Consider a (mostly) fixed dividend policy for Public Transport Operators

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.

 

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About sgthinker

I'm a 40-year old Singaporean male, and this blog pens down my thoughts and feelings about Singapore's political happenings, government policies and society trends. I hope this blog will provide a moderate voice in the growing online debate about the state of Singapore's society. Some of the posts here won't be solely written by me, since there will be times when other writers are more eloquent at expressing their views, in which case I'll share their insights (along with my comments). The content on this blog is owned by me.If you wish to share or reproduce the content, please attribute it to this blog.
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8 Responses to Consider a (mostly) fixed dividend policy for Public Transport Operators

  1. torrent rocks says:

    Have you considered using free market competition as opposed to governmental regulation to deliver better services to commuters at a lower (more competitive) prices?

    Transport operators will need to offer cheaper and better services to commuters to keep them in business. Also, transport operators will need to offer better pay to its workers to keep them from getting a better wagers from other competing transportation companies.

    • sgthinker says:

      I am not sure free market will work, because there is merit to the LTA’s argument that cherry picking will occur. There are bus routes that are unprofitable because the number of passengers is simply too low. Under a free market model, companies will want to avoid these routes.

      Furthermore, a free market model must allow weak companies to die off. But I think the govt is also quite afraid to let public transport companies fail because commuters are naturally inconvenienced in the process. So there is a political cost that has to be dealt with.

  2. octopi says:

    Well you said it yourself: the purpose of publicly listing a company was to be able to raise funds by issuing more stock. The why the hell does the govt have to pump in more money, like the 1.1B they pumped in earlier this year? Obviously the model is broken.

    It is not true that publicly traded companies are transparent and government run organisations are not. Both are capable of transparency, and both are held to different standards of accountability. Both can be forced to publish reports. But only one will have to pay an annual dividend to private owners and skim off the profits.

    In fact, the rationale behind private companies performing better is because they know that if they didn’t perform to the right standards, they would cease to exist. That’s the main problem with frankenstein entities like Government Linked Companies – you can’t close them down. So the added incentive for them to perform financially is gone.

    And let’s not forget that the purpose of transport is to serve the public, not serve the shareholders. The shareholders are not the public and the public is not the shareholders.

    Do you bother to read what you yourself wrote? It’s so self-contradictory.

    • sgthinker says:

      Looks like this is going to need a follow-up post on the $1.1b subsidy, something which I am reluctantly supportive of. The entire subsidy issue is one of the mostly poorly explained and thus most misunderstood PAP policies of recent times.

      A private company is more transparent than a govt-run company. Thre is a difference between the annual reports of SMRT and Temasek.

      • octopi says:

        No it’s not. What happened with the China driver’s bus strike is a model of “he said she said” and we never know the real truth of the matter. Annual reports are only one component of transparency, and only serve one constituent, which is the shareholder. It ignores all the other stakeholders – the commuters and the workers.

        You need to explain why the $1.1B comes from the taxpayers and not a share issue, and you need to explain why a portion, if not all, of the $1.1B will indirectly go into pockets of the shareholders. – if the govt wasn’t paying for it, the shareholders will have to pay for it.

      • sgthinker says:

        A new post is up in response to you.

  3. E Y says:

    I am in favour of nationalizing PTOs.
    Your suggestion to cap dividend payout is a good one, but that does not limit the profits that a listed company can and wants to earn.
    I would like to believe that a listed PTO company will have the ability to draw upon public capital, generate new equity to finance the company’s growth and renewal plans. But if that were true, then the government wouldn’t have needed to pump in the billions into our PTOs.

  4. Pingback: Daily SG: 17 Dec 2012 | The Singapore Daily

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