The other day, on my way to work, I had a lift. I live at Banjulnding and for those who live after Tabokoto, the site of throngs of people standing on the road early in the morning waiting for a van is nothing new. Not for the man giving me a lift- more used to using the Kombo Coastal road to work. His first reaction upon seeing all those standing at NTC Lamin was to ask “Are all these people waiting for a van?” I was fairly amused when I heard that question for it wasn’t something I expected to hear. To me it was so obvious that I barely even noticed it, it was a part of what one had to put up with to get to work.
Later that day I couldn’t help but think of the causes and possible solutions to that problem. As an economist, I thought to look at theory for an initial starting point. Two causes sprang to mind, Government regulation and Agency problems. Imagine to my surprise reading a news story a few days later online about a company being setup in The Gambia to deal with the latter problem. Here is the story about Fangsoto Transport Services. The basic idea of this company is to solve the agency problem that arises from vehicle owners hiring drivers to drive their vans.
Agency problem refers to a situation where the owner of an asset hires someone else to use that asset to make money. The owner of the asset Is the Principal and the one using the asset, the Agent. A classic example of a principal agent relationship is the limited liability company. The shareholders (agents) who do not run the company, own it, whilst the managers (agents) run the company but do not own it. In this relationship, there is a clear conflict of interest between the two parties. Both would like to have as much of the profits generated from the assets as possible. For every Dalasi the principal takes from the profits, there is D1 less for the agent and vice versa. This problem is further compounded by another problem, Moral Hazard. In using the assets of the Principal, the Agent knows that it will be very difficult for the principal to monitor him. He can therefore take more risk than he would otherwise take knowing that higher risks yield higher returns. The best part of it for the agent is that he will be taking risks with someone else’s asset. If it succeeds, he gains more, if it fails he loses nothing. This problem of the agent taking on more risk than he otherwise would have taken had he been monitored properly is called a Moral Hazard problem. The conflict of interest that occurs between the principal and the agent is called the agency problem.
In the case of the transport industry in The Gambia, the agency problem and moral hazard are closely intertwined. The inability of the owner of the van to observe the driver means that the driver can declare to have less income than he actually made, or work less hours. This has led owners to now hire apprentices that they trust to oversee the driver- this also has its own problems which I will talk about in another piece. There is no incentive for a driver to take proper care of the van knowing that it is not his. If the care breaks down, the cost of repairing it does not come from his pocket, therefore he can push the van to its limit in order to make more money for himself at no risk to him (although one can argue he is risking his life).
The Fangsoto Transport Services tries to solve these problems by being an intermediary. An intermediary is a person or institution that stands between two parties. In this case the principal and the agent.
“Once you sign an agreement with us, we take proper care of your vehicle, appoint a driver and will be responsible for maintenance services, and as the owner, you can collect your money on weekly, monthly
“Drivers do not have the trust and confidence in vehicle owners, which result to care free driving and carelessness in the manner to control such vehicle
They try to solve these problems- agency and moral hazard- by taking being able to select good drivers and to monitor them whilst they are working. Their ability to do these two at a lower cost than vehicle owners allows them to make a profit. I failed to mention earlier that monitoring is possible in a principal agent relationship. It is only that monitoring is prohibitively expensive and it eats into profits.
It’s great to see that the things we learn in class also apply to the real world. Something I have been trying to get my students to appreciate for some time now. Economic theory tells us that there are a number of ways that the agency problem can be solved. Making the incentives (in this case profit) of the principal and agent compatible is one way. Another is through the use of government regulation. It is great to see someone coming up with an idea to solve the problem whilst using the free market mechanism. I wish more people looked to solve society’s problems using market mechanisms instead of government intervention
if we can have a varying number of "Fangsotos" in our economy, i guess then we can soon call the market of monitoring van drivers a laissez-faire; that means cheaper monitoring costs for van owners as well as greatly reduced agency problems in that industry. right now one can say that Fangsoto is a monopoly which i guess makes transport for those around the Brikama end still a problem. i can also sense that Yaya Jallow is a classical economists; I, more in line with Keynes guess that little government intervention could at least a little more speed in solving the menace.
ReplyDeleteA good piece, but I think the whole transportation sector of the Gambia need a better approach. The present state of the sector should be a window of opportunity for potential investors. This medium is a unique mean to get the situation of our transport system known. As long as Fangsoto continues to be a monopoly,commuters will pay for all the costs (fares, time and the stresses of using the services of a monopoly. I beg to differ in any kind of intervention..I bet it will just worsen the situations.
ReplyDeleteInteresting piece, but what I don't understand is how will 'fangsoto' determine who is a good driver and who isn't. Perhaps they might use driving skills and diligence, but how are they gonna measure diligence? Besides based on economic theory, people are all the same savvy .i.e. we are all motivated by self-interest.
ReplyDeleteAnyways, its a good initiative and will help complements the presidents efforts in easing the transportation difficulties commuters face, but whatever happened to utsco..........?
An insightful feature on the status quo of transport in the 'kombos' As implied by agency theory, the fundamental reason that causes a conflict of interest between a principal and an agent , is self-interested behavior. This is true of human nature and hence everyone in a given situation, tries to further his/her interest at the expense of others.The self interested behavior on the part of drivers, is not different from that of car owners. Thus, a sensible balance needs to be created.
ReplyDeleteThe establishment of intermediaries like 'fangsoto', will help to ameliorate the conflict of interest but would not provide a long lasting solution to the principal-agent problem.
Well argued, interesting comments. I would first like to ask if Fangsoto is in for business(i.e maximizing profit) or for the welfare of society?
ReplyDeleteIf the aforementioned organization is in for business I think the Agency problem will continue, as I see Fangsoto as an intermediary(Agent) between van owners and drivers. As Economists would say "there is no free lunch" so Fangsoto will definitely seek ways to maximize profit hence as Mr. Y. Jallow puts it "For every Dalasi the principal takes from the profits, there is D1 less for the agent and vice versa". In this case the van is the asset Fangsoto, the van owner and the anonymous driver that will be appointed depends on to maximize profit. Thus each one of them is drawing up strategies to get the bigger share of the profit, thus the Agency problem continues.
I believe the only way to solve Agency problem in the transportation system in The Gambia is the intervention of government through the revitalization of GPTC to compute UTSCO in the transport industry.This will enhance competition and where ever there is competition, there is bound to be efficiency.