Impact of Public Transport Fare Increases on Transport Workers' Salaries

Dr Lily Neo asked the Minister for Transport whether the industrial unrest caused by unhappiness over the remuneration of SMRT's Chinese bus drivers is a timely wake-up call for a serious review of the set-up of our national transportation system to move away from profit-oriented transport companies.

Page: 13

Ms Mary Liew asked the Minister for Transport (a) what is the number of transport fare hikes that have been implemented in the last 10 years; and (b) whether public transport employees benefit from wage increments every time a fare hike is implemented.

Mr Gerald Giam Yean Song asked  the Minister for Transport (a) what is a reasonable return on equity (ROE) for privatised public transport operators (PTOs), below which the Government will deem it necessary to raise fares or provide additional subsidies; and (b) whether the Government considers the ROE of the two PTOs over the past five years to be reasonable.

Mr Baey Yam Keng asked the Minister for Transport (a) what measures are in place to ensure that SMRT will not be distracted from its primary role as a public transport operator as it takes on retail operations at the Singapore Sports Hub; (b) how will its revenue and profit from retail and other non-core businesses be channelled to subsidise public transport operations; and (c) whether the Ministry is studying the successful models of nationalised public transport operators in other countries for adoption in Singapore.

Madam, various Members have raised questions on the profitability of our public transport operators, public transport fare revision, and our public transport model.

Our public transport operators (PTOs) are profit-oriented entities and they are, on an overall basis, profitable. Unlike many of the nationalised systems, like for example, the London Underground or New York Metro, our PTOs are incentivised to keep costs down, to improve productivity, and also develop new revenue sources, such as rental and advertising, so that they remain financially viable. If we restrict the ability of the PTOs to make profits, there will be less incentive for them to do all this. Ultimately, the concern is that this will lead to higher fares or larger Government subsidies, both of which are not to the benefit of Singaporeans.

Mdm Speaker, with your permission, I would like to request the Clerk of Parliament to give a handout to Members because we have put together a couple of tables to show the data of comparative studies on both bus and rail

Page: 14

operations in Singapore to be among the most cost-efficient compared to other major cities, and that commuters in Singapore pay fares that are among the lowest, as Members see in Slide 1. [Copies of the handout were distributed to hon Members. Please see Annex 1.] These include cities which provide huge operating subsidies to run their public transport system. So, we have done a comparison with Hong Kong, London, New York as well as with Tokyo.

In response to questions by Dr Lily Neo and Mr Baey Yam Keng, whatever we do to our public transport model, it must try to provide for cost efficiency and financial discipline, and having the PTOs that are commercial entities with a profit-orientation to run the day-to-day operations helps us achieve this. As for the public good considerations for the public transport system, this is the responsibility of the Government, in how we plan and invest public monies to build up a comprehensive and high-quality public transport infrastructure, as well as to keep fares affordable.

Mr Gerald Giam asked whether the Government considers the Return on Equity (ROE) of the PTOs to be reasonable. Let me first say that the ROE is not the most appropriate financial metric to assess the level of profitability for PTOs. The ROE is actually a measure at the corporate level. It covers all of the company's businesses, including businesses which may not be related at all to their rail and bus operations, and their overseas businesses. More fundamentally, the ROE is also a function of a company's financial arrangements and capital structure. Hence, it does not always correlate closely to profitability at the operating level of a PTO's public bus and rail businesses, and these are the areas of which we are concerned. It would not be an appropriate measure to compare bus and rail profitability across different PTOs. For asset-heavy companies, such as PTOs, a more common measure of profitability is the Return on Total Assets (ROTA), which assesses the level of profits the company generates for every dollar of assets invested. This metric was also recommended by the 2005 Fare Review Mechanism Committee.

SMRT and SBST's current ROTA for their public transport businesses are about 7.6% and 4.9% respectively, which are generally in a range we see for some other PTOs. Here, I wish to add that, actually, the profits from related non-fare revenue like advertising, rental and so on are included in the ROTA figures.

I want to add also that, even for the ROTA, there are limitations in its utility. First, the lumpy nature of investments needed for public transport, particularly for rail, means that we should avoid being overly-seized with the ROTA on a year-to-year basis. Secondly, the ROTA, as currently determined for the PTOs,

Page: 15

does not include those assets which they are already using to generate revenue but have yet to buy over from the Government.

For instance, under the current financing arrangements, SMRT will need to invest in more trains for the North-South East-West Line (NSEWL), the Circle Line (CCL) and the Bukit Panjang LRT. SMRT also has to pay for the re-signalling project for the NSEWL. These are all major investments to which SMRT has either committed or are in the midst of implementing. In addition, under the CCL licence, SMRT would have to buy over from the Government the first set of operating assets in 2019.

That said, we are mindful that the PTOs should not be earning excessive profits at the expense of commuters. Our public transport system is based on a balance of responsibilities between commuters, PTOs and the Government, in order to achieve quality service, affordable fares and a viable and sustainable system.

The key to achieving this balance is to have a robust regulatory framework. Our regulatory framework requires the PTOs to comply with prescribed service standards and maintenance requirements, failing which, penalties will be imposed. This helps to safeguard commuter interest through requiring the PTOs to invest sufficiently to meet these standards. For example, when LTA completes its regulatory review in a few months' time to further tighten rail service standards, the PTOs will need to invest more to deliver the higher levels of service and reliability required of them.

However, beyond just imposing the more stringent regulatory standards and heftier fines, LTA is taking a deeper look at the engineering and maintenance systems and processes that rail operators have put in place. This is an added safeguard following the Committee of Inquiry's report. Let me assure Mr Baey that we are mindful of the concern that he has raised, that the rail operator might get distracted from its primary mission, or for that matter, simply focus on short-term profitability while scrimping on maintenance.

I will now turn to the queries by Ms Mary Liew and Er Dr Lee Bee Wah on transport fare hikes over the past years, whether public transport employees have benefited from the fare increases, and if bus and train driver salaries should form part of the fare formula going forward.

Public transport fares have been adjusted in small amounts seven times over the last 10 years from 2003 to 2012. That is the period that I am looking at

Page: 16

– seven times over the past 10 years by the Public Transport Council (PTC). There was also an occasion in 2009 where the PTC reduced fares because of adverse economic conditions despite the fare formula yielding a fare increase.

From 2006 to 2011, fares increased cumulatively by 0.3%. Diesel prices for that same period went up by about 55% and national wages by over 25% for this same period from 2006 to 2011. This has caused a significant shortfall between fare increases and operating cost increases, and put downward pressure on wages for public transport employees. While the PTOs have increased bus driver salaries recently, against the backdrop of worsening bus industry financials, I expect that going forward, it will be a challenge for the PTOs to do more without fare increases or some form of Government subsidy.

On whether bus and train driver salaries should be included as an explicit component in the fare formula, this is an issue for the Fare Review Mechanism Committee, chaired by Mr Richard Magnus, to consider. I know that the FRMC is very focused on making sure that whatever fare formula is proposed, there is assurance that we safeguard commuter interest in affordable public transport fares. Mdm Speaker, may I request the Clerk to now distribute the next handout?

Madam, I understand the Ministry ensures the service quality of PTOs based on the performance standard as well as penalties meted out when they do not meet those standards. I would like to ask the Minister how does MOT ensure that the money that is being used to pay for penalties is not drawn from commuter fare revenue but from the profits of

Page: 17

non-transport operations and, hence, shareholder dividends?

My second question is: given that the public transport operations receive Government grant injection and, hence, are not as lucrative as commercial operations, such as retail malls, would a situation arise such that the PTO becomes more motivated and interested to make more profits from non-transport operations and does not mind paying for the penalties for service lapses because it just makes economic sense for them as a listed company? How does MOT ensure that this situation does not happen?

Madam, let me thank the Member for his two supplementary questions. On fines, first, the fines are put into the Public Transport Fund and that is used to issue vouchers that we provide to the more needy residents. Secondly, when the Public Transport Council looks at fare increases, they take into account what the fare formula recommends, as well as what the financial performance of the operators are, for example, looking at the ROTA and the trend of the ROTA. There is no component in the fare formula that looks at the fines that they have paid to the regulator. So, that is not taken into consideration in any fare increase.

The situation that the Member mentioned, where PTOs pay more attention than they ought to their commercial operations, is something that we must safeguard ourselves against. Hence, not only must we set very high performance standards and hold them to account for this, fine them when necessary, but LTA is also now more closely involved in their processes – operations, as well as in maintenance, to make sure that throughout the organisation from the top down, they pay sufficient attention to these areas which are of greatest concern to us.

I have three supplementary questions. Of course, we should not deny PTOs from making profits. But if we were to look at the Annual Reports of the PTOs, the dividends given out to shareholders have been increasing every year for the last 10 years. I would like to ask the Minister: since we are in the process of reviewing the formula used by PTC, can the profitability of the PTOs be included in the formula? That means, if they make a certain profit or give out a certain amount of dividend beyond a certain figure, there should not be any increase in the fare at all. The second question is: since we are in the process of reviewing the formula, can we take into consideration the concession rates for Polytechnic students as well? And the third question: Minister mentioned just now that SMRT needs to buy over the assets from the Government. How much does SMRT need to pay to buy over assets from the

Page: 18

Government?

Mdm Speaker, let me thank the Member for her usual penetrating questions. First, on profitability, in the past, they looked at ROTA and used that as a gauge. Therefore, indeed, there were years when, for example, they would give a fare increase to the buses but not to the rail. This was before we had distance fares. The actual mechanics going forward – this is something that we can ask the Fare Review Mechanism Committee (FRMC), chaired by Mr Richard Magnus, to take a closer look at. Indeed, they are doing so on concessions for the different groups, including students, Polytechnics as well as others.

On the Member's third question, which is how much SMRT has to pay for the assets, let me read carefully what I said here. I said that SMRT will need to invest in more trains for the North-South East-West Lines, the Circle Line and the Bukit Panjang LRT. They will also have to pay for the re-signalling project for the North-South East-West Lines. That amount is about $750 million. So, that is the first component that the Member asked about.

The second component is that they will have to buy over from the Government the first set of operating assets of the Circle Line in 2019. That is the second component. They buy over at Net Book Value because there is a certain depreciation of those assets from when it was purchased initially and, operated over the years, there is a certain depreciation. Our estimate is that come 2019, they will have to pay about $1 billion to buy over those assets.

So, these two components that I mentioned earlier in the reply in response to your supplementary question will be about $1.75 billion.

Thank you, Mdm Speaker. Three supplementary questions, please. May I ask the Minister whether he agrees with me that public transport is an essential service that may affect the lives of many Singaporeans and the state of our country's economy? Therefore, is it not better to move away from the profit-oriented business model that is answerable to shareholders' interests which may further add on to the cost of our public transport services?

Secondly, will the Minister consider targeted subvention for the sectors of our population, such as the retirees, students and the needy, rather than the blanket subvention for all, including tourists and non-Singaporeans, so that

Page: 19

subvention goes to those that need it most and appreciate it most?

Lastly, at the stage of formulation and implementation of our public transport infrastructure, are enough considerations given to after-care maintenance, such as the engineering maintenance and cost maintenance, for the long-term sustainability and smooth operation of our public transport here? Are there synergy and communication between all the stakeholders concerned?

Mdm Speaker, let me thank Dr Lily Neo for her three supplementary questions. On whether we consider public transport an essential service, certainly we do. The question is whether we should move away from the profit-oriented model. I think the difficulty really is whether we can move to something that is as efficient and as cost-conscious as what it is today. I think that is, indeed, the challenge.

When we look at what other cities have done – those that are operating nationalised models, we find actually that – at least in the examples I have given you – the fares are higher and, on top of that, there are subsidies that are provided by the government. It is quite a heavy burden on the state and, ultimately, on the taxpayers. The question we have to ask ourselves is that if I can find something that is alternate to what we have today, that can run just as efficiently or even better, I would really like to consider that. What we have seen in a number of cities actually is that they have moved away from a nationalised model to a privatised model. In some cities, like those in Australia, when they run bus services, part of which is provided by a nationalised entity and part of which they have privatised, they have told us that actually there is a benefit, a more efficient way and, hence, lower cost when the private companies take over the running of such services.

On targeted subventions, the Member has raised a good point. Indeed, today, there are concessions that we provide to the elderly so they have a full-day concession for travel on the transport system. There are some concessions given to students and so on. The question is whether we should do more, how much more, and how that ought to be funded by other transport users, or it ought to be something that is borne by the Government. And that something is obviously something that can be discussed and debated further.

The third is a very good question because really we want to make sure that the operators pay enough attention not just only to the immediate maintenance problems but also making sure that they do a sufficient amount for the long-term sustainability of the transport system. So, when we look at what they do

Page: 20

and we ask for their plans, we also look at whether they are planning for upgrades, mid-life upgrades, end-of-life upgrades to the trains and so on. Infrastructure, for example, now the third rail, the claws, that is something that we are also paying much more attention to than in the past. In the past, it used to be that we hold them accountable to the OPS performance standards. Now, we not only do that and have tightened that, but we also go down more to look at their processes and their maintenance plans.

Madam, I thank the Minister for his explanation about why ROE is not used as a measure of the profitability of the transport operators. But my question is: are the commercial operations meant to cross-subsidise any shortfalls in fare revenue? Or is that meant to be for shareholders to keep and for dividends? Because the fact remains that, for example, retail shops in MRT stations, they benefit from a captured audience or captured market in terms of the number of commuters who are travelling through the MRT stations. So, is it fair that that profit goes to the shareholders and dividends?

Mdm Speaker, let me thank Mr Giam for his question. As I mentioned earlier when I cited the ROTA figures for SMRT and SBST, we take into account also the advertising and the retail revenues that are generated because these are related businesses. When I provided the figures, I think it was 7.6% and 4.9% but that includes it. The ROTA figure is certainly a figure that the PTC looks at when they decide on any possible fare increase.

I would like to thank the Minister for the very comprehensive answers. Before the PTO ploughs back its profit to the shareholders in the form of dividends, which have increased over the years, I would like to ask the Minister: how can he ensure that the transport workers' interests are being taken care of so that they will not be disadvantaged? Ultimately, an unhappy workforce will also be cascaded down to the public commuters as well.

Mdm Speaker, let me thank Ms Mary Liew for asking a question on what is probably the most important resource. Indeed, if we do not have enough drivers, the bus fleet will not be operational. That is, indeed, something that is very, very important.

We do not dictate or prescribe how much the operators have to pay to their drivers. Certainly, this is something that, as commercial entities, they have to look very carefully at to make sure that they not only recruit enough but also

Page: 21

retain enough of their drivers.

What we do is we hold them to account as to the service that they deliver to the general public, particularly for the buses which are much, much more dependent on manpower. Indeed, it is not just people at the frontline but also at the backend doing the maintenance, doing the technical support. That, too, is very, very important.

As Members know, there was a salary adjustment last year and we hope to do more in the years to come. Certainly, that alone is probably not sufficient. If we are to push ahead and accelerate the bus enhancement programme that I talked about, then being able to recruit and retain enough drivers, that ultimately determines how quickly I can push that programme out.

Mdm Speaker, I would like to thank the Minister for the long replies to all the questions. The Minister was asked about whether there is a way of having an in-between nationalisation versus completely private model; and then the answer is yes. Our NTUC Fairprice seems to be doing very well. Did the Ministry consider whether public transport services can be run as a cooperative instead of a totally private entity?

These are all options to be looked at and, indeed, it is not as if we are prepared only to stay with one model but we are always on a look-out for other possibilities, other alternatives, and it is on an on-going basis. Therefore, if there are interested entities like NTUC who may perhaps offer to run part of the bus system – I have talked about bus contestability in the years to come – this is certainly something that we would be prepared to look at very, very carefully.

Mdm Speaker, I add my thanks to Mr Christopher de Souza for not only his expression of support but, more importantly, some very, very good questions that he has asked in this supplementary. Firstly, I gave the FRMC quite a clean slate. Not only do they deliver a new formula but they are also going to take into consideration quite a number of different other areas. Ultimately, when there is a fare adjustment, it is actually the PTC – the Public Transport Council – that decides on the amount and whether to follow the fare formula rigidly or whether to deviate from the fare formula. If we look at our recent examples from 2006, certainly the PTC has deviated from the fare formula because the accumulative adjustment was 0.3% over those five years. I believe the fare formula would have recommended a lot more.

Certainly, there was a year when the fare formula recommended an increase and PTC decided to reduce fares instead. So, the PTC looks at the fare formula and the prevailing situation and makes a decision on what fare adjustment to allow. So, there is that flexibility there.

The Member's point on whether there is too much of a focus on profits is a very valid concern. And I think it is, therefore, the responsibility of the regulator to make sure that if this is so, we re-orientate the company. I make sure that I have regular meetings with the Chairman and the senior management. I make known my expectations of how I expect public transport service to be provided and the quality and reliability that I expect to see. From time to time, we will have to sit down and talk to them about operational matters and also to make sure that, if necessary, we properly align for the long term.

Page: 23

On subsidies for Polytechnic students and other groups – I hear his call, as, indeed, from Er Dr Lee Bee Wah. As I said when I first came in in 2011, these were all on my radar screen but I was more sympathetic to additional concessions for the elderly. That was my first priority and, in the 2011 fare adjustment, we did manage to do something to that and extend their concessions to the entire day. If and when a fare adjustment takes place or is to be decided − because there really is not even a new formula on the table yet and we will have to go through the process of talking about it when the formula is eventually reviewed – certainly Members can be sure that this and a few other areas, including for the disabled, are very much on my radar horizon as well.