Why nationalising SBS & SMRT would not have avoided the $1b bus subsidy

The government’s $1.1b bus subsidy to our public transport operators has been criticised as a sign that our public transport privatisation policy has failed. This post will explain why the subsidy is not a sign that privatisation has failed, as well as explain what really went wrong.

Why the bus subsidy happened

The story of the bus subsidy must first begin by recognising that the Public Transport Council (PTC) and the LTA sets the minimum service standards that PTOs must meet. The service standards covers items like frequency of buses and availability service, and a PTO’s failure to meet any standard will result in a fine. Service standards play a very important role in influencing the behaviour of our PTOs.

We all know that public transport woes was one of the key factors in PAP’s poor performance at GE2011. The PAP knew that it had to improve the public transport situation quickly before the next election. Building new MRT lines would be too slow as these lines take over 5 years to build. The PAP was left with no choice but to improve bus frequencies, which meant more buses and more bus drivers.

To achieve more frequent bus services, the PTC could have quickly tightened its service standards. For example, instead of allowing buses to come every 20-25 minutes, buses should not come every 10-15 minutes. By increasing minimum service standards, the cost of more frequent buses would be solely borne by the PTOs. But the PTC cannot use this method because of a concept called “regulatory risk”. Regulatory risk is a situation where the govt changes its rules too quickly for businesses to adapt, thus causing existing businesses to make severe losses. This also discourages future investments. If PTC had tightened its rules too quickly, it would send the signal to other business sectors that the PAP is only too willing to screw commercial entities in order to protect itself.

One could argue that SMRT and SBS are majority-owned by the Govt, so it should be easy for the companies to accept stricter standards set by the govt. However, we should note that SMRT and SBS are publicly listed companies. The boards of these companies also have to answer to minority shareholders. If the standards were tightened too quickly, minority shareholders will complain about the impact to their investments and pressure the PTOs’ boards to take action against the govt. After all, the PTCs’ decisions may be challenged via appeals or judicial reviews. The PAP govt probably recognises that a legal challenge is the worst possible outcome. Not only does the PAP risk a failure to improve service standards, they would also be subject to a very public trial of finger-pointing. Furthermore, SMRT and SBS are still profitable businesses, hence there will be accusations of “wayang”.

If the PAP govt is unable to force the PTOs to bear the cost increase of higher standards, then the PAP govt must bear some (or all) of this cost. This is how the $1.1b bus subsidy came about. The subsidy would compensate the PTOs for requiring them to achieve a higher service standard. This is not the perfect solution because the subsidy is paid from taxpayers’ money, and there is the risk that the subsidy would find its way into the pockets of PTO shareholders. Hence the LTA now has the tough job of ensuring that the subsidy is not inappropriately used to benefit shareholders.

And just in case you don’t believe my explanation, PAP MP Hri Kumar has pretty much said the same thing.

The bus subsidy could have been avoided by a tightening of standards

In hindsight, the PTC and LTA should have raise minimum service standards much earlier and more steeply so that the change is still acceptable to the PTOs and still able to meet our population demand. Rule changes can happen, as long as they happen slowly enough for businesses to adapt. This is why the govt’s raising of foreign worker levies will happen over 6-monthly intervals until mid-2013.

To the credit of the PTC, the PTOs’ service standards have been updated in 2007 and 2009. But I have my doubts over whether the changes were large enough. The old service standards still worked in a Singapore that had a smaller population, but would ultimately fail in a Singapore with a larger population. After all, common sense dictates that a bus arriving every 20 mins may still be acceptable if each bus stop has about 10 people getting on/off at every stop, but the same frequency can become frustrating if there were 20 passenger movements at every stop. Since Singapore’s total population rose quickly from 4.6b to 5.3b between 2007 and 2012, LTA should have also raised its minimum service standards aggressively during this period to keep up with the demand that population growth would place on our public transport infrastructure.

Why the bus subsidy could not be avoided by nationalising the PTOs

The bus subsidy would likely have happened even if the PTOs were nationalised. This is because there is no reason to believe that a nationalised bus company would be motivated to perform better than the minimum standard set by the govt. After all, these standards are endorsed by the govt itself. It costs money and resources to deliver a higher-than-minimum level of service. Regardless of whether our PTOs are privatised or nationalised, we can expect them to react in the same way to the same minimum service standards set by the LTA.

A properly-run nationalised PTO will likely be making only a very small profit (or no profit). Hence, if a nationalised PTO is instructed to improve bus frequencies, it will likely have to ask the govt for money to achieve this outcome since its own coffers are limited. This means that the PAP would have been forced to give a $1.1b bus subsidy to a nationalised PTO. The only difference is that in the case of a nationalised PTO, the public may not even know about this subsidy since the money is transferred internally between govt bodies.

The irony is that the privatisation of the PTOs has led to more transparency which has enabled the common citizen to learn that the PAP is forced to give a $1.1b subsidy to the PTOs. If the PTOs were nationalised, the subsidy will happen and we would be none the wiser.

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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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20 Responses to Why nationalising SBS & SMRT would not have avoided the $1b bus subsidy

  1. octopi says:

    In one sense, nationalising the PTOs would not have prevented the 1.1B subsidy. But if the PTOs were stat boards, then it wouldn’t be an issue: the government would have been asked to bear the costs that exceeded revenue, or to collect the surpluses at the end of every year. We would have all taken it as part of the deal.

    But when you consider that you had $300M paid out to private shareholders every year, it works out that 4 years of dividends would have paid for the extra buses. Which is not totally unreasonable, since buses have a lifespan of more than 4 years. As it is, cash is fungible. That means that the $1.1B is actually in there to boost the bottom line of the PTOs as private enterprises, so that it can continue to pay out dividends to shareholders and continue a viable existence as a publicly listed company. The profit imperative is actually a form of inefficiency because it forces the company to book a profit every year, thereby constraining its options.

    It is very dubious to say that SMRT / SBS are more efficiently run as private enterprises. Whether it is a private enterprise or a stat board, there will be accountability. But the purported increases in efficiency that come about through privatisation are just plain fiction. Going private doesn’t make it easier for you to fire workers. It doesn’t get better people in there to do the job. It doesn’t place an existential threat on a company to do better since the PTO could never close down either way. It doesn’t produce a competitor. Where does the increase in efficiency come from? Only in your own imagination!

    • sgthinker says:

      While I agree that the benefits of privatisation are still debatable, I am intrigue by one of your statements. Why do you say that “Going private doesn’t make it easier for you to fire workers.”
      I can understand the angst about how civil servants have job security and that the nature of civil service makes it difficult to fire underperformers. But it is not clear to me why a privatised bus company would have the same trouble firing underperformers.

  2. blahblahblah says:

    “This is because there is no reason to believe that a nationalised bus company would be motivated to perform better than the minimum standard set by the govt.”

    But it works for the statutory board, doesnt’t it? There is no reason to believe that a HDB/LTA/NEA/NParks would be motivated to perform better than the minimum standard set by the govt ain’t it so?

  3. sporescores says:

    ‘sgthinker’, perhaps your mind is unable to realise it yet, but your reply to me has actually contradicted your point about nationalisation not being able to prevent the $1b subsidy. You are now agreeing that if public transport was nationalised, the government may not have had to cough up $1b. You’ve made a complete U-turn from your assertion that nationalisation would not have avoided the $1b subsidy. Nationalisation is of course more expensive now in the middle of existing contracts with PTOs, but why was it not discussed extensively before the current contracts? Even now in the middle of the current contracts, you have failed to perform even the simplest of cost-benefit analysis of nationalisation before brushing it aside. Perhaps you lack the honesty or humility to admit your post contains nothing to back up your assertion in the title. Or are you so dull-minded and short-sighted that even after my reminder, you still fail to consider the savings from nationalisation? Read your reply to me again – it concedes that your post neglected to account for the current massive profits, and that the issue should instead be about looking at the cost of nationalisation. Perhaps you need to ‘sgthink’ more before you ‘sgtype’.

    • sgthinker says:

      You are putting words in my mouth. Nowhere in my 3 sentences below have I said anything that amounts to “if public transport was nationalised, the government may not have had to cough up $1b.”. Perhaps you are the one who needs to read before you type?

      • sporescores says:

        Sigh… since you are unable to follow the logic for yourself, I have to explain it step by step to you. First, you conceded in your reply to me outside your post that the PTOs make enough profit to cover the $1.1b subsidy themselves. Next, you conceded that it is instead about whether the PAP govt could force the PTOs to bear the cost. A nationalised entity would not have faced these issues that you yourself pointed out in your reply, which your post did not address. Yes, nationalisation is a huge challenge. How much will it cost to nationalise? Less than $1b? More than $1b? Over how long? How much savings will nationalise bring? Over how long? When was the best time to nationalise? When is the best time to nationalise? Again your post does not address these questions. And yet, without doing any mathematics, your post jumped straight to the conclusion that nationalisation would not have avoided the $1b subsidy. Your post is a totally shameless, unsubstantiated, misleading piece of crap, like many of your other posts.

      • sgthinker says:

        Then it’s clear that you have not read my post. “A nationalised entity would not have faced these issues that you yourself pointed out in your reply, which your post did not address.” But this is already described in the last 3 paras of my post.

      • sporescores says:

        I did read your entire post unfortunately, and the last 3 paras are just as fallacious as the ones above it. Nationalised PTOs might already have delivered those higher level service by giving up the $300m annual profit. Note that unlike you, I am honest and do not claim for sure that they ‘would’ deliver exactly those higher standards, hence I said they ‘might’. Without the math and figures, it is disingenuous to claim nationalised PTOs will do the same as privatised PTOs.

      • sgthinker says:

        Then I would counter to say that without evidence, it is disingenuous to claim that nationalised PTOs might deliver higher standards than privatised PTOs. And in fact, given the performance of govt entities like HDB, PUB and LTA, it is hard to give the benefit of the doubt to 100% govt owned entities. Granted, these are stat boards and not private companies. But it is hard to imagine a world where 100% govt-owned SBs are inefficient while 100% govt-owned companies are efficient. And it is hard to imagine why on earth a nationalised PTO would definitely go above the call of duty and deliver standards higher than those required by the govt.

        At the end of the day, this boils down to the fundamental question of whether there are efficiency gains from privatisation. In other words, would the millions of profits made by the PTOs still exist if the PTOs were nationalised? This raises the question of how much of these privatised PTO profits are due to actual efficiencies, instead of gains from hiring foreign workers cheaply. I believe the truth lies somewhere in between, hence I am hesistant to say that nationalised PTOs would be as efficient as privatised PTOs, nor am I willing to say that the profits of the privatised PTOs can definitely be used to offset the bus subsidy.

        But let me give you the benefit of the doubt and assume that nationalised PTOs are as efficient as privatised PTOs. The last 3 paras of my post still applies. Such nationalised PTOs would not be allowed to earn much of a profit (because it would be political suicide to do otherwise). Hence although fares would be lower in this theoretical world, the PTOs still wouldn’t have the reserves of cash to support a sudden and large increase in LTA’s service standards. Which is why the $1b subsidy would still have happened anyway.

      • sporescores says:

        You need to read/re-read my previous reply: “Nationalised PTOs might already have delivered those higher level service…” The $1b would not have happened IF the nationalised PTOs are ALREADY delivering the higher service standards. Again unlike your post and your replies so far, I am honest that it is an IF. You on the other hand are dishonest/illogical in insisting that the $1b WOULD have happened regardless.

      • sgthinker says:

        Then perhaps you need to take your own advice and provide some substantiation. By what basis would your “IF” be even a plausible outcome? Unlike you, I have at least stated the reasons why I believe it is not a plausible outcome that nationalised PTOs would perform beyond the minimum standards set by the govt.

    • sporescores says:

      Finally, you admit your claim is baseless. My point is that contrary to your post, it is by no means clear/true that nationalisation would be as costly as or more costly than the current approach. That was my point – that your post is baseless. I was not trying to prove that nationalisation would be less costly. If your post had been honest about the questions surrounding the complex issue of nationalising public transport instead of jumping to the conclusion that nationalisation would not have prevented the subsidy, I would have had no issue with it.

      • sgthinker says:

        Spores, you have this interesting habit of mis-reading things. My last comment simply said “I have substantiated my point. Now I invite you to substantiate yours.” It is puzzling how you can read my comment as admission that my claims are baseless.

        In any case, I can see why we are having this argument. It is a matter of unmet expectations. Allow me to clarify;
        (a) This post is simply about the bus subsidy and whether it could have been avoided with nationalisation.
        (b) This post is not about whether nationalisation would have resulted in a cheaper outcome. Because.cheapness is not just about the bus subsidy, it’s also cost and efficiency of bus operations and how that would have affected fares,

        This post has never pretended to be about (b). It has always been about (a), which if you claim to have read my blog, was made in response to a commentator in my previous post who asked ” why the hell does the govt have to pump in more money, like the 1.1B they pumped in earlier this year?”

        Your insistence that the post be about (b) is like insisting that a school textbook discussing Newton’s law of gravity should also include a discussion on the Einstein’s general theory of relativity. Yes the topics are relevant, but that is not what the book is aiming to discuss.

      • sporescores says:

        It appears you are not quite capable of basic logic or understanding, or you have dishonestly chosen to ignore my explanation about how your claim (a) is totally unsubstantiated. Unless you can show the numbers to prove that nationalisation could not have prevented the $1b subsidy, your post and your replies are do not bring anything new to the table.

      • sporescores says:

        You have shown a pattern of being either dishonest or illogical in attempting to explain your points. Further, since there doesn’t seem to be much discussion or interest in your post, I shan’t be spending any more time here as well. You can have the last word if you like.

      • sgthinker says:

        Well thanks for the entertainment. I will let future readers decide for themselves on whether either of us made sense.

  4. sporescores says:

    Another fallacious argument by ‘sgthinker’, who has conveniently forgotten to mention the $300 million operating profit that the PTOs make EACH year. Without considering this current profit margin, I wonder how ‘sgthinker’ can be so confident in arriving at the math that the government still needs to contribute $1b subsidy. Another shameful piece of misleading commentary from ‘sgthinker’.

    • sgthinker says:

      Perhaps you fail at reading comprehension, so let me summarise this post for you.

      It has never been about whether the PTOs make enough profit to cover the $1.1b subsidy themselves.

      Instead, it is about whether the PAP govt could force the PTOs to bear a massive cost increase without being subject to legal challenge and reputation loss among investors..

  5. Pingback: Daily SG: 31 Dec 2012 | The Singapore Daily

  6. EY says:

    “By increasing minimum service standards, the cost of more frequent buses would be solely borne by the PTOs.” – Adhering to a government defined service standard IS a given for any operator that is given virtual monopoly (or duopoly in this case) of an industry. Otherwise, why should they enjoy the kind of market protection that is afforded to them by the government?
    Government co-sharing of infrastructure cost is not unheard of. But too bad, this is really a case of too little, too late from SMRT. The proposal to expand their fleet and service standards should also have come from SMRT, detailing what they need to do, rather than be told by the government what it needs to do. If they need to be told what to do, then how different would it be if they are nationalised?

    “The bus subsidy would likely have happened even if the PTOs were nationalised” – this is precisely why it should be nationalised. If a public listed company cannot draw on public capital and support its own operations, then it should not be operating as a public listed company. The point of contention isn’t that nationalising PTOs will avoid the added investment from the government, but it would mean the decision to “bail” PTOs be more justified, if even such a word can be used on our PTOs given the hundreds of millions they are making in profits each year.

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