As reported in today’s mainstream news outlets, our Minister of Transport Lui Tuck Yew said, “Any fare adjustment will allow the two operators to have more resources, in time to come, to make further salary adjustments to their drivers. We recognise that the drivers need to be paid more. (The) question is, where is that money coming from?”
Let me tell him where the money is coming from. It is already there.
In SMRT’s 2012 annual report, one notes that their company is split into 7 different units – trains, LRT, bus, taxis, rental, advertising, and engineering (and other services). Like what a typical profit-oriented private company does, it notes the revenue and EBIT (earnings before interest and taxes) of each unit, treating each unit as separate silos on their own.
Of these 7 units, only 2 – LRT and buses – were loss making. LRT had EBIT of negative $0.3million whereas buses had EBIT of negative $11.6million. All other units had positive operating margins, even taxis and trains. The best operating margins came from rental (EBIT=$63million) and advertising (EBIT=$19.2million).
Because buses are making heavy losses for SMRT (fare revenues – driver wages – fuel cost – maintenance costs – admin costs) and there is little room for increasing fare revenues because of the strict rules of the Public Transport Council, it is no wonder that senior management treats the bus unit as a pariah and parasite, sucking away profits from the overall bottom line of the company. The real darlings are the rental and advertising units in the pursuit of profit maximization.
The alternative scenario of the nationalization of SMRT is that the financial incentive of the company would no longer be profit maximization of its various individual units, but would be focused on keeping the overall budget balanced (revenue-expenditure) in providing service delivery. Thus, its profit-making rental and advertising units would actually be able to cross subsidize for its loss-making buses and LRT.
With SMRT’s overall FY2012′s operating profit of $148.7 million, there is plenty of room for driver’s wages to grow. No need to increase bus fares.
One key argument against the nationalization of public transport, is that nationalization would lead to inefficiency and low productivity. It is quite clear that such a argument does not stick.
First, nationalization does not necessarily mean inefficiency and low productivity. Our schools are nationalized. Are they inefficient and unproductive? Our civil defence force, police forces and prison services are nationalized. Are they inefficient and unproductive? Our libraries are nationalized. Are they inefficient and unproductive? Many of our hospitals are nationalized. Are they inefficient and unproductive? Sure, all of these examples might mean that they are operating at less than “optimum efficiency” on the pareto optimum curve. But surely they are not all basket cases. (Update: Moreover, they are essential social goods necessary for the security of a country and basic well-being for its citizens. Public transport should be the same.)
Second, privatization does not necessarily mean efficiency and high productivity. Just look at the construction sector and its dependency on foreign labour. Same goes for the low-wage service sectors such as cleaning services.
Clearly, whether an organization or a sector is inefficient or unproductive is dependent on combination of factors such as its leadership, its management culture, and the structural environment in which it is embedded in.
In sum, nationalization will allow the profit-making units of SMRT to cross-subsidize its loss-making units. The monies for increasing the wages of bus drivers is already there – SMRT’s FY2012 operating profit of $148.7million. It can help to keep fare prices for consumers low, and actually increase the wages of its most deserving workers.