Thought of the Day – SMRT: The Instant Failure of Privatization
In Economics study, there is always a debate over the pros and cons of “Privatization” of companies providing public goods like public transport.
Companies providing public goods are natural monopolies because they need economies of scale. But the downside is, it tends to be inefficient if it is under government administration. However, this may not be always true.
Natural monopolies are preferred to be under government control because this will prevent them from “exercising their monopolistic power” to “overcharged” and gain abnormal profits through maximization of profits pricing strategy.
Even when natural monopolies are turned into private companies, they will be heavily regulated due to the enormous monopoly power over pricing. This is in the interests of the public.
However, there are other issues when you try to achieve “efficiency” via privatization a monopoly like SMRT. When it becomes a private company, it will shift its priorities from providing reliable public service to making good returns to its private shareholders to sustain its stock market value.
SMRT’s privatization exercise in 2000 is a typical example of how such shift of priorities will harm public interests.
After its privatization and public listing on SGX in 2000, SMRT appointed Saw, a lady from DFS and with only skill set in retail to become its CEO. The motive is simple. They wanted to MAXIMIZE profits from the vast potentials of the properties it owns under its MRT stations.
But Saw went beyond extending the retail space in MRT stations. As a person without any Engineering skillsets but with vested interests in getting hefty bonuses by increasing profitability and cutting costs, she started to cut the “Cost Centers” of SMRT operations. Obviously, the Maintenance Division is considered as a huge cost center that doesn’t generate sales nor revenue but costly to SMRT!
Just like any ignorant money smelling face, she thought she could cut down expenses in Maintenance by replacing “expensive” but experienced engineers and technicians with “Foreign Talents” who have only some paper qualifications (oh, never mind if these paper certificates are fake or not) but extremely cheap at a fraction of the experienced staffs. All thanks to PAP government opening the Floodgate to “Foreign Talents” so that SMRT could capitalize on this fully!
She thought she could just ignore the need of upgrading or replacement of critical assets of the rail system so to boost the profits of SMRT further!
Well, in the short run, SMRT did “extremely well” in giving out good dividends to shareholders. Dividends jumped more than 5 folds after 2002 in some years.
However, it is just obvious and common sense that such management of a company which is heavily depended on good engineering to keep the CORE business running smoothly cannot be sustainable. Eventually, the rail system broke down. This is also partly due to the “overloading” problem due to the extensive influx of foreigners which inflated our population up to 5 million and beyond!
The MRT system was designed and built for a capacity of 3 million. It is supposed to have 8 cabins (like the Hong Kong MTR) in order to cope with a 5-8 million population.
While it is possible to mitigate the problem of overloading by building extensive by-routing rail network like the NW line, Circle lines and Downtown lines, but the stress on the main line NS and EW lines are still extremely heavy. Furthermore, the increase of the number of lines and stations would also mean the need to expand the maintenance division extensively!
How could SMRT keep the growth of expenditure on its maintenance division comparatively low while the number of lines and stations keep increasing in such a speed? You need time to train and get new engineers and technicians to familiarize with the job scope!
The proportion of money spent in maintenance as compared to Hong Kong MTR is extremely low. Do they really want us to believe that SMRT engineers are magicians or superman and women who could do wonders?
The entire system ended up in the current sorry state just because PAP screws it up with its Money-face-cronyism management strategy. They just anyhow send in someone who know nuts about running an effective and efficient rail system to become CEO just because she might be great in squeezing every penny out of SMRT!
And the most ridiculous thing is that they made the SAME mistake of sending in a replacement from the army who also knows nuts about running a rail system and hope that he could clean up the mess the previous idiot has done!!!???
What is worse than putting people who are totally clueless about the job scope to run an important rail company? And both just took in their own KAKIs from the same UNRELATED industry who similarly, CLUELESS and lack of the relevant skill set and in-depth technical knowledge of rail system to run the departments!
Instead of headhunting people with REAL Experience in running a rail system, we ended up with these mulit-million dollar parasites who are clueless of running a rail system!
This is how Privatization of such an important public goods provider cum monopoly ended up so wrong. I guess this will enter into World Wide Economic and Management Text Books!
On the side note, PAP has always treated GLCs as their “dumping ground” for their “scholars” who have expired their usefulness in SAF or civil service. Maybe it is time for us to rethink whether the extensive Scholar system we have right now, especially the SAF scholarship system, is still useful or relevant. We cannot just dump them anyhow into GLCs which they lack the skillsets and experience to work in!
Goh Meng Seng