HDB flats: Public housing left to private market forces. SBS: Private company funded by public funds

Competition

I mentioned earlier that the McKinsey study also mentioned the term perfect competition as one of the key to improve productivity. The fundamental idea is also simple. Under a perfect competition environment, companies are forced to outdo one another to survive. Inefficient and ineffective companies are naturally displaced by stronger opponents who could generate more output at the same or even lower input. A stronger company would also most likely mean a more productive company. More importantly, consumers get to enjoy a better quality and/or lower cost product. In essence, a competitive environment is important for productivity to thrive.

Singapore has been a great place to do business. There are many rules and regulations that build a strong system that allows businesses to compete freely. Yet, we see that such regulations are selectively applied. One industry stands out in terms of controversy and complexity when we tried to apply the word competition–None other than the transportation sector.

Many Singaporeans, including myself, were peeved when we were told that the government is co-funding $1.1 billion to help so called privatized bus companies procure buses. Many questioned the reason for the government to use public funds to assist private companies. While the intention is good, to improve the current crunch on public transport, it is not unreasonable to question whether such direct assistance is appropriate.

By co-funding, it is akin to a direct transfer of $1.1 billion worth of assets (to be depreciated over many years) to SBS/ SMRT. These are valuable resources that can generate a lot more income for ComfortDelgro and SMRT. For people who are unaware, SBS is mostly owned by ComfortDelgro, and the majority shareholder of both ComfortDelgro and SMRT happens to be Temasek Holdings. If the government insists that it is best to let the companies go private and operate in a free market, why did the government decided to interfere?

Public funds go into private companies to generate more income for shareholders. The balance sheet of the transport companies got a boost and in time to come, the assets will generate more income to the profit and loss statements. Shareholders (including the government) of the transportation companies rejoiced. In the meantime, the commoners down the street did not reap any benefit from this capital injection. One can argue that the people benefit from lower waiting time for buses. However, there is also the possibility of slower traveling buses since the roads are already so congested. Simply adding more buses onto the road do not seem like the wisest move I would expect from the legion of scholars within the Civil Service.  The opportunity cost of such a huge amount of money is almost limitless.

In my opinion, the government should loan out the $1.1 billion instead of simply giving it away. After all, we are talking about healthy privatized transportation companies. From the media release by ComfortDelgro, full year revenue in 2011 increased by 6.4% to reach $3.41 billion, and net profit increased by 3.1% to $235.6 million. The Singapore taxi operations increased 7.6% to $748.7 million due to higher rental income from a larger fleet and increase in new replacement taxis. Bus revenue also increased 3.1% to $566.1 million as average daily ridership grew by 6%.

All these figures are respectable numbers. As such, I don’t see the rational to give these privatized companies such a huge amount of money for free. With more bus comes greater operating cost. Will the transport companies then again cite operating cost increase to justify their fee hike? If the money is to be loaned to the companies with interest, the returns from the loan can be put to better use that benefit the general public.

It seems that a government backed monopolistic position of SBS and SMRT has left the companies inefficient, inflexible and ineffective. Many people quoted Hong Kong and Taiwan, where the public transportation system seems to function better and smoother than Singapore even though the fares are lower despite the fact that the companies are nationalized (and they survive). With the government supporting these companies as the largest shareholder and even allow capital transfer easily from the country’s treasury, it is not difficult to see why our transportation companies had ballooned into a rigid, lurid semi-government agency that only serves the interest of the selected few. While the Worker’s Party Yaw Shin Leong incident was shamelessly trumpeted on local media in recent times, the media seems to be pretty quiet on this blatant transfer of public funds from one pocket to another, which to me is a more serious issue.

Government-linked companies like Singapore Airlines, Changi Airport and Keppel Corporations continue to do well amid intense competition from foreign companies, suggesting that free competition is good and government intervention is not required. The issue is straightforward. If the government wants to intervene with public funds, SBS and SMRT should be nationalized. If the companies remain as private entities, public funds should not be used.