High cost of loans cuts buses supply to franchise firms

Franchise operators face low business on reduced supply of buses from investors hit by the high cost of credit.

Kenya Bus Services (KBS), Molo Line and City Hopper are receiving fewer buses from investors who pay the companies for running daily operations under the branded fleets.

Most buses are financed by bank loans and the move by the lenders to raise interest rates from an average of 14 per cent in January last year to above 25 per cent currently has put off investors.

“We used to add an average of 10 buses per month to our franchise, but this has dropped to three buses from the second half of last year,” said Githaiga Weru, the operations manager of City Hopper.

“The cost of buying new buses has risen sharply and this is discouraging investors,” he said.

Edwins Mukabana, the managing director of KBS said the franchise has added only one new bus in the past six months, a sharp contrast to an average of six buses per month in earlier months.

“New additions to our franchise have dropped and we postponed our plans to rollout an upcountry service from late last year until 2013,” Mr Mukabana said.

On average, the bus franchises earn management fees of between Sh36,000 and Sh50,000 per month from a single bus, with the reduced investments converging with high fuel prices to slow down earnings. 

The reduced demand for buses threatens jobs in the transport and vehicle assembly sectors besides hurting earnings of dealers like General Motors East Africa (GMEA).

Ms Rita Kavashe, the managing director of GMEA, said orders dropped for this quarter due to the weak shilling and high cost of bank loans.

The price of buses has risen by more than Sh1 million in the past six months with a 51-seater Isuzu Bus, for instance, now costing about Sh6.1 million from Sh5.5 million in the first half of last year.

Operators like KBS and City Hopper were gearing up for a windfall following the ban on new registration of 14-seater vans and the compulsory memberships to either bus franchises or Saccos.

But the high cost of fuel and buses looks set to dampen their business in the short term as investors adopt a wait-and-see attitude.

The public transport sector has seen rapid growth over the years, with earnings jumping from Sh114.8 billion in 2006 to Sh167.3 billion in 2010.
vjuma@ke.nationmedia.com