Technology companies operate in environments, and governments provide the rules by which they play. Rules they ply their trade with, against their competition and how they relate with their customers. Beyond providing, updating these rules with the changing market realities and conditions, the state also earns income from these technology and tech-enabled companies operating within it.
As these companies also grow in market cap and staff strength and influence, they tend to wield powers, sometimes subtle, and in some situations, brash. And states woo them with incentives like tax rebates and waivers which are all regulatory tools.
Lagos State Government has in the past few months wielded its regulatory wands in ways the tech ecosystem players consider arbitrary and inconsiderate. First, the summary ban on bike-hailing businesses like Gokada, Max.ng and Oride that erased direct and indirect employment opportunities. Security and adherence to the state’s masterplan were the major reasons given. For the agile ones, a full pivot to delivery and logistics services became the only option.
Attempts have been made in the past towards regulating these companies. Finally, document guiding the operation, taxation and regulations of the ridehailing and adjacent businesses like fleet was released.
Disintermediation, Data Security and Revenue Loss
With the age limit set to new cars or not less than 3 years old for taxicab as clarified here by Gawat Jubril, this policy will ultimately delist a number of players in the sub-segment as fleets overhaul to meet compliance drives up capital expenditure.
In the early years of the ridehailing business in Lagos, Uber came to terms with the market realities by accepting older but neater and functional cars on its platform. The average price of a fairly used or better known as tokunbor Toyota Corolla –a car of choice on these platforms preferred for its durability and affordable parts– gives one ideas on the feasibility of this new policy considering a diminishing disposable income and rising poverty level. In essence, despite the intentions, this policy may become exclusionary in the end.
An unintended consequence of this policy on ridehailing businesses will be the emergence of mini ridehailing services; sufficient enough to connect a rider with a passenger but small and nimble enough to evade the tax and regulatory net. Offline arrangements with passengers with somewhat regular movement would become a norm.
This then throws up two major problems; disintermediation or leakage which leads to revenue loss for platforms and government and loss of same data it (government) planned to access/capture in the first place. This ultimately has security implications for players on both sides as their activities are technically ‘illegal’.
A bone of contention for passengers is data access as demanded by the Lagos State Government. Seeing the Nigerian tech ecosystem is a young one, and governments at state levels are quite new to its workings, this concern is a genuine one. Despite clarifications on asking for encrypted data by the government, these doubts persist on the possibility of abuse and access. Data access, use, storage and preservation remains a thorny issue with technology companies and regulatory authorities. One would have suggested data access on a need-by-need basis, at best. What this does is assuage the fears of users on the security of their data.
Commendably, by mandating taxicab drivers register with their Lagos State Residents Registration Agency(LASRRA) card, it brings some form security to riders. On the other spectrum towards data identification and collection, the state government is giving a 90-day window period for drivers to update their registrations. Three months is a long time in technology. It is enough time to find backdoors and find weak points in a system, devise means of exploring them and switch to other platforms, if necessary.
Transaction Charges Break Unit Economics.
Transportation businesses are heavy on maintenance, especially with cars that have seen the best of times. Platforms understand this quite well by externalizing these costs to the drivers and car owners. This is so pivotal to this business model that Uber and Lyft are on the verge of exiting their key market in California owing to the passage of AB5; a law seeking to make drivers, its employees with corresponding benefits, thereby driving up costs.
Using an average of ~100k revenue a week, let’s have a look.
Revenue = 100,000
10% (LASG) trnx fee = 10,000
Platform Commission = 25,000*
Petrol and Maintenance = 20,000
Miscellaneous. = 5,000
H/Purchase Remittance = 25,000**
Total leftover = 15,000
*This applies to Uber. Bolt is about 10%
** Some car owners demand less or higher.
From the above, for a driver on a hire purchase agreement or working with someone’s car, 15,000 does not seem a good incentive to be on any of these platforms in light of other expenses like insurance premium. Considering markets experience downtimes, these estimates are at best, estimates.
Capping Innovation and Growth
By having a wide disparity in fees between the first ~1000 cars and cars beyond that, it then, becomes quite discouraging to add an extra car beyond the first ~1000 cars. What this unintentionally does is, put a cap on growth.
It thereby does not make economic sense to add a few hundred cars to a platform and correspondingly, incur extra N5, 000, 000 license renewal fee. Even at 20% reduction as clarified above by the government, it doesn’t make much of a solid business case as these riders are gig workers in firm control of their schedule who return intermittently to work and go off the app. Hence, the platform may not have a good return on investment to pick up extra fees.
Down the road, licenses would become asset classes akin to the New York City Medallion system where medallions increase in value with the passage of time and sometimes, passed from generation to generation. Perhaps this is part of the plan as the regulatory document highlighted the passage of license with approval from the transportation ministry.
Businesses have been built off these ridehailing platforms like driver training and outsourcing firms, fleet management organisations and vehicle finance facilitators. The new policy would impact them in different ways. A provider of vehicle finance may have to recapitalise the business while at the same time reviewing terms with potential customers to hedge against risks engendered by the policy. With two dominant players (Uber and Bolt), and the reason given above, driver-training and vehicle inspection agents, have a ~2000 cars market size.
Becoming a Placeholder
Despite the competitive advantage it enjoys like access to seaports, location of MNCs, proximity to neighbouring land borders and cosmopolitan population; Lagos may be sending wrong signals to investors and business owners. Its relationship with these technology companies in the past few months could scare away investment capital.
To its neighbours, it is providing them a template on how not to regulate technology start-ups and small businesses. Despite the reviewed framework, these affected start-ups might be using inspiration from colleagues that stayed away from the start like SafeBoda, the bike-hailing startup in Ibadan while rethinking future scenarios while operating in Lagos.
As states key into the federal government’s broadband plan by reducing or totally eliminating Right of Way charges for internet broadband infrastructure, talents and capital would in the long run hedge their options and make these favourable states their next destinations. By so doing, Lagos becomes a nice-to-have location, a placeholder for visibility and other ancillaries and not growth.