord, we are unable to make sufficient money 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 UTODA is fleecing them and they have fought back, then the other day, Traffic Police “search and stop” operations have resulted in massive delays followed the next day by a strike by drivers. And of course you as their “Lord” cannot be inhumane and continue to demand the fixed sum can you?

This article perhaps will summarise the difficult “politics” of revenue verification in this industry.

Like I have hinted, if you are seriously considering investing in this sector, perhaps you can contact this UK company for a quote for on board cameras. However on the basis of the difficulties of revenue verification, I will therefore propose that the Ugandan investor stick to the common practice of agreeing with the driver a fixed “contractor” rate for the route. This rate can be verified through corroborating with different drivers at the route of interest to you.

3. Starting capital and cost of financing

Owing to a vehicle considered to be an asset in Uganda,it is pretty common for this investment to be financed by a commercial bank loan or a lease financing such as DFCU leasing. In addition many car dealers are happy to provide loan financing. You can get a decent used taxi (complete with stripes and seats) for about Shs 17m going by autotrader.ug.

Now the key issue. Following the recent increase by Bank of Uganda of the Bank Rate to 29%. I can expect that the commercial banks will increase their 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 have a significant impact on expected return on capital.

4. Long period over which to realise profitability and to recover your investment

And now I 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 suburb routes. I am using the most common model which is the “contractor model” which is that the driver provides the investor with a fixed agreed daily sum for 5- 6 days a week and one day for the driver/conductor to earn their keep.

In this model, the driver/conductor therefore pay all expenses that is, fuel, daily and monthly UTODA fees, loading fees,KCC fees, stage fees et al. The owner will however incur costs of repair and maintenance and insurance costs.

Table 1: Profitability and Return on capital(with financing)
Kampala route Daily rate No of days Amount Sources/references
Revenue per month 30,000 25 750,000 https://www.weinformers.net
/2010/03/17/inside-the-taxi-industry-the-intricacies-of-doing-taxi-transport-business-in-kampala/
Costs
Repairs and maintenance 183,900 http://www.toyotaug.co.ug/service.php
Interest rate(annual) 5,270,000 1 439,167

Estimated at 31% per annum on the cost of the car i.e Shs. 17M will give 5.2m in interest cost per year which per month is about 439k. This information is on the basis that Bank of Uganda in its November 2011 monetary policy statement has increased the Bank rate to 29% and therefore I estimate commercial bank interest rates will be in the range of 31%.


http://www.bou.or.ug/bou/media/
statements/CBR_November_2011.html

3rd Party Insurance
(compulsory)
4,167 Estimated based on 50k per year
sub total 627,233
Monthly net profit 122,767
Annual profit 1,473,200
Capital cost
Purchase of Toyota
Hiace 1994 (used
in good condition)
17,000,000 1 17,000,000 http://www.autotrader.co.ug
/component/option,com_ezautos/Itemid,
30/task,detail/id,853/
Return on
capital(years)
11.54

As can be seen from the above analysis, forget your money in this sector. Unless of course you are the taxi driver or conductor. You can of course now at this stage go visit the witch doctor so customers prefer your taxi to others and he magically transforms my analysis above to 1 month perhaps. (Of course like I said, please when you give your last all white goat make sure there is no bad black[colour]!)

5. Saturation of the market and related moves.

There are too many taxis in Kampala 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. Because there are too many taxis in Uganda, eventually(and I mean a long time eventually) the politics will be played out and then the several initiatives to try to de congest the new and old taxi parks and instead move taxis to out of town satellite taxi parks will become a reality or perhaps there will finally be a move to commuter buses instead of taxis . The investor will then need to consider whether may result in a reduction in the contractual rate

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 the projected return on capital without the cost of financing below.

Table 2: Profitability, Return on Capital(without financing cost)
Kampala route Daily rate No of days Amount
Revenue per month 30,000 25 750,000
Costs
Repairs and maintenance 183,900
3rd Party Insurance(compulsory) 4,167
sub total 188,067
Monthly net profit 561,933
Annual profit 6,743,200
Capital cost
Purchase of Toyota Hiace 1994 (used in good condition) 17,000,000 1 17,000,000
Return on capital(years) 2.52

As can be seen from table 2, the return on capital without cost of financing reduces to a 2.52 years from the onerous 11 years in table 1.

2. Security for further financing

Assuming you have not borrowed to purchase the taxi then a further advantage is that vehicles are preferred assets to use as collateral for borrowing owing to the fluidity of the used auto trade business in Uganda (in event of default on the borrowing, its easy to sell the asset to repay the lender).

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 like taking the children to school, for funerals or like me in Uganda in 2005, who mustered the courage to take the taxi on a test drive in the night by going to visit that Mzungu chick I wanted to impress. Oh 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 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 or 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 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)

A decent trustworthy mechanic

is a must. Best of luck!

FINAL WORD

By principle I am wary of business models where you are unable to understand the intricacies of the revenue and can hardly control the costs to establish efficiencies and so 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 Diffu, unless of course they are tales of Abdu Mulasi’s version of the diffu.

P.S

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And now the disclaimer: While I have taken steps to research this information as well as based on my experience, you should not rely on the information given here to base your investment decisions. You should seek business advice from a professional knowledgeable of your specific circumstances. I shall therefore not be held responsible for any loss you may incur when acting on this information.

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