Thursday, July 14, 2011

Fare Increases and Nationalization of Public Transport

Yet again there are requests by public transport companies SMRT and SBS Transit to raise fares. I'll not go into whether such fare hikes are indeed justified, for it is beyond my present expertise. Still, as a footnote for future reference, my position on the matter is that I will be convinced that the fare increases are justified if:
  1. It is shown that the public transport companies are nonviable in the absence of the fare rise, and that service levels will necessarily be impacted as a direct result of fares remaining unchanged.
  2. There is reasonable effort on the part of the public transport companies at improving the cost-effectiveness of their operations.
As mentioned previously I lack the expertise and information to make a solid decision and hence I shall be withholding judgement on the issue.

However, some friends have indicated their disgust at the issue. They mention in particular that the privatization of public transport is unsound. Instead, they have suggested for public transport to be nationalized.

I can understand their position. While the free market is very often more capable of provisioning goods and services at lower cost then the public sector, I do not believe that this holds for the situation we have at present. Few competitive forces appear to be at work. There are some economic penalties for poor service standards, yet these are quite insufficient to modify the behavior of transport operators in a significant fashion.

Yet I do not entirely agree with nationalization of public transport. Competitive tendering of bus routes can bring forth a cost reduction of up to 30-40% [1]. It is merely that Singapore has adopted a poor model of privatizing public transport. Public transport operators should not be compensated on the basis of fares collected, because such models offer no economic incentive to improve service standards (demand being largely inelastic). Rather, public transport operators should be confined to being merely contractors of transport services, and compensated appropriately if they meet various service criteria. This helps to aligns the interests of the transport operators in line with those of the consumer. Competitive forces are also more significant during route tendering, hence such tenders should be held regularly.

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