More choices, greater gains?

EXPOSE a sheltered sector to more competition, and market forces will work their magic, leading to increased efficiency, more choices, and greater responsiveness to consumer demands. That, at least, has been the logic behind the opening up of already-privatised markets for goods that were once publicly provided. Some moves took place long ago enough that the liberalised market is taken for granted - in the telecoms industry, for instance - or are less obviously visible to consumers. In the postal industry, three companies apart from SingPost are licensed to deliver letters, but non-corporate users might not have known this. Other liberalisation moves are more recent and more visible, even though the market itself may have been privatised much earlier.

These include public bus services, which have been provided by companies - rather than the government - for decades. Yet, the industry was dominated by just two major operators until the transition to a competitive bus contracting model, completed in 2016.

Similarly, the electricity industry ceased to be a state monopoly when it was corporatised in 1995. But it was liberalised gradually, in a long process that began in 2001 and culminated in the open market being extended to all consumers this November.

And recently, one such market has been making headlines for the wrong reasons: hawker centres, which were managed solely by the National Environment Agency (NEA) until a trial to allow private "socially conscious" operators began in 2015. Shortly after the announcement in August that Singapore was making a bid for its hawker culture to be inscribed in Unesco's intangible cultural heritage list, waves of complaints crashed the celebrations, denouncing the apparently onerous demands that the new alternative model has placed on hawkers.

Have such competitive moves lived up to their promises? When has liberalisation thrown wide the door to the heralded benefits of greater choice and efficiency - and when has it cracked open a can of worms?

Driving efficiency

Not all privatised markets are created equal, and not all once publicly managed goods may be equally suited to a competitive environment.

"The central question is: what is government relatively good at, versus the market?" asks Singapore University of Social Sciences associate professor of economics Walter Theseira. "The unique thing about the government is that it has the power to compel." It can run services at a loss, for instance, as it has the power to fund these through taxation instead.

"This allows for provision of services that would otherwise be hard to provide on a private basis. Any service that has a large positive externality, for example, is hard to provide on a private basis, because you won't get enough people to pay enough for it."

Positive externalities arise when benefits accrue to third parties, allowing for so-called free riders. One market where rides are decidedly not free, so to speak, is that of public bus services. Commuters are the main beneficiaries of the rides they take. Yet, there is still a clear role for government in providing a sufficiently comprehensive network of routes, which purely profit-driven market competition might fail to yield.

This distinction between service provision and the route network is reflected in the bus contracting model itself, under which the Land Transport Authority (LTA) owns the buses and other operating assets, determines what routes are to be provided, and sets standards. Bus companies tender for packages of services and are paid a service fee to operate them.

In contrast to the hawker centre debacle, the liberalisation of bus services has been a relatively smooth ride since it was announced in 2014.

Since the transition, "service standards have improved, as can be seen from the shorter wait times and more comfortable rides for commuters", said an LTA spokesman.

All bus services now have scheduled headways - the time between buses - of no more than 15 minutes during morning and evening peak periods, with at least half having scheduled headways of 10 minutes or less. "Crowding has also eased significantly across the bus network," added the spokesman.

Competition among bus operators has seen average tender bid prices declining since the first package of services was put up for tender. Bus drivers too have gained as companies vie to court them, with the National Transport Workers' Union (NTWU) noting that the new model has allowed for more competitive employment terms and conditions.

Basic salaries of new local bus captains have risen some 15 per cent since the transition to the bus contracting model. Public transport operators have implemented transparent skills training and career development roadmaps for drivers, who also enjoy better facilities such as larger and more comfortable resting areas, staff lounges and gyms at depots and interchanges, said NTWU executive secretary Melvin Yong.

Alongside the competitive gains, however, the importance of government involvement remains clear. Running costs have risen in tandem with improved standards, said the LTA: "As fare revenue is not enough to offset total operating costs, the government has and will continue to subsidise bus services heavily. This is expected to amount to about S$5 billion over the next five years."

Perhaps one reason for the smooth transition is that the model is a proven one. Says SBS Transit corporate communications senior vice-president Tammy Tan: "The experiences of our sister companies in Australia and the United Kingdom, which have been operating under this model for many years now, has produced positive results. This is also being borne out in Singapore."

One of the new entrants, Go-Ahead Singapore, notes that the bus contracting model here is similar to that of London, where the operator has experience. With its division between network planning and route operation, the model "clearly defines each party's role and works well for the industry as well as its stakeholders", says a Go-Ahead Singapore spokeswoman. The firm intends to be here "for the long term" and bid for more packages as they become available.

With the apparent success in bus services, could the MRT system be next? Asked this, the LTA noted that under the New Rail Financing Framework, the licence period has been shortened to 15 years "to improve contestability", but added: "As to whether the MRT system should be opened up even further in the future, we will need to make a holistic assessment, taking into account the need to strike a delicate balance between efficiency gains from competition and that from economies of scale."

Powering choice

In contrast to bus services, electricity might at first glance appear to be naturally suited for monopoly provision. Says Dr Theseira: "For electricity, the transmission network and market mechanism are best publicly provided because there is natural monopoly - it makes economic sense to have only one provider."

Furthermore, the reliability of the grid itself could be seen as a "public good", he adds. "It costs resources to ensure the grid is reliable - by over-provisioning reserve capacity, for example. No single private provider has an incentive to supply this excess capacity... That is why the regulatory and reliability aspect of the grid is generally decoupled from the competitive market side."

That is precisely what has been done. The liberalisation of the electricity market has involved separating natural monopoly segments - transmission and distribution - from the contestable segments of power generation and retail, said a Ministry of Trade and Industry (MTI) spokesman. In deciding upon and implementing the progressive liberalisation, the MTI and Energy Market Authority (EMA) sought industry feedback and consultants' advice, and took reference from other countries that had deregulated their electricity markets.

With greater competition, consumers can expect smaller bills and higher service levels, says Associate Professor Xu Yan, from Nanyang Technological University's (NTU) School of Electrical and Electronic Engineering.

The Open Electricity Market (OEM) for household consumers was rolled out in full in November, after an earlier soft launch in Jurong. Previous liberalisation stages had applied only to businesses of certain sizes. "For Singapore's case, since the OEM is just introduced recently, it may take a certain period of time to see the gains and benefits from the whole picture," adds Dr Xu. "However, it may be clear that the customers can benefit from more electricity packages."

The EMA views the gains similarly. Said a spokesman: "The greatest benefit of liberalising the retail electricity market is that it provides more choices to consumers."

One aspect is pricing. Soft launch consumers in Jurong who switched from SP Power to an OEM retailer generally paid an electricity rate of about 20 per cent lower than the regulated tariff. Greater choice also includes "innovative offers", said the EMA, such as packages where power is offered with other products or services.

Some retailers are banking on consumers looking beyond financial value to life values. YTL PowerSeraya executive vice-president Low Boon Tong noted that its power brand Geneco offers plans with alternative energy sources such as natural gas and solar. "By having the power to choose, business and residential customers can also choose to sign up with a retailer that shares their values and is committed to ensuring a sustainable energy future for Singapore." (see amendment note)

As of August 2018, more than 60 per cent of the country's 96,000 business accounts and more than 30 per cent of 108,000 residential accounts have switched to a retailer, accounting for some 78 per cent of Singapore's total electricity demand.

The OEM has the benefit of various safeguards, not least the built-in safety net of SP Group continuing to operate the national power grid. SP Services managing director Chuah Kee Heng notes that the SP Group rate of 5.7 Singapore cents per kilowatt-hour - part of the regulated tariff - has been steady for a decade. No matter which retailer a consumer uses, the price includes this component: "5.7 cents for the same level of efficiency and reliability". (see amendment note)

"We are also the retailer of last resort," notes Mr Chuah. If a retailer exits the OEM for any reason, its customers can be transferred "very seamlessly" to SP Services. In other words, he adds, there is "no risk".

Perhaps the main danger for consumers is being locked into a contract that they later regret. Consumer education and an official price comparison tool help to mitigate this risk, with contracts also restricted to durations of six, 12 or 24 months.

Retailers, too, can have their load lessened as SP Services offers call centre and billing services. Their message to retailers, says Mr Chuah, is: "Look, let us take away all the pain and the backroom operations so you can focus on other aspects."

Although the liberalisation process seems to have reached a conclusion with the islandwide OEM, NTU School of Electrical and Electronic Engineering Associate Professor Gooi Hoay Beng imagines even more dramatic possibilities in the future, such as households tracking half-hourly electricity prices to shift consumption accordingly, or even generating their own power with photovoltaic systems and selling excess electricity.

Food for thought

Unlike the liberalisation of bus services and electricity retail, the new hawker centre model has little precedent to draw upon. Hawker centres themselves, as government-managed providers of affordable food, have few parallels overseas.

The rationale for having the government run hawker centres is not about infrastructure or network planning, nor a natural monopoly - far from it, given that hawker centres compete with privately-run coffeeshops and food outlets. Rather, the government's role is to achieve social aims: providing affordable food while preserving hawker culture.

With no tried-and-tested methods for opening up such a market while preserving these social objectives, perhaps, it is unsurprising that this industry has seen the most teething problems in its liberalisation.

The nature of the controversy is also distinctive. Complaints have not been about competitive forces per se. Rather, they have focused on rentals, costs, and onerous contract conditions imposed by operators upon hawkers. In short, the charge is not that the model has hurt consumers - who in fact gain from contract terms such as long opening hours - or failed to achieve efficiency, but that it has been tough on hawkers.

"The hawker centre problem comes about because of a few conflicting goals," observes Dr Theseira. "We want hawker centres to provide cheap food. We also want them to give good enterprise opportunities to hawkers. There is difficulty in achieving both goals at once. And obviously, if hawker centres were completely privately managed, we would expect that the management would not have any reason to achieve either if it would be too costly."

Under the alternative model, socially conscious enterprises now manage seven of Singapore's 114 hawker centres. One of these enterprises, NTUC Foodfare, has pro-hawker measures such as complimentary food hygiene inspection and guidance to help hawkers maintain a high standard of cleanliness for compliance; an optional bulk purchase scheme so hawkers can enjoy lower costs; and a "hawkerpreneurship" programme to lower the barrier of entry for young hawkers. These reflect the unique concern that complicates the hawker centre model: a focus on the welfare not just of consumers but also "producers", or hawkers themselves.

This is also captured in NEA's Nov 9 announcement following its review of contractual terms between operators and hawkers.

"Underpinning this review is the recognition that hawkers are central to the hawker trade and our hawker culture. Our hawkers are dedicated entrepreneurs, and they face the challenge of maintaining a balance between providing affordable food and (managing) business costs," said the NEA.

Accordingly, changes were made "with a view to better safeguard the well-being and interest of our hawkers". These include allowing hawkers to terminate their tenancies by giving no more than two months' notice, and not requiring them to operate more than five days a week.

Consumers do not have sole priority in the hawker centre market - in contrast to the liberalisation of bus services and electricity retail, where benefits were consistently framed from the consumer's perspective.

Perhaps it is therefore less useful to view the controversy as one about a market opening up to private provision. The lessons to be drawn are arguably less economic, and more social - in line with the model itself.

Amendment note:

An earlier version of this story incorrectly mentioned YL PowerSeraya. The company's name is YTL PowerSeraya. Separately, the story stated an SP Services rate of 5.7 Singapore cents per kilowatt-hour. SP Group has clarified that this should be the SP Group rate instead. The article above has been revised to reflect this.