Recent Fare Increases by Public Transport Operators

Er Dr Lee Bee Wah asked the Minister for Transport (a) with the sharp drop in oil prices, why are the public transport operators allowed to raise their fares; (b) how much will these operators benefit from the fall in oil prices; and (c) why are these operators not absorbing the 2.8% increase carried over from 2014 given that they are running profitably.

Mdm Speaker, fare adjustments are guided by the fare adjustment formula and process recommended by the Fare Review Mechanism Committee (FRMC) and were accepted by the Government in 2013. The formula is pegged to changes in the core Consumer Price Index (CPI), Wage Index and Energy Index over the preceding year, less 0.5% for productivity gains. The core CPI and the Wage Index constitute 40% each of the fare formula. The Energy Index, constitute the remaining 20%.

The formula broadly reflects the operating cost structure for the public transport operators. The FRMC had also recommended that fare review exercises be conducted annually. This is so that commuters do not have to endure a sudden, large fare adjustment after a few years. This formula and process for fare adjustment is valid for five years, until 2017, and we will review it again thereafter.

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Er Dr Lee has asked how the recent 2.8% fare increment was derived and why fares were increased despite the sharp drop in oil prices. Er Dr Lee will recall that the full fare adjustment quantum considered by the Public Transport Council (PTC) in the 2013 fare review exercise was actually 6.6%. So, they considered 6.6% for the 2013 fare review exercise. But the PTC was mindful of the impact of a large fare increase on commuters. So, the Council decided to grant only a 3.2% increase, or less than half of the 6.6% increase.

The remaining 3.4% was carried over to the fare review exercise for 2014. If we add this 3.4% to the negative 0.6% for the 2014 fare adjustment quantum, we, therefore, get a total fare adjustment quantum of 2.8% for the 2014 fare review exercise. In short, the current fare increase was due to the carry-over from the last exercise and the fall in oil prices in 2013 helped to mitigate this.

The continued fall in oil prices in 2014 and the start of this year will generate some cost savings for the transport operators. I should point out, however, that energy costs comprise about 20% of the operating costs for the sector, which is why the Energy Index is only 20% of the fare formula. Other costs, which include salaries for bus drivers and other public transport workers, account for the remaining 80%, and these have continued to experience upward pressure. We also expect operating costs to go up when higher operating standards come into effect from 2016. Notwithstanding this, overall, we are likely to see a negative fare adjustment of about 1% for the fare review exercise in 2015, because the energy costs have come down significantly in 2014. The 2015 fare adjustment that we will do at the end of this year will take into account all the indices of 2014.

When deciding on the fare adjustment, the PTC also has to ensure that the overall public transport system remains financially viable. Er Dr Lee has asked if the public transport operators could absorb the fare increase out of their profits. The fact is that operating buses and trains is not a highly profitable business; far from it.

In fact, of all the profits that are generated, roughly about 95% comes from the non-fare business and, at most 5% comes from operating trains and buses. Only in the recent quarters have fare revenue and income crept marginally above costs. Operators, however, need to make profits, for example, to pay for future capital expenditure. In a previous Sitting of this Parliament and in reply to a supplementary question from Er Dr Lee Bee Wah, I mentioned that SMRT has significant future capital commitments from now to 2019, somewhere in the region of $2 billion. We spoke about that. From now to 2019, SMRT has significant future capital commitments in the region of $2 billion. How do we put this $2 billion in context? Well, it is more than three times the cumulative profits that it has made in the last five financial years.

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The most important thing is to reassure Members of this House and the commuting public that the Government is committed to ensuring that public transport fares always remain affordable. In this regard, it is worth noting that households have generally been spending a smaller proportion of their income on public transport over the last 10 years – a point that I made in previous Committee of Supply (COS) debates and I will again show this in the coming COS debate in March.

In addition, during fare exercises, special attention is paid to vulnerable groups, such as senior citizens, persons with disabilities and lower-wage workers. For this year, fares will remain unchanged for these groups of commuters in the April fare exercise and, generally, the fares for more than 1.1 million commuters will be held constant.

Mdm Speaker, I would like to thank the Minister for his comprehensive reply and patience. The fact is that whenever there is a fare review, it attracts a lot of discussion amongst residents. The fact is that the operators are allowed to do business beyond bus and trains, and so, residents expect them to cross-subsidise. The fact is that both SBS Transit and SMRT recently reported huge jumps in profits. If I remember correctly, SBS Transit reported a 27.8% jump in 2014 profit and SMRT a 58.4% increase in Q3 profit.

Therefore, I would like to ask the Minister to seriously consider the fare review formula. Can this formula include profitability instead of just about operating cost? And can the review of the formula be brought forward, instead of waiting until 2017?

Mdm Speaker, let me thank Er Dr Lee Bee Wah for her passion and for championing these various areas. Indeed, there is a certain amount of cross-subsidy that is taking place. Even for SBS Transit, if you have seen the recent results for the whole of FY2014, the buses continue to make a loss. The reason the company remains profitable – and I will come to the profit figures in a while – is because of the other income that they have managed to generate as a result of rentals, commercial operations and so on.

For SBS Transit, the profit for the whole year increased from about $11 million-plus to $14 million-plus. In percentage terms, very high; but in terms of absolute numbers, measured against total revenue for the year of about $1 billion, you really see that the profit margin is about 1.5%.

The profit margin for SMRT for the past financial year (FY) – their FY ends only in March 2015 and it would not be appropriate for me to speculate what the final quarter's figures are – was 5%. As I had mentioned before, this was largely due to the revenue and profits that they generated from their non-fare business – commercial operations, rentals, taxis and so

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on. SMRT, you may recall, had been losing money on buses for quite a number of years, and it is only in the recent quarter that we have seen a turnaround, helped partly by measures that they have taken as well as the fortuitous situation of a reduction in fuel costs.

At the end of the day, the overriding factor that is of importance must be: are our fares affordable, how do our fares compare with those of other countries and cities? Because if you say that you stifle every possibility of a private operator making some profit, improving efficiency, productivity of which there is a dividend that is paid to all commuters through that 0.5% in the fare formula, if you stifle all that, then, ultimately, if it results in an even larger increase in fares, is that of benefit to everybody? That, to me, must be the question that we always ask.

That is the question that the PTC looks at very carefully: how do you find a balance between making sure that fares are affordable to commuters and yet ensuring the financial viability of the entire system? If the system ultimately is not financially sustainable, then, over time, the Government and all taxpayers will have to step in to bail it out. The important thing is to make sure it remains financially viable; make sure that our fares are affordable on two counts. One is in comparison with other cities; and two, in comparison with household income and the percentage that households are paying on public transportation.

Mdm Speaker, I thank the Minister for his explanation. I think the overriding factor must be whether there is a justification for an increase in the fare since the reported profit keeps going up. Anybody who invests in the company will know that those operators do not bear high risk because they are providing a basic need; everybody will have to take public transport if they do not own a car. My question is to come back to this fare review formula. Can the profitability of the PTOs be included in the fare review formula: can the change in the formula be effected earlier?

On the formula, I think it is always useful to allow a formula to run for a number of years. We have had this formula running since 2013. I think it is useful for it to continue until 2017 and we do a review then.

On the point that profitability has increased and, therefore, we should not increase fares – I take the Member's point. Thus, the converse must also be true – that when profitability has decreased, even though they are profitable, we must allow them to increase fares.

So, the Member's point was that when profitability increases, take that into account and, therefore, do not allow them to increase fares. Now, I see the Member's point: that as long as they are profitable, we cannot allow them to increase fares. Hence, we come back to

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the question of what incentive is there for them to be even more efficient and more productive, which ultimately benefits the commuters? If they run a shoddy operation and the business becomes very expensive, ultimately, we all bear the costs. That always is a fundamental.

The second point is this: we have mentioned that they have major financial commitments over the next few years, until 2019. I hope that point is not lost. They have commitments to buy trains and all the other projects that we had spoken about in the previous Parliamentary sessions, amounting to about $2 billion.

Therefore, if you take $2 billion, what does it all mean? It is more than three times the cumulative profits over the most recent five years. More than three times of that. They will have to figure out a way to meet these commitments. They will have to figure out a way to make sure that they remain profitable. But most important of all, they will have to figure out a way to make sure that they continue to improve on reliability and the service that they offer to commuters.

I would like to ask the Minister: in relation to the provision of public transport, is there not also a duty on the part of the providers to see that as part of their public service? In other words, we should not look at profitability and determine the price of public transport fares, just solely on the basis that the buses may or may not be making profits. The fact is that there is cross-subsidisation within the company, and overall, there is profit. So, should the PTC then not take that into account in determining the fare as well?

Mdm Speaker, I thank Ms Chia for that supplementary question. Indeed, as I have mentioned earlier, there is a certain amount of cross-subsidy. They do not determine the fares; neither do they determine the standards because, really, at the end of the day, they are almost running like monopolies. The last thing you want for them to do is to be able to determine standards and to determine fares. So, the standards are actually determined by the Land Transport Authority. The fares are determined by the PTC.

We have debated extensively in this House about the fare formula that was derived in 2013 after Mr Richard Magnus and his team took an extended amount of time to study this matter carefully, as well as to consult widely, before coming out with the fare formula.

My fundamental point is this, which is really an elaboration of what I have mentioned to Er Dr Lee Bee Wah: are we better off if the services are provided by an entity that is run effectively, that is able to keep costs down, that is able to allow us to enjoy relatively low

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fares, certainly compared to cities around the world? Is that of benefit to us?

And if that is of benefit to us, rather than the converse – which we have seen in a number of cities where they run nationalised systems, not very efficiently done, the cost goes up, they have no handle on that, as well as on other aspects of transportation, ultimately, it is borne by much higher fares in those cities or through a large subsidy from government and taxpayers – if you look at those two possibilities, then, certainly, the former must be more enjoyable and acceptable for Singaporeans. That is the situation that we have today.

I understand the point and I understand the concern that people always have over profitability of these operators – what is the reasonable amount, what is acceptable and so on. In the past, we also looked at Return On Total Assets (ROTA) but, for the recent fare formula, they have also tried to make sure that we just do not look only at ROTA but try and have a formula that mirrors more closely the operating cost of the two operators and, at the same time, make sure that the productivity improvements that they do make, part of it is given back to commuters as well.

So, hopefully, we are trying to arrive at a balance where fares are affordable, in relation to household income and expenditure; fares are affordable in relation to what other cities around the world may be paying for the same level of service or a lower level of service, in fact. And fares are affordable because there are various targeted subsidy schemes that the Government may put in place in order to protect the most vulnerable groups. That is the situation that we are trying to achieve.

Mdm Speaker, a supplementary question. From the Minister's reply, it seems to me that the fare needs to be increased, so that the operator remains profitable and, with that, they can thereby be more efficient. That is the logic, as I understand it. But on the converse, will it be that if the company or the operator is profitable and productive enough, they would have made enough profits and there is no need to increase the fares?

Mdm Speaker, I am not really sure I follow the argument of Mr Low Thia Khiang. But let me try to interpret what I understand from it: that if they are profitable and productive enough, there is no need; or if they are efficient, productive and profitable enough – sorry, forget about the profitability; if they are efficient and productive enough, there is no need to increase fares.

Theoretically, yes, except that they do face cost pressures as well. They employ more people, many of them Singaporeans. Their employees do expect wages to go up. You run

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Town Councils, some of you run companies and so on, and you know the cost pressures that we all come under, and they come under, too.

Much as they would like to reach that state of nirvana where efficiency, effectiveness, productivity can overcome all these pressures, the truth is that 80% of their cost largely mirrors the core CPI as well as the wage increases. We know wages have been going up; we know that core CPI has been going up; we have been fortunate that the 20% component, that is, the Energy Index has gone down, using the index for 2013. In the second half, prices have come down, compared to 2012.

So, I am not so sure that you can actually escape from the fundamental point that they do, like every other entity, public or private, come under the same cost pressures, the same expectations of their employees to see a reasonable increase in their wages. Driving buses, for example, is a very manpower-intensive kind of operation, together with the maintenance of the buses. Inevitably, they cannot avoid coming under the same pressures which are reflected in the formula that Mr Magnus and his team have derived.