This Is Why SMRT and SBS Are On SGX

 

When it comes to public transport, the common SMRT’s complaint of most Singaporeans (apart from the frequent service disruptions) are the listings of SMRT and SBS on the Singapore stock exchange. Why is a public transport operator out to make profits from the people? We explore the issue.

Updated 8 July 2015

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Mention the words SMRT, SBS Transit, and profits in the same sentence and you’ll be assured of getting a heated response from any man or woman on the street. Public transport is an emotive issue in Singapore because a large majority of the population use it to get around the island. Therefore, issues of reliability, maintenance, fare hikes and the like are bound to elicit an emotional response, and usually the response is one of disdain and anger.

The anger is understandable. When you’re literally crushed between the backpack in front of you and the dank smell of someone who hasn’t seen the inside of a shower in weeks at the Jurong East MRT station, you’re definitely allowed to mentally wave your fists furiously at the public transport powers that be. Not to mention the frequent train breakdowns that have been happening in the past couple of years, with the most recent one just this Tuesday, when train services on both the North-South and East-West lines were down for more than two hours during evening rush hour.

With such terrible service, you demand angrily, why are our public transport operators allowed to raise public transport fares every year, especially during a time when oil prices are at historically low levels?

We discussed the relationship between oil prices and public transport fare hikes in a previous article but in a nutshell, oil prices, together with diesel and electricity costs, make up 20 percent of the fare formula that the Public Transport Council uses. Also, when the council members convened to discuss the fare increase, they were using the full-year oil prices for 2013, not 2014 or 2015 figures.

Raising Funds by Listing Yourselves

However, one thing still bugged us – SMRT and SBS being listed on the Singapore Exchange. Prior to the maintenance and breakdown issues as well as the fare hikes, their listing was never a thorn in the public’s side. After all, when everything is going well, everyone will be happy.

But hell hath no fury like Singaporeans experiencing train breakdowns (and multiple ones at that). When a multitude of problems started cropping up, everyone started questioning why companies serving the public are trying to making profits instead of just breaking even. SMRT and SBS found themselves having to balance the needs of the shareholders, who will push for higher profits and dividends, and the needs of the public, who are hoping that fares remain cheap and affordable. Let’s face it, these are two parties that impossible to please at the same time – if one is happy, the other usually is not, since their objectives and goals are on opposite ends of the spectrum.

The reasoning for the listing of the two public transport operators on the SGX actually made a lot of sense at that point in time. Simply put, SMRT and SBS needed to raise a lot of funds within a short period of time to purchase trains and buses. These vehicles don’t come cheap – a single train comes up to tens of millions of Singapore dollars while one bus usually costs in the region of S$300,000 to s$500,000. At that time, the Singapore government didn’t want to take on the massive financial risk of fully subsidising these purchases. Therefore, the only way SMRT and SBS could quickly raise funds and bring the public transport infrastructure up to speed was to offer shares to the market. In return, the two public transport operators would be allowed to collect bus and train fares to pay dividends to their shareholders and recoup their huge investment.

As the years went by, the government folks operating the public transport system and the two operators shifted from a model of building ahead of anticipated demand, which incurs huge upfront costs, to one of building tracks and purchasing assets (buses and trains) just when demand starts to pick up. Unfortunately, as everyone squeezed onto the platform of the Jurong East MRT station knows, the latter method was an abject failure. The population experienced a meteoric rise but the public transport infrastructure was unable to keep up, leading to the problems that everyone is facing today.

Switching Tracks

To the government’s credit, they’re attempting to resolve this eternal conflict between the SMRT and SBS shareholders and the public by taking it out of the equation.

How?

By moving from a fully privatised public transport model to one revolving around government contracts and a tender process. All future public transport assets such as buses and trains will be under the government instead of the public transport operators, and all fares collected will go into the government coffers instead of the pockets of SMRT and SBS.

Now, SMRT, SBS and any other public transport operator who wants to move people from one place to another will have to duke it out in the bidding process. We feel that it’s a great step in the right direction because it introduces more actual competition into the system instead of the faux competition we have now and it gives a better picture of how much it actually costs to operate a public transport system. The age-old question (are SMRT and SBS efficient public transport operators?) will finally be answered.

The future public transport system will function just like the pitching model in the creative industries. A company calls for a bid for a project that it’s planning to launch and invites agencies to pitch for it. Different agencies come forward with their idea and the amount they need to pull it off.

Similarly, SMRT, SBS and any other players will pitch for the different public transport packages with the amount that they think they need to run the system while allowing for a bit of profitability.

As for the fate of the current assets that are under SMRT and SBS, there are two ways the government can go about managing them – either leasing them from the two companies or purchasing them outright.

What do these changes mean for stockholders? Instead of SMRT’s and SBS’s share price being dependent on fare hikes and other revenue, it will instead be tied to the level of productivity and efficiency these two companies can achieve.

What about the people who take public transport daily? All signs point to a better and more efficient public transport system, a system we can all be proud of and call our own.