My earlier article on the proposed S$1.1 billion give-away to SMRT and SBS Transit, our two public bus companies, was, truth be told, rather rambling. I was trying to cover too much ground. A comment by Yuen has motivated me to try to re-state my case, this time in a more succinct way. Further down, I will provide a more direct response to his comment.
In six points, my thoughts on this matter are:
1. By awarding sectional monopolies to SMRT and SBS Transit, the government has pulled a veil over the question of whether these companies have operated as leanly as they could. How do we know they have not over-rewarded their directors and senior staff? How do we know they have been as efficient as possible? Or that they have not been over-generous with dividends?
2. Therefore, how can we take them (and the government) at their word that they are unable to expand their fleets to cope with demand without a bail-out? To say that if the public wants better public transport, taxpayers must cough up, is to oversimplify the issue. Maybe the companies could have put aside enough funds to buy their own buses, if they had put their minds to it before. As it is, at end 2010, SBS Transit had total capital and reserves of S$317 million, while SMRT had S$770 million. Putting aside enough money to expand their bus fleet aggressively is not that unrealistic.
3. In other words, I am not convinced that capital grants from the state amounting to S$1.1 billion are a proven need — though this is not to say I am sure we can do without.
4. Even if capital grants are needed because
(a) SMRT and SBS have been as efficient as possible and there is no way they can find more savings to fund needed purchases (an argument I remain skeptical of), or
(b) as a general rule, affordable, good quality public transport can never be profitable no matter how much one tweaks the numbers and therefore state subsidies have to play a part (a position I am sympathetic to) . . .
5. Why must capital grants be given on a silver platter to two nominated companies? If we wish to keep the companies as private (albeit publicly-listed), commercial entities, then the injection of capital must follow commercial logic. Either the existing shareholders must suffer dilution of their shareholdings (i.e. the government must get new shares commensurate with the amount of capital injected), or if the existing shareholders do not wish to suffer dilution, then the companies must accept loss of market share. The latter will happen when the capital grant is given to a third company which then gets to operate 550 new buses. This would naturally be a wholly-government-owned company.
(See also How to subsidise buses)
6. Indeed, as Yuen argues, it would be awkward for a wholly-government-owned company to operate in competition (if that is — surprise! — what it amounts to) with two quasi-private companies, which is exactly why I say, go for the clean solution: Nationalise them all.
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I mentioned at the start of this article, Yuen’s comment. He wrote:
what do people want exactly? LTA ordering the two bus companies to take out bank loans or issue bonds to buy new buses to expand services, and pass on the interest bill to passengers in higher fares?
taking YB’s two suggestions
1. treat it i.e. $1.1B as an injection of equity capital, thereby diluting private shareholdings — that requires the approval of existing shareholders, who will meet, discuss, complain, write to ST forum/TemasekReview… that might be very transparent, but is transparency the Government’s favorite objective? it obviously would not be quick
2. set up a third bus company, wholly owned by the government, — then we would have the government directly competing with two “private” companies; further, by losing their duopoly, the companies may well need to be compensated; while I am not clear about the terms of their existing franchise, I remember that when Singtel lost its telecom monopoly to allow M1 and Starhub to get licenses, the government paid a compensation of $1B or thereabouts
the $1.1B subsidy is of course contrary to the government’s past policy and is ideologically untidy, but it gets the buses on the road quickly and is not affected by all those objections swirling around; Singapore Inc plows forwards in its usual way
He has raised some cogent points, particularly his recognition that we’re not starting with a clean slate.
Taking his first point, indeed, the bus companies can issue bonds to raise the needed capital, but as he said, they will have to pay interest on those bonds. Yuen makes the mistake of assuming that fares must rise to cover the cost of interest payments. But why should they rise? Fares after all are set by the regulator. If the regulator, bowing to public pressure, refuses to let fares rise by much, then either:
(a) the companies have to find internal savings in order to pay interest — perhaps they could reduce directors’ salaries, top management bonuses and dividend pay-outs? Or
(b) the companies go broke and the creditors seize and auction off the assets to new bus companies.
From commuters’ point of view, neither of the above outcomes are scary.
Given this government’s penchant for protecting business interests (especially crony business interests) over the working stiff’s interests, more likely than not, the regulator will allow fares to rise as much as needed to keep SMRT and SBS Transit in profit. Then the scenario that Yuen paints may well come about.
But that is not an argument to say, “Oh dear, we can’t let that happen, so we better not ask the companies to go to the bond market. Instead, let’s give them a busload of cash with no strings attached.” If the regulator behaves that way, it is a political question, and the answer doesn’t lie in our bending backwards to be nice to the bus companies. It lies in keeping a political watch over the regulator (and by extension, the government).
Yuen’s next two points confuse difficulty with right and wrong. He comes very close to saying that if the right thing to do is difficult, let’s not bother with trying; let’s live with the wrong solution.
He may be more realistic than I am, but I find it hard to give up so easily.
As for his final point that the state may have to give huge compensation to the transport companies to get them to give up their duopoly, firstly I find it rather incredible that they would have been promised a duopoly, since, at least in theory, they were supposed to “compete” with each other, even if in practice nothing of the sort happened. And if indeed our government had given them contractual rights to operate a duopoly, rights which cannot be rescinded without a huge payment, then all the more I shall be furious at the crass stupidity of it all.