The Slippery Slope of Subsidy

The recent debates on the $1.1B Govt funding to SBS and SMRT for the purchase and operation of 550 buses have been very surprising.

I’m surprised WP did not use this to argue their case for nationalisation of public transport operators, as they did several months ago, when NCMP Gerald Giam engaged MOS Josephine Tan in an exchange of opinion pieces in ST.

I’m also surprised PAP didn’t use this to justify its current regulatory framework. They could have easily said, look— if bus operators are screwing consumers, they wouldn’t need any incentive to run more buses and make even more money. Look how effective our price regulation has been!

Frankly, the $1.1B funding is a govt subsidy to industry. By definition, a subsidy is an admission that an industry is unattractive. So I would have expected opposition MPs to look well beyond today’s $1.1B and ask the Govt to explain how it expects the industry to turn around and when the subsidy can be withdrawn.

Economists know that unprofitable industries can be subsidised for decades, for all kinds of reasons—national pride, votes in crucial states, etc. Economists also know that it is difficult to wean such industries off subsidies as they have no incentive to become profitable.

Opposition MP’s should have asked, what happens after the $1.1B runs out? Will SBS and SMRT scrap those buses and retrench the drivers? Will SBS and SMRT be so efficient and profitable in 5 years time that they will continue operation of these buses on their own? Or will the govt allow fares to rise significantly in 5 years’ time to enable SBS and SMRT to carry on without subsidies? Or perhaps the Govt will propose giving another $1.1B in five years’ time because SBS and SMRT have had no incentive to improve profitability, given they know the Govt will be forced to subsidise them further?

How can the Govt assure us that they won’t be subsidising SBS and SMRT for the next 30 years?

These are the kinds of questions I’d have hoped opposition MP’s would have demanded answers from the Govt.

I’m also surprised the public’s complaints have been on the lines of, “why are we using taxpayer money to help listed companies buy buses”, “why can’t these companies raise money themselves through new shares or bond issues”, etc.

Really— the question is not about market access. It’s about return. Bondholders want a return. So do shareholders. Why should SBS or SMRT go to the market unless the funds raised can generate a return that will cover the coupons to be paid to bondholders and not dilute existing shareholders’ returns?

Obviously, management has done their calculations and they believe they can’t generate enough profit from new bus operations to satisfy the expectations of bondholders and shareholders. Thus, they do not want to raise funds in the market.

Basically, PAP’s chickens have come home to roost. The Govt is stuck in a bind. The people are not happy at crowded bus services, and PAP has lost votes. However, the bus companies will not do national service because they are listed companies and they cannot set out to disappoint shareholders explicitly.

So they throw $1.1B into the pot, to hopefully break this stalemate.

The billion dollar question is: Will PAP’s gambit work?

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6 Responses to The Slippery Slope of Subsidy

  1. tan says:

    I say nationalize it. There’s plenty of upside for this argument and now, better than ever for WP to put forward their case. Maybe other budget debates are taking up too much time and I am sure (hopeful) this will be looked at again once the team has more time to study it.

  2. EY says:

    Like you I am surprised that there was no mention of nationalizing the bus companies in this debate. Especially when Tharman said that any profits from the billion $ investments will be returned to the govt. In essence, it is a national investment, outsourced to a private company, but where profits still go back to the govt coffers.

    The govt’s stand of not nationalizing bus companies has been that it can lead to inefficiencies due to the lack of competition, etc. But if these same pvt bus companies will not be making any profit from the expansion of the bus fleet, then what are the incentive for the bus companies to be more efficient and competitive than if bus companies are nationalised?

    On the downside of nationalising bus companies, i think, there could be a potential impact to morale of staff, and teething problems associated with any change of management. Other than that, in my perhaps myopic view, the govt should seriously consider nationalising the bus companies.

  3. henry says:

    Raise wages.
    If private enterprise responds to market demands, then the cost of buying buses will be passed on to customers. The result would be higher bus fares. I would ask for higher wages to cope with the higher cost of living.

    Higher wages seems to be a big taboo here. There is nothing wrong in paying $5 bus fares provided it is in line with wages. The national currency can also be revalued.
    There is also nothing wrong in paying $3000 salaries for bus captains excluding overtime.
    Its a lot of responsibility and work conditions is very demanding. I say: pay them well.

    The same goes for cleaners.

    I do not see any logic in disbursing Billions to private enterprise just because we want to keep wages low.

  4. George says:

    They may well do as you suggest-cough out a billion or more as in 5 years time GE 2016 would just round the corner. Self-snooked, as they say in billiards.

  5. Pingback: A “populist” measure, can be a sound measure: ex-IMF Chief Economist « Thoughts of a Cynical Investor

  6. Pingback: Another Day, Another Committee | Political Writings

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