I refer to the 25 Feb 2017 Channel News Asia report “Raise water prices by as much as 100% to reflect production cost: Economist”.
Water price hasn’t increased for 19 years
Professor Ng Yew-Kwang said that water prices have not been raised since 2000 – nearly two decades ago. But the price of raw water bought from Malaysia has also remained at three cents per 1,000 gallons since 1961 and hasn’t been raised for 56 years already.
Why does Prof Ng begrudge 19 years without an increase in treated water price but forget that the government has been profiting for the past 56 years with no increase in raw water price from Malaysia?
Making 5 times over amount to cover shortfall
Prof Ng claimed that the cost of operating Singapore’s water system has more than doubled from S$0.5 billion in 2000 to S$1.3 billion in 2015. But according to PUB’s 2016 and 2011 annual reports, the revenue from operating Singapore’s water system has also more than doubled from S$0.55 billion in 2001 to S$1.2 billion in 2015.
The operating loss in 2015 is only about $69 million. If we divide $69 million by Singapore’s 2015 population of 5.535 million, we obtain $12.5 per person per year or roughly $1 per person per month.
So if the argument is simply to make up for increased costs, then approximately an extra $1 per person per month should suffice. However, the increase of 30% on an existing annual revenue of S$1.2 billion will amount to an extra $360 million per year or $360 / 5.535 = $65 per person per year or $5.4 per person per month.
The government will thus be collecting 5 times as much as is needed to cover the revenue shortfall. Hence, the argument that this is about cost recovery is not valid. It is not merely about cost recovery but making 5 times that amount of money instead.
Comparison with other cities
Prof Ng said that Singapore’s water price is not high compared to other Asian cities when income level is factored in whereas water prices in European cities are much higher than Singapore’s.
It is strange that Prof Ng factors in income when comparing with other Asian countries but does not factor in income when comparing with European cities. European cities having much higher wages than Singapore should also end up with water prices that aren’t as high with income factored in.
Should have increased 10 years ago?
Prof Ng said water prices should have been increased 10, 5 years ago. 10 years ago is 2007. But according to PUB’s 2016 annual report, PUB registered positive net income before grants in the years 2007, 2008 and 2009.
There is, therefore, no justification for water price to be increased 10 years ago in 2007.
Negative net income only started to occur since 2010 when our population was about 5 million. Since then, population growth has depleted our water supply, necessitating ever more expensive means of water production including desalination and NEWater. Of Singapore’s four water taps, these two are expensive. They are not the panacea they are touted to be to solve our water problems.
Thus, Prof Ng’s claim that on the basis of economics, water price should have increased many years ago is false.
It is because the government is unable to grow the economy without growing the population that we end up with the need to employ ever more expensive ways of producing water for ever more people.
Is the government’s inability an economic problem or a government problem?
From the table above, it can be seen that PUB’s net operating income has been quite healthy over the years. But net income before grants has been unhealthy since 2010. The difference is in borrowing costs or interest payments.
The following are the pertinent information to consider from PUB’s annual report 2016:
Looking at PUB’s balance sheets above, there has been an increase in short-term borrowings by $150 million ($250m – $100m) between the start and end of FY2015 while accumulated cash has increased.
Question is, why increase borrowings by $150 million when PUB has cash or cash equivalent of $780 million at the start of 2015?
More likely than not, interest from cash will be lower than interest from borrowings. In that case, PUB should not have increased short-term borrowings by $150 million but should have taken the funds from its existing cash pile.
In fact, it should have retired the entire $250 million short-term borrowings with the cash it has.
The table below shows various long-term bonds issued by PUB at various times.
As an example, on 12 July 2010, PUB issued a $400 million bond which forced PUB to pay 3.012 % interest to bond holders every year for the next twelve years.
But according to PUB’s 2011 financial report, PUB was sitting on a cash reserve of $400 million on 31 March 2010. Why didn’t PUB use the $400 million cash to pay for whatever that it needed to pay for be it in part or in full instead of issuing a $400 million bond and incurring 3.012 % interest in turn?
In fact, by the end of the fiscal year on 31 Mar 2011, PUB’s cash reserves swelled to $1,056 million. In other words, the $400 million bond issued in FY2010 did nothing but add to their cash reserves.
They were so good at generating cash then; it didn’t make sense for them to issue bonds.
It isn’t just the price of treated water that hasn’t increased for nearly two decades. The price of raw water from Malaysia hasn’t increased for more than five decades already. The proposed 30% increase is 5 times the amount needed to cover costs
The price of water in European cities is not as high as depicted by the government if high European wages are also factored in.
There is no reason to increase water price 10 years ago because 10 years ago, the government was making money, not losing money from supplying water.
This whole issue of water price increase essentially stemmed from over population which depleted our water supply and necessitated more expensive means of water production.
PUB’s net operating income is largely sound all this while except for the last two years. PUB’s negative net income before grants is largely due to high-interest payments due to the large volume of long-term bonds it has issued. At least some of these bonds issued appears to be unnecessary and could have been funded using the cash stockpile that it has.