MICHAEL AVERY: Taxi industry profitability is dwindling

Last week’s violent taxi protests in Cape Town reignited a critical question about how to better integrate and formalise this crucial aspect of SA’s transport infrastructure.

In SA, where most families rely entirely on public transit to get essential services, and where the spatial legacy of apartheid necessitates long-distance travel to work and places of education, investment in public transport generates strong economic and social returns.

Though privately owned, the minibus taxi industry is the most important cog of SA’s transport network, carrying about 15-million commuters to and from work daily, according to Stats SA’s 2020 household survey. The survey also finds that SA households spend the equivalent of 12% of the country’s GDP on transport. This ratio is far greater than in many other countries, including trading partners. Despite having similar levels of public transport usage, these countries spend about 7% of their GDP on transportation. 

The minibus taxi industry is also largely lawless, with many operating without the requisite operating permits, having scant regard for the rules of the road, and violent. The industry doesn’t pay corporate or income taxes, apart from fuel levies.

While official numbers are hard to come by, reading through the Competition Commission land-based market inquiry into public transport, 200,000-250,000 minibus taxis are operating in SA. The National Taxi Alliance says the industry generates at least R100bn annually.

The minibus taxi industry is woven into our history, tracing its origins in defiance of segregation, with the thunderclap of Soweto 1976 prompting reluctant acceptance by the apartheid government. Starting in 1977, an agreement with the SA Black Taxi Association allowed taxis with up to eight seats, giving birth to the industry.

Conflict with buses led to the Welgemoed Commission advocating deregulation in 1981, but the national transport policy study proposed controlled growth using 16-seater vehicles and permit quotas. The White Paper on transport policy in 1987 led to the lightly regulated Transport Deregulation Act of 1988, causing minibus taxis to thrive but overshadowing buses and trains, despite concerns about fares and safety. 

The increase of violence over routes is not just the fault of the industry but symptomatic of yet more state failure. Provincial regulatory entities receive and decide on operating licence applications. Planning authorities at local government are in charge of giving directions to these entities, such as whether to award, extend, change or transfer operating licences. And this must be based on five-year integrated transport plans, which the commission found just aren’t being done.

Given this history and limited access to legitimate business opportunities, it is little wonder the industry is overtraded and infiltrated by organised crime. Its profitability is dwindling too, judging by SA Taxi’s numbers. According to the organisation’s research in 2020, the average short-route operator on the 23km route between Soweto and Johannesburg earned profit of about R25,000 a month.

But since Covid-19 this has deteriorated markedly. Fare increases haven’t kept up with the rising costs from interest rates and fuel and the price of the vehicle. The average monthly instalment on a new vehicle has increased by more than R6,000 over the last three years. Is it fair that taxi operators pay VAT on purchasing new taxis for commercial use? No, but then again, they should also pay their fair share of income tax. Then there’s still interest rates and fuel, probably the biggest input.

On the revenue side, we’ve had one set of fare increases since Covid-19, with another expected shortly. This is hard to track because every association does something different. Added to this, SA Taxi’s figures show commuter volumes still haven’t returned to pre-Covid levels. Little wonder operators are cutting corners with unroadworthy vehicles rightfully being impounded.

Recapitalisation programme

The government’s taxi recapitalisation programme has had limited success. But that’s where the idea of subsidisation becomes interesting, because any talk of a taxpayer-funded subsidy of a private entity through the department of transport, or any other mechanism like local government, immediately brings with it some degree of accountability.

In SA, when it comes to funding transportation most of the money goes to rail systems (trains) at 56%, followed by buses at 43% and minibus taxis at just 1%.

If we look from the national government’s perspective, compared to spending on roads, public transportation receives 54% of the funding. Alarmingly, the government also gives a lot of money to the terminally ill Road Accident Fund (RAF), which got more than R50bn in the 2023 budget. This is 15% more than the total funding for public transportation in the entire country. 

Here’s something else to consider from the most recent draft national public transport subsidy policy document: the RAF’s debt has ballooned to R518.7bn. This means a lot of money is being spent to compensate people for accidents, which cost a minimum of 3.4% of the GDP in 2018. 

So, when we talk about funding public transportation, it’s not just about making buses and trains better. It's also about making the roads safer for everyone. Bringing the minibus taxi industry into the fold through a user-funded subsidy is a big part of that, and a critical plank of the government’s new draft policy before the cabinet.

The bottom line is that taxpayers have been spending more on rail through Prasa since 2009, while passenger numbers have dwindled thanks to unreliability, crime and mismanagement. Subsidised bus services have seen marginal increases in patronage over the past two decades, despite a notable reduction of budget allocation as a proportion of the department’s budget.

But we must be careful about the design of any user-based subsidy, as we already see evidence of the moral hazard in inefficient public transport subsidisation in the mostly empty buses running along Johannesburg’s Rea Vaya routes. 

The draft user-based subsidisation policy has questionable recommendations but bringing the country’s taxi operators into the formal fold via a subsidy makes good macroeconomic and microeconomic sense.

As part of the proposal taxi fares would be migrated to digital payments, and this would go a long way to bringing the sector into the formal tax net, which by some rough calculations could bring in up to R5bn in taxes annually.

Is this realistic given the nature of the industry? It would be naive to think that such drastic reform would be easily achieved, but that’s no reason not to try.

• Avery, a financial journalist and broadcaster, produces BDTV's Business Watch. Contact him at badger@businesslive.co.za.