We Subsidise Our Own SMRT Fares

From a certain perspective, Singapore is a command economy masquerading as a capitalist one.  Considering the vulnerability of the economy to international tensions and trade disputes, it is a logical course of action.  The contention here is that we have been privatising profits and socialising losses.

We can, however, observe that the establishment views this as a necessary evil, and have only done so when absolutely necessary.  An example of this cut back would be the government’s declining to bail out Hyflux, which is absolutely correct.  Hyflux grew out of reckless optimism, and less than optimum management of debt and leverage.

Still, we have seen this in companies linked to Temasek Holdings.  I have spoken about Olam in a separate post, so I will not go over it again.  Another example would be SMRT.  We should note, just like the case of SingTel, and similar companies and state assets treated as capital injection into the SWFs, the capital for SMRT was subsidised by the government, and by extension, the taxpayer.  We say this because it is a fact that the entire tunnel network, the rail network, the cost of the stations, the depreciating assets that are the taxis, buses and trains, the supporting infrastructure – they are all paid for by the government.

This is not necessarily bad.  It ensures that there is an overarching central planning which efficiently maximises the use of scarce resources, such as land, and optimises property and fixed assets.  This also lowers costs tremendously, and those savings are passed on to the consumer.  There is a reason why our transportation costs are very low.  We subsidise it ourselves.

What it does do, however, is skew the numbers in the financial statement, and the company portfolio, making their management look better than they really are.  Until we had the recent breakdowns, due to systematic cost-cutting in maintenance and procurement, at the expense of future performance, the government could parachute any general, who would then set up a management team of his background, and it would work.  Being a senior military officer does not make one a better manager because management in an extreme hierarchical environment is significantly different from management in a corporate environment.  And they have been found wanting.

For example, in 2015, SMRT recorded a net profit of $91 million.  In 2016, it jumped to $109 million.  In 2017, it plunged to $26 million.  Last year, it was a loss of $86 million.  This is because all those years of cutting cost on maintenance and replacement with inferior parts caught up with that.  That is what happens when we have a management system where people do their “National Service”, and need to look good for the term, and then pass the buck to the next person.  One of the reasons mentioned in 2017 is that fare increases did not keep up with maintenance costs.  This is only part of the story.  These maintenance costs are compounded from short-termism of previous years.

Regardless, we can also posit that the massive profits of previous years were in part due to the subsidised capital injection by the government funding the infrastructure.  Were we to consider the cost of this, they are not performing spectacularly.  They are able to declare these impressive profits because there is no cost booked in the acquisition of the network.  People can disregard it if we get a return in terms of a world class system that runs on time.  That the executives cannot even keep the trains running without breakdowns is a management failure despite a huge subsidy.  They do not even have competition to contend with, being a state monopoly.

This comes to the second point.  When SMRT profits, I do not see fare subsidies, since it is a profit centre.  But when there are losses, as there is now, we have fare increases spoken of.  The profits are extracted by shareholders, and are bonuses for the executives.  The losses are our problem.  This needs to be addressed, and the relationship made more equitable.