Futuregrowth Asset Management has provided funding in the amount of R300-million into the taxi industry. Taxis are the main mode of transport for millions of South Africans every day, and the industry has been disrupted over the past couple of years with the emergence of Uber, particularly among the middle- to upper-class. Futuregrowth’s funding goes to SA Taxi, South Africa’s largest financier of minibus taxis, which, in turn, will use the money to provide financing to the company’s Zebra Cabs owner-driver scheme. SA Taxi acquired Zebra Cabs metered taxis in 2015. David O’Sullivan spoke to Gerswhin Long, investment analyst at Futuregrowth about the project. – David O’Sullivan
What is the nature of this investment?
Ultimately this is an investment into the taxicab industry. There’s one thing that I really like about this investment. It’s essentially funding SME’s, or funding entrepreneurs, so your typical Uber model would be a situation and we’ve seen this typically in the market where you have investor who buys a vehicle from and finances by the bank and then he employs a driver and typically the drivers don’t do that well because of the whole profit sharing situation that they have with the Uber investor. The initiative that we funded now is specifically for owner drivers, so you cannot have a situation where an investor comes in and employs someone to drive for him. The reason we like that is, it stimulates entrepreneurship, and ultimately a vibrant SME market would lead to a vibrant economy. In a nutshell, Zebra is a subsidiary of SA Taxi and they provide funding specifically for Uber or for Zebra Cabs.
Well, SA Taxi is an interesting one. We’ve been dealing with SA Taxi for well in excess of ten years, we’re very, very comfortable with management, we know the guys quite well, and they’re quite a conservative bunch. I must also add that we’ve seen various other players in the market approach Futuregrowth for funding for similar initiatives. The reason we went with SA Taxi specifically is that they really have that infrastructure backbone in place. What SA Taxi can offer the entrepreneur ultimately is a fully integrated solution. What I mean by that is from the sale of the vehicle to maintenance of the vehicle, to providing clients for these entrepreneurs, to funding the vehicle, so it’s a totally integrated package that they offer relative to other players in the market who just do financing for instance.
If I can just draw a parallel David, with the banks for instance, the banks would finance an Uber driver by just providing the financing and off the driver goes and they don’t really interact with that entrepreneur again. In terms of SA Taxi there’s a range of value-added services, some of which I’ve mentioned, but others would be, for instance, they would provide driver teaching facilities, helping the drivers manage their cash flow for instance, helping them with client interaction techniques, all of these which lead to the driver being more successful ultimately.
What is the relationship between SA Taxi and Zebra Cabs? I believe SA Taxi acquired Zebra Cabs.
Yes, SA Taxi acquired Zebra Cabs around 2015 and Zebra Cabs now form part of the SA Taxi Group.
Is the funding from Futuregrowth Asset Management then going towards Zebra Cabs and their owner-driver scheme?
Yes, it’s going to Zebra Cabs, but ultimately this forms part of the SA Taxi Group (the funding that we provided into a specific SPV, special purpose vehicle).
The taxi industry is quite a volatile industry, sometimes unregulated; it gets a bit of a bad name. Why are you confident that, that is an industry where you feel your money is safe?
Yes, the taxi industry is an interesting one, but SA Taxi as a group; they’re actually one of the guys in the industry that’s bettering the industry. There are many things that they do in the market, such as for instance, I mentioned the driver development, and in some cases they do advanced driving classes, they have very good relationships with the regulators both on a national and on a provincial level, so if you’re going to come into the taxi industry, this is definitely the guys you want to finance, they’re the guys trying to improve the industry.
It’s important for you thought to have complete confidence in SA Taxi. You obviously have this long-standing relationship. You view SA Taxi as something of a pioneer of innovation in the taxi industry, don’t you?
Yes, definitely. In terms of pioneering the industry, just the way that they manage their books, why we’re comfortable with them is the initiative that we’re funding now is very, very similar to what the taxi industry looked like ten years ago when we started funding SA Taxi. If I can just draw the parallel with the minibus taxi industry, there you have a very fragmented market. There aren’t big players in the market, there are many independent guys going around and at the time when we started funding SA Taxi, the fleet was very old, the general taxi fleet within South Africa. That presented an opportunity for us to fund them and for them to recapitalise the market.
We’re seeing a similar trend in the meter taxi industry where you have a situation where there is close to 20 000 meter cabs in the industry, but access to finance has been a problem for these guys that play in the market. In addition to that the fleet is also quite aged and the older your vehicle is, the less productive you are as an entrepreneur, so it’s important for these guys to continually upgrade their vehicles and therein lies the opportunity for SA Taxis.
You’ve mentioned what it is about the Uber model that you don’t like where you see the advantage for SA Taxi, Uber though has completely disrupted the taxi industry and they show an incredible growth. Do you think there’s still a demand for metered taxis? It seems that possibly is something that is being phased out as people prefer to go the Uber route in terms of booking a taxi, paying for a taxi.
Maybe I should bring this point in as well. SA Taxi or Zebra is not a direct competitor to Uber. SA Taxi is in effect their non-bank financial institution. They provide financing for people going into the market. Essentially what they could do is they could fund an entire fleet of Uber cabs for instance and that would still stack up in terms of their business model because they provide financing for vehicles essentially. The second point is there is definitely a need for cabs.
The point that I’ve made earlier is that there’s close to 20 000 (it’s around 17 000 cabs) going in the industry at the moment and of that a very small portion, close to 15 to 20 percent is actually Uber drivers. There’s a very, very big independent cab driver community out there and that is a big opportunity for SA Taxi because they ultimately want to recapitalise those vehicles and get newer vehicles on the market and get these guys hopefully onto their platform, which would make SA Taxi more profitable ultimately.
Will they be getting their drivers into system similar to Uber’s where an app dictates the way taxis are booked, an app dictates the way a taxi is paid for?
I think that’s one of the benefits of Zebra Cabs as well. They have this app, it’s up and running, it’s been going for a few months already, but in addition to the app, there are multiple hailing methods or multiple methods in which clients can actually book a ride on Zebra Cab. For instance, you can road hail, (you can stand along the side of the kerb and just call a cab, just put out your hand, call a cab), you could call their call centre, as an example, you can use their website. They also have relationships with corporates whereby they enter into contracts with corporates and the corporates use them to transfer staff essentially. So there are multiple methods in which you can book via the Zebra Cab platform which is a benefit to the drivers ultimately because you don’t just want to be reliant on an app.
In what other way is SA Taxi different from Uber?
The SA Taxi or the Zebra initiative is different in another way in terms of the payment method. Currently, Uber, you can pay with credit card and in some instances cash as well. Zebra allows for cash, they allow for credit card, they allow for e-wallet, so there are numerous payment methods as well, you’re not reliant solely on the app to make your payment. They’ve actually entered into an arrangement with one of the banks and they’ll have point of sale devices in the vehicles so you can pay with your credit card, cash, or e-wallet. It just makes the rider experience a little bit better in terms of payment.
SA Taxi also mentions the way in which it can differentiate itself from Uber and one of the things is that they are partnering with corporates in Johannesburg to meet their transport needs, what can you tell me about that?
That would be large corporates. It’s basically getting a corporates on their books. SA Taxi would form the relationship with the corporate. If the corporate wants to make a booking to transfer staff from one point to another they would contact Zebra and Zebra would then route that request through to their underlying cab drivers. Essentially SA Taxi, they’re leveraging their standing in the market to source business for the underlying cab drivers and obviously the underlying cab driver benefits from that, so he’s getting miles on the clock or clients in his car and it comes from a source, SA Taxi ultimately.
Perception is a big issue as well and we’ve seen so many taxis on the roads in South Africa that are in a terrible state of repair. You’ve mentioned that SA Taxi has upgraded the fleets and that the research shows that the average age of a metered taxi fleet is five years. Are you satisfied then that SA Taxi continually looks at the fleet and looks at the equipment and the comfort of the cars that are being made available?
Yes, definitely. We’re very comfortable with that David. What actually SA Taxi does is drivers that are on the Zebra platform specifically, and you’re a hundred percent right when you say perception is a big thing in this industry. Also just to draw a parallel with the minibus taxi industry again, for the minibus you can have a couple of dents in the minibus and people will still ride, with a cab if you pull up with a whole lot of dents in your cab, you’re not likely to get a client as easily. So what Zebra Cabs does is twice a month these guys actually need to report to SA Taxi head office and they’ll do an inspection on that vehicle just to see that everything is still up to scratch and that the standards are maintained because ultimately they want to put a name out there, they want to put a brand out there and seeing that the car is in perfectly good condition is one of the ways that they can boost their brand relative to competitors.
I believe this initial funding then is earmarked for expansion over a two-year period, give me a little bit more information on that.
How it works is, the initiative is running in Johannesburg at the moment. Ultimately, the objective would be to move into other cities as well, Cape Town and Durban probably being the next ones, but for SA Taxi it’s about getting that presence in one city, just being known in one city before they branch out. The process here is, essentially this funding would be used to get the Johannesburg section up and running and then expand from there.
Obviously Futuregrowth gets involved for financial considerations, Gershwin, to what extent are you motivated by the developmental focus here, looking at development and empowerment in South Africa of South Africans?
Yes, David. That’s a very big consideration for us. At the moment Futuregrowth has about R170bn of assets under management and a very big portion of that is specifically driven towards development finance initiatives. We have a fund that deals specifically with these things, that’s called the Infrastructure and Development Bond Fund and that’s one of the largest funds of its kind in South Africa, so it’s a very big focus for us and then the SME angle was a very big driving factor for us entering into this investment as well. One of the big focuses for Futuregrowth is to invest into projects where there’s a positive social spinoff and this definitely ticks the box in that regard.