Fuel Price Hikes Put Ride-hailing Sector in Trouble, Time to Re-innovate the Business Model

By Nathnael Tsegaw

About two months ago, a friend and I had a meeting we needed to get to quickly in Mexico. So, I pulled out my phone and hailed a ride, standing in front of the DH Geda building. The fare the app quoted shocked me, reading slightly north of 200 birr.

Traffic jams might have contributed to the added cost. But still, this was a trip for which we used to pay no more than 100 birr. When I showed the fare to the friend who was with me, he promptly said, “to the taxi, it is,” and we started walking briskly 

After my meeting was done, I went back home in a minibus taxi, reflecting on this experience. At least to me, this looked like an indicator of a foreboding future for the ride-hailing sector in Ethiopia.

When the recent gas price hikes were introduced, this anecdote was tucked away in the back of my mind. Then I asked myself, “Would ride-hailing services be able to weather the storm?” As I dived deeper, things looked even grimmer.

Currently, Ethiopia imports petroleum products worth close to 3 billion dollars annually. The demand for gasoline is also increasing rapidly, growing by 10% on average every year.

Beginning in July 2022, all fuel subsidies are being lifted, and this process will continue for the next five years. The administration has been signaling its intentions for more than a year, determined to save more than 25 billion Br in public spending being spent on annual subsidies.

Before the lifting started, in April 2022, one of the more substantial fuel price hikes was announced, and gasoline cost 36.8 birr per liter and diesel sold at 35.4 birr per liter.

Another hike in July pushed these prices up by more than 32%. But yesterday’s announcement changes the game entirely.

According to the new tariffs, gasoline will cost 57 birr per liter while diesel will sell for 59.9 birr per liter. Considering how quickly the birr is losing value and inflation is soaring, I wouldn’t be surprised if these prices rose even more. Of course, this will significantly affect the cost of ride-hailing trips.

Additionally, per a bill drafted by the Ministry of Finance and approved by parliament, ride users are to pay a value-added tax of 15% for every trip they take, further pushing trip fares up.

When you combine these two factors with the recently raised starting fare, which stands at 95-birr, ride prices seem poised to soon be out of the affordable range for the “middle class.” Especially with the current rate of inflation, which forces people to prioritize.

When you put all this together, you might ask, is a change in how ride-hailing companies operate warranted? As I began to think about alternative models, the government announced significant tax relief for electric vehicles. It brought the tax on imported electric vehicles down to only 15%. I thought this could be the answer. But as I pondered further, I concluded it couldn’t be. Electric vehicles could replace some portion of the ride fleets. And we have already seen some efforts to do just that.

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However, I’m not sure we have enough electric power in the country to justify such a significant transition. The average electric car will require 15 kWh of electricity every 100 km. Assuming that’s what the average ride driver travels in a day, just half of Ride’s nearly sixty thousand-strong fleets would need 450,000 kWh per day if the vehicles were electric.

That figure is roughly 7.5% of the electric power the Grand Renaissance dam is set to generate. In a country where about half the population has no access to electricity, advocating for electric cars for ride-hailing might be pushing it.

But how will the industry evolve if an electric car isn’t the primary option in the face of rising oil prices? You may ask.

One possible answer occurred to me while waiting for a taxi on “Mexico’s” streets. As I was just standing there with sore legs from all the waiting, a shrill voice shouting the name of my neighborhood caught my attention. As I moved closer, I noticed he was touting for sharing one of the large yellow SUV-type cars with other people. I’m not new to these “Lada sharing” trips, where a group of passengers going to a similar destination share a trip and split the cost, and I imagine neither are most of you. But I have noticed more and more ride-hailing providers and drivers getting into the action.

I have also recently observed many staunch ride-users switching to this similarly convenient but cheaper option. If the middle class continues to be priced out of ride-hailing services, that shift will likely continue. And I think there might be a great opportunity here.

Perhaps one of the top companies in the sector could integrate ride-sharing features into their app. Or a new app that optimizes “Lada sharing” will take its rightful place among the top transportation apps, which could mean new opportunities for innovators. Whether or not any of this will come to pass, only time will tell.

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Nathnael Tsegaw is the manager of Shega Insights and is interested in economics and innovation.  He can be reached at  Nathnael@shega.org