Archive for March, 2017

Reply to “a final rejoinder on justifications for water price increase”

March 10, 2017

I refer to the 8 Mar 2017 Online Citizen commentary “A final rejoinder on justifications for water price increase”.

Bullshit 1: Lost debate, just declare opponent’s logic faulty

Prof Ng claimed that most of the points I made earlier were clearly faulty on logic and economics. But if that were true, then shouldn’t it be very easy for Prof Ng to clearly pin point what exactly were wrong with those arguments? Yet, half the time we find Prof Ng conveniently sidestepping arguments by claiming they were irrelevant or making half baked generalisations without substantiations or simply restating arguments without actually addressing counter arguments.

Bullshit 2: No more shouting about 30% inflation

Prof Ng’s original argument was that since general inflation is 30%, water should also be inflated 30%. When I pointed out that more than half of our water experienced little or no inflation having been fixed at 3 cents per 1,000 gallons since over 50 years ago, which leads to an average water inflation of about 15% only, not 30%, he brushed that off as irrelevant. This was what he wrote exactly:

“When I use ‘inflation’, I refer to the increase in the general price level, as consistent with general usage, not to the increase in the costs of water supply alone as calculated by Colin. I will thus ignore his figure of 15% as not relevant to my point.”

Thus, Prof Ng did not actually address my argument but merely brushed it off as irrelevant so I maintained my stand that Prof Ng was wrong to insist that the half of our water that experienced little or no inflation be inflated 30% as well.

Prof Ng has now completely changed his story in his latest reply. From saying 3 cents per 1,000 gallons is irrelevant to general price level, he is now saying it is irrelevant to determining long run marginal cost. It seems that Prof Ng has capitulated on this original argument and no longer insists on 30% inflation anymore. How is it possible that someone whose reasoning is ‘clearly faulty’ can succeed in forcing Prof Ng to capitulate on his arguments?

Bullshit 3: Long run marginal costing turns out to be rough estimate only

Prof Ng continues to insist that long run marginal costing is the efficient way to price water even though it was pointed out to him earlier that the market equilibrium price cannot depend on marginal cost alone but must require demand curve information too which has been totally lacking in the water debate thus far.

Prof Ng has finally let the cat out of the bag and admitted that he merely ‘roughly estimated’ and made some ‘reasonable projection’ to arrive at the demand situation. That is exactly as expected. How can there be a price demand curve for water when Singaporeans have been paying fixed water price all this while? Long run marginal cost is useless without the price demand curve for water. Any talk about using long run marginal cost to determine the market efficient water price without the price demand curve can only be bullshit. Isn’t it scary the entire nation has been suckered into putting their faith in a water price that turns out to be based on rough estimates only?

Bullshit 4: Water demand not inelastic well beyond 0.5% level of water consumption

Prof Ng claims that water demand is not inelastic well beyond 0.5% level of water consumption. That may not be true.

According to a study by Yale and Harvard researchers (Managing water demand: Price vs. Non-Price Conservation Programs by Sheila M. Olmstead and Robert N. Stavins), price elasticity of US residential water ranges from -0.3 to -0.4. This means that a 10% increase in marginal price of water only lowers water demand by 3% to 4%.

In another study (Residential price elasticity of demand for water – comparing Cyprus with other countries), researchers obtained average price elasticity of water for various cities / countries as follows: Melbourne -0.08, Sydney -0.09, a Cyprus city -0.05, Denmark -0.52, Finland -0.41, Turin Italy -0.52, TWM Netherlands -0.36.

Thus, in all these cases, water demand is indeed price inelastic.

More importantly, Prof Ng is completely silent on the argument that the increase in consumer surplus brought about by a shift in the demand curve to the right or up is spurious to say the least when applied to water demand. If this argument is clearly faulty, why can’t Prof Ng simply demolish it?

Bullshit 5: Only focused on water infrastructure

Prof Ng is only focused on water infrastructure but the government shouldn’t similarly adopt this silo view of our economy but should instead take a holistic view and appraise all infrastructure investments against future gains from industries and businesses.

If the government is confident that future gains from industries and businesses outweigh all infrastructural commitments by more than GIC annual returns, then by all means carry on. There is no need to increase water price since future gains will more than pay for these investments. But if the government isn’t confident about future gains, it shouldn’t drag the people along and force them to pay for their folly.

Bullshit 6: Corruption allegation

Prof Ng claims that the statement “extra money gained by the government goes into their pockets and disappears into government reserves only to reappear as losses in government investments” constitutes a serious allegation of corruption. That is a silly accusation. The government makes huge budget surpluses all the time which goes into government reserves and on to government investment vehicles. This happens all the time and is common knowledge, so what’s there to allege?

Bullshit 7: Larger population substantially reduces per capita costs of goods like defence

Prof Ng continues to harp on his mistaken view that a larger population substantially reduces per capita costs of goods like defence when it has already been pointed out to him that the effect may not be as significant since it is only applicable to capital costs but not necessarily to running costs. In the desalination example he gave, I provided evidence to show that capital costs is only 30% of total costs so the cost spreading effect would be much greatly reduced. For example, if our population doubles, the cost of desalination will not halve. Only the 30% cost is halved to 15% so the final price is reduced from 100% to 85%. So instead of a 50% reduction in desalination price, we only get 15% reduction, a vast difference indeed.

Bullshit 8: Higher flat price largely paid by immigrants

Prof Ng claims that higher price of flats and land is largely paid for by new immigrants and that existing Singaporeans are not made worse off. That is not true. PRs only purchase about 20% of HDB resale flats which means that Singaporeans buy the remaining 80% so an increase in flat price is largely paid for by Singaporeans, not immigrants.

PERMANENT residents (PRs) may buy one in five, or 20 per cent, of HDB resale flats today
[Straits Times: PRs, foreigners form 12% of HDB dwellers, 19 Feb 2010]

The new figures released by Mr Khaw looked at the 2,162 HDB resale transactions closed last month. They showed that a fifth of buyers were permanent residents (PRs), 8 per cent were private property owners and about a quarter – 23 per cent – were newly married couples, or first-timers.
[Straits Times, “Who the resale HDB flat buyers are”, 26 Jun 2011]

The PR numbers are in fact not insignificant – it was reported last year that they accounted for 20 per cent of all resale transactions in 2010.
[Sunday Times, Avoid Feast and Famine in Housing, 4 Nov 2012]

Bullshit 9: Turning a blind eye to increased indebtedness of future generations

Prof Ng says that although non-owners are worse off when property prices increase, their parents will be better off. But that doesn’t answer the point I made earlier about the fact that families with many children (say three or more) may end up worse off than before as the combined losses by the many non-owner children in future housing purchases outweigh the present gains by their parents. In other words, the parents’ gains will be more than paid for by their children in the future. Property gains by one generation gets passed down as debts for the next generation.

Furthermore, parents’ gains are on paper only for unless parents can bunk in with their children or have more than one property or migrate to a cheaper country, they will have to continue to stay in their house and cannot realise their paper gain. Downgrading depends on parents having a large enough flat to begin with and may not reap much cash considering that proceeds have to go back to CPF first.

Bullshit 10: Pursuance of efficient water pricing through rough estimations

Prof Ng has the cheek to highlight pursuance of efficient policies in water pricing when his own water pricing turns out to be based on rough estimates only. How can Singapore be truly efficient in water pricing using Prof Ng’s rough estimated water pricing?

Reply to more justifications for water price increase

March 8, 2017

I refer to the 4 Mar 2017 Online Citizen letter “More on justifications for water price increase”.

Bullshit 1: Can’t refute, so call it irrelevant

Prof Ng could give no reply to the fact that more than half of the water we consume experienced little or no inflation having been fixed at 3 cents per 1000 gallons all this while. Since half of our water experienced little or no inflation, Prof Ng has no basis to compare it with 30% general inflation and insist that this water should be inflated 30% as well. What Prof Ng cannot refute, he calls it irrelevant. That’s all he can do.

Bullshit 2: Government says save water means water is underpriced

Prof Ng says that when the government asks people to save water it means water is underpriced. But that could be due to water being, according to Minister Chan Chun Sing, a so-called existential issue needed for our survival rather than it being underpriced. Surely under pricing is not a matter of existence or survival is it?

Bullshit 3: Water revenues not enough for infrastructure investment

Much of the infrastructure investment is to support future population and industry growth. The proper appraisal for these infrastructure investments should be the incremental revenue from future industries and businesses less cost of these additional infrastructure investments weighed against an appropriate cost of capital such as GIC 6.1% nominal returns (http://www.gic.com.sg/report/report-2014-2015/investment_report.html, in USD). Infrastructure investment can only make sense if it can yield more than 6.1% annual returns. If it can, then there is no need to increase water prices. If it cannot, then it is better to park the money with GIC and earn 6.1% instead.

Bullshit 4: Economics

Long run marginal costing has one problem – where is the demand curve? Long run marginal cost alone is insufficient. Without the demand curve, there is no way of working out the equilibrium market efficient price.

The government can plan for the quantity demanded in future just as it planned for the quantity demanded today. But quantity demanded doesn’t constitute the demand curve. There is no price information on consumers’ willingness to spend on water. The current water price is a dictated price which is not necessarily the price consumers are willing to pay at the current quantity demanded. Since water demand is highly inelastic, in the worst case scenario where water demand is perfectly inelastic, it would be impossible to determine exactly what price consumers are willing to pay for the present quantity demanded.

As long run marginal costing has been in place since 1997 (http://www.financialexpress.com/opinion/singapore-shows-the-way-on-water/63431/), it can be assumed that the current pricing is already at the current long run marginal cost. So when water planners move Singapore from the current long run marginal cost to the next long run marginal cost through intensive infrastructure investment, it should be accompanied by a rightward shift of the demand curve through population and industry increases. This rightward shift of the demand curve will lead to higher demand curves which will lead to an increase in the willingness of existing consumers to pay for water.

Consumer surplus is calculated based on the area between the demand curve and the price line. So when the demand curve shifts right or up, there is an increase in consumer surplus for existing consumers. This implies that existing consumers now derive more benefit from the fact that there are now more consumers, greater quantity of water supplied and higher price to pay for water. But that’s not how normal consumers feel. When population increases, water supply is increased and people pay more for water, the average consumer doesn’t feel happier about it nor derive more benefit from it.

This should show how nebulous the consumer surplus concept is when applied to water demand. Since market efficiency and long run marginal costing cannot be separated from the concept of consumer surplus which is nebulous when applied to water demand, the whole long run marginal cost way of determining water price is seriously flawed.

Bullshit 5: Government will lessen increases in other areas

Prof Ng claims that the additional money that government makes from supplying water will lessen increases in taxes, charges and prices of other things. That again may not necessarily be true. The extra money that the government gains can simply go into their pockets and disappear into government reserves only to reappear as losses in government investments.

Bullshit 6: More roti prata

Prof Ng continues to adhere to his roti prata style of heads he wins, tails you lose argument that European cities not only have higher water prices, they also under price water according to long term marginal costs. But as mentioned earlier, long term marginal costing has serious flaws when applied to water pricing. Also, do European cities have 50% fresh water capped at 3 cents per 1,000 gallons? Why not compare with Asian cities?

Prof Ng also mentions that only 1% of water consumed is for drinking. Is Prof Ng suggesting that water is not an existential problem as Minister Chan Chun Sing insisted since we can get more than enough drinking water from our own reservoirs? Or perhaps both Prof Ng and Minister Chan think that flushing the toilet is also an existential problem?

Bullshit 7: Buries his head in investment costs only

Prof Ng continues to ignore the high running costs of desalination and chooses instead to bury his head in capital investment only. According to Hyflux (Hyflux named preferred bidder for Tuas II desalination plant, Singapore, 7 Mar 2011, page 8), the amortised capital cost of the desalination plant is only 30% of operating costs. No details are given on the number of years of amortisation but by considering a longer time period, the share of capital cost may be even lower. Hence, Prof Ng’s focus on spreading capital costs over a larger population can only apply to at most 30% of desalination costs only.

Again, Prof Ng brushes off high running costs as irrelevant. As the exchanges continue, more and more of Prof Ng’s answers become condensed into one word – irrelevant, rather than effective rebuttals.

Bullshit 8: Higher prices benefit Singaporeans

Prof Ng claims that higher prices due to more people fighting for limited resources will accrue mostly to Singaporeans and the government and is only bad for non asset holders.

Correction Prof Ng, since the government owns most of the land in Singapore, higher prices will accrue mostly to the government rather than to the people. Secondly, the children of Singaporeans are non asset holders so this is bad for our children. Our gain will be their loss so there will be no net gain for Singaporean families with many children. Thirdly, there is a sizeable population of foreigners, PRs or otherwise, who also benefit from higher prices. Many of them have sold their houses back to Singaporeans at much higher prices and emigrated to the West, taking their gains (our losses) with them. So it is hard to say that Singaporeans (not including the government) has benefitted.

Prof Ng says that higher population leads to lower per head costs of defence and other goods. Is the per head cost of housing lower now due to higher population? Between 1991 and 2015, non-landed private residential price index rose from 42.8 to 137.4 while population increased from 3.1 million to 5.6 million. Per head price increased from 13.8 per million to 24.5 per million, it didn’t decrease.

Reply to Prof Ng’s reply

March 2, 2017

I refer to the 2 Mar 2017 Online Citizen letter “A reply to “False justifications for water price increase””.

Bullshit 1: 30% hike cannot even catch up with inflation

Prof Ng said that general inflation since 2000 has exceeded 30%. However, according to MAS core inflation index (http://www.mas.gov.sg/statistics/other-statistics.aspx), core inflation increase since 2000 is 29.959%. It hasn’t exceeded 30%.

More importantly, the price of raw water from Malaysia has remained at 3 cents per 1,000 gallons all this while and hasn’t been subjected to inflation. Since Singapore gets half its water from Malaysia (Straits Times, Singapore’s water success has H2O expert worried, 21 Mar 2016) and more from our local reservoirs, more than half of our water has not been subjected to inflationary pressures. Setting aside the low cost involved in treating fresh water, the average inflation that can be applied to our water should only be about ½ × 30% + ½ × 0% = 15%. Thus, Prof Ng is wrong to say that the announced 30% water fee hike cannot even catch up with inflation. It is about double the average water cost inflation.

Bullshit 2: Singapore water price compares favourably to other countries

Prof Ng likes to compare Singapore water price to those of European cities. But even amongst European cities, there are some with reasonably low water bills relative to their incomes (http://www.thejournal.ie/water-charges-ireland-europe-rankings-3015297-Oct2016/):

City Annual water bill as percentage of median income
Dublin 1.3%
Stockholm 1.5%
Rome 1.7%
Madrid 2.2%
Luxembourg 2.5%
Helsinki 2.8%
London 2.9%
Paris 2.9%

Prof Ng selectively chooses Beijing as a comparator for Asian cities which he conveniently brushes off with the comment that he dares not drink straight from a Beijing tap. But the same can be said of Singapore; almost every household boils water to drink or installs expensive water filters.

Japan, South Korea, Taiwan and Hong Kong have cheaper water than us that isn’t inferior in quality.

Bullshit 3: Often hear about water saving on radio

Prof Ng claims that he often hears about water saving on radio but not saving of other things and asks why. The reason is that our radio stations are government owned and broadcast what the government wants the people to hear.

Bullshit 4: Water prices do not adequately reflect costs

Prof Ng claims that our water prices do not adequately reflect costs. If that’s the case, then PUB should be suffering immense losses year after year. But no, PUB has been making positive net operating income and positive net income before grants all the way till 2013 and 2009 respectively.

Bullshit 5: Price goods at the highest cost source

Prof Ng says that water should be priced at the higher costs of producing NEWater and desalination even for raw water obtained from Malaysia for economic efficiency. But it is precisely a monopoly that prices goods way above costs which results in a dead weight loss for society that leads to economic inefficiency. So on the contrary, for economic efficiency, water should be priced near its weighted average cost of production.

Prof Ng claims that any extra money made by the government in producing water can be used to offset spending in other areas and lower taxes in those areas. But what we are seeing is a near simultaneous increase in the price of everything. Car park, electricity, conservancy and now water charges have all gone up. Tell us Prof Ng, what is going to go down? For all we know, all these increases are just being used to shore up investment losses by our government.

Bullshit 6: Most cities under price water causing wastage

Prof Ng likes to cite high water prices in European cities but yet claim that many cities under price water causing wastage. If so many European cities are charging high water prices, then surely there should also be many cities that are not under pricing water? Prof Ng flips arguments like flipping roti prata. Whichever way he flips, his logic is always, heads he wins, tails you lose.

Bullshit 7: Population increase does not lead to lower water costs

Prof Ng disagrees with the notion that population increase has led to water price increase. He can only make sense of this notion in a simple dichotomy of Singapore being fully supplied with cheap Malaysian water versus Singapore requiring expensive water over and above that supplied from Malaysia. The truth is more than that.

Let’s say the cost of purifying Malaysian raw water is $1 per litre while the cost of producing NEWater and desalinated water is $10 per litre. Let’s say at first we were producing 9 litres from Malaysian raw water and 1 litre of NEWater and desalinated water. The weighted average cost of producing water would be 0.9 × $1 + 0.1 × $10 = $1.90 per litre.

Let’s say due to population growth, on top of consuming 9 litres from Malaysian raw water, we now also consume 9 litres of NEWater + desalinated water. The weighted average cost of water is now 0.5 × $1 + 0.5 × $10 = $5.50 per litre. So the average cost of water has indeed increased as a result of population increase.

Let’s say in the long run, population exploded and on top of the 9 litres of Malaysian raw water, we consume 27 litres of NEWater + desalinated water. The weighted average cost of water will become 0.25 × $1 + 0.75 × $10 = $7.75 per litre, which is an increase again.

Bullshit 8: Larger population lowers cost of desalination

Prof Ng claims that a larger population helps lower the cost of investment for desalination. But that’s only for fixed costs, not running costs. The main cost of desalination is the cost of electricity and every extra litre of desalinated water will use an extra amount of electricity.

Bullshit 9: We are economically better off with larger population

Prof Ng says that we are economically better off with a larger population because immigrants cannot take away assets owned by existing people without adequate payment. But the issues involved are much more than that. As more people fight for the same amount of limited resources, prices go up for all. Also, the law of diminishing returns will ensure that as more and more people crowd onto this island, the benefit from the extra people will become lesser and lesser until it actually begins to detract from rather than add to the well being of the society.

The leaders of this country must recognise the optimum level at which Singapore can perform and not force our country to go far into diminishing returns.

March 2, 2017

I refer to the 1 Mar 2017 Channel News Asia article “water must be priced in full to reflect its true scarcity, says Masagos”.

Mr Masagos was reported to have said that water must be fully priced. Except for the last few years, the government has been making money selling water to the people since day one. In that sense water has not only been fully priced all this while, it has been overpriced.

Mr Masagos claims that we subsidise housing. But a brand new ‘subsidised’ HDB flat can cost half a million dollars, a price that can buy you a condominium in many Western cities. The same can be said of healthcare and tertiary education. The government’s concept of subsidy means handsome profits for themselves.

How can Mr Masagos claim that water is of strategic and national security importance but not housing, healthcare or education? Without an educated workforce, can Singapore achieve the high income and prosperity it enjoys today? Without housing, can a slum filled Singapore be as safe and secure as it is today?

Mr Masagos claims that consumers must feel the price of water the moment he or she turns on the tap. Then by all means penalise households or companies with high water usage. Don’t punish everyone with a 30% increase that affects even those who are thrifty with water.

Mr Masagos claims that water should be priced at the long run marginal cost. But the long run marginal cost is the cost in the future, not the cost now. If we expect HDB flats to cost $1 million each in the long run, do we price them at $1 million each today?

Mr Masagos says that costs have gone up. But so too have revenues, which Mr Masagos conveniently omits saying.

The three desalination plants that will be built in the next three years are meant to serve population growth. Excessive population growth is the mother of all problems. It shouldn’t just be the people who must feel the pinch of water price to cut down water usage. The government should also feel the pinch of the people’s reactions to population growth problems to cut down on population growth.

Mr Masagos gives no details about the $0.78 per m3 desalination price in 2005 and the $1.08 per m3 desalination price at Marina East. For all we know, the difference could be due to higher land costs that are factored into the desalination price.

Mr Masagos says we are a water stressed nation. But water stress is not merely a function of water scarcity; it is also a function of overpopulation. The more we overpopulate tiny Singapore with limited water resources, the more we stress ourselves with water.