To Be or Not To Be Private

SMRT SALARY REVIEW


It’s becoming a regular thing. Train delays, rails faults, rail cracks, signalling system issues.The Singapore Mass Rapid Transit (MRT) system is starting to show signs of ageing with aches and pains.

Since the major disruption in Dec 2011, the aches and pains are showing up more often, and many have blamed it on the lack of maintenance. Since then, nationalisation of public transportation has become a hot topic. The pursuit for profit has distracted SMRT Corporation, the older of the two rail operators, from its core job of providing transport, many say.

Better for Government to take back.

I recently read an article on The Economist published on 18 May 2013, on how Sweden invites private sector operators to run subsidised public hospitals[1]. The result: shorter waiting times, better service. Why? Because the financial model is structured such that if service improves and cost are contained, the private operator increase its profit. So the profit motive drives the provision of quality services.

The article on Sweden tossed up an interesting perspective. Profit does drive better service and it’s benefitting the people. But this also attracted political flak in Sweden, because private = profit = greedy = evil. Even though the results are better than if civil servants were to run the hospital. Quite the same dilemma we are in.

A moral question?

Privatisation of public services is not new, and Singaporeans have long lived with and even accepted the practice. For a long time, telecommunications services, which used to be provided by a Government statutory board called TAS, has been liberalised and privatised. Power supply too, has been liberalised and privatised. These are aligned to international practices in the developed world, and have been serving us well.

But when it comes to public transport, there are numerous calls for nationalisation, which is for civil servants to take over and run our MRT systems and buses. This in fact bucks the trend in many countries, including China, where private operators run public transport.

I don’t think we really believe SMRT could have done a better job if it’s part of civil service, but more because it doesn’t sound quite right to pursue profit out of an everyday necessity like transportation. The moral question on most people’s minds appears to be, “Should necessity services that people have little choice over, be privately run and profit oriented?”

The instinctive answer is “No”. The profit-driven private entity can never put public good and public interest first. After Lehman Brothers and all things written about the evils of capitalism, this is the natural public sentiment. But is it then right to go the reverse direction?

Pendulum swings in global ideologies

When the first MRT line was built in 1987, SMRT was established to operate it. In year 2000, SMRT was privatised, through a listing at the stock market. Singapore was not alone then – in the early years of the 21st century, UK too privatised the running of its underground rail system through a public-private-partnership (PPP). In fact, that was the period when all round the world, public services from telecommunications to public utilities were privatised.

Back in those days, just to set some context, the world is locked in Cold War, where superpowers were split into two distinct and opposing ideologies – communist/socialists led by the Soviet Union, and democratic/capitalists led by the United States.

Under the Soviet system, the Government is authoritarian and there are no elections for people to choose their Government. Consistent with that political philosophy is also an economic philosophy that everything is centrally planned by Government, and run nationally. Under the democratic system of the US, freedom is key. People choose their Government through elections. Aligned to that is an economic philosophy where people compete in a free market and earn the rewards
of success. Wherever Government can create space for the market, it will.

And then there was Thatcherism. Margaret Thatcher implemented privatisation of state-owned companies during her reign from 1979 to 1990. She took economic freedom even further. A key objective I believe was to give the masses ownership of national assets. Her idea was diagonally against the Cold War rival’s idea of communism. She was controversial but won 3 elections. Power back to the people. Doesn’t that sound like good democracy?… In those days, that was the popular ideal and this trend carried on into the early 2000s.

In Singapore, we followed the liberalisation trend in those days. We have SOTUS – share ownership top up scheme – to help the masses own shares in previously public assets like telecommunications, and public transport. The idea is to redistribute the country’s assets to the mass public, instead of being held in the hands of those in power. We have been careful not to allocate to only rich capitalists, but ensure that ordinary citizens buy these shares, through their CPF savings so that savings grow over time. It’s not a case of the poor paying for transport fares to a profit-making entity that sells shares only to rich people.

But today, the tide has turned, history forgotten, pendulum swings, and people yelling for democracy seem to want it in reverse. No more free-market, they want more socialism, more welfare. Many have condemned Thatchersim in the UK, and blamed it for today’s problems. Interestingly, UK underground rail gradually went back to the hands of a Government entity (Transport for London) after the private companies in the PPP arrangement failed.

In the last decade or so, people saw terrorism, the failures of capitalism, deadlocks of democracy, countries driven to their knees by the “free market”, and these have started to re-shape people’s thinking and ideological leanings.

The tale of SMRT

Ideologies aside, let’s look at the facts of the Singapore system. I took a closer look at SMRT, which is the more beleaguered of the 2 transport operators, to see whether privatisation worked for us.

The privatised system created a vehicle for revenue generation to fund the operations of public transportation. Instead of a cost-centre that drains national funds to run an essential service, SMRT is a business that generates its own income to run the trains and buses. As a private company, shareholders provide capital and cashflow for SMRT’s operations. If SMRT isn’t profit-making, citizen taxpayers will be paying for these operating costs. By making profits, SMRT relieved the state of cost-burden to run public transport, and created wealth that can be shared.

SMRT, according to its latest annual report, has over 52,000 shareholders as at 28 May 2012[2]. Who are these people?  Many are ordinary citizens. One of my older relatives is a shareholder. According to him, if you attend the SMRT AGM, it is full of ordinary Singaporean retirees, many presumably put their nest egg in SMRT. It was not a gathering of the elite class that lives in fancy condos or drive big
cars. They are the faces of people who built Singapore.

Is SMRT really driven by profit?

Based on simple calculation of its dividends over average share price of the year, dividend yield is slightly above 4%, meaning it is just slightly better than CPF Special Account. It does not promise a
windfall. Just a safe, stable investment that is better than CPF Special Account.

But ok, we say the dividend yield not excessive, but share price went up a lot. Below is a screen-grab of what I found on Bloomberg. In the last 5 years, at its peak, it managed to hit above $2 briefly, but for the most part, hovered at an average of $1.6 – $1.8. No windfall for the average investor. But if we have held the stock all the way from year 2000 when it was first listed, the share would have increased from $0.60 to $1.40 today – over 13 years wait. Excessive? Do people hold stocks that long?

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I did notice that $1bn(!!) has been distributed to shareholders, and one could ask, maybe that’s why fares have to go up and SMRT does not have enough money to do maintenance and so trains breakdown.

But I also noticed, even if SMRT don’t pay out any dividend, maintenance and capital investment cost are still high. I read in the papers that changing the wooden sleepers alone is $600mn. Installing
a new signalling system is like $400mn. New trains run into a couple of billions. Not paying dividends is not going to free up much funds for maintenance. Instead, we are probably just denying ordinary
Singaporean retiree the moderate 4+% return they are seeking.

While the masses pay fares, the masses can also own the profits that SMRT makes. The lower income gets transport vouchers. With diversification into retail business, SMRT also created jobs and
business opportunities for local entrepreneurs. Along the way we enjoy the convenience of shops, bubble tea stalls, Cheers, etc at train stations. People interact, connect, and ordinary transport nodes are now buzzy and alive. Sounds good to me.

Capitalism, private ownership of businesses etc, they are not by themselves wrong philosophies, and these motivate businesses and individuals to work hard, innovate, deliver good products and services. The key is to regulate the market so that we achieve what we desire to see as outcomes. And SMRT is under Government regulations to provide good transport services.

Before we get carried away …

Of course things are not perfect. The issue at hand really is, can SMRT continue to pay strong emphasis on delivering good public transportation, though it also runs retail? I don’t see why not, we
can all walk and chew gum at the same time (when not in Singapore). Perhaps the previous management did fall short in terms of train operations, but this new management seems determined to correct that, so much so that SMRT profit is now significantly squeezed.

Which brings me to the last thing I want to talk about – the new management and the new CEO. I must say the guy has been under quite a bit of fire, especially given that he was an ex-army general. It’s rather ironical that people are calling for SMRT to be nationalised, which means it will be run by public servant. And yet when a public servant resigned from service and became its CEO, he got criticised precisely for being a public servant before.

But our best hope, in my humble opinion, is to try and have the right people who can make accurate and sound business judgement for a company to stay on its mission and vision. Who cares if they were private, public, social or whatever sector before, so long they can improve the system? It is work-in-progress, whether we privatise or nationalise.

Well, in the SAF, they run fighter planes, navy ships, missiles, tanks, artillery, and any wrong move involves lives at stake. Every NDP we display that capability, much of it is related to engineering
and organizational management. If those capabilities can be transferred to run a more reliable train service that will always align to public interest, why not give him a chance?


[1] http://www.economist.com/news/business/21578020-sweden-leading-world-allowing-private-companies-run-public-institutions-hospital

[2]http://www.smrt.com.sg/Portals/0/PDFs/About%20SMRT/Investor%20Relations/Annual%20Report/2012_AR.pdf

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The Editor

Hello, I am the Editor of FiveStarsAndAMoon :)

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2 Comments

  • Very lengthy article ,but well worth the read. I don’t really know for sure what works, but whatever it is… I just hope SMRT will keep running. Properly.

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