Public Transport – Does Nationalisation Solve our Problem?

Singapore public transport companies have again submitted a request to hike fare to the Public Transport Council (PTC). That, of course, drew a storm of protests amongst the already price-sensitive residents of Singapore who had been hit hard by the ever rising consumer price index. There had been calls for nationalisation of public transport while PAP had been stanch in defending the privatisation strategy and policy. Does nationalisation really solve our problem? If it doesn’t, what else can we do?

Unfortunately, after examining the merits of privatisation and nationalisation, the merits of privatisation prevail. Nationalisation is actually a populist policy that does not solve the crux of the problem. Nationalised entities normally would have higher cost structure due to the lack of need to innovate and compete. Though the cost of national transport could go down, the market is not working at maximum efficiency and there is lesser excess wealth generated by the entire economy due to high operating cost. Hence, the PAP is right with their privatisation policy.

However, in order for the invisible hand of the market to work efficiency (to avoid market failure), our Government must start to introduce competitors into the market. We should not allow companies to have monopoly power in this industry or the drive to innovate to provide additional utility or to reduce cost would be subdued. Allowing fair competitions would mean that all infrastructure build by the Government would be accessible to other transport operators as well.

The process of introducing competitions would take a long time and could not be done overnight. What the Government can do is to introduce fair competition policies to prevent the existing state-linked companies from drowning the new entrants. Before the market is operating efficiently, there is a need to regulate the industry even more tightly so that the existing transport companies do not abuse their monopoly power.

The profitability of privatised company would be scrutinised closely by investors. However, regulations are required to be in place to check on these companies. We cannot benchmark other privatised companies currently to do asset valuation. As other private companies have serious competitions and other risks involved, we must give a significant discount on the returns of the money in the future to factor that risk. Yet, public transport is a basic utility and without serious challengers to the monopoly, the risk is minimal and the returns are considered ‘safe’. Investors should know that buying the stocks of our public transport companies are likened to buying ‘Government bonds’ and hence there is no real need for matching or even exceeding payouts of other companies in general. Armed with this argument, PTC would be able to push back on demands to hike fare when the companies are making decent profit margins.

Secondly, as the companies enjoy monopoly power, the consumers are left without a viable option for low-cost transport. It is hence very important to ensure that the companies provide these utility exceptionally well. We have heard complains of atrocious services such as long waiting time, dangerous driving or overcrowding. These complaints are never taken seriously by the operators as they know deep down that the consumers would have no choice but to put up with them. It is therefore essential that these are set as KPIs and with penalty for non-compliance.

Thirdly, the Government must regulate the companies to provide services to all parts of the island. Excuses such as certain stations are not profitable should not be used as arguments to keep the said stations closed. In a competitive environments, companies would never had used those arguments simply because competitors would venture in at operating cost to earn goodwill of the customers and that goodwill could translate into profits for other routes. Lack of competitions means that this has to be regulated to ensure that no one is left behind (literally).

In conclusion, I challenge the Government to open up the market. Privatisation does not mean creating a monopoly whose sole purpose is to make supernormal profits. In order to reap the benefits of privatisation, we not only have to do it, but more importantly, do it right.

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Posted on July 14, 2011, in What's Happening?. Bookmark the permalink. 6 Comments.

  1. Hey Collin! I’ve managed to read a couple of your entries, and have really enjoyed them. They’re very insightful! Think you’re probably going to be helping ME with my econs degree rather than me helping you… 🙂
    I really liked these few entries on Singapore’s public transport. I did a module last year on transport econs, and you’ve pretty much got the right idea here. I had to write an essay on the privatisation of the British railway, I can email it to you if you’re interested!

  2. Sure! Send it to me:) but cannot blame me if I cost you your ace!

  3. Excellent post! I’m doing my IB extended essay on the nationalisation of the bus services and have reached the same conclusion – nationalisation is not the answer. Currently, the problem isn’t so much with fares (fares have only risen by about 0.3% if SBS reports are to be believed and fares, adjusted for PPP are cheaper than HK, NYC and Tokyo) but the crowding issue. Allowing people to ride the MRT for free before 7 isn’t the best use of taxpayers money. Nationalisation would see quite a few problems, starting off with no x or dynamic efficiency, a huge burden on taxpayers and a difficulty in raising capital for long term projects, something which public transport does need.
    The reason perfect competition seems like a good idea is because, at the end of the day, SBS buses and SMRT buses are perfect substitutes, they are indistinguishable. So allowing more firms to enter the market would seem to be the better idea. The argument of cherry picking is an interesting one, it did happen in the UK. Can it be avoided in SIngapore? I believe it can with some regulation from the PTC. A contract based tender can be arrived at.
    Another solution I seriously considered was competitive tendering or performance based contracts, perhaps even establishing a monopoly but on the basis of a legal contract which would not allow cherry picking to take place.
    The problem is, that at the end of the day, the government owns large stakes in both SBS and SMRT. They are never going to consider renationalisation.

    • Monopoly without the threat of entry is always going to slack on innovation because of replacement effect. Go google replacement effect and monopoly and you will see why they have little incentives to innovate. A credible threat of entrance will make them innovate

  4. If it was on the basis of a performance based contract after competitive tendering, then you could see their licences being taken away if they don’t meet the standards, so that is a motive to innovate.However I discounted the monopoly option because firstly, there were possibilities for legal disputes, but more importantly, commuters would suffer for the time a slack company was in charge even if their contract could be taken away later. So the monopoly wasn’t my final solution, I advocated, much like you, freeing up the market and introducing more competitors with government regulations on routes and fares. If it is done properly, there wont be situations like we had when we had 11 independent bus operators.
    The same issue follows with liberalising the market. Since the government owns stakes in both SBS and SMRT, they wont want to see other operators cutting into the profits of their companies.

    • The threat of taking away license is never going to be sufficient to increase innovation. The companies would focus more on sla and other kpis but would submit the higher cost of maintaining a certain level of sla to PTC and pass the cost to consumers. Such is the problem of a regulated monopoly.

      However, in a fully competitive market, the threat of credible entrance that can come in at a cost lower than the monopoly would accelerate innovations to keep out competitors. This is in fact the textbook case study on value of innovation to firms. The highest value is to a monopoly facing a credible threat of entrance. These people have the greatest need to innovate. All the government have to do is to announce that they will open up the routes to all who can meet certain safety and sla to see existing players scrambling to increase efficiency and service offering.

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