The taxi industry is a great case study of how our modern economy has failed to include the legacy industries of the black majority.
The belief that the industry is lawless is laced with a couple of untruths that must be dealt with.
SAns mistake being sophisticated for being entrepreneurial. My industry of VC & PE investors — are complicit in this.
We look for financial projections in macros, audited financials, and business plans to enable us to do financial somersaults using the taxis as assets.
So what we mean by the taxi industry is informal is it doesn’t fit our Sandton model of formalisation.
But make no mistake: TAXI OPERATORS ARE PHENOMENAL ENTREPRENEURS.
Think about the complexity in the mathematical modeling required to run a single taxi:
You have to calculate the fixed cost per trip & variable cost per kilometer, per passenger, per route, and then add then margin for marginal revenue.
Scenario: a passenger is traveling Soweto-Sandton. The route must be calculated in kilometers, frequency & latency.
Kilos: the distance traveled.
Frequency: the number of trips (at full capacity) that each taxi can make.
Latency: the cost for the return trip (when taxi is empty)
Added to this must be the financing costs:
The principal cost of the taxi + the interest payable on that cost + the insurance on the taxi + the insurance shortfall.
Then you add the operating costs:
The unit labour cost per driver
+ the cost for the wear & tear of the consumables: tyres, clutches, brakes
+ the association fees
+ the cost for the roadworthy tests
+ the cost for licensing
+ the cost for attaining & maintain a PDP
Then you have to calculate the net contribution margin for EACH taxi.
Net contribution is the sum total that each taxi must pay to the owner at the end of every day: net of all the costs listed above (although most owners simply keep a reserve fund for most of the incidentals).
This “reserve fund” is a form of self-insurance by the owner for the unforeseen costs of running a taxi.
Then you calculate the “shrinkage”: Each owner presumes that the driver will “make trips” without declaring that income. So that means you have asset utilization without the resultant income flows.
Each “undeclared trip” increases the rate of depreciation of the asset (shortens the lifecycle) & accelerates the wear and tear of the asset. But remember there are no income flows or net contributions to compensate for these.
Most owners, aware of this fact, build it into their financial model & simply give the driver a “daily net income target” + plus the return of the vehicle at the end of the day with a full tank of gas.
So — as we all would — the drivers chase their daily target for the 1st part of the day & then work for themselves for the remainder of the day.
To those that are often annoyed at the driving habits of minibus taxis on the roads, especially during peak hours, this “daily-target” will help you understand why taxis drive the way they drive.
I am not excusing it. Just stating the fact.
See the only method of maximizing profits, which is the primary goal of any free-market capitalist business, is either to do more trips or have more taxis on the road.
This is why every taxi owner (true too for Uber & Bolt owners) wants to increase the size of their fleet.
BUT… most of these calculations above are not done by CAs or mathematical modeling graduates. What Uber employs mathematicians to build into its algorithms, taxi owners have been doing on the back of matchbox for decades.
So they are clearly enterprising & entrepreneurial.
Just an aside:
the irony is that the people that complain about the driving habits of taxis on our roads don’t understand that the motivation for the taxi driver is the same as the motivation for the company they work for, “profit maximization”.
How do you achieve profit maximization is a competitive market?
Drive the price lower or regulate new entrants to manage over-capacity.
This is why associations exist. As a & price-adjustment & capacity regulation mechanism.
To those that are annoyed that taxis don’t want to be regulated, answer this, “which industry has ever volunteered itself into government regulation”?
… don’t worry, I will wait.
Even the people protesting that taxis don’t deserve a bailout because they are not “formalized” or regulated, forget that there are unregulated industries that have benefitted from state-sponsored bailout programs all through our democracy.
Those that argue taxis don’t pay tax, forget that every litre of fuel has a levy (tax mechanism) built into it.
This is also true for the VAT paid for tyres, the taxi itself, etc.
My opinion is that the Taxi industry demonstrates the lack of imagination by our government to create a regulatory framework that allows taxi operators to follow the law whilst free of state intervention: what we call in strategy “freedom within a framework”.
Until we get that right, the taxi industry will remain at the margins of our formal economy.
Just like spaza shops.
Just like ama-society.
Just like umshayelwano.
We need to stop trying to retrofit our people into an economy not built for them.
Global Speaker | Venture Investor | Leader