No incentive for best service quality

The announcement by the Land Transport Authority (LTA) of a new rail financing framework is definitely a step in the right direction, but may not be going far enough ("LTA to take over rail assets in move to improve service"; last Saturday).

Privatising a public service may not always lead to the desired result of better service quality.

The most successful privatisation effort thus far has been that of Singapore's telecommunications services. Consumers have benefited from better quality service and more competitive pricing.

But why have the same benefits not been enjoyed by consumers in the transport sector, in particular the MRT service? This is because there is a lack of competition.

Unlike the telecoms service sector which has several operators competing to deliver the best service at the lowest price, SMRT is a monopolistic operator. Although SBS Transit operates the North-East and Downtown lines, it is not a direct competitor, as commuters cannot choose to take trains by one operator over the other.

In the absence of competition, one cannot blame SMRT, a public listed company, for focusing more on the bottom line rather than on service quality. Changing the ownership of the infrastructure and rolling stock is unlikely to change that behaviour.

Thus, there are other measures such as penalties for not meeting service quality and the LTA sharing some of the upside if SMRT achieves higher profit levels and bearing some of the downside if profit falls below a certain level.

While these measures serve to keep the operator honest, the new framework could result in undesired behaviour.

There is no real incentive for SMRT to generate high profits, as most of the excess profits will go to the LTA. It could result in management paying itself and its staff higher bonuses and better perks so long as the 5 per cent Ebit (earnings before interest and taxes) margin set out in the contract can be achieved.

If there is a profit shortfall, the LTA will step in to compensate the company and SMRT may be able to ask for a fare hike.

The focus could become one of meeting the minimum service quality so that the contract is intact.

The only way to secure the best quality of service at the lowest price for commuters is to introduce real competition or to return the entire operations to the Government.

The bus service contracting model is a better model, as it awards the service contracts to bidders who can provide the highest service guarantee and pay the highest licence fees to the LTA.

Yeo Chee Kean

A version of this article appeared in the print edition of The Straits Times on July 19, 2016, with the headline 'No incentive for best service quality'. Print Edition | Subscribe