LTA to take over SBS Transit's rail operating assets from April

SINGAPORE — From April 1, the Government will take over ownership of the trains, signalling systems and other operating assets of the North-East Line (NEL) and the Sengkang and Punggol Light Rail Transit (LRT) systems from transport operator SBS Transit.

The Land Transport Authority (LTA) will acquire SBS Transit’s rail operating assets at net book value, which is estimated to be about S$28.8 million (S$30.8 million with Goods and Services Tax) as at March 31 this year. 

The authority will make 60 per cent of the payment on April 1, and the remainder over the next two years. 

The acquisition means that the entire rail network here will be under the New Rail Financing Framework (NRFF), where the Government owns the rail operating assets and relieves operators of heavy capital expenditure and fare-revenue risk. 

Operators will focus on the core role of operating and maintaining the rail network, while the Government ensures timely procurement of more trains and operating assets to keep pace with ridership demand.

In 2016, rail operator SMRT sold its operating assets for the North South Line and East West Line, as well as the Bukit Panjang LRT, to the LTA for more than S$1 billion.

SBS Transit will pay an undisclosed licence charge annually for the right to operate and earn revenues from the rail lines. 

Its existing licence of 30 years, which began in January 2003, will be replaced by a new licence of 15 years with a possible extension of five years.

It will have to meet LTA’s maintenance performance standards and operating performance standards as part of the licensing agreement.

In turn, the Government will take on some revenue risk, as well as share in the profits. 

Under the licence charge structure, if fare revenue falls below the target by 2 to 6 per cent, the LTA will share half of the shortfall. If the shortfall exceeds 6 per cent, the LTA will bear 75 per cent of the incremental burden.

As for profit-sharing, LTA will take a cut if the earnings before interest and tax margin exceeds 5 per cent. It will share the shortfall if SBS Transit’s earnings before interest and tax margin falls below 3.5 per cent.

The announcement on Wednesday evening (Feb 14) follows discussions that began some time back. 

While there were no major bottlenecks, both sides had to agree on issues such as the risks undertaken and SBS Transit’s protection when there is revenue shortfall.

The estimated value of SBS Transit’s rail operating assets is much lower than SMRT’s in 2016 because of a smaller asset base. 

The NEL and Sengkang-Punggol LRT systems began operating in the early 2000s, compared to the late 1980s for the North South Line and East West Line. SBS Transit has, hence, bought over less of the rail operating assets from the Government. 

A MORE SUSTAINABLE MODEL
SBS Transit’s chief executive Gan Juay Kiat said that the NRFF is a more sustainable model for the company in the long term.

The LTA, which may reimburse the operator if there are regulatory changes, said that operators may be too cautious to expand capacity or do upgrading works if they bear the full financial risk.

Transport economist Walter Theseira of the Singapore University of Social Sciences said that the NRFF’s “main benefit is going to come from having the resources to do maintenance on time and (carrying out) asset renewal when appropriate”.

The previous model, where operators had full profit-loss responsibility, “works okay when the system is new”, he said. “When the system is old, your maintenance cost goes up; revenue doesn’t go up.”

Noting the greater contestability under the NRFF, he added: “The goal of this change is not to give the commuter a better experience this year or next year. The goal is to make sure that in 10 or 20 years’ time, we don’t tell ourselves, why did we not learn our lesson from the North-South and East-West lines?”

Singapore’s two oldest rail lines have been plagued in recent years by disruptions stemming from maintenance lapses and ageing infrastructure. 

On how the Government can manage costs as all rail lines age, Dr Theseira noted that fares today are not even covering operating costs. 

“There’s no easy way out,” he said. “The only question is, as a citizen, would you rather pay by putting money in your ez-link card or would you rather pay through increasing your taxes?... There’s no magic pot of gold that’s going to pay for it, that’s not us.”