What's a reasonable rate of return?
IN THE light of past experience, the reported remarks by Transport Minister Lui Tuck Yew ("Bus fares may go up to help improve drivers' pay"; yesterday), which were echoed by the chairman of the Government Parliamentary Committee (GPC) for Transport Cedric Foo, were unsurprising.
What was left unexplained by them, and also left unsaid when fare increases were mooted previously, was what constituted a reasonable rate of return.
SMRT's net profit for financial year 2012 was $119.9 million, which gave a return of 12.88 per cent, on operating expenses of $930.6 million.
Would such a performance be considered a reasonable rate of return by the Government and the GPC?
To dispel the perception that operators are being mollycoddled, the Government should define the reasonable rates of return for them. Perhaps a benchmark could be determined by studying the performances of privatised public transport operators in other countries.
An adjustment in the expectation of what constitutes a reasonable rate of return would not necessarily affect the attractiveness of public transport operators' stocks as the heavily regulated profile of public transport here ensures a relatively low level of risk.
So, such firms will still be the darling of investors with lower risk appetites or those who prefer a balanced risk approach.
Chew Yong Jack