Lost amid the Anton Casey mess was the announcement that SMRT would raise fares by more than 3% in 2014 and additional 3% in 2015. With yesterdays announcement that SMRT profit had fallen by more than 40%, SMRT appears destined to take increasingly stronger steps to maintain profitability. While people have understandably been upset by the fare increase, there appears to be a poor understanding of how this fits into the larger picture of Singaporean public finances and the Temasek portfolio.
- Transportation companies and especially public transport companies are notoriously unprofitable. There is a reason there are virtually no listed public transportation companies and that is because they are unprofitable. Throughout the world, whether it is North America, Europe, or even Asia (Singapore and Hong Kong excluded) public transportation companies like bus and rail companies do not make money. Public transport train, subway, and bus companies from Japan to Germany are rarely profitable enterprises.
- SMRT is an immensely profitable firm. Despite being in a difficult industry, SMRT has posted net profit margins of nearly 20% as recently as 2010 and even in its most difficult recent year still managed to post a net profit margin of 7.3% equaling $83 million SGD. In other words, despite declaring a healthy net profit, SMRT has also declared its business model “unsustainable”. This begs the question: what is driving the unreliability and financial problems at SMRT?
- SMRT is receiving subsidized profits via government funds. Though most people are aware of the subsidized fares available to seniors and students, there are two much larger and less obvious ways the government subsidizes SMRT. First, the Singapore government has been gifting buses to the SMRT most recently to the tune of $1.1 billion SGD resulting in an annual implied subsidy. If we take a simple scenario assuming this money was loaned to SMRT over 10 years at 5% annual interest, this would necessitate annual payments of $142 million SGD. Consider, that SMRT only recorded net income of $161 million in 2011 declining to $83 million for the year ending March 31, 2013. It becomes obvious how important this implicit subsidy become to SMRT reporting yearly net profits around 10%.
Second, though there is no public statement about the agreement between SMRT and the government on the rail, subway, and light rail assets, given the generosity of the government to SMRT with regards to buses, it stands to reason that they are displaying a similar level of generosity with regards to rail assets. The government of Singapore paid for out of public funds and built rail and subway lines and then reach an agreement for SMRT to pay the government for the use of these assets. If the government is not charging SMRT a cost plus rate for the use of those rail assets, as is the most likely scenario, this represents an additional significant subsidy. Given the large amount of money invested by the Singaporean government over time but the longer expected of life span of rail assets when coupled with the bus subsidy, it would be conservative to estimate an implied subsidy of greater than $200 million SGD annually to SMRT. Given their recent net profit of $83 million and their $163 million in 2010, this implied subsidy represents between 125-250% of net profits.
- This matters because SMRT is a publicly traded firm and a portfolio company of Temasek. SMRT is publicly traded and counts Temasek as its dominant shareholder. Temasek repeatedly boasts its superior asset management in producing 16% annualized returns since 1974 and SMRT has produced consistently high rates of return producing an 18% net profit in 2010. Given the close links between the government and Temasek, each has an incentive to ensure continued profitability even if that means the government gives money to Temasek managed firms so they can declare a profit. SMRT is only making a profit because of government subsidies not due to superior management. If the government wants to give money to SMRT for the purpose of maintaining service, this would be a reasonable use of public funds. However, the government giving money to SMRT so it can declare a profit and increase the rate of return for government linked shareholders is nothing less than cronyism.
Let me strongly emphasize that given the difficult nature of the public transportation industry, I am not philosophically opposed to public private partnerships in this area. However, it seems to be a clear conflict of interest and inappropriate for the government to be subsidizing the profits of a publicly listed firm that is owned by a government owned investment firm. SMRT clearly has no profits without government subsidies and the subsidies should not be used to allow Temasek or other executives to meet profit or return targets for bonuses.