Saturday 13 August 2016

Bus industry to complete transition to Bus Contracting Model on 1 September 2016

SBS Transit, SMRT Buses to get $7.2 billion in new deals to run buses
Govt phasing in new contracting model for 11 bus packages operated by incumbents
By Christopher Tan, Senior Transport Correspondent, The Straits Times, 12 Aug 2016

The Land Transport Authority (LTA) has reached a multi-billion-dollar agreement with SBS Transit and SMRT Buses to run buses under a new government bus contracting model.

The transition will take effect from Sept 1, and there will be 11 bus packages under the model, the LTA said yesterday.

The packages are of varying sizes, and have different compositions of bus services with different route lengths. The authority estimated that the total contract fee for SBS Transit would come to $5.3 billion, and that for SMRT would amount to $1.9 billion.

SBS Transit operates eight of the packages with 196 bus services, and SMRT Buses operates three with 77. The packages have an operating tenure of between two and 10 years.

When the packages expire, each will be put up for competitive tendering - like the two clinched by foreign players recently.

The LTA said this phased approach to competitive tendering minimises the risk of service disruption and allows the LTA to refine the management of contracts.

The bus contracting model - where the Government owns all operating assets and collects fare revenue - has been in the works for at least four years.

The Government took the first step when it set aside $1.1 billion in 2012 to buy 550 buses to beef up the fleet on the back of a surge in public transport demand. This was soon expanded to 1,000 buses.

In May last year, the first competitive route tender was won by Australia's Tower Transit for $556 million, for a five-year contract to run services out of Jurong West.

Six months later, in November, Britain's Go-Ahead clinched the second contract operating out of Loyang for just under $500 million.

In June, LTA called tenders for a third parcel in Seletar.

The new model is meant to incentivise operators with revenue certainty and shield them from heavy capital expenditure so they can focus on meeting service standards.

LTA chief executive Chew Men Leong said moving to the new model puts the bus industry "on a financially more sustainable footing".

"But commuters can expect higher bus service levels throughout Singapore," he said.

With this model, buses will arrive at intervals of no longer than 15 minutes during the morning and evening peak periods, with at least half of them doing so at intervals of no longer than 10 minutes. Feeder services will run at intervals of six to eight minutes.

Mr Sitoh Yih Pin, chairman of the Government Parliamentary Committee for Transport, said: "It is too early to tell if service will effectively improve. We will have to allow the new model to be in play for a sustained period before any judgment can be made."

But Mr Sitoh added that the new model allows the LTA to be more responsive to ridership changes.

Industry players welcome new bus contracts
Analysts also expect switch to contracting model to be positive for operators
By Christopher Tan, Senior Transport Correspondent, The Straits Times, 12 Aug 2016

Industry players and investors welcome the switch from the current regime to the new bus contracting model, while commuters are waiting to see whether it will lead to better service.

Commenting on the agreement to move over to the new model - where the Government owns operating assets and assumes revenue risks, and operators are paid a fee to run services - SBS Transit chief executive Gan Juay Kiat said: "We are glad that we have been able to successfully conclude the terms of the negotiated contract with the Land Transport Authority (LTA).

"While this bus contracting model is a more sustainable model for the long term, commuters can also expect higher service levels as bus services will progressively come under the contract's bus service reliability framework. This means better regularity of buses calling at bus stops."

In its first-quarter financial results briefing on Monday, SMRT noted that the new model "has safeguards against inflation, wage and energy cost increases".

SMRT added that it will also take part in the competitive bid for the next tender package in Seletar.

Yesterday, the LTA said it had concluded a deal to move both SBS Transit and SMRT Buses over to the new contracting model.

It expects to pay the two around $7.2 billion to run 11 route packages with tenures ranging from two to 10 years. The payments will be made in annual installments.

Maybank Kim Eng analyst Derrick Heng said the new model will be positive for the two companies.

"But if shareholders expect a huge windfall in the form of special dividends, they will be disappointed," he said. "But in the long term, it will be a more positive model as it frees the operators from revenue risks."

Mr Heng estimates SBS Transit will have an annual revenue of $760 million and SMRT will have $311 million, based on an assumed seven- and six-year average tenure respectively. At the same time, they get to keep advertising and rental revenue arising from their bus businesses.

DBS Equity Research senior vice-president Andy Sim said the move should augur well for the two companies, whose bus operations "are running at low profitability".

"The variability of the tenures is interesting... Looking at the tenures of the contracts, there are only three out of 11 which are five years and under," he noted, adding that this should provide longer-term predictability for the two incumbents.

Investors clearly view the new model in a positive light. On May 20, 2014, SMRT and ComfortDelGro shares spiked on speculation that the Government would assume ownership of all buses and depots, and that transport firms would bid for routes to operate in competitive tenders.

SIM University economist Walter Theseira said the $7.2 billion fee would have taken into account the two recent successful route tenders by Tower Transit and Go-Ahead.

As to whether it represented fair value, he said that depended on the fare revenue the LTA would eventually collect.

"But given public demand for a high level of service and quality together with low fares, I think it is quite possible the Government will end up effectively subsidising the public bus system," Dr Theseira said.

"Certainly, the Government has already done so through programmes such as the Bus Service Enhancement Programme, to say nothing of the infrastructure cost of building bus depots and other bus infrastructure. However, we will need to evaluate the system after launch to assess this frankly."

SIM University senior lecturer Park Byung Joon said "increased service frequency and less bus bunching" are two requirements clearly spelt out in the new bus contracts. He said incentives and penalties are also in place to motivate operators to keep to these standards.


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