Sunday 9 December 2012

Shifting gears on bus fare formula?

By Christopher Tan, The Straits Times, 8 Dec 2012

BY INDICATING that bus fares could go up from next year to help bolster the salaries of bus drivers, Transport Minister Lui Tuck Yew has hinted at a fundamental shift in our public transport fare review policy.

For a good part of the past two decades, bus and train fares were adjusted according to macro-economic conditions, so as to encourage operators to be efficient and not simply pass cost increases on to the commuter.

In the current formula, fare changes are pegged to the previous year's inflation rate (measured by the consumer price index), national average wage increase, and a component that allows commuters to share in the productivity of operators.

It has worked pretty well, but its main drawback is its one-year time lag. For instance, if inflation and wage changes were acute the previous year, and the country is slipping into a slowdown in the current year, a fare rise based on the previous year's numbers would not go down well.

In fact, because of that, operators have often been denied the actual percentage increase allowed by the formula. And if a formula is not followed closely, what is the point of having one?

Perhaps a fundamental shift is timely - what more with the turbulent events in recent weeks. A committee headed by former judge Richard Magnus has been working on a new formula since last year.

It is expected to present its findings early next year, but Mr Magnus has dropped a number of clues in his blog, suggesting that fare changes might be more closely pegged to changes in operating costs in the future.

"It may be necessary to adjust the components of the fare formula to better reflect changes in the industry cost structure since the last review," he wrote in one of his entries. "For example, there may be grounds to include an energy/fuel component inside the fare formula."

Whatever new formula the committee is working towards, it will hopefully not overly burden the commuter. As Mr Magnus made clear from the onset, ensuring fares are affordable remains a top objective.
Transport operators have also hinted to the investor community that changes may be afoot that might help the bus operations become more viable in the long run.

SMRT's newly minted chief executive Desmond Kuek, at the company's interim financial results briefing in October, indicated the probability of "government intervention" that will bolster the sustainability of the bus business.

Indeed, the first sign of this might have been an announcement by the Land Transport Authority last month that it would soon be calling a tender, open to private bus operators, for a service between Jurong West and the city.

The model is similar to how bus services are farmed out in countries such as Britain and Australia. An operator secures the right to serve a route (or routes) with a competitive bid. The government gets to keep fare revenue.

Transport operators favour this model, as it removes much uncertainty from their operations, and they can focus on the service standards spelt out in the tender. The Singapore Government, however, has been averse to this model, as it dislikes taking revenue risk.

But it looks like it is dipping its toe into the water. If this model is adopted, it will effectively delink fares from operating costs. It will, however, call for more direct government subsidies.

The danger here is that operators might become less cost-efficient, knowing that cost increases can well be absorbed by higher subsidies.

Indeed, that has been the case in countries with such a system. Critics have, for instance, described the London public transport system as one built on subsidies and inefficiency. In 2000, the city's annual bus subsidy was £24 million. It is now £393 million (S$775 million).

Singapore can well afford subsidising bus operations, of course. But there is a line between being able to afford something and spending tax revenue wisely.

In fact, Singapore has long believed that market efficiency and the profit motive will ensure public transport operators remain lean and mean while meeting commuter needs.

But in reality, it is never easy serving two masters. Recent events have shown that SMRT might have focused too much on shareholder returns, at some expense to commuter interest.

So, what is the better system?

Nationalising public transport? Workable, but the probability of inefficiency is unpredictable. If the example of Britain in the pre-Thatcher years is anything to go by, it can go horribly wrong.

IT professional Nilesh Sahita, 47, has an interesting suggestion: Merge the two public transport operators into one entity, restructure them as a business trust with a strong mandate to provide essential public service, and let Singaporeans be shareholders in the trust.

You get the efficiency of a privately run business, the social responsibility of a public entity, and the profit-sharing element of listed companies - all rolled into one.

The tricky bit in that is that you will still need to have a strong regulatory regime. In fact, a strong regulator is needed in almost every model. And that needs beefing up here - something made quite clear by the Committee of Inquiry into the December 2011 MRT breakdowns.

All said and done, it is just too simplistic to conclude that better bus driver salaries equate higher fares. Fares are just part of the equation. Drivers' job satisfaction, for one thing, certainly does not hinge on pay alone. And service standards depend somewhat on how happy the drivers are.

Also, we should bear in mind that while bus operations may not be very profitable, public transport companies on the whole offer investors decent yield. So we should not measure the profitability of any one business in isolation.

We should view them holistically as a mix of rail, bus and commercial operations. In the case of SBS Transit, perhaps Singapore taxi operations should be included in its mix (as it is so with SMRT).

That way, it will be quite clear that the two companies are still eminently viable and robust.


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