Khaya Sithole | Taxi fare hikes: What happens when you regulate the unregulated

Khaya Sithole (Supplied)
Khaya Sithole (Supplied)
  • Taxi commuters are facing a pay hike.
  • An increase in transport costs isn't linked to an increase in wages, so a hike in transport costs deepens the wedge between wages and take-home pay.
  • Where spatial planning and lack of infrastructure development leave limited viable transport options, consumers are the ones who lose out.

The journey from Alexandra to Sandton is a sobering illustration of the South African inequality conundrum.

Every morning, thousands of individuals cross the great divide between a township whose socioeconomic status exists in a stark contrast to its neighbour across the M1 highway that is often referred to as Africa's richest square mile.

The gulf across the two communities is an exhibit of how inequality manifests and persists; a social testimonial on how the persistence in the gap between economic access, opportunity and outcomes, entrenches and replicates itself across generations.

Such individuals, ranging from formal and informal workers; and those crossing over the highway just to seek an elusive opportunity, share one common feature – the need to migrate back and forth on a daily basis. This requires an ability to access reliable, affordable transport on a consistent basis or – in the alternative – walking to work on a daily basis.

In its 2015 draft working paper on wages and transport costs in South Africa, the IMF identified transport costs as a potential driver of the wedge between an employee's quoted wage and actual take-home pay.

In a country where the increase in transport costs does not influence a rise in wages, an upward increase in transport costs deepens the wedge between wages and take-home pay. For lower-income workers, any increase in this wedge has profound implications for their standard of living and the national inequality conundrum.

This is where the question of transport infrastructure plays a critical role.

This week, the most prevalent form of transport in Alexandra and other townships – the taxi industry – announced increases in fares for some routes including the Alexandra-Sandton route. The increases, proposed to come into effect next week, have gone up by as much as 170% for some commuters.

This is based primarily on the effect of the Covid-19 regulations that require taxis to carry less than full capacity in order to observe the social distancing measures that form part of the fight against the spread of the pandemic.

Just like any other sector, the taxi business operates with a combination of fixed and variable costs. The most common of the variable costs is the fuel component which is updated on a monthly basis based on factors far from the influence of the taxi operators.

The latest fuel price adjustment came into effect last week and would ordinarily influence the adjustments in fares. However, a longstanding point of contention between commuters and operators is that the downward adjustments in the fuel price, never get passed on to commuters.

In other words, in times of declining fuel prices, the transmission mechanism doesn’t function as well and as rapidly as it does during times of fuel increases. Of course, such an approach is common to capitalist systems wherever you go.

What’s different though is that in most formal businesses, the benefit of this downward adjustment, would lead to the greater marginal profits for taxi operators being saved for a rainy day.

In the taxi industry it is difficult to apply this approach to financial prudence. As so many taxi operators operate on thin margins, any benefit that accrues from the arbitrage between lower fuel prices and no downward adjustments in fares; is redirected towards other needs rather than preserved for the future. For operators who can contemplate and implement this preservation of cash, such an approach would be a discretionary exercise rather than a universal practice.  

The secondary influence in the proposed adjustments is the question of limitation on the number of passengers that each taxi can carry. This has played a key role in influencing taxi operators to increase their fares.

The difficult part of the increases, though, is the seemingly arbitrary nature of the process. In any financial modelling exercise, a temporary 70% limit on passenger capacity would not warrant a permanent 170% increase in fares.

In any financial modelling exercise, a temporary 70% limit on passenger capacity would not warrant a permanent 170% increase in fares.

The additional variable is that passenger volumes are themselves constrained by the fact that parts of the economy remain in lockdown mode. Based on those two variables alone, taxi operators are indeed experiencing a reduction in capacity and frequency of trips.

The inability to influence their cost base, makes the commuter the only alternative recourse for keeping a taxi operation viable. This, however, does not justify an increase which – in the absence of any rational justification – is at best opportunistic and at worst exploitative.

In response to the issue, the Minister of Transport – Fikile Mbalula – has committed to getting the Competition Commission to probe the matter. This is, of course, the type of thing that would make sense in any market where industry practices mirrored such disturbing developments.

Minister Mbalula, however, would do well to understand the consequence of his own government's failure to have a cogent strategy for managing the transport sector.

A cogent strategy would be underpinned by a rational regulatory regime for all parts of the transport value chain. This is not the case in South Africa.

Where the government has sought to regulate and operate, we have seen the disaster that is our train system and even our aviation sector.

Where the government has sought to regulate and operate, we have seen the disaster that is our train system and even our aviation sector. Where the government has sought to let free market forces operate in a regulatory vacuum, we have seen the current state of the taxi industry.

These days, the state’s involvement with the taxi industry doesn’t stretch much further than the process of setting licensing conditions.

Free market fundamentals are to be championed in every society where consumer choice and flexibility exists. In places where spatial planning and lack of infrastructure development leave consumers with just one form of transport as the only way to move; such fundamentals will not generate optimum outcomes.

What can be done?

The minister may very well be able to reach a conclusion that the practices proposed are detrimental to the consumers; the difficult question would then be – what can he do about it?

In a community where the only option is using a taxi, a ruling will make no difference to the taxi operators who can stick to their new prices with the understanding that commuters have no alternatives anyway. For a commuter from Alexandra whose lack of proximity to bus or train routes requires a link facilitated by taxis, the dependency on the taxi sector is a long-term feature of their job market participation.

The Covid-19 regulations, noble as they are, have affected various industries in different ways.

Industries like the taxi sector, so often derided for its poor compliance profile, are now finding themselves in limbo when universal regulations find themselves at odds with the operational architecture of the industry.

This experience is now indicating to us the consequence of imposing regulations on an unregulated sector. Whilst the lessons are plenty for the state and the industry, the capacity to learn remains to be seen.

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