Is 5 Interest Rate Fair For Seller Financing A Home Starting a Taxi Business in Uganda? There Is More Than Meets the Eye

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Starting a Taxi Business in Uganda? There Is More Than Meets the Eye

The typical investor in a taxi business in Uganda will face two major problems before they even start making their first buck. I describe this issue below.

When I first bought a used taxi from my grandparents, I took it to be repaired to a mechanic on the outskirts of Wandegeya. He “hooked” it and told me it was in perfect condition. One week later, the differential has developed some problems. Furthermore the crankshaft experienced some problems. I finally got around to this problem but then came the magic story.

The typical Ugandan reader may be surprised because I have never tackled business and magic before. It seems that many Ugandans firmly believe that going to a shaman and providing your final white goat (and no black spots) will turn your business into an overnight success even if you can’t tell the difference (no pun intended) between cash as profit. (which you can use as dividends) and cash from sales (which you can’t use until all expenses are settled).

So the story of witchcraft is like this; I hired my cousin John [not real name for obvious reasons] to work as the first conductor of a taxi. According to family rumors, he “bewitched” taxis because:

*Day 1. The suspension broke.

*Day 3: Crankshaft developed further problems.

*Day 5. The differential vibrates again.

*Day 7: The taxi hit a person crossing the road in Ndeeba.

In 1 month the taxi was operating, I only made Shs 7,000! Oh, I used that to save the driver at the police station. I’m not one to consider the validity of magic stories, but it brought me to the taxi business and the factors to consider if you want to invest in it.

First the CONS (of course)

1. Mechanics without ethics

It’s possible that when I taxied for a repair, the mechanic I entrusted the repair with gave me a pro-forma invoice for the part he didn’t install, got it second hand or third hand or even he didn’t. t perform all necessary repairs. How can I verify that without knowing the intricacies of cars, let alone used taxis from Bungokho?

You can of course solve this problem by taking your Toyota Hiace (the main model used for taxi business in Uganda) to a Toyota Uganda repair shop. Do not expect of course to pay Shs. 7,000 for repairs. 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 genuine parts so forget those used crankshafts your Kakooza mechanic will find from the Kisekka market. As per the Toyota Uganda website, you can expect to start paying for servicing the Toyota Hiace Model from Shs. 183,900.

2. It is difficult to verify income

Unless you drive your own taxi or install cameras like London Buses or National Express buses in the UK, it’s nearly impossible to ascertain passenger numbers on a given route at any given time. I know many business owners will avoid this problem by not paying the driver/conductor fee and instead demanding a fixed daily/weekly amount say 6 days a week with Sunday being “driver’s day”. The day the driver becomes the day he doesn’t pay you as all revenue will go to the wards to earn theirs. This may work 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 give you half of the agreed fee. How do you verify that driver’s story?

Oh, there will be many stories like that. Another time the Association of Ugandan Taxi Operators and Drivers (UTODA) tricked them and they fought back, then another day; The Traffic Police’s “search and stop” operation had resulted in massive delays which were followed the next day by a driver’s strike. Of course you as their “master” can’t be inhumane and keep demanding a fixed amount right?

As I pointed out, if you are seriously considering investing in this sector, you may be able to find a supplier for mounted cameras. However for simplicity and in line with the norm in Uganda I would therefore propose that potential investors stick to the common practice of agreeing to a fixed “contractor” rate with the driver for a given route. However I would recommend that these rates be verified via verification with a different driver than the route the taxi will be traveling on.

3. Initial capital and financing costs

As vehicles are considered a major asset in Uganda, usually these investments are financed by commercial bank loans 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 lines and fixed seats) for around Shs 17m based on my research information from autotrader.ug.

Now the main issue in terms of cost of financing. Following the recent (November 2011) hike by the Bank of Uganda of the Bank Interest Rate to 29%, I can expect that commercial banks will raise their lending rates to an average of 31%. Bank interest rate is the interest rate at which commercial banks can borrow from the Central Bank as lender of last resort. Significant financing costs will as we will see later have a significant impact on the expected return on investment.

4. Long timeframe to realize profitability and recover your investment

I now set out my analysis of the estimated profitability for this business.

I have assumed that the investor buys a taxi to travel on either of Kampala and its suburb routes. I use the most common model which is the “contractor model”. The model is for the driver to provide the investor with an agreed fixed daily amount for 5-6 days a week with the 7th day for the driver/conductor to earn.

In this model, the driver/conductor incurs daily expenses, namely; fuel, daily and monthly UTODA fees, loading fees, KCC fees, stage fees et al. However, the owner will bear the cost of repairs and maintenance as well as insurance costs.

Profit position summary:

Income per month: Shs 750,000 (estimated 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 31% interest rate on a 17m car. Rates estimated at Nov 2011 Bank of Uganda rate plus 2% margin)

Insurance (3rd 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 investment (B/A): 11.54 years!

As can be seen from the analysis above, forget your money in this sector. You can of course now at this stage if you like go visit a herbalist who will probably cast his spell so that the customer prefers your taxi over the others and he will also magically analyze me above to give a return maybe in 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 everywhere you turn there are taxis, so I don’t even need to go into details, but it’s worth noting trends for the sector. Because there are too many taxis in Uganda, judging by several reports from UTODA, eventually the politics around the industry will play out and then some government initiatives to try to reduce the overcrowding of new and old taxi parking lots in downtown Kampala; and instead of moving taxis 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 PROS

1. Fair return on investment, assuming no financing.

Therefore, the main advantage of this sector is for investors who will invest without incurring borrowing costs. I set below the projected return on investment without financing costs:

Income per month: Shs 750,000 (estimated Shs 30,000 per day for 25 days)

Monthly repair and maintenance: Shs 183,900 (estimated from Toyota Uganda repair shop information)

Insurance (3rd 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 investment: 2.52 years

As can be seen from the above, the return on investment without financing costs reduced to 2.52 years from the onerous 11 years in the first analysis.

2. Guarantees for further financing

Assuming you have not borrowed to buy a taxi then a further advantage is that in Uganda, vehicles are the preferred asset to use as collateral for a loan due to the fluidity of the used car market.

3. One-time use alternative

The advantage of a taxi of course is that you can use it for one time use like a private rental or for example for personal use which benefits investors for example; taking children to school, to funerals or; like me in Uganda who in 2005 plucked up the courage to take a taxi on a test drive at night visiting the “Mzungu” girl I wanted to impress.

I think John’s magic had worked because when I was returning home from visiting the girl, I hit the neighbor’s wall as I tried to reverse the taxi to turn into the gate of the house. I insist it’s magic at work and certainly not the fact that I don’t have any experience driving long vehicles whatsoever!

SUMMARY AND FINAL WORDS

First the numbers.

Based on my analysis:

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

*Revenue per year: 9,000,000

*Annual profit (revenue excluding all fees and interest) (B) is Shs 1,473,200

*Return on capital (years to get the capital back) (A/B) is 11.54 years.

*However, if you do not incur financing costs, the payback period is estimated at 2.54 years.

Now the basics you should get before investing:

*Research on fair contractor rates. Since the preferred model in Uganda is to rent out your taxi to drivers/conductors, it’s worth spending time talking to various drivers and perhaps even UTODA to set a reasonable price for your route and ensure you get the agreed-upon fare without the “mukama” story “wange” .

*Consider cheaper financing options. Too often we overlook the benefits of raising funds, say from family members and friends. It can provide equity financing (interest free credit) rather than crippling commercial bank loans.

* A good and trustworthy mechanic is a must. Good luck!

LAST WORD

I’m principally wary of business models where you can’t understand or verify the intricacies of revenue recognition and can barely verify costs to build efficiencies and on that basis, to me this would be a “no-no” sector.

However it has the main advantage of simplicity of revenue stream and that is probably why this has resulted in over investment in this sector including by [financially] illiterate people.

Therefore, if you are interested in the simplicity of this type of investment plus the advantage that the vehicle is safe for further loans then by all means invest in it and all you have to make sure is that you don’t hear any stories from Kakooza about “vibrating differentials.”

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