Spare the rod and spoil the child – LTA and the recent MRT breakdown

yew tee mrt stationIt has been two weeks since the most severe MRT breakdown in Singapore’s rail history. A total of 55 stations in the North-South and East-West line were affected during peak period, leaving hundreds of thousands of commuters stranded and facing difficulties in getting home.

Due to the fact that SMRT is a publicly listed company, it has received additional attention from the investment community. OCBC Investment Research has warned that a hefty fine might do more harm than good to the root of the country’s rail system. Technically, that is correct, as the fines would lead to a reduction in SMRT profits, and hence, provide them with less resource to improve rail service.

In our opinion, the Land Transport Authority (LTA) has to start playing the role of the “stringent parent”. By default, that makes SMRT the “problematic child”. The phrase, “spare the rod and spoil the child” comes to mind.

Before going into what we think LTA should do, let us take a look at some statistics and ask ourselves some relevant questions first.

1. Should Desmond Kuek – SMRT CEO – be paid so much?

Let’s look at this objectively.

Desmond Kuek was paid in the range of SG$1.75 mil to SG$2 mil and SG$2.25 mil to SG$2.5 mil for FY2014 and FY2015 respectively.

In FY2014 and FY2015, 48% and 61% of his total wage were due to variable or performance related income/bonus respectively.

Exhibit 1: ROA & ROE of SMRT (in millions)

Exhibit 1

Source: SMRT Annual Report – FY2014 & FY 2015

From a corporate’s standpoint, SMRT made a 47% increase in year-on-year net profit, increased its ROA (return on assets) by 1% and ROE (return on equity) by 3.1%. This is a good effort.

Since Desmond Kuek’s remuneration is likely to be pegged to the financial performance of the company, similar to salaries of CEOs in most companies, it should come as no surprise that higher profits for the company translates into a higher salary for its CEO.

From a social standpoint, the question to ask is whether his salary should be pegged to some other non-financial related performance of the company, assuming it is currently not. Would that help improve things?

2. Are LTA’s fines sufficient?

Let us take a look at a published investigation findings on rail incidents by LTA.

Exhibit 2: Investigation Findings on Rail Incidents

Exhibit 2

Source: Land Transport Authority (Updated: 6th July 2015)

33,000 passengers were affected by the two-hour disruption on 23rd September 2014. SMRT was fined SG$210,000.

The fine seems to be insufficient for a few reasons.

  1. Net profits in FY 2015 was SG$90,454,000. This meant that the fine of SG$210,000 is only 0.23% of its total net profit.
  2. Using simple maths, even if we were to pay every one of these 33,000 commuters $5 per hour for the inconvenience they have suffered, the fine should still be at least SG$330,000.

The simple answer is no, we don’t think LTA fines were sufficient.

3. How can LTA play the role of a stringent parent?

Referring to Exhibit 3, the reliance on public transport has been unprecedented, with a large bulk of our population relying on the MRT for day-to-day commute.

Exhibit 3: Public Transport Ridership

Exhibit 3

Source: Land Transport Authority

SMRT has an experience board of directors to help ensure that it is a profitable company with sound operations. LTA does not need to be worried about the financial sustainability of SMRT (SMRT has retained earnings of $681 million). They should let the board and senior management of SMRT worry about these financial matters.

Rather, what LTA should be worried about is what they can do to deter transport operators, be it SMRT or other players, from further lapses. If that can be done most effectively through hitting their bottomline, so be it. That’s the role of a stringent parent.

For your information, the maximum fine for every rail disruption is 10% of an operator’s annual fare revenue for the relevant rail line. Taking an illustration elsewhere, BP paid a record US$18.7 billion to the US government for their oil spill over the Gulf of Mexico in 2010.

4. Has the rail system improved since 2011?

The good news is that the rail system has improved in terms of numbers of service delay between 2011 and 2014. The bad news is that performances have deteriorated in the first quarter of 2015.

Exhibit 4: Service Delays on MRT net work from 2011 to 1Q2015

Exhibit 4

Source: Land Transport Authority (Updated: 25th June 2015)

The first part of Exhibit 4 shows that there were already 5 service delays greater than 30 minutes as of 1Q2015, compared to a total of 8 for the entire year in 2014. Add that to what has happened lately, and you can see why we are not too optimistic about what is happening.

Conclusion

A hefty fine would make rail operators, who are monopolies in their respective operating lines, consider directing a lot more resources into the upkeep of the rail infrastructure. This would better serve both Singaporeans via greater reliability, and SMRT via fewer big fines in the long run.

This article was first published at DollarsAndSense.sg. DollarsAndSense.sg is a website that aims to provide interesting, bite-sized financial articles which is relevant to the average Singaporean.