SA Taxi empowerment deal with Santaco embodies BEE ethos
BUSINESS LIVE / 30 NOVEMBER 2018 - 05:05/ EDDIE RAKABE
Difficulty negotiating and implementing complicated commercial transactions in a fragmented industry is among the unresolved issues
The taxi industry has come a long way in recent years and now it is finally staking its claim to a position of influence in the mainstream economy.
It is bewildering that an industry that is the oldest, most resilient symbol of black capital accumulation has only concluded a major transaction so long after South Africa’s black economic empowerment (BEE) policy was adopted in the early 1990s.
The SA National Taxi Council (Santaco) recently announced a R1.7bn empowerment deal to acquire a 25% stake in SA Taxi, a subsidiary of Transaction Capital that specialises in sales, financing and insurance of minibus taxis. This vertically integrated vehicle finance subsidiary has succeeded in a market few financiers dare venture into.
Taxi operators are considered high-risk borrowers due to their generally poor or nonexistent credit profiles, and because the industry has an equally poor road safety record and is prone to violent conflict. Many operators do not qualify for vehicle finance from the largely risk-averse and inflexible traditional banks.
Providing finance to this underserved market cannot be an opportunistic “take the money and run”-type of endeavour, and to its credit, SA Taxi has studiously avoided this approach. The company’s founding values are rooted in deepening financial inclusion, having been originally acquired from African Bank in 2006 and often supported by development finance institutions regarding raising capital.
The company’s latest debt issuance was covered by an American government agency and several impact investors that emphasise social and environmental benefits along with financial returns. With this type of philosophy and support, SA Taxi has been able to innovate alternative credit risk assessment criteria that not only consider formal employment status but also taxi route profitability to facilitate finance for taxi operators.
This BEE deal ranks highly in the sense of two businesses with similar interests and matching “skin in the game” coming together to build shared value. Most importantly, while the deal format and ownership structure within Santaco have not yet been finalised, the transaction embodies the ethos of broad-based BEE as it is intended to benefit thousands of taxi operations and drivers.
SA Taxi will, in turn, benefit from a strategic BEE partner in Santaco — as a vehicle financier contending with the risks of payment defaults, it makes sense to partner with an entity that can put pressure on its members to honour their debt obligations and provide avenues to generate new business.
In this way, SA Taxi benefits from reduced credit risk and an improved ability to leverage cheaper capital in future, while taxi operators gain from self-patronage, future dividend pay-outs and perhaps further opportunities to influence the strategic direction of the company to the advantage of the industry at large.
The authenticity of the deal is also demonstrated by SA Taxi’s backing of Santaco’s funding through vendor financing. Previous empowerment deals that have been financed through special-purpose vehicles have often left BEE investors in a precarious financial position when the share price failed to live up to expectations.
Empowerment deals that advance the national imperatives of inclusion and involve small business owners are always worth celebrating. However, this deal does raise a number of questions the taxi industry will have to answer if it is to be repeated. One of these is the difficulty negotiating and implementing complicated commercial transactions while the taxi industry remains so fragmented — it still comprises thousands of independently owned small taxi operators.
Another pertinent question is why an industry with an annual turnover of R50bn would need a far smaller company revenue-wise to support its balance sheet and help it raise the capital required for the deal. Given that some taxi operators have in the past protested that SA Taxi’s interest charges are excessive, it also raises the question of how the relationship will be managed in future.
The industry has been unable to implement self-initiated reforms, such as the 2010 transportation transformation strategy, which sought to exploit business opportunities within the taxi industry value chain, and it is unclear whether the empowerment deal will make this any easier.
Asking these questions is in no way an attempt to underplay or denigrate the efforts made by the industry to penetrate the formal mainstream economy. The intention is to shine a spotlight on internal structural limitations that continue to hinder the growth and development of the industry into a nationally recognised transport conglomerate and brand.
Rushing into a series of empowerment deals without addressing these weaknesses could fuel fragmentation and further marginalisation. For instance, the proliferation of small independent operators and taxi associations makes it difficult to instil the corporate governance principles and values necessary to protect and legitimise the interests of each stakeholder. The lack of endorsement of the deal by the National Taxi Association (NTA) reflects badly on the industry’s unity.
The fact that the industry did not have unencumbered cash to purchase the stake is a further indictment of its ability to build a formal and bankable business structure that can compete with established transport companies. For many years the industry has relied on a single income stream while neglecting opportunities to diversify revenue to build surplus cash for investment. The challenge boils down to informality.
The industry forfeits millions of rands of potential discounts on the purchase of new vehicles, spares and repairs due to the individualised model of ownership, lack of organised formal structures beyond traditional route-based associations, and a general mistrust between competing bodies.
Strategies to transform the taxi industry should involve adopting a vertical integration business model and jostling for market share in various segments of the transportation industry value chain. For maximum impact, it is desirable that such a strategy be driven from within the industry using internal resources if possible.
The notion that the industry is unable to generate savings to finance alternative investment should be defeated — taxi operators frequently acquire vehicles that cost more than R700,000 without access to formal lending. Perhaps what needs addressing is the matter of allocating capital more efficiently and finding ways to attract external investments to the industry.
The taxi industry remains one of the few in the transport sector with the potential to facilitate broad-based BEE at scale. However, this will not happen by acquiring equity stakes in companies that have reached market saturation.
Efforts to unlock these opportunities will require tailor‐made and imaginative interventions by the government and, more importantly, a self-driven industry initiative to invest in its own capabilities and growth.
• Rakabe is an independent development economist, writer and researcher.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER