Overhauling Singapore’s public transport model

The current model of provision of public transport has produced many undesirable outcomes, as evidenced by the “crush loads” experienced by commuters every day and the public outcry each time fares are increased. It would do Singaporeans no good if the government sticks dogmatically to its narrow philosophy of the virtues of privatisation and the profit motive, without considering the true economic reality of the public transport industry in Singapore.

This was an op-ed that was published in the Straits Times Review section on 19 July 2011, under the title “Consider the economic reality of transport here”. I would like to express my appreciation to my friends and fellow Party members who contributed to this article. It was a team effort.

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Minister for Transport Lui Tuck Yew recently criticised the Workers’ Party’s (WP) proposal for a not-for-profit National Transport Corporation to replace the current two listed public transport companies.

Mr Lui claimed that WP’s proposal had “serious downsides, chief amongst which commuters and taxpayers (yes, even those who don’t take public transport) are likely to end up paying more, and possibly, for a poorer level of service over time”.

He added that “it is the profit incentive of commercial enterprises that spurs efficiency and productivity improvements”.

Market failures in public transport

These are simplistic and tired old arguments about the virtues of private enterprises which fail to fully appreciate the economic reality of the public transport industry in Singapore.

Firstly, taxpayers who do not take public transport already contribute to the provision of public transport in the form of taxes that pay for the construction of roads, the development of rail lines and the purchase of the first set of trains on every new MRT line.

Secondly, public transport is an industry rife with market failures which the Minister seems to ignore.  The current regime where SMRT Corporation (SMRT) and SBS Transit (SBST) each provide both rail and bus services provides an illusion of competition.

The reality is that SMRT and SBST have clearly delineated areas of responsibility with no route overlaps.  This makes each of them a de facto monopoly provider in their own particular areas.

Commuters do not have the freedom to switch between providers whenever they choose to, nor do we see public transport operators (PTOs) fighting to acquire and retain customers like airlines do with promotions, discounts and loyalty programmes.

The monopoly status is also reflected in the consistent high returns these companies earn. Freed from the discipline of genuine market competition, they have few incentives to raise service standards and keep prices low.

To say that shareholder discipline will create such incentives is naïve at best, and wrong at worst.  Shareholders seek higher profits, not better or more affordable services.  The government must examine whether a public utility should be owned and operated by what are effectively private monopolists earning monopoly rents.

Mr Lui claims that the current regulatory regime is a “robust” one that does not allow operators to benefit at the expense of commuters.  This is a remarkable assertion once we consider the profits of PTO’s—$215.4 million last year alone.  The fines imposed for not meeting service standards pale in comparison to these profits.

SMRT and SBST have consistently enjoyed high returns on equity (ROE) of above 15 per cent.  For SMRT, it has been above 20 per cent in most years.  In contrast, the median ROE for a Singapore listed company is about 9.5 per cent.

Source: SMRT and SBST company financials
Source: SMRT and SBST company financials

A company that provides a public good should not earn such excessively high returns, as these invariably come at the expense service quality and benefits to commuters.  The overcrowded trains and buses show how companies which do not face genuine competition can increase profits and raise shareholder returns at the expense of the commuting public.

Source: SMRT and SBST company financials
Source: SMRT and SBST company financials

As a result of such profit-oriented behaviour, the two PTOs’ high returns have been enjoyed by their shareholders.  For example, SMRT has paid out close to 80 per cent of its net income in recent years.  These generous dividends could instead have been used to provide better services or reduced fares.  However, it is not possible for publicly-listed firms to do this, as their obligations are to their shareholders.

Public transport as a public good

Mr Lui mentions the “serious” downsides of a nationalised public transport system, while ignoring workable examples—even locally—where the government heavily subsidises public services or even provides services directly to the public.

Schools, for example, are mostly government run. Public hospitals and clinics are heavily subsidised.  Even public housing is subsidised by public money.

Yet when it comes to public transport—an essential service for the majority of Singaporeans—the government advocates its provision by listed corporations, whose first priorities are to their shareholders.

Public transport is a public good that serves a national purpose, in the same way as healthcare, education or public housing.  Thus running it on a cost-recovery basis will create positive externalities if it benefits the overall economy, for example, by getting people to work on time and in comfort.

In the face of the pressing need to provide this public good, it is clear that the present public transport model needs to be overhauled.

WP’s National Transport Corporation proposal

WP has, since 2006, called for the MRT and public buses servicing major trunk routes to be brought under a National Transport Corporation (NTC), which will oversee and provide universal transport services.

NTC should aim to provide safe, affordable, accessible, efficient and reliable universal public transportation services, on the basis of cost and depreciation recovery.  As a not-for-profit corporation owned by the government, NTC will serve the needs of the public and not that of listed company shareholders.

WP’s proposal recognises public transport in Singapore as an inherent monopoly and as a public good.  A well-managed NTC can provide superior outcomes compared to the present profit-oriented monopolies.  We would expect no less from NTC, in terms of efficiency and cost-effectiveness, compared to the way any other statutory board is managed by the government.

To achieve these outcomes, the government should set stringent key performance indicators (KPIs) for the NTC.  These KPIs could include:

  • Affordability of fares to ordinary Singaporeans;
  • Containment of costs;
  • On-time bus and train performance;
  • Customer satisfaction ratings (through independent surveys);
  • Percentage of public transport ridership;
  • Productivity improvements and innovation.

To incentivise their performance, the bonuses and pay increases of NTC executives should be pegged to the achievement of such KPIs, and there could be negative consequences for not meeting them.  This will be more effective in ensuring service standards compared to the present regulatory regime, where the fines imposed on the companies for failure are a pittance compared to their profits.

Conclusion

The current model of provision of public transport has produced many undesirable outcomes, as evidenced by the “crush loads” experienced by commuters every day and the public outcry each time fares are increased.

It would do Singaporeans no good if the government sticks dogmatically to its narrow philosophy of the virtues of privatisation and the profit motive, without considering the true economic reality of the public transport industry in Singapore.

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19 thoughts on “Overhauling Singapore’s public transport model”

  1. Public Transportation MUST remain Public….The PAP has hijecked what is rightfully a Public Service…The inefficiency of the Public Transport System is costing the Country billions of dollars in lost work time, poor quality of life, unneessary angst and unhappiness of the people…All these problems are not readily quantifiable but they are actually costing the nation more than the extra profits the Dupolistic Transport companies make…
    And these OBSCENE profits are made at the expense of the People and the NATION.

    These Transport Companies should be charged with Economic Crimes against the Nation and the People.

  2. How much more savings PER RIDE can we expect if we nationalized public transport? IS this amount worth taking on the additional risk?

    Will nationalizing prevent future hikes? Most probably not. If not then would it be worth it?

    If public transport is nationalized, who pays for the capital assests such as buses etc? Wouldn’t that money be more useful in spurring on new industries that can get better returns to 1) increase employment, 2) increase salaries, 3) reduce taxes or 4) increase benefits strategically for everyone?

    Are there any benefits for Singapore Citizens in a model where a Singapore-listed company on SGX to make profits, pay taxes on those profits, the shareholders to receive dividends, and take on the risk associated with running a transport company?

    Isnt it easier just to legislate performance requirements which the companies must comply, than to own the whole company?

    Lets all wake up.

  3. Franco: “If public transport is nationalized, who pays for the capital assests such as buses etc?”

    As far as SMRT goes, it is the taxpayers. The govt pays/paid for

    1. the tunnels and track
    2. the signalling system
    3. the train carriages
    4. the EasyLink system

    and so on. These things come out of the budget of the Ministry for Transport. You can look it up online.

    SMRT really does not own much of the subway infrastructure. When you step into the MRT station, ask yourself what did SMRT pay for? Not much. SMRT *leases* almost everything from the govt… at a very highly discounted rate.

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  5. I could understand why the govt wants to own all the strategic assets. There are probably civil defence and national defense issue relating to the mrt infrastructure.

    None the less, privatization has greater benefits for the country than nationalization. There is only a very, very small percentage of the population that wont be able cope with a 2-3% increase , or about $1.5 dollar increase in transport fees per month.

    Its folly to suggests that we nationalize the transport system just for them. A concession to assist them will do.

    Or better yet, help them with skills upgrade so they can have a 20% increase in pay. No?

  6. The government can own the infrastructure but it does not have to lease it at a discounted rate which amounts to a huge subsidy. I remain to be convinced that the trains themselves have any national defense value.

    The problem with privatization is that the government loses control of the quality of service. Notice that how the trains have become more cramped over the years and how fare has risen. This degradation of service quality is a consequence of the private monopolistic power of SMRT. That is why EVERYONE is angry over the impending fare hike. Why are we paying more (money) for less (service quality)?

  7. I believe it’s best to have a public model for transportation as this is a basic need unlike airlines. If it was only left to private players then they would only ply those routes that are profitable.

    Take an example that if a Bus provider refuses to ply buses on Sunday’s saying that it is not lucrative, how would people travel.

  8. Let every Singaporean, from the time they have to pay for Bus/SMRT, get “Shares” of the Transport Companies i.e. SMRT/SBSTransit.

    These shares cannot be en-cashed by selling on the open market. These shares will be returned to the state when the person dies or is no longer a Singaporean.

    (Rich/Millionaire) People may own this shares. But may apply to get it (if they fall on bad times).

    In this way, every year people will receive dividends from these shares to partly offset the costs of transportation.

    Profit goes up means dividend will be higher as well. Singapore can well afford it.

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