INVESTORS seem to be reacting poorly to news last week that Singapore's duopolistic public bus industry will be opened up to competition from as early as 2010.

The share prices of SBS Transit (SBST), ComfortDelGro and SMRT Corp say as much.

Since the Government's announcement last Friday, the shares of SBST, which controls 75 per cent of the public bus market, have lost 14 cents, closing at $2.66 yesterday. The shares of its parent group, ComfortDelGro, were nine cents down at $1.57, while rival SMRT's stock ended three cents lower at $1.69.

It is an understandable knee-jerk reaction. After all, history shows that profit margins erode when competition sets in. This has been seen in the airline, shipping, taxi as well as car retail business.

Before panic sets in, however, investors should pause and look deeper into the development.

Firstly, the market is set to grow exponentially. The Government is targeting a public transport ridership of just over 10 million trips per day by 2020. That is explosive growth in just 12 years from the current 5.6 million.

In this enlarged and liberalised market, SBST and SMRT are likely to remain dominant players, even as they share the pie with new players.

Unless they mess up big time, they will continue to enjoy reasonable growth prospects - SMRT a bit more than SBST, perhaps.

And if you think about it, a duopoly in such a fast-expanding market may not be sustainable. To cope with growth on such a scale, the incumbents would need to lock up a lot more cash in fixed assets.

For instance, SBST spent about $135 million to renew its bus fleet between 2005 and 2006.

Maintenance, manpower and energy costs will also shoot up. In a liberalised market with more players, the burden is spread around.

If the Government adopts a cost-plus method to its tender system - where operators are paid a fixed income for their services regardless of externalities, such as asset renewal, oil price and ridership - the new equation may even be better for SBST and SMRT. They will get predictable earnings, with near-zero risk.

In fact, this competition model may be necessary to attract newcomers onboard. Otherwise, few will be able to stomach the capital outlay.
Some observers have expressed doubts over whether the size of the market could support more players.

However, Dr Paul Barter, an assistant professor at the Lee Kuan Yew School of Public Policy, has said the Singapore public transport market is comparable to that of the whole of Australia in terms of total demand.

Professor David Hensher, director of the Institute of Transport and Logistics Studies, University of Sydney, reckons that Singapore could have up to 10 "operating regions". Sydney, which has 4.2 million people, has 15 bus operating regions.

So, the Singapore market is not small today. And it is set to grow - fast.

With news of the imminent change to the current regime, talk of Singapore's most anticipated merger seems to have dissipated, too.

It is premature to write off the possibility of marriage.

ComfortDelGro could still hook up with SMRT, or make majority shareholder Temasek Holdings an offer it cannot refuse.

The merged entity would be better placed to expand overseas. SMRT has not exactly been successful in venturing abroad. With a merger, it can put its rail expertise behind ComfortDelGro's established contacts in China, Britain and Australia.

In short, the merged entity can exploit emerging markets in China and India and partake of rail operatorship contracts in established markets such as Australia.

SBST can then be the vehicle to focus on the new Singapore market. It can even be delisted, to put to rest once and for all the age-old dilemma of how to serve commuter, regulator and shareholder - at no expense to each other.

Hindrances remain, of course. One is how a merger would be viewed in the new scheme of things, where increased competition is the goal. Would the administration give its blessings to a merger in this new order?