Sunday 22 September 2013

When markets don't work

By Willie Cheng, Published The Straits Times, 21 Sep 2013

SINGAPORE’S certificate of entitlement (COE) system is, in many respects, a brilliant market-based mechanism to objectively determine vehicle ownership.

It is a world’s first in urban planning that has worked fairly well for 23 years. Certainly, without it, Singapore’s traffic flow and jams would be worse than they are.

Setting a quota for vehicle growth, and then getting prospective owners to bid for certificates to own them, has so far added some $50 billion in tax revenues as well.

However, the increasing angst over high COE prices and the current debate on “bringing fairness back to the COE system” reflects the rising revolt against the clinical application of market approaches in all situations.

Marketplace adjustments

SINGAPORE is a country that embraces free market economics and principles. And, as a consequence, we have done very well economically. However, even market purists recognise that the ideal of a free market needs to be tempered in order to achieve broader societal and national goals.

For example, prices of many commodities and essential services are adjusted directly by the Government in line with economic and social policies. They are adjusted higher (for example, taxes on alcohol, tobacco and cars) or lower (for example, subsidies in public health care, education and transport).

Of course, price adjustments are not restricted to the consumer market. In the labour market, foreign worker levies increase the cost to employers of using migrant workers, while Workfare decreases the cost of using low-income Singaporean workers.

Prices can also be indirectly adjusted by regulating the level of demand or supply. By making the national health insurance scheme, MediShield Life, compulsory for all Singaporeans, the Government is raising the insured base, thereby reducing the average cost of insurance to individuals (if all other features are kept equal).

The Government Land Sale programme is used to manage the supply and prices of land for housing and other developments.

Even the age-old market principle of caveat emptor (Latin for “let the buyer beware”) is modified in several situations. For example, under the Lemon Law which was enacted last year, businesses are obligated to provide consumers with replacements, refunds or price reductions for defective goods.

More recently, Singapore’s highest court upheld Dr Susan Lim’s conviction for overcharging, ruling that there is “an objective ethical limit” to medical fees, notwithstanding the patient’s willingness to pay.

Monopolies and social goods

ECONOMISTS and policymakers have long recognised two major areas where markets do not work well: monopolies and social goods.

A monopoly occurs when a single organisation dominates the supply of a particular good or service. This gives it tremendous pricing power at the expense of buyers. A monopoly need not be organisational; it can also be situational. For example, the price of what is normally readily available and cheap – think free Internet connections – can skyrocket on an airplane or on a cruise ship in the middle of the ocean.

It is only normal to expect every commercial company to strive for a monopoly position, if for no other reason than to be able to set high prices and thus maximise profits.

However, the paradox of free market economics is that while all firms “naturally” seek to become monopolists, the market works as intended only if none actually succeeds in doing so.

Towards this end, anti-trust laws and bodies are set up by governments to ensure that dominant players do not become overly dominant.

In Singapore, the Competition Commission seeks to protect consumers and businesses from anti-competitive practices. Since 2005, it has dealt with more than 160 cases.

Other industry-specific regulatory bodies also do their part in dealing with anti-competitive and monopoly situations.

Free markets also do not work well with social goods. These are goods and services that are usually provided by the state, largely because they serve the overall common good. Typically, these include defence, public infrastructure, basic health care, education, public housing and public transport. Social goods are often fully or partially funded by the Government rather than priced in a free market.

Every government draws the line between what is and what is not a social good at different places. Singapore, for example, has gone further than most countries in providing public housing to 82 per cent of the population. At the same time, pre-school education in Singapore is left in the hands of private operators.

If commercial monopolies are undesirable, and if social goods are generally best provided by the state, it follows that market failure could be greatest when social goods are provided by a commercial monopoly.

In the context of Singapore, three examples spring to mind.

Mass public transport

THE Mass Rapid Transit train system and buses are operated by two listed companies: SMRT Corp and SBS Transit.

Although the two companies were meant to compete with each other, each is effectively a monopoly where bus and train routes do not overlap. It is hard, for example, to see how the East-West Line (of SMRT Corp) competes with the North-East Line (of SBS Transit).

It is also difficult to see how a listed company, which must necessarily be focused on profits for its shareholders, would make fare concessions for the elderly, students and the disabled, as may be socially desirable if it did not have to.

The disconnect for commuters is that the two companies have been reporting profits despite the widely reported deteriorating service standards (overcrowding, rail breakdowns and delayed buses) in the last year.

Telecoms infrastructure

WHEN SingTel was privatised in 1993, it was allowed to retain the extensive telecoms infrastructure built up when it was a state enterprise. This included a well-established and largely underground access network consisting of manholes, ducts and cables (mainly copper pairs) which reach out to all homes and offices.

Effectively, this network reprsents a monopolistic position for SingTel because the construction of an alternate island-wide network would be cost-prohibitive.

Sure enough, access to SingTel’s ducts and manholes was the subject of a long-running dispute between SingTel and StarHub until it was settled in 2007.

In 2008, the Government decided to roll out the Next Generation Nationwide Broadband Network. The tender to build an open, high-quality fibre network was won by OpenNet, consisting of Singapore Press Holdings, SP Telecommunications, Axia NetMedia, and SingTel with a 30 per cent stake.

In turn, OpenNet subcontracted SingTel to physically roll out the network by making use of SingTel’s existing ducts and network.

Later, all four shareholders of OpenNet decided to sell the company to NetLink Trust, a wholly owned subsidiary of SingTel. The transaction is currently awaiting regulatory approval.

In the meantime, there are fears that the sale creates an unfair competitive advantage for SingTel, especially against the 20 other Internet service providers operating in Singapore.


GAMBLING is a unique type of social good in that it is one that governments frequently feel they have to take responsibility for providing or not providing citizens.

In Singapore, gambling is illegal except for the lottery, sports betting, horse racing and the two casinos. Leaving aside the question of whether casinos should have been introduced in the first place, a major difference between the casino operators and Singapore Pools (operator of the lottery and sports betting) and Singapore Turf Club (operator of horse racing) is that the latter two are state-owned entities, while the two casino operators are listed companies.

In less than four years since the two casinos were in operation, there have been more than 25 enforcement actions by the Casino Regulatory Authority for regulatory breaches by the casinos.

So far, the Government’s response in the above three examples has largely been to implement tighter regulations and enforcement actions. These may go some way towards managing the ill effects, but they are far from optimal. It would be addressing only the symptoms and squander resources for the continual policing needed.

The root cause is structural. As such, the long-term solution may well be to ensure that the ownership of the operating entities and assets lies with the state or the community (for example, through co-operatives). While this is easier said than done, formulating the issue in these terms could be part of the “new way forward” as the Prime Minister suggested in his National Day Rally speech.

The writer is a former managing partner at management and technology consulting firm Accenture. After a career in the market economy, he now sits on the boards of several non-profit and commercial organisations, including SPH, and is the author of Doing Good Well.

No comments:

Post a Comment