Subsidizing Profits, SMRT, and Temasek

In 2008 during the global financial crisis, United States politicians debated whether bailing out failing banks would set the precedent of ‘privatizing profits and socializing losses’.  Economists call this problem “moral hazard” when companies are not forced to recognize their risks and consequently accept higher risks knowing a third party will absorb their losses.  While the debate rages about whether major US and international banks privatized the profits and socialized the losses, this is standard practice with many Singaporean and specifically Temasek owned companies.

SMRT is probably the best example of this practice within Singapore.  As I have noted elsewhere,   SMRT and other Temasek firms enjoy tremendous privileges that other foreign or even other Singapore firms simply do not enjoy.  For many year, the Singaporean government has paid for the capital that that SMRT uses everyday.  The tunnels, the rail lines, the subway cars, and buses that SMRT uses everyday have been purchased by the Singaporean tax payer.

The financial effect is simple.  SMRT as a publicly listed company and a portfolio company owned by Temasek makes money only because of the generosity of the government and the Singapore tax payer.  Despite having recently declared a $62 million SGD net profit for the year, SMRT depends heavily on the gifts of the Singapore tax payer through gifted buses and other infrastructure.  If SMRT had to make principal and interest payments on the buses alone, it would require yearly payments of $150 million SGD.  The financial effect is this: SMRT profit is entirely attributable to subsidies given to it by the Singaporean tax payer and not high quality management at Temasek.  Put another way, Temasek and its senior executive are only able to declare a profit for SMRT because the Singapore government gives it money.

There are three more philosophical reasons this matter.  First, most people appreciate and respect the success of other when gained through skill, talent, and hard work but resent unfairly gained benefits.  This is why few people complain about companies like Apple or Google, they make a good product and compete with others.  SMRT has not achieved its profitability due to providing a top quality product against fair competition, but through political manipulation and public bailouts.

Second, SMRT is socializing the risk and privatizing the profits.  When losses are incurred it is the Singapore tax payer that suffers but when profits received, it is the executive of Temasek that enjoys the benefit.  SMRT is placing the risk on the tax payer but capturing the benefit for itself.  While individuals or firms taking individual or corporate risk should be allowed to keep those profits private or socialize risk and profits, it is truly objectionable to socialize the risk but privatize the profits.

Third, the true financial and economic cost of SMRT and related infrastructure is not being recognized.  As one economist noted, if something cannot go on forever it will stop.  Singapore, SMRT, and Temasek cannot maintain a loss making firm dependent on regular bail outs to report profits or eventually it will stop.  By hiding the true cost of ownership, maintenance, and investment, the government is attempting to protect its Temasek owned asset rather than the tax payer.

Mass and public transport is a notoriously difficult and generally loss making industry.  It is however, morally reprehensible to pretend that a company is making money and use tax payer money to create  profits for the investments of family members.  The people of Singapore are being defrauded by bearing the risk of investment but seeing none of the profits.

Note: This piece was prompted by a post in the TREmeritus.com last week asking whether SMRT was a public or private company.

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