One of the biggest complaints about the privatisation of our public transport system is that our public tranport operators (PTOs) like SMRT are pursuing generous returns for shareholders as the expense of its consumers. Perhaps one simple way out is for the LTA to intervene into the dividend policy of its PTOs.
Public transport is one of the safest businesses in Singapore. As this business sector is economically and politically crucial to our country and the PTOs’ returns are regulated by the Government by an inflation-linked fare formula, PTOs bear very little revenue risk. What this means for shareholders of PTOs is that they have one of the most low-risk dividend-paying shares in Singapore. The dividend returns may fluctuate from year-to-year, but it is “confirm chopped plus guarantee” that our PTOs are not going to go bankrupt.
There have been calls to nationalise the PTOs so that they are able to deliver better services to commuters and better pay to its workers. I’m not so sure that is necessarily the case. There are good examples of nationalised industries, and terrible examples of nationalised industries. It all really lies in the quality of the management and the incentives given to the management team.
Furthermore, there are good financial reasons to list a company publicly, such as providing the ability to draw upon public capital to generate new equity and thus finance the company’s growth and renewal plans (as opposed to asking the government for an equity injection at taxpayers’ expense). There is also increased transparency in a publicly listed company compared to a state-owned one.
Personally, I’m reluctant to support a call to nationalise the PTOs, but I do recognise that there is a natural tension when a company with a near-monopoly has to both generate shareholder returns and serve the best interests of its commuters. To break this tension, the LTA should consider intervening in the PTOs’ dividend policy, such that dividends are mostly capped at a low rate (e.g. SGS bond yield plus a small premium). This would allow the PTOs to continue to tap on a wide pool of investors, at the same time breaking the PTOs’ incentive to generate shareholder returns as the expense of commuters. Investors would also have to recognise that investing in the PTOs will give a stable but low rate of return. To incentivise the PTOs to continue to improve its service, this dividend cap may be allowed to fluctuate a little if the PTOs are able to meet or surpass all of LTA’s service standards.