Singapore MRT model to blame for fare unsustainability

The previous blog debunked PAP's narratives for train fare increase and posited they are red herrings to hide the real cause for fare unsustainability. The elephant in the room is something the PAP does not understand, will not admit because it points to incompetence, or perpetuates because it suits their 'prosper the elites and pauper the poor' policies. Any of the 3 is totally unacceptable.

The Singapore system has been good fare-wise in the past, but at the expense of neglect in engineering and maintenance. With attention now refocused on maintenance, going forward, the fares will be locked in a spiral of upward adjustments. Mass rail transit systems are operating in deficits in most cities all over the world. Singapore will be no exception because we are based on more or less the same type of model used in other cities that are struggling.

The Hongkong model:

To explain why the Singapore system guarantees future fare increases, the best way is to show the Hongkong experience and why HK has the most profitable mass transit system in the world. The HK model is a bundled vertical structure where one single entity does the entire functions of a MRT system, namely infrastructure, rails, rolling stock, controls & signals, maintenance, and the running of the train service. The HK government does the planning of the mrt routes and everything else is left to MRTCL which is run, and funds itself, as a commercial enterprise. The government leases all the land required to MRTCL which builds the infrastructure.The land around mrt stations will increase in value naturally. Such surrounding land are also leased to MRTCL which develops them in partnership with property developers. MRTCL thus has a share in revenue whether real estate sales or rents from property development. The table below shows MRTCL revenue segments.

In 2015 for example, almost 60% of MRTCL revenue came from property and commercial related activities. Farebox contributed only 37% of total revenue. MRTCL is thus able to cross-subsidise fares thus ensuring upward pressure on fare adjustment is contained.

MRTCL has a small contribution of about 4% from global business, which is from managing mrt operations in other cities. It is able to do this having operated as a purely business enterprise and developed strong specialist skills in the business. Singapore, on the other hand, relies on a retail executive and generals, and continues to loose homegrown specialist and engineering skills as local PMETs are dropped off in preference for cheaper foreign labour.

Singapore model:

Singapore adopts a fully unbundled vertical structure. Infra building and train operation are separated. The government plans the routes and builds the infrastructure fully funded from budget. Infra management and the rest of the functions of running the mrt are in the hands of a multi-modal duopoly of SMRT and SBS Transit. These 2 entities operate the mrt and bus systems as well as handling the renting of premises in the stations and advertisements. Farebox revenue is the only significant revenue. Commercial activities contribute some, and zero from property development. Both SMRT and SBS Transit are therefore unable to cross-subsidise fares.

Mass rapid transit business require heavy maintenance and investments in hardware upgrading in order to offer a safe and high quality in service delivery. The weaknesses in the model are:

• Operators take full risk for farebox revenue. They can apply for fare increase using an adjustment formula which has a cap. A capped fare formula disincentivises operators to invest in maintenance and upgrades. 
• The operators have no ability to cross-subsidise from non-train service revenue.

Now that the PAP has finally got the idea that maintenance is important, the operators' expenditure will go north perpetually, which calls for fare revisions. The 2 weaknesses of the model guarantee upward pressure for fare increases into the future. Do note that PAP recognition of maintenance and safety issues was never driven by service delivery but by political concerns from backlash from the many breakdowns and accidents.

The use of SMRT and SBS Transit is the government's way of demonstrating competition. Nobody is buying this faux competition as it is public knowledge a cabal of PAP connected networks are deeply entrenched in the system, actually, in all spheres of socio-economic institutions in the country. The use of 2 operators is consistent with PAP layering approach mentality which negates the benefits of economies of scale and duplication of a lot of functions thus detrimental to the cost structure.

Why Hongkong model superior to Singapore's: 

The fact that the HK model is superior is seen in MRTCL's profitability. This is further reinforced by the Tokyo mrt system which has more or less same features as HK and is equally profitable.

The heart of the matter lies in something called Land Value Capture. It is a fact that land surrounding the mrt stations will rise in value. Who captures this appreciation in land value? In the HK system, LVC is fully cornered by the Public Private Partnerships of MRTCL, a public owned company, and property developer partners. This ensures MRTCL a continued source of revenues in rentals and property sales. In Singapore, LVC accrues in layers -- firstly to the government from land sales or leases and property taxes, then to property developers, on to property owners who collect rent, or final home owners who benefit from future price increases. Unlike MRTCL, Singapore mrt operators have zero share in this vast wealth creation by mrt stations. In HK, a large chunk of the LVC flows to the public indirectly in MRTCL and directly in cross-subsidised fares. In Singapore, LVC flows to the PAP locked away in reserves, and to a layered rich.

The PAP's paranoia for building reserves is why we ended up in this most inequitable way. Government land sales end up in the reserves, but future increase in land values are captured by the rich. It is the poor who form the bulk of mrt pax that contributes to the system, but the rich who milks the system. Look around and it is easy to see the REITs capture all the malls and spankling condos around the stations, the few family-owned and foreign property developers laughing all the way to the bank.

The Singapore model comes off the brains of million dollar salaried elites, of helicopter view people who cannot see the ground. The PAP's boast of competency falls flat in the Singapore model for mrt. They were unable to see 10 years ahead.

In 2000 HK govt floated MRTCL in the HK Stock Exchange and sold just 25%. By law the govt has to retain 50%, but they divested only 25% which earned them billions. The MRTCL counter has continued to climb northwards and it has a very prominent place in HK economy because of its role in land development around mrt stations.

On the other hand, Singapore has nothing to show but grand fumbles.  In the same year 2000 Singapore floated SMRT on the Singapore Stock Exchange. The counter garnered not much investor interest. In 2015 the government had to buy it back and privatise it, putting it under Temasek. In all those years, passengers had to live with breakdowns and accidents because the scrimped on maintenance to chase profits. Even the great Ho Ching, the most powerful woman in Singapore, is unable to do anything to improve profitability.

HK approach has basically been government hands off, letting MRTCL to run professionally as a private business enterprise. It has blossomed. On the other end of the spectrum, Singapore is a place where the PAP knows best in everything. Singapore's experience is a matter of too many officialdom's hands all over the place. It is suffocating when bureaucrats pretend to be great businessmen. In an effort to improve non-farebox revenue streams, they conducted a review in 2017 to see if commercial activities of existing mrt lines could be out-sourced rather than left in the hands of operators. In other words, PAP bureaucrats think they can be better businessmen than SMRT and SBS Transit. In the coming new Thomson-East Coast line, the LTA has out-sourced this in some complicated ways. What is happening is simply yet additional red tape and messy layering of production activities. These are efforts to unbundle a train operator's revenue stream to an outsourced entity at a time when fares are not sustainable. We just have to hope there is no S$2 corporation cornering some contracts like the shameful AIM episode.

The need to increase train fares is due to the nature of the business which requires heavy investments in infra, maintenance and continuous ungrading. Farebox revenue is insufficient to sustain a mass rapid transit that meets acceptable safety and service delivery levels at affordable fares. Subsidies of one form or another is inevitable. The HK model shows how this can be achieved. The Singapore model is a renter economic approach, where wealth created by the mrt stations in terms of value adding to the land, is captured by the government and the rich. The PAP has no empathy for the poor who needs to dig deeper into their pockets for higher fares. They will not explain the real reason mrt operations are not sustainable without fare increase is due to either their incompetence in adopting a poor systems model, or their elitist policy of letting the rich corner land value capture.

The PAP cabal that preaches a $0.10 or a $0.07 increase in fares is no big deal is no longer relevant to the Singapore poor who has to suffer for the mistakes they made.

See Debunking PAP's reasons for train fare increases

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