The S$1.1 billion question — let me say it again

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.

* * * * *

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.

17 Responses to “The S$1.1 billion question — let me say it again”


  1. 1 wikigam 27 February 2012 at 09:38

    I it a waste of 1.1 b ??? I canot see any direct benefit to the public transportation (Bus user) , year by year the bus fares was increased

  2. 2 self-pwned 27 February 2012 at 10:04

    Funny thing is …. should we be expecting even more fare hikes AS A RESULT of this $1.1 billion GIFT to the bus company?

    Click on the screen captures below to see the answer from a Minister of the Prime Minister’s Office given to an NTU student :

  3. 3 Anonymous 27 February 2012 at 10:06

    Alex, how much do you know about the situation in the UK when they tried to privatise their train services? And the railway situation of the US way back when they were first building it?

    There’s a book that talks about it, I’ll be damned if I can recall the title though, but essentially, what it tries to say is that trains and railways will never be profitable as fully private companies, and the whole thing is moot anyway because they can’t ever set out as fully private companies. That’s because

    a) The initial investment required to build the train tracks and the train stations is too much for private companies to bear. They can never earn back enough to pay back and make a profit on the initial infrastructure costs. This is because public train services can’t charge too much for their fares, because then it becomes uneconomical for the average joe to take it. Indeed, the situation in the US when they first built their railways is that the railway tycoons realised that they couldn’t keep their companies afloat without resorting to becoming a monopoly.

    b) The real value of a railway is not the actual bottom line. The railway itself will always make losses without massive subsidies and government handouts. The real value of a railway is the real estate surrounding it. Hubs then to grow around railway stations, because goods and people flow through easily, businesses will flock to that place. It vitalises the area around it. That is the real value of a railway. This is one of those intangible value thing that doesn’t easily translate to dollars and cents, but is vital for the dollars and cents to start rolling in.

    It goes without saying for the MRT, but I think the bus services in SG is somewhat similiar in that their real value is not their bottom line, but as blood vessels carrying oxygen around the island.

    I don’t know what the best solution is. I agree with you that the answer is to nationalise it, but that’s just my uninformed opinion. There may be other more suitable models. Doing that, however, means other things, such as taxes may have to rise to keep the fares affordable. It’s always going to be a give and take, but I thought it might make a more convincing argument for nationalisation if we actually talk about why railways are the way they are, and why sometimes it’s better for the public to bear the costs of certain utilities because the good they do is not tangible in absolute money terms, but without them, standard of living drops.

  4. 4 Tc 27 February 2012 at 10:07

    Agreed. Government should bite the bullet and nationalise the bus ops. Costs about $600mil basing on sbs transit market cap, which include the rail ops, while smrt bus ops is a third of sbs ops.

    Now you look at the segment reporting in sbs transit annual report. There are four of them, bus, rail, advertising and rental. The latter two are ancillary to the former two. Arguably, the bus ops are much more profitable than set out, as adverts on buses and rental income from bus interchanges are reported as separate business segments. So, instead of the $14 mil profit in 2010, it could be doubled that if you account for the related advertisement and rental income earned.

    I wonder which figure was used to apply for fare increase? Anyone?

  5. 5 George 27 February 2012 at 11:37

    IMO, it is an open and shut case of an attempt by govt to conceal the fact that it, as a major stakeholder, has been twisting the arm of the transport GLCs for maximum return in dividends. This lend weight to the suspicion that the govt is still trying extremely hard to recover from the gic?Temasek investment disaster it has suffered recently.

  6. 6 Poker Player 27 February 2012 at 11:58

    “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.”

    Not the first time. Telecoms.

  7. 7 arockefeller (@arockefeller) 27 February 2012 at 14:28

    Hey Alex, thanks for continuing to address this issue; this recap was very welcome. There are many factors at play here, and many different options, but any time the government chooses to give a billion dollars to a private company serious questions must be asked.

  8. 8 yuen 27 February 2012 at 15:03

    > (Yuen) comes very close to saying that if the right thing to do is difficult, let’s not bother with trying

    not quite; I dont think the rights and wrongs of various solutions are so easily determined; each is “wrong” in some sense, so in the end, the simple and quick solution gets adopted; of course, negative consequences may reveal themselves later and changes of directions result, usually without anyone admitting mistakes

  9. 9 Clarence 27 February 2012 at 17:39

    How is it that govt says that lesser mortal cannot develop crutch mentality but when it comes to govt-invested companies by TH, it has so much free way to develop crutch mentality and handsome rewards for shareholders/management using tax-payer money ?

    How much of the tax-payer money actually ended up into pockets of these expensive mediocre management team of these GLCs ?

    Another case of Uniquely Singapore ?

  10. 10 KAM 27 February 2012 at 17:58

    Can we have open windows, non-aircon buses? I believe only the rich and office-going people really need air-con buses, and only during peak hours. The other hours need only non-aircon buses.

    And some money needs to be spent to make bus lanes bus-only lanes. Any strayers should and must pay a heavy penalty, like suspending the car for 1 month or suspending the driver’s license. Paying a penalty fine in terms of money, simply does not work.

    Bring back the trams.

  11. 11 Chee Ken Wing 28 February 2012 at 00:20

    YB, your case to nationalize public transport is very weak. I agree that it may be a bit of a stretch to offer the two bus operators $1.1bn to subsidize operations, but your conclusion to nationalize public transport needs to be analyzed further before it can even be seen as a viable option.

    Firstly, a government-led buyout of SBS and SMRT is required. SMRT has a market capitalization of about $2.6bn, and SBS $0.5bn. Just buying their shares from the open market alone could easily wipe out the $1.1bn.

    For simplicity’s sake, let’s assume that $1.1bn is sufficient to nationalize the transport operators. There would be no improvement in service standards since there are no new buses, just no more shareholders apart from the government.

    Then what? We’d need another $1.1bn to increase bus capacity and cater for increased operational expenses. And both companies would still return the same profits as before, or maybe less because of the increase, with no real change in the way both companies operate. The only thing this whole exercise would have done is to turn both entities into taxpayer-owned corporations.

    I don’t think that nationalization is necessarily desirable. It is a double-edged sword. Profits accrue to shareholders, but shareholders will also need to risk losses. I’m not convinced that the government is good at running businesses. The career bureaucrats usually need some private-sector input to counter-balance their decision-making.

    • 12 yuen 28 February 2012 at 12:29

      > SMRT has a market capitalization of about $2.6bn, and SBS $0.5bn.

      part of these companies is already owned by the government so there is no need to pay the full market price for them if they were to be nationalized; however, nationalization also raises messy issues and is obviously not the kind of quick and simple solution the government needs

      it is useful to mention that when SBS was listed, permission to use CPF money to buy its shares was introduced for the first time; in fact, that was part of the exercise to “give people a stake in the economy” of which the most prominent example was the listing of Singtel, which resulted in most citizens owning some shares; unfortunately, that ended rather unhappily: many small shareholders, including many old people, were not able to trade the shares as they lacked stock broking accounts and could not take profit even when they wished to; in the end, the banks had make special arrangements just to let them exit as shareholders; in short, well intentioned policies can produce unintended results

      • 13 Poker Player 29 February 2012 at 22:19

        “it is useful to mention that when SBS was listed, permission to use CPF money to buy its shares was introduced for the first time; in fact, that was part of the exercise to “give people a stake in the economy” of which the most prominent example was the listing of Singtel, which resulted in most citizens owning some shares; unfortunately, that ended rather unhappily: many small shareholders, including many old people, were not able to trade the shares as they lacked stock broking accounts and could not take profit even when they wished to; in the end, the banks had make special arrangements just to let them exit as shareholders; in short, well intentioned policies can produce unintended results”

        What you have done here is use a very specific example to justify a statement of the obvious in the most general terms.

    • 14 Clarence 28 February 2012 at 17:58

      “Firstly, a government-led buyout of SBS and SMRT is required. SMRT has a market capitalization of about $2.6bn, and SBS $0.5bn. Just buying their shares from the open market alone could easily wipe out the $1.1bn.”

      Does the government even need to buyout the share ? I thought our government can do as it pleases and as it likes by bulldozing their way through if they really want to do it ?

      How is it that when it comes to decision not supported by the PAP, it must follow the rule it set but when it comes to one that PAP strongly support, it can bulldoze it ways regardless of whatever rules ?

      Can anyone intelligent explain that ?

      • 15 Chee Ken Wing 1 March 2012 at 02:44

        Well, if they really wanted to be nasty, they could just mandate the need to increase the size of the bus fleet through the PTC, and demand that buses arrive more frequently without giving them a cent. Drastic changes like that could effectively run both public transport operators to the ground.

        Personally, I like the first half of the idea. I’d like to see them raise the bar for service standards. But instead, the government should buy the buses, and lease them to SBS and SMRT at a preferential rate. I think that’s similar to how the government intends to manage rail operations in the future; Meaning that they build the infrastructure and pay for some of the capital costs involved.

  12. 16 Roy 28 February 2012 at 11:40

    Chee Ken Wing. Your sole point to not nationalize is:cost, and specifically upfront cost. You also assume that there is no way of running SMRT and SBS better without capital investments.

    Regarding your 1st point. Lets do a proper financial analysis before we comment. 1.1billion this year, and how much more in 2 years time? Lets do a NPV and we’ll see. Until then, your guess is as good as mine. What I would like to add is: the tax payers money will not be free money to the shareholders’, it remains public for public’s usage.

    You mentioned that if gov takes over, there will be no improvements without additional investments. We do not know that. There are many ways tat the operations now are financially efficient but from a delivery of public goods perspective, ineffective. It depends where the centre of gravity of management’s preference leans towards.

    Finally, regarding your point on career bureaucrats being ineffective, BINGO! Take a look at the senior management of all GLC and tell me how many were not ex-army bureaucrats. They are already running the place and doing so ineffectively as they most competent running organizations that are not profit driven, we should align their capability with reality by nationalizing!

  13. 17 11@11.com 6 March 2012 at 07:04

    Good pieces, both. Thought the point in the earlier piece that the new buses could potentially merely _replace_, as opposed to augment, existing capacity, in particular, is well-taken. Nationalization versus privatization is an old debate; compliments on contextualizing it for Singapore. Just two additional points to make:

    a) Sectional monopolies (ie, monopolies on specific routes) is a good thing, if you’d like to go down the route of privatization. Otherwise, if two bus-operators compete with each other on the same route, they’d literally be chasing each other on the road for the same set of passengers. Not a good deal, that; not for passengers or other road users.

    You really can’t differentiate yourself much on service in this business; really, how much service can you have in a 30 minute ride to work every day? Competition is moot here; buses and trains aren’t taxis or planes where, as a consumer, you can choose to favour one company over another. (And even at that, the ability to choose is much less than, say choosing a jar of peanut butter at your local Fairprice. But that’s a different tale.)

    b) I think you’re missing a super-crucial point here, as is the previous commenter who mentioned the National Rail experience; ComfortDelGro is the world’s second-largest land transport operator. It operates not just routes in Singapore, but also cabs in KL, bus-routes in London and inter-city routes in Scotland, among other places. As I see it, the main reason for the government to spin off existing GLC’s as fully-blown entities is to enable them to make in-roads elsewhere; ComfortDelGro, for instance, would find it easier to buy routes in London as ComfortDelGro and not as, say, a government-controlled Singapore Bus Service Ltd. Given that ComfortDelGro already earns half its revenue from overseas, and wants to increase that share to 70% in the next few years, they’d be relentless on this. (I’m not saying *I* think it’s easier for them to participate in overseas markets as apparently private entities, I’m saying the government presumably thinks so)

    The basic argument for privatization in Singapore was slightly different from that in UK, where operational efficiency was the stated reason. Not so here; here, the stated reasons were greater flexibility, faster decision-making and greater market participation, on top of the already great service that the companies had presumably been providing. The only way to evaluate whether this has come to fruition is to compare (relatively speaking) subsidies / handouts in the pre-privatization era (the 90’s, ideally), and see if there’s any difference in service-levels etc. Whether some well-placed executives are making a killing or not is moot; the main question is how much control tax-payers have over the broader outcome (aka, service-levels, and presumably profit, whether in actual amount or in kind)


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