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.