The cost of Public Transportation redux

Source: Door Keeper's Flickr

On 24 Jan, SBS and SMRT announced their planned reduction in public transport fare in the Straits Times:

BUS and train fares are set to go down this year, with transport operators choosing to pass their Budget 2009 savings to commuters.Details of the fare cuts are expected by the end of next month after the Public Transport Council (PTC) meets SMRT and SBS Transit.

Council chief Gerard Ee said: ‘Due credit must be given to the operators who initiated this. We now will work with them to hammer out the details.’

In the past, both companies opted not to apply for fare increases when economic conditions were poor, but this is the first time they will reduce fares.

The two companies will save about $1 million between them, according to industry estimates, from a range of measures in this year’s Budget.

Revenue is also up with more trips being made on buses and trains. Public transport ridership is at an all-time high with 4.9 million trips last year compared to 4.5 million in 2007.

Bus and trains fares were last increased in October.

[Truncated]

A month ago, I wrote “The cost of Public Transportation” to take issue with Transport Minister, Raymond Lim’s comments regarding bus and train fare.

I also mentioned that given lower business costs, lower oil prices and lower inflation (all three has happened or is going to happen with the announcement of the pro-business budget 2009), transport fare may decrease. I also added an assumption that wages remain stable (given the recession, wages might actually fall, leading to even lower business costs).

Now, SBS and SMRT has announced their plan to reduce public transport fare because of cost-savings from the budget 2009 and increase in ridership (an increase of almost 9% or 400,000 additional rides)

Given the monopolistic nature of the public transport industry in Singapore, any consumer surplus given back to the consumers is highly appreciated. A monopoly do not derive any or much economic benefit from reducing its price when facing an inelastic demand. It is generating goodwill by passing on the savings to consumers.

(Even if the industry has two players – SBS Transit and SMRT – and not a sole producer, they are colluding by not duplicating services in similar routes, thus behaving like an unofficial cartel and having the same monopoly price-quantity diagram)

What is important to note of this piece of “good” news is the percentage and amount of fare reduction actually given (which was not yet mentioned). According to the article, the companies are ironing out the details with Public Transport Council (PTC) at the end of the month. So there is no exact figure or even an estimated range given on the planned reduction.

Given that the business savings from the budget announcement is S$1mil and the additional earnings from increased ridership unreported, it is difficult to estimate the planned reduction amount.

Nonetheless I try to estimate the reduction based on previous fare hikes and the GDP growth level from the past three years.

Oct 2008 – an overall increase of 0.7% (after taking into account the increase in fare rebates for service-transfer)

OCt 2007 – an overall increase of 1.8% for bus fares and no change in train fares.

Oct 2006 – an overall increase of 1.7% in transport fares.

Singapore’s GDP grow 7.7% (2006), 7.5% (2007) and 1.5% (2008), with negative growth of 0.5 to 2.0 expected in 2009.

The increase in fare prices seem to be relatively consistent and move in the same direction as the GDP and not by a proportionate movement (e.g. 7% growth translate to 4-5% fare hike), therefore I will estimate the reduction to be consistent with the previous fare increase, i.e. a reduction of about 1 to 1.5%. Hence this will set us back to pre-Oct 2008 fare levels.

What is also important to note is that this fare reduction might set a precedent for future fare decreases due to more cost-savings, bad economic situation, increased revenue or a combination of these three reasons.

The premature release of this news on fare reduction before any details are known could be a PR spin to generate more goodwill. The following paragraphs from the news article suggested the PR angle:

‘These are exceptional times which call for exceptional measures and if a fare reduction can be achieved, the goodwill shown by the transport operators will not be easily forgotten,’ said Cedric Foo, head of the Government Parliamentary Committee for Transport.

Emphasis: goodwill

SMRT has also pledged an additional $300,000 to help needy commuters but has not decided how to distribute the money.

I’m puzzled by why SMRT has not decided how to distribute the money. Didn’t it do the sums before arriving at the sum of S$300,000? It can’t be plucking the number out of thin air right? If they haven’t decide, why jump the gun and pledge the amount without mentioning the details? Unless they want to let people know that they are doing something to help the needy even if the details are sketchy.

Even if it is a PR stunt, I think SBS and SMRT are going in the right direction by reducing price fares during bad time, especially when they benefited from the national budget plan and increased revenue.

With the monopolistic stranglehold on the public transport in Singapore, the transport companies don’t really have any economic incentive to reduce fare. Moreover the inelastic demand means we, as consumers, are quite helpless if they continue to increase fare prices amid the recession.

So I welcome the fare reduction news, but I shall wait to see the size of the reduction announced in early February.