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Why the South African state should not subsidize minibus taxi owners

Millions of South Africans rely on minibus taxis to get around. Without these vehicles, people couldn’t get to work, school, or just visit friends and family. Data from Statistics South Africa Quarterly Labor Force Surveys to suggest that there are approximately 250,000 minibus taxi drivers in the country; there are probably about the same number of minibus taxis.

South Africa Statistics 2020 National Household Travel Surveymeanwhile, indicates that 60% of households declare the taxi as their main mode of transport and the Living Conditions Survey 2014/5 showed that 79% of households reported spending money on taxi fares in the past year. The 2020 travel survey also shows that the most common complaint from households about public transport centered on the cost of taxis: they were too expensive. For example, a person living in Khayelitsha working eight hours a day at minimum wage in central Cape Town, 27 km away, would earn R184 a day and pay R48 for a taxi round trip – 26% of their gross earnings.

Rising petrol prices, due to the war in Ukraine and trade disruptions, have amplified calls from taxi associations, Competition Commission and others for the state to increase subsidies for minibus taxis. The only direct subsidies paid to owners of minibus taxis are the scrapping allowance, which they receive if they scrap old taxis. Taxi operators complain that this is unfair and that taxis should be subsidized like buses and trains.

I am an associate professor of economics who has studied the taxi industry and transportation costs for 10 years. I took hundreds of taxis during this period, partly to install the site taxi map, which helps taxi commuters find taxis. But I do not believe that minibus taxi operators should receive new operating or capital subsidies. Indeed, owners of minibus taxis already benefit from two implicit but extremely valuable subsidies.

Disregard labor laws

The first is that most taxi owners do not respect by labor law when hiring drivers. This significantly reduces owners’ operating costs. The second is that if taxi associations appear to be de facto cartels, the State does not enforce competition law in the taxi sector. Prices and industry profits would be lower if the laws were enforced.

My analysis of Statistics SA 2019 Quarterly labor force survey data shows that 70% of taxi drivers earn less than the national minimum wage of R20 per hour and 75% work more than the legal maximum of 55 hours per week.

If all drivers earning less than minimum wage received minimum wage but worked the same number of hours as before, the estimated annual payroll of taxi drivers would increase by about 30-40%. Thus, ignoring labor laws drastically reduces the cost of operating taxis.

The train and bus companies, on the other hand, are almost all formal. They are required to pay their drivers and other employees the wages which are determined in the bargaining councils and which, at R50 per hour for bus drivers, are two and a half times the national minimum wage.

Bus drivers can also work only the maximum number of hours allowed by law before qualifying for overtime pay. They are also entitled to paid holidays and various conditions of service that do not exist in the taxi industry.

Cartel-like behavior

Taxi associations are groups of independent contractors who come together and set a price for each ride they control, which all members must charge. This is the classic definition of a cartel and is illegal under competition law

The The recent market investigation by the Competition Commission in land passenger transport acknowledged the Ministry of Transport’s concern that taxi associations set prices. Yet in the conclusions of the report on pricing, pricing was not even mentioned. Instead, the commission suggested that taxis should receive more subsidies. This non-application of competition law is a very significant implicit subsidy.

Taxi associations maintain and increase their power for two reasons. First, they force every taxi owner to charge the same price. Second, they actively work to prevent entry into the routes of non-members of the association, who, in a freer market, would enter to take advantage of the high profits and ultimately drive down profits and prices – to the benefit of taxi users.

threat and reality violence is the primary means used by associations to prevent entry. But they also work with public officials who, in many cases, has decided that taxi associations should have the final say on who can get a license for the route they control.

Profits for taxi owners

Given these two valuable implicit subsidies, it’s no surprise that owning a taxi is usually extremely lucrative. Cape Town conducted its own investigations taxis from 12 associations 11 years ago, finding that annual profits were around R70,000 a year ($9,000 in 2012), while the value of the vehicles was probably around R100,000-200,000 ($12,000 to $24,000 in 2012). This represents an annual rate of return of 30 to 70% on the capital invested.

Taxi associations often charge extremely high membership fees. The Report of the Competition Commission mentions fees ranging from R10,000 to over R200,000. When I spoke to taxi drivers in Cape Town on my travels, many were desperate to become owners despite these high fees. Why would anyone want to pay such a large sum of money to be able to operate a seemingly unprofitable business? The obvious answer is that many taxi owners actually make big profits.

transport planners, policy makers, taxi representatives and commentators ignore or deny this. Often they Argue that there is an “oversupply” of taxis. They then conclude that taxis operate at very low profit levels and should be subsidized. But subsidizing taxi owners who belong to cartel-like associations is likely to result in higher profits for owners, with little benefit for taxi users.

Minibus taxi operators provide a valuable service to many people in South Africa that the state has been unable to provide. They receive few direct subsidies but two very important implicit subsidies. Instead of the state subsidizing taxi owners more, policymakers should think creatively about ways to increase competition, reduce violence, and enforce existing regulations.

Andrew KerrAssociate Professor, University of Cape Town

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