Debt Recovery In Public Services: Should Constituents Go To Jail?

"Walk a mile in his moccasins (shoes)" is a quote often attributed to unknown American native Indian tribes. It is actually from a poem Judge Softly by Mary T. Lathrap in 1895. It is of course about empathy. One should withhold judgement unless one fully understand someone else's situation.

Two recent incidents brought on an onslaught of public indignation against a perceived uncaring government. There was the case of the mother who failed to pay her daughter's school fees which caused the poor primary school girl to be denied her PSLE certificate. This was followed by the case of the single mom who failed to pay her conservancy fees and was hauled to the police station.

Few Singaporean really appreciate and discuss the many deeply troubling issues that the country is mired in, but many are vociferous over minor community trespasses. Even then, these have in the main been knee jerk reactive outbursts of condemnation at the government, almost always viewed as where the final responsibility lies. It would do well if one were less trigger-happy and try to fathom deeper causal factors, as indeed there often are.

On the other hand, hard working executives who have conducted themselves dutifully, often kick into defensive mode. Immediate is the denial of responsibility as all rules were observed diligently. Ministers push the non-responsibility narrative further by explaining from authority with some clarity from their perspective.

Ministry of Education explained primary school is free for Singaporeans except for a monthly miscellaneous fee of S$6.50. When parents fail to pay up, there is no attempt at chasing payment in view of the meagre sum. The fees are allowed to accumulate till after the final PSLE results are out when they will be forced to settle all outstandings in order for their child to receive the certificate. This has been the practice for years.

The Town Council explained consumers who did not pay conservancy fees are given reminders, then warning letters. Long outstanding bills are then handed over to lawyers and the collection process then is no longer in the hands of the TC. Legal letters are sent. A S$100 fee could end up with a $3,000 bill after adding on penalties, reminder notices, cost of lawyer's letters, court fees. After several unsuccessful attempts, legal proceedings commence at the Night Court which sends out summons. If the plaintiff fails to attend court hearing, it is contempt of court. The sheriff issues a warrant of arrest.

This no nonsense credit collection process is the norm across all bureaucratic departments such as HDB, URA, IRA, LTA, etc. A single traffic offence may result in a $25 ticket for the offender. If left unattended despite several reminders, it could snowball into thousands of dollars by the time it reached the Night Court stage. The process may seem heartless, but it is the only way to manage recalcitrance. For those of us who begrudge the payment of money to government, or who are great procrastinators especially in making payments or filling up some forms, let's admit it, this is the bureaucrats' big cane that enforces discipline.

There are avenues for approaching bureaucrats to plea for one's case, whether for wrongful fine or on hardship grounds.

By and large, however, I believe the various departments have their own way of  meeting the public to address their individual issues. Take the case of traffic summons which I do know from personal experience. When I was running my own small business, the number of traffic summons for parking offences that I received was crazy. Considering the number of tickets, from different agencies - HDB, URA, LTA, and the several reminders that each generated, it added to the confusion and overlooked payments. When I was making plans for leaving the country, I had to make sure I cleared all these fines to avoid getting stopped at the airport because I didn't know if any offence had reached the summons stage. I settled all HDB & URA tickets. LTA was a problem as my unpaid fines had ballooned to more than $2,000. I visited the office at Sin Min, pleaded on hardship grounds but that I wanted to settled all offences, and was very surprised at the leniency offered to me. The officer was able to reduce all my fines except for one which had reached the court proceedings for which I had to pay in full. All-in, my damage was reduced to about $600.

Once, I received a parking ticket for an offence that I refuted. I had parked properly in a parking lot which was over a manhole. When workmen needed to access the manhole, they lifted my small 2-door Honda Civic and placed it partially out of the parking lot. They did not reposition my car after completing their work and I received a fine for improper parking.  I marched down to the URA office at the old multi-storey carpark at Market St. It was an office solely for hearing parking fine complaints. Hundreds of offenders with all sorts of summonses waited in line to unleash their grouses. You hear 'Next', then you enter the office to pitch your side of the story, and the officer chopped and wrote something on the summon to reduce the fines. Summonses, once issued, are very rarely cancelled. The officials pretended to listen sympathetically as the offenders poured out. They have heard all excuses and stories ever invented. It dawned on me then that the whole process was in reality, an invention by the government for public stress relief. In the end, almost everyone gets some reduction on the fines. Offenders felt they had won something. Everybody goes home a lot happier.

Verily, it is often a case where efficiency has no time for empathy

The incidents of unpaid school fees and conservancy fees is a matter of ecce homo. Meritocracy to its illogical concslusion, delivers the bureaucrats intoxicated with their standards, rule books, bye-laws, or regulations, often in flux where parameters are ambiguous. Whilst these two long outstanding fees are certainly delinquent, they could be a case of severe recalcitrant, or red alert of family in financial distress. Knowing the correct situation determines the appropriate follow-up action. This makes the difference between a good bureaucrat and an excellent one.

Allow me to illustrate with another personal experience. When in my pre-U days in Swiss Cottage Secondary School, I suffered fractures on my wrist and right leg. After a couple of months rest at home, I returned to class. Picture me climbing up the stairs to the class on the third floor with those old, clumsy, heavy, wooden crutch. Imagine up and down four times daily for more than a month. Compare this to a nephew of mine who was knocked down by a car and suffered serious hip injury. After hospitalisation, he returned to Maris Stella Secondary School where his class was on the upper floor. On his return, the principal had the class relocated at ground level just to accommodate him in his crutch.  Therein lies the difference between a bureaucrat from a public school, and an executive from a private school.

The MOE had indicated withholding PSLE certificates if fees remain unpaid. The Town Council said they were not the ones that called in the police. To its credit, MOE has relented and expressed their willingness to review their procedures. It is however, disheartening to note that a simple case of lack of individual initiative of a bureaucrat requires a ministerial review of procedures.

The two unfortunate incidents highlight the underlying cause is the lack of individual initiatives. This is however, deeply rooted in our suffocating culture of too much government and a conforming Confucianist proclivity. It is the psychology of the government knows best in everything and so bureaucrats simply withdraw internally and concern themselves with being the most efficient administrators as stickers to the rule book. The bureaucrats had delinquent receivables listings. Red flags would already have been shown much earlier. Had they checked they would have found two single mums struggling to make ends meet. Had they worn the constituents' moccasins, they could have done something to assist, just like the principal of Maris Stella.

Era of cheap money but no fixed rate housing loans

DBS named Social Enterprise Champion of the Year at President's Challenge Social Enterprise Awards 2019.... (DBS.com Dec 2019). OCBC the best consumer bank in the world, while DBS the best bank for SMEs.... (Global Finance Oct 2019). S’pore’s big 3 banks among world’s 10 strongest.... (Bloomberg Market Ranking 2015). DBS named world’s best bank.... (British magazine Eurmoney 2019).

With all these accolades, tiny Singapore must be so lucky to be so well-served by our local banks. In the domestic market, banking regulations protect our banks in Singapore dollar transactions. Have they in turn worked hard and innovatively for the benefit of Singaporeans generally?

More specifically, have banks provided Singaporeans with the best options in housing loan? This is acutely important given that Singapore has the highest home-ownership rate in the world at 91% (2018). This is the ratio of owner-occupied units to total residential units. Only Romania has a higher rate than us.

Singapore housing loans are all basically priced on variable rates. The rates are computed as some basis points above a referenced rate and move up and down with the latter. The reference rates are Singapore Interbank Offered Rate SIBOR), Singapore Swap Offered Rate (SOR) or a rate determined by the bank (e.g. internal board rate). The banks may offer the gimmick of a fixed rate for the first one or two years, followed by the usual variable rates.

There are NO 30, 20, 10 or even 5 year fixed term housing loans in Singapore. What advantages do fixed term loans offer? Well the monthly payments are fixed over the life of the loan. Home buyers can plan their affordability and do not worry about the volatility of interest rates. For big ticket items like housing loans, an increase of just 1% pa interest rate can cause serious financial hardship. Back in 1984 when loan interest rates shot up to 13% pa, many borrowers were taken to the laundry.

Fixed rates are perfect for borrowers where the house is like forever. Of course anything can happen, like a divorce, emigration, foreign job posting, etc so some terms need to be considered like whether the loan is portable, early repayment charge is not too high, refinancing is allowed, etc. Long term fixed rates are normally a little higher than short term variable rate loans, the longer the tenor, the higher the rate. This spread depends on the banks cost of funds for their short and long term borrowings which is a function of the short/long term yield curves. Fixed rates allow home buyers the choice to lock in their commitments, especially during periods when rates are low. The past decade or so has been an era of extremely cheap money but the market does not offer Singaporeans the opportunity to lock in their loans at low fixed rates for the long term.

Singapore 10-year Interest Rate from Jun 1998 to Dec 2019

The Monetary Authority of Singapore (MAS) issues Singapore Government Security bonds (SGS) with maturities of 2,5,10,15,20,30 years. Singapore runs on balanced budgets so MAS does not borrow for operational needs purposes. The SGS program is for the purpose of creating SGD long term yield curves so that the market has a benchmark to price itself. The funds raised from SGS are kept separately to be used solely to service these bonds. The MAS has done its part to create the tools for SGD fixed income market, but banks are not biting.

The chart above shows the SGD 10-year yield curve. The years 2003, 2011,2012,2013 for example, were excellent times for borrowers to lock in their housing loans at very good rates had long term fixed rate housing loans been available.

Long term fixed rate housing loans are not uncommon in other countries. For example, Japan's  “Flat 35” loans are long-term fixed-rate mortgages that can be repaid between 15 to 35 years, UK has 15 year fixed rates, Australia 19 years, even Malaysia 5-35 years fixed rates are possible.

The US has the best developed housing loan market in the world where 2 out of every 3 loans are fixed rates with 30 year tenor. Financial derivatives add another dimension to the US market. The loans are bundled into mortgage-backed securities (the mortgages, subject to uniform underwriting standards, are typically guaranteed by the government-backed mortgage-finance companies Fannie Mae and Freddie Mac). These securities are purchased by investors who take on the risk of future rate changes. Securitising these loans into financial derivatives allow the huge amount of capital tied up in housing loans to be recycled by the banks into more mortgage loans or other business. This adds more liquidity to the market, making for cheaper loans to borrowers.

The US subprime housing mortgage crisis of 2007 was caused not by the system, but by too much government interference in the free market. The Community Reinvestment Act forced banks to extend housing loans to people who would not have been able to borrow. This caused housing prices to rise dramatically and FED rate was raised to dampen the market. The increase in FED rates created financial burdens on those who borrowed on variable rates tied to FED rates. When housing market tanked, home owners sold or were foreclosed at huge losses and defaulted on their mortgage loans. This turned the financial derivatives into junk bonds as the underlying borrowers were of poor credit ratings.The housing crisis then turned into a banking crisis.

Danish bank launches world’s first negative interest rate mortgage

In an era of cheap money, Singapore home buyers are missing out a great deal on the opportunities that fixed rates can offer. When yield curves get inverted, ie when longer term rates are lower than shorter term rates, it is a good time to lock in long term commitments. This happened with the USD recently. In August 2019 the third largest bank in Denmark, Jyske Bank, began offering borrowers a 10-year deal at -0.5%. Borrowers continue to make monthly payment, but their payments will be less than what they borrowed since the interest rate is negative.

Jyske Bank is the first to offer fixed negative rates for a long term loan. Another Danish bank, Nordea, says it will begin offering 20-year fixed-rate deals at 0% and a 30-year mortgage at 0.5%.  

Are Singapore banks up to this? Not by a long shot. They have a captive market, why bother with running a more complex loan portfolio. The Ulu Pandan Condominium project of DBS Realty in 1977 was perhaps a lesson Singapore banks never forget. DBS was the major lender with a first time ever fixed rate in Singapore for the first 10 years at 9% pa. When interest rates climbed in the 1980s, DBS starred at tremendous losses. It was obvious domestic bankers lacked the skills in managing their interest rate ladders in those days. In stepped MAS and government to sort matters out. Sanctity of contracts went out the window, borrowers signed new mortgages with more expensive variable rates, and DBS survived to become the best bank today. Singapore consumers? Suck it up, folks.   .

National Service - Social Justice Or Honour Argument

Citizenship by juis soli or juis sanguinis, is the first right a person exercises at the moment of birth. It is a right that requires of us, as citizens, to honour our country. It is an obligation weighed on us to perform or conduct our purposes in exaltation and preservation of the motherland to the best of our capabilities, whatever our station in life,. Our country expects our reverence, for without this first right that she bestows on us, we have no other rights. For what is a man without a country? The Rohingyans know this too well. So did Mehran Karimi Nasseri, an Iranian exile who ended up living in Heathrow Airport Terminal 1 for 18 years.

“To serve is beautiful, but only if it is done with joy and a whole heart and a free mind.”
― Pearl S. Buck

In National Service, three hallowed words are emblazoned on our chest  - Duty, Honour, Country. It is a Code that fires the bellies of men and generates patriotic fervour capable of sustaining soldiers with an indomitable spirit in the most degrading conditions in battlefields, bravery in the most dangerous circumstances, and ultimate sacrifices when called upon. An Army with the most sophisticated weaponry and the best training, produces fighting men with no resolve in battle if they do not have these motivations in their bones.

As Singaporeans, we recognise we have responsibilities as well as rights. As a nation, we are bound together in destiny, one in which we hope to live in happiness and enjoy the freedom our Constitution, as a social contract, grants us. That social construct requires of us a commitment to others, an obligation to protect that freedom. It is a commitment of love, charity, duty, given with passion, which honours those who came before us and who built and died for the country. Unworthy are those whose self-preservation overwhelms when they weigh the wages for their labour for country. Without this Code, patriotism is impossible.  

In various social media discourse with young men over the years, I have never ever encountered one that shares my feelings on NS. Almost all diminish the Code to nothing but hubris. The youths of today, skewed on science and technology, hold a liberal world view that puts themselves in the centre of everything. Theirs is a world where The Charge of the Light Brigade is not about valor or dedication, but some bumbling generals and dumb cavalrymen taking blind orders. Where General Yue Fei's tatoo 尽忠报国  (Jìn zhōng bào guó) on his back was the work of a silly village mother who bought into the Emperor's propaganda. Where a quote of JFK "Ask not what your country can do for you, ask what you can do for your country" gets a rebuke.

Plato said there are 3 classes of man : lovers of wisdom, lovers of honour, lovers of gain.  

A few days ago, I found myself in familiar digital altercation with four young Singaporean males over the issue of NS. One of them professed to be in his 60s, but his angry and colourful language and hateful Facebook icon told me otherwise. Young liberal values of equality last hardly ten minutes. As soon as it becomes apparent our views diverge, the name calling starts. I was no longer their equal. Snippets of that exchange here show some idea of the conversation, the name calling and other digressions are redacted.

They professed their argument was not a total rejection of NS but the inequity they suffered, in terms of loss of 2 years which set them back against female Singaporeans and foreign workers, and annual mandatory reservist trainings disadvantage them in employment opportunities. Why waste 2 years of their lives when we have no wars to fight? Why NSmen cannot get a fair wage? They made sacrifices but they suffer economic disadvantages. Why should they defend the elites? Why not extend NS to females too? Why waste so much on defence budget when we don't have a war for 50 years? Why not outsource defence to mercenary Gurkas Force?

I put clearly to them that NS is non-negotiable. One decried we were having a serious conversation why was I pro-establishment. My rejoiner was indeed a country's defence is a serious matter, more so that NS is non-negotiable. None was willing to shoulder the burden for the greater good unless there is a good wage to be earned. It is sacrilege to talk of sacrifices when economic recompense is demanded. Their arguments do not stand. No matter how reasonable an argument may seem, it's a camouflaged excuse to justify a reluctance to do duty.

When I talked 'Duty, Honour, Country', I was branded a 'dinosaur', pro-establishment, other unkind names, and my views were 'Victorian claptraps'. When I derided their calls for equality to extend NS to females, they said I'm devoid of understanding the new world reality, pointing to Israeli women in the IDF. This old man could not quite comprehend what they meant. Were they referring to the New Age of Feminism, where it's about equal glass ceilings and a shot at CEO jobs for women, or to the Age of Lost Masculinity, where these young men have to put on jockstraps going into a chess competition?

One can stand at Hong Lim Park and scream 'social justice'. There is nothing to stand on without a country

One of the young man said all he wanted is social justice. That is so typical run of the mill, lazy, ivory tower argument that educated youths spin. He thinks he is standing on high moral grounds. It is mere virtue signalling and his one size fits all statement does not stand to scrutiny. The social media is full of young social justice warriors, so many that they have earned the acronym SJW. I gave him a chance to explain his meaning which turned out as I expected. He was merely asking for fair treatment. He sacrificed, so he wanted equity. SJWs champion all sorts of equality issues without understanding the philosophical implications of what they mean - LGBT, human rights, gender equality, etc .

'Social justice' is firstly an oxymoron. 'Social' is a vacuous description for 'justice'. Sacrosanct to SJWs is the belief that injustice can be wiped off the face of the planet if the playing field is leveled and wealth or benefits distributed which will lead to a Utopia on Earth. All socialist acts are fundamentally taking from one party and distributing to another. Yet SJWs toss the catchphrase about like a standard bearer oblivious to the paradox of the injustice in their very ideal.

SJW advocacy is usually a blanket appeal to some form of equity and they feel that is a valid argument. If you are against it, you are promoting social injustice, which of course simply is not true as no ordinary person supports inequality. It's too simplistic to use as an all-purpose justification for any policy or program. Those that receives, benefits personally; those denied, looses personally but may have dire economic consequences for the community. For example, higher taxes for millionaires in Democrat controlled states in US to fund increased social programmes cause the business class to pull out of those states and transfer jobs and businesses elsewhere.

Equality is not cast in iron simply because people are inherently endowed differently. After getting the women into NS these young men may then say hey it's not fair for me to carry the 80mm mortar barrel, give it to Jennifer, after all we are getting the same salary. Or why should we attack this hill, it's too high, give the job to Company B. Allocation according to attributes, skill sets, strategic objectives, national priorities, etc, take a back seat to the dictates of SJWs.

Social justice is plain and simple an idea in Utopia. Policy setting based on the SWFs' unachievable ideals is Utopianism at work where it is possible to make fishes climb trees. It is lost to them that the heroes have become the villains as they push toward a form of Utopian elitism.

"They who can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety."... Benjamin Franklin

Paraphrase BF's quote by replacing ' temporary safety' for 'compensation' fits the NS conundrum. What that youth asked is actually called an 'appeal to desert'. This is a philosophy of the condition of deserving something, which may be good or bad. It's structure is basically Y deserves X because of Z.  Y is the subject. X is the treatment or wage that Y deserves. Z is referred to as the desert bases, ie upon what basis or virtue that Y is deserving. So here the young man say he deserves a good job, or just compensation, because he sacrificed for the country in NS.

Many political and moral thinkers have pondered over the concept of appeal to desert and it remains debatable whether desert applies to justice at all. Great minds such as Emmanuel Kant and John Rawls have posited on the ethics of desert. There are 2 schools of thought. In very simple terms, they are :

• Deontological ethics : This  just requires that people follow the rules and do their duty. It emphasises on the action itself. If aspects of the action is considered morally obligatory, such as a duty, then the consequences for human welfare is not important. A case of means justifying the end, duty for duty sake. 
• Teleological ethics or  Consequentialism : This judges actions by their results. Therefore the results must stand to scrutiny, analysis, weighing the cost and effects and other subjective determination of the morality or equality of its outcome. 

In short, instead of  'social justice', that young man should talk of 'distributive justice'.  This looks at whether the distribution of goods among the members of society is equitable. In reality, all practical consquentialists do not concern themselves with an equitable society which is an Utopian ideal. Whatever is the best possible result, all things considered, should be in the mutual interest of all concerned.

"Patriotism means to stand by the country; it does NOT mean to stand by the president or any other elected official."... Theodore Roosevelt

Invariably, the core reality, that the country is paramount over all else, that idea is lost to the youths who will carry the debate on NS to various controversial issues of the day. Whatever these many be, and in Singapore there are many - elitism, arrogance of those in power, non-accountability, incompetence, CECA, foreign workers, high cost of living, unemployment, inept politicians, poverty, abuse of power, lost of liberty, etc. These are issues that are serious and worthy of loud public voices and platforms to champion against, but ought to be decoupled from a discussion on NS, or minds will be mired and unable to see a disconnect.  

The Code of  'Duty, Honour, Country' which are the highest of virtues and moral laws, now has a price tag. Enthusiasm for the kind of liberty paid for by patriotic duty and honour to country is dead. What is happening to our young people? I'm beginning to have ephebiphobia.

The Truth About Electricity Tariffs

SP Services announced the electricity tariff for 2020 Q1 at $0.2424 per kWh (before GST) which is an increase of 3.5% over the last quarter. The higher tariff is attributed to oil price increases but skeptics point to prevailing low LNG prices and see yet another unjustified round of price increase. The public is adamant there is over-pricing. To them, the proof is the S$1b profit the SP Group makes annually.

The common  mistake of the uninitiated is to look up spot prices for LPG at a commodity trading site and seeing no direct connection to tariff rate movements, conclude there is a conspiracy. The tariff is not rigged and the price of oil do have a significant impact on the cost of electricity. The relationship of the price of oil to tariff is a bit complicated. It requires of one to invest some time to understand.

I write this blog to explain tariff computation and the relationship to oil prices. It will be clear there is no rigging of the tariff rate using oil price movement to hoodwink the public.


Tariff composition:

The tariff comprises of a fixed and a variable component. The fixed part are recoveries for Market Admin fee, Market Support Services, and the Network cost (grid/transmission). These are fixed and reviewed in accordance with the relevant Licences. They do not change quarterly.

The energy cost is the variable cost that is computed quarterly. This is the projected cost of electricity to be purchased in the market for the next quarter.

Imagine a new company wants to enter the power generation business and so it forecasts its selling price for the next quarter. It takes into account its capital cost (fixed asset depreciation), raw material cost (LNG. coal, nuclear fuels, etc) and factory overheads to arrive at its production cost. This is the Long Run Marginal Cost where capital cost are viewed as variable cost. Then it adds a gross margin to cover all operational cost and an ROI. In making this forecast, it takes into consideration expected price movements of raw materials.

That's basically what SP does when it computes the energy cost component (power generators' selling price) for the next quarter tariff. SP has to work within parameters set up by EMA and this will include factors like what ROI rate to use, what type of power plant to base on, which specific crude oil index to use, what exchange rate to use etc. Because 95% of power supply in Singapore comes from CCG (combined-cycle gas) plants, SP uses the most efficient CCG plant model in use in our market. This is the norm in contestable markets. This way, new entrants to the market will not be disadvantaged. Because it is a CCG plant, the fuel is LNG. Since SP is computing the energy cost for next quarter, it has to forecast LNG prices which is indexed to oil prices. It also has to forecast exchange rates because oil prices are quoted in US$. Fanciful modelling tools are used to do this.

The point here is computation of the energy cost component is a well-thought out formulated process, nothing whimsical nor sleigh of hand involved.


Oil prices vs LNG prices:

The question the public ask is why compute tariff based on oil price when there is no co-relationship. In the past few months LNG price has dropped to its lowest ever whilst crude oil price is now moving up. So Singapore consumers do not benefit from the LNG glut. But why is it other countries like UK and US are having significant decrease in their electricity rates? The answer lies in the way LNG is priced differently in all countries.

Crude oil is traded in a highly developed and liquid global market with well established benchmarks like Brent and WTI. Natural Gas is a pre-dawn market, sold and priced very differently in various global markets. There are basically 4 pricing systems for LNG :
1. Gas-on-gas (UK, Canada, US)
2. Indexed to substituted energy prices (Continental Europe, SE Asia)
3. Oil-linked prices (Japan, Korea, Taiwan)
4. Regulated (ME, Russia, China).
There are many reasons why it works this way for LNG but that is not the subject matter of this blog.

Singapore used to have PNG (supplied from Indonesian and Malaysian NG fields) but have now switched to LNG.  The LNG price in Singapore is computed from crude oil prices and that's what SP does. That's the way the local market is.

What is the relation of crude oil and LNG?  They are both fuel or energy sources which possesses heat content measured in Btu (British thermal unit). A barrel of oil is about 42 gal with about 5.8m Btu. 1,000 cubit feet of LNG has about 1.037m Btu. So basically 1 barrel of oil has about 6 times the energy in 1,000 cubic feet of LNG. It is on this basis LNG price is indexed to crude oil prices.


LNG spot prices and long term contracts:

This may come as a surprise to many. Spot prices being waved about in most commodity markets do not have anything to do with today's production. Asian LNG spot prices may have come down to about US$5 per mm Btu. This is irrelevant for current production. In power generation, for example, power producers have already locked up their LNG requirements in long term contracts months ago. In the case of PNG the supply contracts could be 10, 20 years. 

SP computation of tariff is based on oil prices. The point here is even if it is based on LNG prices, spot prices is not the determinant factor.


Oil price outlook:

Brent crude oil average US$64pb in 2019 and market expectation for 2020 is mostly bearish. For example, the predictions for 2020 average price for Brent crude oil were -- US Energy Information Administration: Average  at US$61pb, Goldman Sachs at US$63pb, JP Morgan $64.4bp, and Global Platts at US$65 first half then fall back to US$60.

These predictions were made early December when prices were at the lower US$60s. Prices after Christmas were already US$69+. The trendline for increase was already evident in early October when price was about US$59pb. Going into Q1, SP says oil prices are rising. SP takes the position of most market players that see a rising trendline for Q1 and Q2. What say SP skeptics, based on what market intelligence?

Generally, the prediction is by January 2020, oil prices will increase due to efforts by governments to support the climate agenda. You may blame Greta Thunberg for this. This is due to the International Maritime Organization (IMO) enacting Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL Convention), which lowers the max sulphur content of marine fuel used in ocean-going vessels from 3.5% of weight to 0.5%. But prices will be driven down again in the later part of the year to end with averages that is lower than 2019's US$64pb due to high global inventories.

The point here is the next quarter tariff is based on forecasted oil prices and that's something that cannot be read off energy indexes online. That's SP's call.


Correlation of oil prices to LNG prices:

In the early days, LNG started off at discounts to oil prices as governments tried to encourage more conversions to cleaner fuel. Traditionally, it was naturally indexed to oil, which is still the basis used in many Asian countries. It's stability of course depends on the correlation between the two. US EIA collated some data which show a correlation of +- 26% but there are warp factors which can lead to divergent price movements, such as the past few weeks with oil going up and LNG going down.

LNG trading market is still evolving and with growing importance of NG as fuel it may well overtake oil in terms of volume. An universal LNG benchmark index delinked from crude oil is the way forward, but that is still far in the future.


Direction of Singapore:

The government has moved to develop the market and all the necessary infrastructure that will enable Singapore to delink LNG prices from crude oil. In 2016, LNG spot index SLinG (Singapore LNG IndexGroup) was launched on SGX, settlement prices for LNG futures and swap contracts were published by the SGX. SLinG represents FOB spot prices for LNG delivered in Singapore. One LNG storage terminal has been built with another on the way. Singapore has successfully wooed all sorts of traders and players in the LNG industry to open offices here.

There were other games in play in this huge gamble of making Singapore a LNG trading hub.  The Baltic Exchange was acquired and SLinG indices were listed in a few markets. In 2013 Temasek set up a subsidiary Pavilion Energy tasked to acquire LNG assets in a big way, both upstream and downstream such as LNG shipping, gas fields, etc.

Low volume of Singapore's LNG consumption stands in the way. One fundamental pre-requisite for a commodity market is liquidity which Singapore lacks. The government has moved to create the market ahead of creating liquidity, putting the horse before the cart in an extremely high stakes game. Early 2019 it has withdrawn the SLinG index due to low participation. Pavilion splashed US$1.3b in 2013 on 2 NG wells in Tanzania belonging to Ophir Energy which were written off in 2016 - no gas deposits were found. (Pavilion CEO Seah Moon Ming moved on to Chairman SMRT, from one job with zero experience to another) .

So it looks like SP will continue to compute tariff based on oil-linked price for LPG for a long time more. A gas-to-gas model is still a piped dream for the moment.


Vesting contracts :

There is one more complicated aspect to explain the tariff computation. Vesting contracts are mechanisms normally intended for the purposes of containing market power. A power company who is a predominant producer can influence prices simply by withholding production. This is known as market power. To reduce this power, the company has to contract with SP at an agreed price for a certain load. Thus the balance of the company's output is reduced and it can no longer influence prices in the market.

Vesting contracts were meant to be temporary mechanisms. It's no longer required when there is no more dominant producer. By 2013 power supply was evenly spread over a few power companies. A new vesting contract was implemented to promote the use of supply from the newly commissioned LNG Terminal. This LNG vesting contract applied to new plants coming on stream after 2013 which included Hyflux.

Some definitions are helpful before going further. Power companies supply the market by auction every 30 minutes. The successful ones generate and feed their output into the Grid at various Nodes. There are nodal charges which they add on to their cost. Power companies get paid on their Nodal Price which is their auctioned price plus nodal cost. The weighted nodal cost of all power companies for that 30 minutes supply is the USEP (Uniform Singapore Electricity Price). The USEP + some administration charges is the Wholesale Electricity Price for that particular 30 minutes supply. SP and all retailers purchase at the same wholesale electricity price.

Under these vesting contracts, the power company commits the next quarter's supply for an agreed load at the energy cost computed by SP. This is the Vesting Contract Price, or Strike Price. The difference between the Nodal Price of the power company and the Strike Price is settled between the 2 parties. If the Strike Price is lower, SP pays the power company the difference. If the Strike Price is higher, power company pays SP. So basically, vesting contract is also a way for SP to hedge against energy cost higher than what was forecasted.

In hedging, SP should gain sometimes and loose sometimes. The gains are credited back to consumers and losses are recouped from customers. SP adjust for such hedging gains or losses of one quarter by adding or deducting it to the next quarter's Energy Cost component of the tariff.

The points to note on these vesting contract adjustments are :

1. Due to overcapacity, power companies are forced to bid low in the auction market. This has caused Nodal Prices to be consistently lower than the Strike Prices. Which means SP has been the payer of vesting contract differences for decades. S$ billions have been paid out by SP over the years.
2. The load vested were initially less than the aggregate of SP customers' purchases. As more and more of SP customers switched over to electricity retailers, the same vested load in time exceeded SP customers' load. This began sometime in 2019 Q2.
3. How does SP split the vesting contract difference (hedging cost) to consumers? The cost is split between the (A) aggregate load of SP customers and (B) which is the balance of vested load less (A), proportionately. 
4. Who pays the hedging cost? SP customers pay their share of the cost 3(A) in the following quarter's tariff. SP bills retailers their share of the hedging cost for the load in 3(B) which the latter in turn charge to their customers. Since the 3(B) cost is split to a bigger customer base, retailers' customers bear a smaller burden at the moment. It is SP customers who bear a high burden.
5. SP in effect hedges all their electricity sales. Thus SP Services makes neither profit nor losses in their electricity sales services.

The point here is adjusting the tariff for previous quarter's vesting contract difference warps the tariff computation. For example, it may seem oil prices are decreasing, but adding the previous quarter's hedging cost jacks up the forecasted energy cost and thus the tariff.


Power companies pricing:

Power companies do their number crunching and bid to supply the market. They differ from the way a new entrant coming into the market and SP forecast their energy cost in 4 fundamental ways:

1. Power companies compute every 30 minutes which is the auction schedule.
2. Unlike the new entrant coming into the market, or SP computing the energy cost for the next quarter, the fuel cost of power companies is not forecasted, but based on their supply contracts. Since the fuel is purchased forward some time ago, the LNG spot price may not be representative of their actual cost.
3. Power companies look at their variable cost of production, namely raw materials and variable production overheads. This is their Short Run Marginal Cost which views capital cost as a fixed cost. Pricing their production below the SRMC means negative cashflow and suicide. If they price upward of SRMC they recover capital cost (depreciation), then operations cost, and the rest is the net profits.
4. How much above their SRMC will power companies price themselves is a matter of market competition. Currently, due to excessive over capacity, power companies are bidding low to get despatch for their plants. In the past decade, power companies have been running huge losses.

 

The table shows USEP has been consistently lower than the energy cost component of the tariff for 2019. In fact that has been the case for the last several years. USEP is the weighted average of Zonal Prices. With USEP running below tariff energy cost, it means SP has been a payer for all those vesting contract differences.

The point in this is that for years, tariff for each quarter has been warped by the vesting cost adjustment. This condition will persist as long as the over capacity situation remains.


What explains the S$1b profits of SP:

So if SP Services does not make any profits from sales of electricity because they are fully hedged, why is the group showing S$ billion profits each year? The group's main profits come from SP PowerAssets which manages the power Grid (transmission) and from foreign operations. (Read my blog here).


Tariff up, Municipal gas down?

For Q1 SP raised electricity tariff but lowered cooking gas rate. There is no anomaly. LNG and municipal gas are different animals. LNG is natural gas, containing mostly methane. This is used for electricity generation, industrial stock and bunkering. Municipal or Town gas is used for cooking. Singapore's municipal gas is produced by City Gas Pte Ltd at its Senoko Gasworks. Municipal gas was previously produced at Kallang Gasworks which relied on coal. Senoko Gasworks uses naptha. Municipal gas contains mostly carbon monoxide, some hydrogen and methane. Electricity and cooking gas rates have no corelationship since raw materials and production are different.



Conclusion:

Tariff computation is a formulated process laid down by EMA. LNG price is oil-linked because it is the way the market works for Singapore. Whether it is fair or not is a tough call because there is a 26% correlation of oil-LNG prices and prices have been divergent sometimes. At this point they are moving in opposite directions to Singapore consumer disadvantage. But at other times, the reverse could occur.

Looking at LNG spot prices, the tariff does not make sense and one wrongly concludes SP is pulling a fast one. This is erroneous because LNG spot price movement has no bearing with the way LNG cost is computed for power generation. Power companies use their long term contract cost, SP uses a complicated forecasting formulation, based on oil prices, in a scientific manner.

Vesting contract adjustments further warp the tariff computation. The over capacity in the market results in SP being consistently a payer in the vesting contract differences which is passed on to their customers by pricing it into the tariff for the next quarter.. SP sells electricity on a fully hedged basis and thus makes no profits or losses. Consumers who have not switched to retailers bear a high burden of the hedging cost.

Any criticism of tariff over-charge should be directed at the transmission cost. SP Group has amassed huge sums of profits out of transmission. The question to ask is therefore, did these profits flow to Temasek, or retained in SP PowerAssets to fund power infrastructure maintenance and development. Are power infras funded internally, or from national budget?

CECA - The Dangers Of Labour Mobility

Singapore opened the floodgate for hundreds of thousands of Indian workers into the country when it inked the Comprehensive Economic Cooperative Agreement with India in 2005. With no parliamentary discussion, it's left to conjecture whether the means in pursuit of economic numbers were closet decisions by omniscient bureaucrats who never envisioned the backlash and the national perils CECA presents.

By allowing the ease of labour mobility to a country of 1.3b population hungry for jobs, Singapore imported the geo-politics of the Indian sub-continent into the tiny island state. A sectoral, cultural or religious clash influenced by events in exogenous flash points, is a national security threat that the authorities appear to have ignored.

On the Dokalam plateau, Indian and Chinese troops stare across the border at each other. It may be Dokalam, it may be any of the several disputed areas in the Himalayas, hostilities can flare up at any moment. The Sino-India border conflict has been going on for decades. However low the probability, Singapore cannot be reticent that the next Sino-India border skirmish may raise national sympathies between the hundreds of thousands of Indian nationals and PRC Chinese workers in the country that spill hostilities onto the streets.

Racial and religious harmony is a treasured Singapore identity. True blue Singaporeans are no longer emotionally impacted by events in countries where their forebears emigrated from.  The same cannot be said of new citizens and other residents. As Indian Prime Minister Modi implements the new Citizenship Act, seen as a thinly-veiled religious cleansing war against Muslims, the world braces for a horrific persecution of non-Hindus on a scale far worse than China's suppression of Uighurs. Another India-Pakistan war triggered by sympathies to the persecution of Muslims in India is a high possibility. The spectre of unrest in Singapore amongst Indian workers themselves is not a far-fetched side-effect of the horrors that will likely unfold in the Indian subcontinent.

Unrest in Singapore, inspired by geo-politics of the Indian sub-continent, is real and the danger lies in the vast number of Indian and PRC Chinese residents. All that is required is a spark that can create an unrest on a scale beyond the capacity of the small Singapore security forces to handle. It can develop into a full scale destabilising event.

The demographics of Singapore since independence has been roughly 70% Chinese, 20% Malays, 5% Indians and 5% Others. Faced with different birth rates amongst the races, the admission of new citizens and permanent residents had been applied in the past to tweak population growth dynamics to satisfy a desire to maintain status quo. The huge influx of Indian nationals comes with a cultural homogeneity shock that is almost inevitable. Not only does it significantly alter the national racial mix, it radically redefines the Indian composition. The inflow of Indian PMETs are mostly drawn from the Northern Hindi speaking part of the sub-continent, in contrast to the Tamil speaking majority of local Indians. Unknowingly, Singapore imports massively a people with an ancient caste culture, the impact of which is slowly being played out. Local Tamils complain of growing Hindi demands for more space in TV, education, places of worship. Will the Tamil-Hindi agitation in the home country take root in Singapore is a question that must be addressed warily.

The open door policy for 127 specified job titles without any qualification test is lowering the sigma for labour quality in Singapore. The Indian educational system has very serious quality and authenticity issues. Whereas pre-CECA, there was hardly one single Indian university that was recognised by Ministry of Manpower (MOM), today, Indian degrees across the board are not questioned, even for some from paper mills. Media reports of Indian sub-par degrees have been publicised regularly, the latest coming from Mckinsey that suggests 95% of Indian engineers can't code. Singaporean patients at hospitals are increasingly requesting to be attended to by non-Indian doctors. The competence, efficiency and effectiveness of Singapore Inc reputation, built up over decades, is being corroded away insidiously chip by chip.  In the madness for quantity, the sacrificial lamb is quality.

The core stock of older local PMETs are diminishing by the day as cheaper Indian nationals move in. Wiping away a national knowledge base is nothing short of a long term economic suicide. For a government that prides itself on taking objective economic views on all issues, it is incomprehensible that the long term damage this implies is a non-issue.

The moment we want to believe something, we suddenly see all the arguments for it, and become blind to the arguments against it. George Bernard Shaw
Read more at https://www.brainyquote.com/topics/blind-quotes

The moment we want to believe something, we suddenly see all the arguments for it, and become blind to the arguments against it. George Bernard Shaw
Read more at https://www.brainyquote.com/topics/blind-quotes

"The moment we want to believe something, we suddenly see all the arguments for it, and become blind to the arguments against it." George Bernard Shaw

The government is focused on economic growth by population expansion, remaining competitive by wage constraint, and promoting technology sector as the key driver. Labour, vast numbers of them, from India, is a quantitative fit and solution to the desired end. The labour mobility article in CECA is a radical idea that germinated non-egalitarian policies the locals perceive as relegating them to second class citizens in their own country. Is there balance in the fruits of CECA to the dangers that labour mobility present? A million immigrant workers entering a country of 100m people is no issue, but to tiny Singapore with 3.5m citizens, it is a serious threat.

See related blogs :

CECA : The Shocks Of Labour Mobility

The Government Thinks Singaporeans Are Too Stupid For Lots Of Jobs