SMRT operating assets to come under new rail financing framework from Oct 1

SMRT operating assets to come under new rail financing framework from Oct 1

Under the new framework, SMRT will transfer ownership of its operating assets, such as the trains and signalling system, to LTA for nearly S$1 billion. In turn, the transport operator will pay a licence charge to operate the lines.

SMRT photo

SINGAPORE: More timely capacity expansion and higher maintenance standards for SMRT lines are in the pipeline with the transfer of SMRT's operating assets to the new rail financing framework, the Land Transport Authority (LTA) announced on Friday (Jul 15).

The transfer, which will happen on Oct 1 pending SMRT shareholders' approval, will see LTA pay the transport operator nearly S$1 billion for more than 60,000 assets, including trains and signalling systems. In turn, SMRT will pay a licence charge to operate the lines and earn revenue from them.

The rail financing framework, announced by the Government in 2008 and implemented for the SBS Transit-operated Downtown Line in 2011, will now be implemented for the SMRT-operated North-South, East-West and Circle lines and Bukit Panjang LRT.

SMRT and LTA have been in discussions for the transfer since 2011.

With the change, rail services will be more responsive to an increase in ridership, LTA said. The authority will be able to ensure that capacity expansion, as well as the replacement and upgrading of operating assets, are done in a timely fashion.

“Rail operators, relieved of heavy capital expenditure, can focus on providing reliable and well-maintained rail services for commuters,” LTA added.

Coordinating Minister for Infrastructure and Minister for Transport Khaw Boon Wan said the move to the new rail financing framework would benefit commuters. "It will allow LTA to add trains to respond more quickly to demand, and to replace and upgrade existing rail assets in a more timely manner. This should achieve the twin objectives of raising rail reliability and reducing crowdedness."

In a media statement on Friday, SMRT's President and Group CEO Desmond Kuek said that the move would "allow SMRT Trains to better focus on fulfilling its role as a public transport operator to deliver high levels of operational reliability, safety and service".

MORE STRINGENT MAINTENANCE STANDARDS

SMRT will have to meet more stringent maintenance standards under the new framework. To meet the higher standards, the transport operator will increase its maintenance staff strength by 20 per cent - equivalent to about 700 employees - over the next three years.

LTA will also step up its maintenance checks and audits, and similarly increase headcount for its maintenance and engineering team.

Under the new framework, SMRT’s operating licence will be shortened from between 30 and 40 years to 15 years, to make the industry “more contestable”, LTA said.

“We can re-tender the operation of rail services more often, which should better incentivise operators to perform well. It will also allow more frequent resetting of licences with new requirements to improve service levels and cost efficiency.”

SMRT, LTA TO SHARE PROFITS, RISKS

The new licence will also provide for some risk- and profit-sharing between SMRT and LTA. For example, SMRT may be required to pay an increased licence charge if its profits are higher than expected.

SMRT will have the licence to operate the four lines until Sep 30, 2031, pending its shareholders’ approval of the asset transfer. If approved, the operating assets will be transferred to LTA at net book value (cost less depreciation) as of Sep 30, 2016, which amounts to S$991 million (S$1.06 billion including GST).

LTA will conduct asset condition surveys for the older operating assets, and make payment for them in tranches - 60 per cent of the payment will be made on the date of transition, with 15 per cent, another 15 per cent and the last 10 per cent to be made on the next three anniversaries of the transition.

LTA said that SMRT has provided warranties on the conditions of the assets, and the authority is entitled to withhold payments for assets requiring rectification or replacement.

SMRT said in its media statement that the new framework will lower business risks for the company, noting that the current framework had become "unsustainable" as its rail fare margins had been declining since its 2012 financial year amid "significantly" increased operating expenses, with capital expenditure over the next five years expected to reach about S$2.8 billion.

However, the operator cautioned that there remain "significant" risks relating to fare adjustments, increases in operating expenditure, the timing of asset renewal and regulatory changes that may impact profitability.

Mr Kuek said that the decline observed in SMRT's rail-related profitability was a result of the fare gap, rising operational expenses and the increased capital commitments.

"Despite the steady increase in non-fare earnings, this trend of declining profitability is expected to persist under the current financing framework as the additional capital expenditure and increased depreciation would exert additional pressure on the future cash flows and profits of the SMRT train entities," he said.

NO IMPACT ON COMMUTERS, SMRT STAFF

The transition will not affect day-to-day operations and will not impact employees of SMRT Train and SMRT Light Rail, LTA said.

Commuter fares, which are regulated by the Public Transport Council, will also not be affected, LTA added. The current fare adjustment formula was accepted by the Government in 2013 and is valid until 2017, and will be reviewed before its expiry.

As for the SBS Transit-operated North East Line and Sengkang-Punggol LRT, LTA said it is still in discussion with the transport operator on the transition to the new rail financing framework.

Source: CNA/cy

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