Tuesday, July 19, 2011

Consider the economic reality of transport here

Jul 19, 2011

Current public transport model has produced undesirable outcomes

By Gerald Giam

MINISTER for Transport Lui Tuck Yew recently criticised the Workers' Party's proposal of a non-profit National Transport Corporation to replace the current two publicly listed transport companies.

Mr Lui claimed that the proposal had 'serious downsides, chief among 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'.

These are simplistic arguments that fail to take account of the economic realities of the public transport industry here.

First, 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.

Second, public transport is an industry rife with market failures. The current regime, with SMRT Corporation (SMRT) and SBS Transit (SBST) each providing both rail and bus services, provides just an illusion of competition.

The reality is that SMRT or 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.

[Consider what you are implying. Are we to believe that having duplicated routes would be a good thing? The competition of a duopoly in this case is not to have two service providers overlap, but that there are two service providers. The implicit competition is that fares and service standards have to be comparable. So if one can provide a peak hour frequency of a bus every 5 minutes, the other service provider does not have the luxury of claiming that such a performance standard is unachievable. It is not that the argument is simplistic. It is that your understanding of competition is basic. The rest of the argument then fails.]

Commuters do not have the freedom to switch between providers, nor do we see operators fighting to attract and retain customers like airlines do with promotions, discounts and loyalty programmes.

Their monopoly status is also reflected in the consistently 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 naive 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 says the current regulatory regime is a 'robust' one that does not allow the operators to benefit at the expense of commuters. This is a remarkable assertion, considering the profits of the public transport operators - $215.4 million last year alone. The fines imposed on them 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. By 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 excessively high returns, as these would invariably come at the expense of service quality. Overcrowded trains and buses show how companies without genuine competition can raise shareholder returns at the expense of the commuting public.

Mr Lui mentions the 'serious' downsides of a nationalised public transport system. But he ignores workable examples - even locally, where the Government subsidises public services or even provides services directly to the public.

Schools, for example, are mostly government-run. Public hospitals and clinics are significantly 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 companies, whose first priorities are to their shareholders.

The Workers' Party has, since 2006, called for the MRT and 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, it will serve the needs of the public and not that of shareholders.

This proposal recognises that public transport in Singapore is an inherent monopoly and a public good. A well-managed NTC can provide superior outcomes compared to the present profit-oriented monopolies. We would expect no less from an NTC, in terms of efficiency and cost-effectiveness, as we would from any other statutory board managed by the Government.

To achieve these outcomes, the Government should set stringent key performance indicators (KPIs) for an NTC. These include:

  • Affordability of fares
  • Containment of costs
  • On-time bus and train performance
  • Satisfactory customer ratings (through independent surveys)
  • High percentage of public transport ridership
  • Productivity improvements and innovation.

The bonuses and pay increases of NTC executives should be pegged to the achievement of such KPIs. This will be a more effective way of ensuring service standards than the present regulatory regime, where the fines imposed for failure are a pittance compared to the profits.

The current model for the 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 philosophy of the virtues of privatisation and the profit motive, without considering the true economic reality of the public transport industry in Singapore.

The writer is a Non-Constituency Member of Parliament and chair of the Workers' Party's media team.

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