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What's driving the privatisation?

Is this a bailout, or an attempt to rein in public discourse on SMRT's problems? The exercise raises questions


THE S$1.2 billion takeover offer for SMRT by Temasek has raised questions about the motive behind the exercise. Why does the train operator, whose stock has been a favourite among investors for its generous returns, have to be privatised?

Has it to do with increasing maintenance challenges? Or the fact that its share price has fallen so much that its controlling shareholder finds the company undervalued? Is it simply because a privatised company can be better managed than a listed entity? Is it its falling profitability?

Is it all of the above?

SIM University economist Walter Theseira had a wry response when asked what will become of SMRT after it is delisted.

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"We may never know the answer," he said, "because Temasek is under no obligation to report on its performance. In terms of breakdowns, we can still tell, but as for its financial performance, I suppose the entire point of taking it private is that you don't have to talk about it anymore."

Is that what this is then - a "bailout" of a struggling company?

This offer comes barely a week after the Land Transport Authority (LTA) announced plans to take over SMRT's rail assets for almost S$1 billion.

The state usually steps in when a company of national interest has tried ways to salvage itself, to no avail. Consider the case of Malaysia Airlines in 2014, or the bailout of financial institutions like AIG, Bear Stearns and Merrill Lynch in the 2007-2009 subprime mortgage crisis.

There are benefits to privatisation.

A major one would be doing away with the need for regular disclosures and the subsequent scrutiny by tens of thousands of shareholders.

As Dr Theseira put it, the government may have little interest in having the issues of the rail system debated in the public domain any more than necessary. "It is a distraction to policy makers," he said.

The takeover will also enable Temasek to undertake major internal restructuring out of the public eye.

The Singapore investment firm owns about 54 per cent of SMRT. Temasek holds substantial stakes in companies which are considered of critical importance to Singapore: it has a 77 per cent stake in SIA Engineering, 56 per cent in Singapore Airlines, 52 per cent in Olam, 51 per cent in ST Engineering, 51 per cent in Singtel, and 49 per cent in Sembcorp Industries.

It also has significant stakes in Keppel, Singapore Post, CapitaLand, DBS Bank and other national corporate icons.

Some wonder whether the SMRT takeover marks a U-turn in the government's policy of listing many of its entities 20 to 30 years ago.

SMRT was listed in 2000 amid a string of share sales of government companies in the 1990s through 2000s as the state moved to loosen its grip on the economy.

The government did the same for its telecommunication and energy sectors to boost the efficiency and value of these firms, and to liberalise the market and encourage competition.

The motivation behind listing SMRT was to redistribute the country's assets to the public. But a common criticism since has been the operator's pursuit of short-term profits at the expense of long-term rail reliability.

Critics cite the focus on its retail rental income as a case in point. They say it took its eye off the ball - the more crucial engineering part of the business - and over time, regular breakdowns and technical glitches cropped up, causing tension between the interests of commuters and shareholders.

It is hard to say how things will change at SMRT with a change in ownership, although the industry generally believes that the best model for public transport is one where the government owns the physical asset, and a private firm operates it under contract to the state.

This is because the private company is in the best position to innovate and implement best practices, while the state can do its checks and balances. The result: the customer benefits with lower costs and a more robust service.

Around the world though, rail operating contracts are complex, and railway companies don't always fall within a clear classification along the continuum between privatisation and nationalisation. Sometimes, it is a combination of the two.

For example in London, the transport authority owns and operates most of London's underground services, but contracts out some services - such as the new Crossrail line and London Overground rail network - to private companies.

For now, though, investors are probably less interested in the feasibility of SMRT's business model going forward; their concerns are more financial.

Wednesday's announcement has sparked a lively debate on whether the offer price of S$1.68 a share is adequate. There are gripes among shareholders hoping for something closer to S$2 - but this being a scheme of arrangement rather than a general offer, the offer price will not be further revised.

It does not help that investors are probably also sore that Temasek agrees with SMRT about not paying out a special dividend from the asset sale to LTA, because the money is needed to pare SMRT's debt and support its re-investment needs.


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