SMRT Corporation’s Fares & Profits

Bus fares rose last December 2019.  And there are plans to increase train fares towards the end of the year.  Understandably, people are upset, but it is important to have a sense of perspective, and look at some numbers.

Public transportation, as an industry, is generally unprofitable.  This explains why there is so little investment in it all over the world, since the municipal, or state authorities end up subsidising them.  Whilst it can be argued that there are economic, and other benefits, to be extracted, it is unlike bureaucrats and populist politicians to see those benefits since they are hardly immediate.  This also explains why there are virtually no listed companies whose core business is public transportation.  The Singapore model is the exception.

Singapore Mass Rapid Transit Corporation, SMRT, is ridiculously profitable.  Up to 2013, its profit after tax was just over 18%.  Due to mismanagement of maintenance by the previous regime, this has dropped in the intervening years to an after-tax loss of $86 million in FY2018.  In the years 2010 and before, the profit margin was even higher.  We must understand that the market did not change - they are part of a public transport duopoly with Comfort Delgro Group.  Their loss was entirely self-inflicted.

However, despite this, SMRT has always complained to the Public Transport Council, and elsewhere, that its business model is unsustainable, and that fares need to be increased.  This is despite the fact that the Singapore government effectively subsidises SMRT.  For example, in December 2017, the 5-year Bus Service Enhancement Programme effectively gifted buses to the duopoly.  The Singapore government also undertakes the cost of building the infrastructure for the tunnels, new lines, and supporting infrastructure for SMRT trains.  This is taxpayer money subsidising a profit centre to the tune of hundreds of billions of dollars.

If we were to consider the amounts used to subsidise SMRT as a loan, at prevailing market rates of between 4% to 5%, over a period of a decade, like many corporate papers, SMRT would be looking at paying between $140 million to $150 million, to service that loan.  When we contrast that with the declared profit after tax for the last decade, it starkly shows how SMRT’s profits are really subsidised by taxpayers.  Coming back to the funds paid out for infrastructure development, we have no real idea the true scale of the subsidy, but an educated guess would make it over 100% of the profits.

I agree that making SMRT into a profit centre promotes efficiency, but that should not be at the expense of the taxpayers, where that pursuit of executive bonuses means seeking ever higher profits.  This has been seen in two ways.  The first is that profits generated are outsized, and yet, there is this pressure to continually increase prices.  Prices should not be increased when declared profits, except for the last year, are in double digits.  The second, is in the measures to cut costs which lead to the series of breakdowns.  This is obvious mismanagement, and short-termism, and the people truly responsible have not been seen to be taken to account.  There is no announcement of heads rolling, and bonuses clawed back.  This engenders some scepticism of their management standards.

In summary, I am not convinced that SMRT, and by extension, the public transport companies under Temasek Holdings’ stable, have a good enough reason to ask for fare increases.  They are not justified when we, in effect, have subsidised their growth.  We want something in return, and there should be more dialogue on the matter.