Botched Tender? LTA performs u-turn on private bus operators

The decision to award the first City Direct private bus tender to ComfortDelGro – the parent company of existing public operator SBS transit is baffling. The original intention to use private operator capacity to augment existing public operators appears to have gone up in smoke. Was the introduction of competition to the existing government controlled duopoly operators too dangerous? Or was the tender itself simply botched up?

Original Intention

Lui Tuck Yew, then Minister for Transport, describe the tendering process thus –

“I have also asked LTA to see how we can tap on the resources of private bus operators, given that the two [Public Transport Operator]s’ resources are already very stretched”
Speech by Lui Tuck Yew, Minister for Transport, at the parliamentary debate on the population white paper. 5 Feb 2013

Josephine Teo later re-iterated this point in an oral reply in parliament –

“the move to invite private bus operators to run City Direct bus services is to tap on their existing resources to improve bus service levels. These operators may have existing buses and drivers available in between their other assignments, such as ferrying school children or workers, and it is our aim to contract them for the required bus services.”

Josephine Teo. Oral Answers to Questions. Parliament Reports. 9 July 2013.

On the face of it, this plan seems perfectly reasonable. Private bus operators with spare capacity and an interest in growing their business can be brought into the industry to address an apparent shortage of resources amongst public operators. Another obvious but unspoken change that such a move would bring is increased competition in the transport segment. The current model, where two operators – both of whom have the state as their largest shareholder – enjoy a duopoly is arguably less good at delivering value to customers than it is at delivering guaranteed profits to shareholders.

Private, Public or Parent?

In awarding the tender to ComfortDelGro, the parent company owning 75% of existing operator SBS Transit, LTA appear to have performed an abrupt u-turn. Ms Teo and Mr Lui’s stated goal of using private capacity to supplement public shortages does not appear to have been realised. While CDG does own a bus operator separate from SBS Transit, there is no meaningful independence between the two companies. With such a large shareholding, CDG enjoys almost complete control over SBS Transit – CDG’s owners control a large enough share of SBS Transit to dictate the running of the company. This is underscored by the management structure. The Chairman of SBS Transit, Lim Jit Poh, is also Chairman of CDG. SBS Transit’s deputy chairman, Kua Hong Pak, is listed as “Managing Director/Group Chief Executive Officer” in CDG’s annual report.

Rather than bringing private operators into the industry to bolster capacity, LTA appear to have achieved nothing more significant than enabling the management of CDG to work with the management of SBS Transit (who are in fact the same people) to use the resources of the former to alleviate the constraints of the latter. While the substantive difference Ms Teo and Mr Liu originally sought to draw between public and private operators is not obvious in hindsight – a bus is a bus after all – getting a parent company to assist a child company is not a game-changing achievement. One is left wondering, if the solution were this simple, why did SBS Transit and CDG not find a way to work together sooner to solve the ongoing transport crunch? Were they suitably incentivised to innovate and problem solve?

Whither Competition?

Competition is the greatest spur to innovation, and it is something that has clearly been lacking in many sectors of Singapore’s economy. Enjoying a comfortable duopoly with 54% Temasek owned SMRT in the transport segment, SBS has earned significant profits – achieving a return on equity over 10% from 2008 to 2011 – before falling to 5.5% in 2012. Were SBS complacent in the knowledge that there were no competitors existing or likely to emerge to their bus operations? Probably. Could SBS really not have found a way to increase their “stretched” capacity without waiting for LTA to award a tender to their own parent company? A parent company with the same senior managers? It seems unlikely. The suggestion that management were complacent due to a lack of competitive pressures is hard to avoid.

As it stands, the move does nothing to increase competition in the sector. The current duopoly is not threatened by a “new entrant” which is in fact closely related to an existing player. Will the man who is Chairman of both SBS and CDG allow his new operator to aggressively challenge the position of his existing player? Again, it seems unlikely – and this represents a missed opportunity. While increased competition was never explicitly mentioned as a reason for the tender to private operators, the language used caused many – not unreasonably – to assume this was an expected outcome. The government controlled Straits Times reported on expected bids from both Woodlands Transport and The Singapore School Transport Association – but made no mention that CDG might bid.

The opportunity to bring new blood into the industry, not just in terms of capacity, but new management and new ideas as well, should not have been missed. Faced with a threat to their duopoly, SBS and SMRT would have been forced to re-asses and improve their operations. Conversely, awarding the tender to a government-owned company linked to an existing PTO further entrenches the existing state-duopoly and reduces opportunities for new entrants to break into the industry. It could be that the government feared the effect of competition on the existing players – both of whom have the state as their largest shareholder – and decided to favour a bid from a related party. It is hard to know. It could also be that the government intended to bring in new players from the private market, but botched the tender by not realising that SBS’ parent company would be eligible to bid. If financial parameters were part of the selection criteria, then it is likely that CDG would have an advantage over smaller private operators – and while it could be that this is what happened, it is impossible to say for sure.

As a believer in the driving force of competition, one can only hope for a better outcome in subsequent City Direct tenders. However, only ten routes will be tendered in total and all are likely to be valuable to a new player seeking to establish themselves. For this reason, the decision to award the current tender to CDG is particularly disappointing – with any luck, subsequent routes will go to a new player with real independence from the existing government linked players.


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6 responses to “Botched Tender? LTA performs u-turn on private bus operators

  1. More than the issue of the U – turn and lack of competition is the real problem in this country – conflict of interest. It starts from the very top and is present at every level of governance.Take the simple issue of remuneration for the Ministers. The PM decides on the amount of “performance bonus” not only for his Ministers but also for himself. The Attorney-General is the legal advisor to the government and also the Public Prosecutor. Then the AIM saga shows up yet another example. It is time for a serious debate in Parliament on this fundamental issue which, in my view has led to much of this type of problems in the country.

    • This is definitely true. I should have thought to write about conflict of interest. In this case, it is particularly blatant. The government, as largest shareholder, has an incentive to protect the profitability of the existing players. In selecting a “new enterant” that is the state-owned parent company of the state-owned existing player, they have clearly selected a path devoid of competition. Only a fool would suggest this was done deliberately to maximize GLC profits, but the fact that there was a conflict of interest remains. GLCs and related companies should have been banned from tendering.

  2. A. Sim

    Let us put it this way. Most infrastructures even when they are released to go public, are never intended by the government to allow these be run by independent entrepreneur. The conception of Temasek is to take care of businesses (profit & loss) so as to release their direct burden of blame but still have enough leverage of controls if any shortcomings were to surface from time to time. Basic infrastructures controlled by the government, are usually non profit and subsidized for public consumption.

    These entities are business units of Temasek and the onerous, one is to expect, is to have reasonable return of investment. If they are top heavy, contributing to a much higher operating expenses, this will definitely determine the cost and the price commuters have to pay. Therefore you will see no competitive pricing, which does not benefit the consumers.

    It will be a better scenario, if the government took control and the operation of these routes and allow SBS to compete. But this will not make any sense, since, SBS an entity of Temasek and being own by the government,

    Like you have mentioned, “Competition is the greatest spur to innovation” but it will never be the case for Singapore, Public transportation and Public housing are the top most essentials for the people in Singapore. Just take a quick glance at the costs of owning a car and a HDB flat. The government makes sure the “money tree” will always flourish from the “contribution” of its people. But is the government generous enough by providing much needed security for the people and taking good care of them, when misfortune befalls them? Almost everything and anything that requires its people to pay, the first thing on their minds are to profit from them. That is why there are hardly any local entrepreneurs in the making.

    • Really agree with what you wrote. Just look at how much profits SMRT made and dividends paid to TH over the years. Then someone realised they actually need to do maintanance and suddenly the profits shrank they said it is “unsustainable” and go to the government for help. Of course, TH kept the dividends but commuters suffer from poor service and breakdowns.

      Similar arguments apply to other areas of the economy. In telecomms, Starhub and Singtel have the gov as largest shareholder, but is the 3G network reliable? How much problems did everyone have last year? Even “HDB Corp” – now called “Surbana” is owned mostly by TH. They profit – they have to or else PM and his wife will be criticised – but consumers lose out.

  3. Wadosy

    The plan is that everyone (or as many as possible) should work directly or indirectly for the gahmen. That way the worker is clear who fills their rice bowl, and who can break it when they vote for someone else.

  4. Pingback: 2013 review part two – a year of u-turns | andyxianwong

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