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Consumer education focus: The taxi-financing industry

The taxi industry is a big contributor to the fiscus, without receiving any government subsidies, explains David Hurwitz of Transaction Capital.

NASTASSIA ARENDSE:  Now we are going to be looking at the taxi-financing industry as part of our consumer focus. I’m sure you saw the headlines, even as you were driving to and from work, I think it was a month or two ago, where taxi bosses forced Gauteng highways to a standstill. A lot of us who are sort of middle class or upwards were bemoaning the inconvenience, especially when the real target was I suppose the eye-popping interest rates that taxi bosses were complaining about.

So today I wanted to have a part of the show where we try to understand the taxi-financing industry and its risk. To have that discussion I’m joined on the line by David Hurwitz, who is the CEO of Transaction Capital. David, thanks so much for your time.

DAVID HURWITZ:  My pleasure.

NASTASSIA ARENDSE:  Talk to me about the taxi-financing industry. You operate in I think two distinct divisions as Transaction Capital, in what’s perceived as highly specialised risk. Why the taxi financing industry? Let’s start there first.

DAVID HURWITZ:  You are right. We have two divisions. One division is Transaction Capital Risk Services, involved in assisting large corporates manage their consumer exposures, collecting debt, and originating new loans – that type of business.

And the other side of our business is a business called SA Taxi, which is a vertically integrated taxi business. We do provide finance, but not only finance. We support minibus taxi operators. So we are involved in procuring vehicles from the original equipment manufacturers, we have dealerships which sell those vehicles, both new and pre-owned, we finance the vehicle, we insure the vehicle, we provide telematics and tracking services to taxi operators so that they can track their vehicles, and then we have a very large mechanical refurbishment capability which allows us to refurbish and service vehicles as well. So we provide extended warranties and the like. So we really are very vertically integrated into the taxi industry.

NASTASSIA ARENDSE:  One of the issue brought up by some of the taxi operators was that the interest rates are a bit high. Explain to me, when you look at the pricing of your risk, what ranges are the interest rates in right now?

DAVID HURWITZ:  Our interest rates will range from about 16% now right up to 26%. But I think what’s very important to understand is that we are a developmental credit provider. Nine out of ten of our clients cannot get finance from the banks, so our mandate really is what we call inclusive growth or financial inclusion, and what we are doing is we are financing a taxi operator who has had the banks turn their backs on him. We are giving him an opportunity to start a new business and to enter into our economy and become economically active. So there is a very big social element to what we are doing. You correctly point out that our rates are higher, but of course we do need to price for that type of risk. So one reason for our relatively high rates is the fact that our clients are excluded from the [loan companies] and only because of us can they start their businesses.

And then of course we are funded like a bank. Banks have deposits and they are able to gear themselves many times over, whereas we aren’t. We are actually funded by commercial investors, the institutions of South Africa, as well as some international governments. We are funded by the American government and various other development finance institutions in Europe as well, so European governments as well.

NASTASSIA ARENDSE:  From a numbers point of view, how many minibus taxis do you finance?

DAVID HURWITZ:  At the moment we’ve got just under 30 000 minibus taxis on our book. We estimate that there are about 200 000 minibus taxis in South Africa, so that would give us about a 12-15% market share. We are the largest player in this space. We’ve been doing this for many, many years, since well before 2008. We actually started in about 2005 under the banner of Transaction Capital, and since then we’ve actually originated loans or invested about R17bn into the industry. We’ve created over 60 000 taxis and each taxi is responsible for about 1.8 direct jobs. In that regard we’ve created about 110 000 direct jobs and about 250 000 jobs in total. So we are a very big investor into this industry.

NASTASSIA ARENDSE:  We are currently in what can be described as a tough economic environment if you look at the retailers and many other people who are operating in different industries. When you look at the interest rates that you charge, what are the chances of default? Do you get a high number of operators who default on their paybacks?

DAVID HURWITZ:  Our business is very, very unique. The short answer to your question is that, if we take a look at our entire portfolio, we would have about 17% of our portfolio going into arrears, more than three months in arrears, and of that we’ll only have about 12% that actually end up failing in their business venture. So to take round numbers, roughly about one in every ten of our taxi operators don’t succeed. The reason for this is that we provide them – as I said, we are not just a financier – with business support. So our model is a direct model. It’s all predicated upon getting the taxi to the operator as cheaply a possible through our own dealership.

I think what’s very important to say is that they weren’t only protesting against SA Taxi in terms of our rates. In actual fact the protest was extremely wide, and it’s been ongoing for a long period time. They started off first and foremost protesting against OEMs, around the price of the vehicle. The price of the vehicle has gone up quite substantially over the last five years, and what we are doing is we are working together with the taxi industry to try and deliver vehicles into the market cheaper, and we are trying to do that by having a direct approach to try and get vehicles and cut out the middle man wherever possible.

They protested against government about a month ago, and that was for the lack of subsidies into the industry. It really is unfair that the taxi industry is the largest component of public transport in South Africa. It transports 15 million people every day and it accounts for 69% of every public transport trip, but they get no subsidy, whereas the bus and rail industry gets huge subsidies from government. In addition, there is no funding from government. I just mentioned that we are funded by international governments, and our local government – it’s quite peculiar that SA Taxi and the taxi industry has to raise its money from offshore.

So there was a huge amount of protest, not only against our business, but really against a whole host of participants in the taxi industry, and the protest action was really against their exclusion from the industry’s value chain.

NASTASSIA ARENDSE:  What are your thoughts on the meter taxi industry? There is so much commotion, especially when you drive through Sandton, around the Gautrain station. You do tend to see extra security because there is this big competition between Uber and meter taxis. Where do you stand on that?

DAVID HURWITZ:  A very small component of our business is to finance metered taxis, and we would finance both them and Uber. There is another player in the country called Taxify, as well as the traditional meter taxi operator. So from our perspective we are a participant, a small participant in the industry, really as a financier and insurer and again a retailer of vehicles.

At the end of the day transformation is happening, industries are changing and I think it will be very difficult to stop e-hailing, but I do think that, depending on how the regulatory environment unfolds, there is certainly a place for that industry to transform.

NASTASSIA ARENDSE:  I suppose every industry has that one thing that’s a misconception or something that people think it is, but it actually isn’t. In about 60 seconds, is there one thing about the taxi financing industry that may be a misconception and we can clarify it right now?

DAVID HURWITZ:  I think the misperception is that the taxi industry is viewed by big businesses as a fringe sector. The minibus taxi industry really has been ignored by big business and government, and that is really something that people don’t understand. People love to complain about the minibus taxi industry, but they don’t understand what a huge participant it is in the South African economy. As I said, it’s the backbone of our public transport infrastructure, it moves 15 million commuters a day.

We calculated that just our fleet alone pays R630m worth of fuel levies every year, and the taxi industry in total pays R5bn in fuel levies every year. So they are a big player in the industry, they’re a big contributor to the fiscus. We sympathise with the industry where their concerns are valid, and we are assisting them wherever we can to let them transform and be viewed by the rest of the economy as a mainstream industry in South Africa.

NASTASSIA ARENDSE:  David, thank you so much for your time this evening.

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