The cost of Public Transportation
Source: sei-ji rakugaki
In a Straits Times news article “Will try to contain costs” published on 21 Dec 2008, the journalist reported:
But Mr Lim also tempered hopes that current falling oil prices will translate into a similar drop in fares, saying that there is no direct correlation between the two. If there is, public transport fares would have shot up 40 per cent between last year and earlier this year on the back of a spike in oil prices over the period, but did not, he said.
And
But the minister also dispelled the hope expressed in a popular question that he said many have put to him: With oil prices now plummeting, why not fares too?
‘That’s a fair question,’ he said. ‘The answer is that public transport fares are not directly linked to oil prices.’
Instead, they are tied to what Mr Lim called national factors: the level of inflation and average wage increases.
Refuting the idea that fares are directly linked to oil prices, he pointed out that ‘from 2007 to this year… oil prices went up 40 per cent, but fares went up just 0.7 per cent’.
The level of inflation is the change in price of the goods and services in the country. Therefore, the level of inflation should be “tied” to the price and not the other way round. Transport cost is a heavily-weighted item (Transport & Communications) at 22%. (Source: SingStat) of the total composition of the Consumer Price Index (CPI).
The only economical reason to increase price is to maintain a certain profit margin (if the firm is making economic profit) or trying to break even/minimise loss (if the firm is in a loss-minimising situation). The latter is not applicable to our two major transport companies; SMRT and SBS, who make a net profit of S$149.9m (FY2008) and $8.3m (Q3, 2008) respectively.
In fact, increasing fare prices will contribute to the level of inflation.
The inflation rate just dropped 50 percentage-points to 5.9% for Nov and according to MAS, it is due to falling commodity prices (including oil and basic food) and falling business costs (such as rental costs). Given that Singapore is expected to face recession in 2009 and that inflation is also expected to fall to 1-2% in 2009, maybe the Transport Minister can highlight this and expressed that it is possible for price fares to fall in 2009.
Why?
Because public transport is a highly inelastic demand in Singapore, given lower business costs, lower oil prices and lower inflation rate, should the fare prices not decrease as well? Unless, of course, the wage rise of the transport workers increase by an exponential amount to justify the continuous rise of fare prices.
So probably the two questions to ask are: how much profit is enough for our transport companies and what is considered excessive profits by the government?
Mr Lim urged his audience to look at the ‘big picture’. He said: ‘We don’t want the companies to be making excessive profits, but that’s different from saying that they cannot make profits at all.’
