Photo by @pohlim


SMRT is a failure of governance and not free markets

by Wesley Goh

Of recent times, Singapore’s Mass Rapid Transport system (SMRT) has been embroiled in successive failures in its train service and public faith has dwindled to the point where disruptions have been normalised into daily commutes. Flooded tunnels, the incompatibility of new trains and train systems were clear indications of SMRT’s callousness and neglect of infrastructural maintenance. A lamentable service wrought upon itself, most would surely think that this was a result of corporate greed and private self-interests. However, I would like to dissuade the public from such opinions and explain that its failures are the result of the government’s interventionist policies and the lack of free markets.

When the Land Transport Authority (LTA) announced in the middle of 2016, that it was conducting a hostile takeover of SMRT’s shares, shareholders of SMRT surprisingly voted strongly in favour of the buyout. It was further met with approval and consent from the public on the premise of belief that somehow a government takeover would miraculously solve all of SMRT’s problems. This event should have been an obvious indication to the general public that it will bloat the government’s current fiscal budgeting and contribute to the recent proposal to increase taxes. Yet, this strangely eluded everyone.

Lately, LTA’s announcement to use 10 million dollars of taxpayer funds to unclog SMRT’s decaying infrastructure was not well received and many took their displeasure to the comment boards of articles reporting on LTA’s move. Many were indignant that taxpayers are bearing the cost of SMRT’s neglect. A natural response, however, these arguments hold no credibility or weight as it is obvious that government ownership of SMRT meant that repairs have to come from taxes. It is what we pay taxes for.

At this point, some might say that this is the result of privatisation that fuelled corporate greed netting us SMRT’s current predicament and taxpayers would now have to pay for it in order to get some semblance of an efficient public transportation up again. A reasonable conjecture but SMRT’s failures are not apolitical but a failure of central planning and government policies.

Our government has always prided itself in its ability to provide an efficient, reliable and affordable public transport.  With one of the lowest taxes in the world and the government’s direction to suppress fares without encumbering the taxpayer on fare subsidies, this affordability came at a cost. A cost that is unsustainable and waiting for an implosion.

The management of the ‘affordable fare’ policy dictates that fares are regularly micromanaged to keep them artificially suppressed while somehow ensuring train operators can maintain operational and commercial viability, as quoted here from the Ministry of Transport’s webpage:

“Central to the fare formula is the principle that fares should be kept affordable while ensuring the commercial viability and sustainability of the public transport operators (PTOs). The formula protects the interests of commuters by capping the fare adjustment, rather than leaving it to the PTOs to decide what the market can bear. The Public Transport Council (PTC) will decide the quantum of fare adjustment during each fare review exercise.”

A centrally managed fare adjustment policy and a fare cap means that train operators are bottlenecked into an unfavourable position where they are unable to make any meaningful profits removing any incentives to innovate while being enforced to provide and maintain an efficient public transport. This essentially shifted trains from being SMRT’s primary asset to becoming its biggest liability, translating it from a train business into a shopping business.

To address the success of SMRT’s former years using elementary textbook economics, a binding price ceiling may not have impacted its efficiency when fares were at market clearing rates but large deadweight losses have begun to cumulate as time progressed and the formula fails to upkeep and account for a multitude of factors that could only be foreseen by entities with perfect information or environments with symmetric information.

The government’s ambitious attempt at keeping public transportation efficient, reliable and affordable brought us SMRT’s current day predicament. Like many other things, there are always trade-offs. If fares are to be artificially suppressed, while transportation is expected to be kept efficient, costs have to be borne by the taxpayer. It is unreasonable and unsustainable to expect that fares can be kept low and efficiency to stay consistent.

Even when LTA restores efficiency several years down the road, public transportation will forever be under its true potential if it were under a free market economy. A centrally planned public transportation will always be subject to political pressure and political self-interests to be built in areas where it is cost inefficient, unprofitable and costly to the taxpayer. This was also openly admitted by transport minister Khaw Boon Wan on stating issues of the Light Rail Transit (LRT).

Expectations and proposals

Since consent was given for LTA’s takeover, discussions on the dissatisfaction on the use of taxpayer funds is now irrelevant because those issues should have been raised at the time of LTA’s takeover discussion. The public should expect that some semblance of efficiency will be restored but at a slow and inefficient pace like all centrally planned projects are. Taxes will inevitability be raised to budget for increased costs to maintain and operate the trains over the years. Trains to remain below the standards of international competitors unless tax funding increases.

In order for Singapore to model other centrally planned public transportation systems that have shown reliability and efficiency like those in Hong Kong or South Korea, it has to come at the cost of increased tax funding. The Singapore government could further increase taxes on vehicle ownership and adjust the supply of Certificate of Entitlements (COE) prices and channel those funds directly into the public transportation subsidies so that those who are willing and able to afford the luxury of personal transport are paying for those who are taking the public transportation, achieving some sort of Pareto efficiency and mutual trade-off.

However, like all public welfare systems, funds from increased vehicle taxes and COE prices will eventually be insufficient to sustain fare subsidies in the long run and taxpayer funds will have to be tapped. A bleak proposal at best, but a necessary consideration for the Singapore government if some level of international standard of public transportation is desired.

The utopic proposal would be the complete removal of fare caps, barriers to entry and the facilitation of free markets in Singapore’s rail system. When public transportation stops being a public good, free market forces can efficiently allocate capital goods according to the most valuable consumption wants. Competition spurs multiple profit seeking entrepreneurs to innovate in order to seek out new methods for growth and profit opportunities, so as to stay ahead of its’ competitors. This is known as ‘creative destruction’, in which new products and services are constantly being introduced making old ones obsolete. This is most notably seen the smartphone market and also why Japan continues to be the leader in its transportation industry.   Although this would result in higher fares, facilitation of free markets will undoubtedly result in a fast, efficient and reliable public transportation and we can be ensured that corporations running these lines are held with a high level of accountability to the public when service failures occur as they could easily be ousted by market demands.

This utopia is still a widely unpopular opinion since people dislike unpleasant truths and would prefer seeking surface-level ideas and solutions without looking into the larger repercussions that arise from it in the long term. Singapore is far from achieving free markets in its transportation industry, but if enough people understand the economics behind it, then there might be a glimmer of hope that Singapore’s public transportation could someday transcend that of the Japanese transportation industry.

Sources:

Lim, A 2017, ‘Bukit Panjang LRT built as an 'after-thought' and because of political pressure: Khaw Boon Wan’ 

Ministry of Transport, 2017, How we are keeping public transport fares affordable 

This entry was posted in Opinion.
This entry was posted in Opinion.