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.
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.
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.
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.
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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