On the Transfer of Risk from Corporations to the Publlic

The 3rd April 2012 running over (and dragging) of a 66 year old woman, crossing the road with traffic signals in her favor, by a SBS bus calls into question the training given to bus drivers. The bus driver was reportedly a national of China, where SBS actively recruits and where buses are culturally regarded to have right of way over pedestrians.

From this perspective, the accident is simultaneously unsurprising and shocking, the former because it would have been a matter of time and the latter because this obvious risk has not been comprehensively mitigated by training. This accident would not have happened if appropriate training was provided. This failure constitutes an unconscionable transfer of risk from SBS to the public. An investigation should be conducted and a stern regulatory response should follow if SBS is shown to be negligent.

Risk costs money to mitigate. It is not surprising that corporations are keen to find ways to transfer the burden of risk from each other. I myself have been taught to be careful with what risks I accept. It is up to the party bearing the risk to take mitigating measures. But what is the risk has been transferred without being accepted? Can the party now bearing the risk be blamed for not mitigating the risk?

This matter can easily be reframed into the standard picture of negative externalities imposed on the public. So I am not saying anything new. However, the risk and risk mitigation perspective I'd far more relevant to this setting and generally more concrete. Pollution leads to a risk of disease that can be mitigated with the discomfort of masks and/or the expense of good air purification systems. Yet the risk remains, albeit slightly diminished. What is the appropriate transfer back to society then? I think the answer lies in the cost of mitigation measures scaled up by an appropriate factor for time expended.

Where there is no transfer back to society, law and regulation should incentivize the corporation to do risk mitigation on its own. Financial penalties for negative outcomes should be capable of wiping out all or most cost savings for not handing risk, otherwise simple arithmetic tells us that nothing will be done.

Without commenting on the state of regulation in Singapore, let me say that this is important. The next grandma run over and dragged to death could be yours.

Revisiting Regulation in Singapore

I've written to the ST Forum again about IDA's weak regulations in response to another reported "ISP incident". I did so earlier this year, raising the example of the $5,000 penalty (per month) for violating Quality of Service requirements. IDA neatly sidestepped the issue with a non-sequitur. (See: An earlier post titled "Regulation of Industry")

While I call for more stringent regulations, I am not an uninformed Luddite whose crazed propositions would tear down the economy. I understand that Singapore's survival is predicated on a strong economy. Today, we have a decent to good economy, with business-friendly regulations and business-friendly labour policy.

However, in recent years consumers have suffered. The minibond saga is emblematic of this, with Hong Kong investors getting relief while Singapore investors lost most of their principal to (what I believe to be) deceptive marketing practices (and a touch of greed fogging their vision). Telecommunications too is a much complained about industry.

To be a great economy, corporations and consumers in Singapore will have to work in partnership. This can only happen with equality in the said partnership. When corporations have too much power, they use that power in an easy route to gaining economic benefits as opposed to the tougher route of innovating and developing ever better goods and services. Thus, government regulations have a role to play in this: creating a healthy business environment for both firms and consumers.

Good regulations are necessary for us to go from Good to Great.

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Addenda:
Now, allow me to attach my letter to the forum, which I've just sent off. (So I'm unsure if they'll publish it.)

I refer to the letter "Poor show by SingTel after broadband disruption" (Jun 7, 2011) by Garrick Woi, who, in late April this year, suffered a 16 hour long disruption to his broadband access along with others in "limited residential areas". He reports the lack of communication on the part of his ISP and difficulty getting information on the outage.

I believe that a blase attitude has been encouraged by the weak penalties specified by IDA's regulations, which are not stringent enough to shape good behavior on the part of ISPs. For example, Quality of Service violations, which are necessarily severe, warrant a fine of $5,000 a month. When preventing an impending outage or swiftly remediating an outage would cost significantly more than $5,000, ISPs are encouraged to take no special remedial action, especially in view of the fact that customers are locked in to long term contracts. The "sense of responsibility", that might nudge them in the opposite direction, should be bolstered by a strong set of regulations.

I've written to the ST Forum ("Slow broadband: IDA's rules are not effective enough", Mar 28, 2011; "IDA yet to address crux of issue"; Apr 11, 2011) and to IDA on the weakness of existing regulations, but their reply neatly side-stepped the issue ("Broadband speed not part of service quality standards", 2nd Apr 2011).

In the 16-hour outage affected home businesses would have lost revenue and reputation, and probably will not be compensated due to difficulty in reigorously quantifying the losses. Similarly, it is unlikely any answer to Mr Woi's question "Can affected customers claim compensation for the service disruption?" will be to his satisfaction.

I invite IDA to answer, directly, whether it thinks a mere $5,000 penalty is justifiable for a violation that could lead to losses orders of magnitude above it. This is a matter of national econmic interest. I hope IDA will review it's internet regulations and establish a comprehensive set of rules and penalties that are fair to ISPs and customers.

Internet regulations are a side-show in the grand scheme of Singapore's economy. There has to be a change of mindset on the part of regulators, bearing in mind that regulations should make it easy to conduct business responsibly. Allow me reiterate my conclusion: Good regulations are necessary to take Singapore's economy from Good to Great.

Regulation of Industry

At the expense of the general population, the Singapore Government is too friendly to big business and somewhat lax in its regulation. To cite an example, allow me to quote (the original) of my letter to the Straits Times Forum (dated Mar 28, 2011).

I read, with great dismay, Friday's article "WoW... StarHub, why so slow?". Consumers seem to be getting a severely raw deal with respect to broadband access. Violation of the Quality of Service (QoS) obligations warrants a fine of $5000 monthly. This comes to less than two cents per subscriber per month in StarHub's case. Whether violations occur or not is secondary to the magnitude of the punishment, which reveals a lax attitude towards regulation of the broadband industry by IDA. A QoS violating broadband provider incurs a tiny cost per subscriber while all subscribers incur economic losses in terms of lost pleasure, wasted time, or even lost business. Furthermore, subscribers remain locked in by their contracts. Stiffer penalties for violations are needed to ensure satisfactory service in what might today be classified as critical infrastructure.

Allow me to give an example of strong, but fair, regulations. Informally speaking, sustained failure to provide broadband services of the promised quality amounts to breach of contract by a service provider. As such, to protect the interests of consumers, regulations should to be in place that give subscribers the option to void their contracts without penalty, returning any loaned or subsidized equipment if necessary. In addition to that, a sizable fraction of total monthly bills should be refunded to consumers and a similarly sizable fine levied. In this example, the punishment fits the crime although consumers are arguably still on the losing end with the previous losses due to poor service and the trouble to, if they choose to, contract with a different service provider.

Regulation of critical infrastructure such as broadband should be strong. No Singaporean would tolerate intermittent power or water today. Why should we tolerate sustained slow broadband?

IDA's first response (on 2nd Apr 2011, 2nd Apr 2011, Broadband speed not part of service quality standards) was totally off the mark as indicated by the title. Regulations are meant to encourage good corporate behaviour. In this respect, IDA's regulations, at least for ensuring quality of service, are greatly lacking and leave eventual customer flight as the sole real mechanism for encouraging good quality of service. Consumers should not have to bear the majority of the downside risk in service contracts.

Singapore had to be big business friendly when there was no big business to supply jobs. Now Singapore's economy is bustling. It is time to put in place regulations that may be described as having a large basin of acceptable operating standards and tremendous penalties for straying from these standards even a bit (the basin is, after all, large).

Consumer protection also known as protection of the property/contractual rights of the general populace should be a core value of any civilized nation. Why expect less of Singapore?

On Financial Crises and the Lack of Incentives to Prevent Them

I was watching this documentary titled Inside Job. One line of narration got me:

Since the 1980s, the rise of the U.S. financial sector has led to a series of increasingly severe financial crises. Each crisis has caused more damage, while the industry has made more and more money.

This got me back to this piece of work I did some time ago on showing that a "fixed proportion portfolio" with a re-balancing trading strategy made more money the greater the volatility in the market was. (Of course the finance literature had proven that long ago, but I wanted to do it myself and in a form I was interested in.)

In this trading strategy, the fundamental observation is that if the market goes up and comes back down to the starting level, or down then back up to the starting level, the trader would have made a strictly positive amount that increases in the size of the swing.

There's no need to look up the proof. I've since lost the little paper scraps. Do this in Excel, re-balance with each price movement. You can verify this in simulation. And if you go further and do a full simulation with percentage transaction costs, you'll find that there is a level of volatility that gets you positive profit most of the time, and that that more volatility means more money.

The upshot of this is that the larger market volatility is, the more investors adopting a dumb strategy like that stand to make. More volatility means that time is being "compressed", with more swings per unit time and hence more money.

What I am saying is, this is a very basic trading strategy that means buy after a fall, sell after a rise. This is based on a random market with no inside information. In this, in so far as they can control it, there is no incentive for traders to keep volatility down. This would tangentially point to the conclusion that Finance, as an industry, has no incentive to do away with crises as those provide the biggest swings, and the way back up is paved in (bonus) gold.