The $1.1 billion bus question

Why use public funds to subsidise the two profitable publicly listed bus companies.? As public debate rages, experts query network efficiency and operators’ obligations   This story was first published in The Straits Times on Feb 26, 2012

The Government’s surprise $1.1 billion injection to help bus operators ramp up capacity over the next five years was intended to be a bold “put your money where your mouth is” step to tackle transport woes.

Since it would take time to build up the rail network, one way to relieve daily congestion in public transport would be to add more buses, said Deputy Prime Minister Tharman Shanmugaratnam in his Feb17 Budget statement. Also, 60 per cent of all passenger trips are made on buses.

The Government will provide funding for 550 buses while the two operators – SBS Transit and SMRT – will add another 250 buses. These 800 buses will mean a 20per cent increase to the current fleet. The Government will set aside $1.1 billion for both the purchase of buses and the running costs for 10 years.

But this move has sparked a lively public debate, with many asking why public funds should be used to subsidise the two profitable publicly listed companies. A crop of letters to the press took up this issue in recent days, as did Internet chatter and reactions posted on the Government’s feedback unit, Reach.

Regular commuter Tristan Yeo found it “puzzling” that the Government needed to do this when these firms have bought their own buses all along with profits earned from fare revenue and related businesses such as advertising and rental.

Transport researcher Lee Der Horng, of the National University of Singapore, said: “We do need more buses to cater to the increasing demand. However, I think the public will have concerns regarding why taxpayers’ money is being used to help profitable and private operators.” He added: “The Government really should configure a transparent and stricter regulatory framework to specify the obligations and responsibilities of the operators.”

SBS Transit, which runs three- quarters of the 4,000 public buses in Singapore, incurred an operating loss of $6million on its bus business last year, down from a profit of $14.9million in 2010. But the company still made $36.7million overall, via revenues from its other businesses, such as rail and advertising.

SMRT made $68.9million during its first half ended Sept30, 2011, even though its bus operations incurred an operating loss of $6.2 million. In SMRT’s case, its bus business has usually been loss-incurring.

Pointing to how the overall business portfolios of SBS Transit and SMRT Corp are profitable, Mr Zafar Momin, who teaches strategy implementation at the Nanyang Business School, asked: “Can they not continue to cross-subsidise their bus operations until they figure out a more efficient operating model for buses?”

He added: “They cannot expect to make high returns on every line of business.”

Hybrid systems

Bus systems in many cities – such as London, Stockholm, Copenhagen, Adelaide and Perth – are “hybrid” systems, pointed out Assistant Professor Paul Barter, who teaches transport policy at the Lee Kuan Yew School of Public Policy.

They are operated by listed private-sector companies which receive substantial government subsidies. In countries such as Australia and Britain, the government buys the buses and pays for all or a large part of the operating costs.

It carves up routes into parcels and puts them up for tender. Successful bidders run the services, and are paid a fixed basic fee. They are paid bonuses if they meet set key performance indicators, and are penalised if they fail.

The Singapore Government’s latest move, albeit meant as a “one-time” measure, might signal a shift towards such a “hybrid” model, said some observers.

But Prof Barter added: “If there are going to be subsidies, then we need strict government oversight to make sure we get the service improvements we pay for and that the extra money does not just boost dividends or stock prices.”

The ongoing debate gets to the heart of just how transport systems – both rail and bus operations – should be financed.

For rail, the practice in Singapore has been for the state to build the infrastructure and supply the first set of operating assets. Since the first MRT line was built more than 20 years ago, and including new lines that will roll out by 2020, the Government has committed some $70 billion. (This figure does not factor in the present value of this money.)

Going forward, the rail financing regime will change to one where the Government continues to build the infrastructure but leases operating assets to the operators.

For buses, the practice has been to give out indirect subsidies.

The two bus operators have not needed to bid for Certificates of Entitlement, which practically all other vehicle buyers must secure. They have also recently been given waiver of the Additional Registration Fee, the main vehicle tax, and duty on diesel, which until a few years ago was dutiable.

Moreover, their buses are allowed to be kept on the road for 20 years, twice that of almost all other vehicles; and they are charged a nominal rent for the space their interchanges take up. Taxpayers also pay for bus stops and interchanges.

To be sure, government financial support for public good is common in a number of other sectors, including health care, public housing and education. Interestingly, in the case of rail, the state makes back what it spends on its infrastructural investment through land sales around MRT stations. These plots fetch higher prices than elsewhere. This does not happen with its bus investments.

The move announced on Feb 17 marks a significant change. But this does not necessarily mean the current system is broken, as some observers seem to have suggested. It is, however, a quick fix for the transport crunch. Singapore’s population explosion in the last five years or so – mainly from new residents – has put a huge strain on the public transport system.

Ramping up bus capacity can be done much faster than raising rail capacity. Each new MRT line takes about seven years to build. It is this urgency that has motivated the $1.1billion subsidy package.

Academics and industry experts have posed other questions. Veteran transport consultant Bruno Wildermuth says Singapore does not really need more buses, but “better utilisation” of buses. “There are many empty buses moving around because of the lack of a rational network,” he said.

Mr Zafar asked: “Are our bus operations run as well and as creatively as possible? Over the years, despite many fare increases, how have cost efficiencies improved?”

Whichever way forward, observers say that subsidising bus operations – even if it is a one-off measure – must be executed well so that all the mechanics of the scheme are transparent to the public and the result a positive one for commuters.

Associate Professor Anthony Chin, who specialises in transport economics at the National University of Singapore, says more needs to be done to explain the rationale for the Government’s latest move on buses. “They must manage this well. It’s a question of handling the public’s perception of fairness.”

This story was first published in The Straits Times on Feb 26, 2012