The unintended consequences of taxi recapitalisation

The government’s Taxi Recapitalisation Programme (TRP) is supposed to fix a set of problems that plague the South African taxi/minibus industry. Taxi violence, unsafe vehicles, and bad driving habits among taxi operators combine to make the industry unpopular and, in some cases, unsafe.

The changes mandated by the TRP will, presumably, go a long way towards creating a safer and less dangerous environment for the people in the industry, as well as for passengers and other drivers. At least, that’s the hope.

The TRP attempts to create a safer environment by requiring all minibus owners to exchange their old vehicles for new, larger minibuses. The government will give taxi owners a R50,000 subsidy towards the purchase of the new vehicles and old minibuses will be scrapped. However, this subsidy is unlikely to cover the full costs of purchasing a new minibus. So while some operators will put new vehicles on the road, others will continue to try to skirt the authorities, driving their old taxis.

TRP also requires taxi owners to convert their old radius-based permits (which allow them to carry passengers anywhere within a particular geographic area) to route-based operating licences (which require the drivers to stick to a specific, pre-determined route). The hope here is that taxis will stop to take on and let off passengers only along these designated routes, lessening the problems caused by taxis picking people up and letting them off just about anywhere.

And, the TRP is designed to shift the control over taxi ranks from taxi associations to municipal authorities. By shifting the control of ranks the government hopes to lessen the tensions that arise when one association attempts to monopolise a rank and keep away competitors.

While the intentions behind these changes may be good, the consequences of the TRP are likey to be less salutory. The TRP will, for example, be a boon to some taxi operators and a real burden to others. Larger, wealthier operators are much more likely to be able to afford the costs of replacing their minibuses than are smaller operators. And the local automotive industry, which will contract to provide the new vehicles, should also be quite happy. But who are the likely losers under TRP?

In the absence of a government subsidy for taxi fares, the TRP will almost certainly lead to a fare hike for passengers. New vehicles will cost more than R50,000, which means the operating expenses of all taxi owners will rise. These costs will likely be passed along to taxi consumers. For some of these passengers, fare hikes will be unaffordable, and they will be forced to look for alternative modes of transportation: less convenient buses or trains and walking are possible options. But trains and buses run on schedules than can be inconvenient (meaning people will pay more in “wait costs”) and walking is dangerous. In 2003, nearly 40% of all fatalities on South African roads were pedestrians. If a rise in taxi fares causes more people to walk, there’s a real likelihood that the number of pedestrian deaths will increase.

The TRP will harm small-scale taxi entrepreneurs. The requirement that owners turn in old vehicles and replace them with big, new minibuses will simply be too onerous for many current operators. Some legitimate taxi operators will go out of business and this will have an impact on people such as drivers, mechanics, minibus washers, hawkers and others, whose livelihoods are tied to the taxi industry. And because fares are likely to rise due to increased operating costs, unlicensed “pirate” taxis will troll the roads looking to carry those passengers who don’t want to pay the higher fares for the newer licensed taxis.

The taxi industry is anywhere from a R10 to R16.5 billion per year business. Hundreds of thousands of people work directly, or indirectly, in this business. The TRP will put some of them out of work. This should be troubling in an economy with an unemployment rate over 26% (or over 40% if one looks to the broader definition of unemployment).

Most troubling, however, is that the TRP is likely to lead to a government-created cartel of larger-scale taxi operators. Because the subsidy to purchase new vehicles will not be enough to cover replacement costs, larger, wealthier taxi owners who are better able to absorb these, and the other costs associated with TRP, will remain in the industry while the small-scale taxi entrepreneurs are driven out. Fewer taxi operators means reduced competition and reduced competition spells trouble for consumers, in the form of higher fares.

There are problems in the taxi industry that need to be addressed, but the TRP will leave many problems unresolved, most notably problems related to poor law enforcement. TRP will put bigger, new taxis on the road, but at a real cost to taxi riders and small-scale taxi entrepreneurs. It will not, by itself, transforms bad or aggressive drivers into model operators. It will not ensure that taxi owners maintain their vehicles, and it will not stop pirate taxis from operating. All of these things require, demand, improved law enforcement efforts—something the TRP does nothing to address.

Author: Karol Boudreaux is Senior Fellow, Mercatus Center at George Mason University, and author of the study, Taxing Alternatives: Poverty Alleviation and the Taxi/Minibus Industry, which is to be released on 24 March 2006 and forms part of the Enterprise Africa! project funded by the John Templeton Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the Mercatus Center, the John Templeton Foundation or the members of the Free Market Foundation.