After more than four years of intense negotiations, the Government and rail operator SMRT Corp have reached an agreement to switch to a dramatically different arrangement that is designed to improve service standards.
The Ministry of Transport (MOT) said yesterday that the Land Transport Authority will take over all operating assets of the North-South, East-West and Circle lines, as well as the Bukit Panjang LRT Line, from SMRT for $1.06 billion. This is the net book value - or current value - of the assets, plus GST.
In turn, SMRT will run the trains on these lines and retain a share of the earnings. But it will have to pay a licence charge to LTA annually. The fee, which varies according to SMRT's profitability, will go into a sinking fund for asset replacement.
The operator will also have to abide by a more stringent maintenance regimen, as well as higher service standards. If it fails to do so, it faces more financial penalties on top of the ones currently in place.
To reflect its asset-light status, SMRT is expected to post an average Ebit (earnings before interest and taxes) margin of 5 per cent - about one-third of what it made in the last five years.
The new framework will also have a risk- and reward-sharing formula. If SMRT makes substantially more, the Government can cream off some in the form of a higher licence fee. But if its margin is crimped by new regulations or fare changes, the fee can likewise be reduced.
Asked why the Government is not applying the same model as the new government bus contracts, where operators bid to run services for a fixed fee and the LTA collects all fare revenue, MOT Permanent Secretary Pang Kin Keong said: "It was a judgment call. We wanted to have the operator to still have some skin in the game.
"We wanted them to do things that will attract ridership."
Pending approval from its shareholders, SMRT will start a new 15-year contract from Oct 1. It will thus operate the four lines up till 2031, with an option for a five-year extension. Under the current system, SMRT's contract for North- South and East-West lines and Bukit Panjang LRT expires in 2028, while its Circle Line deal expires in 2019. Both come with an option for a 30-year extension.
The shorter tenure now makes it easier for the LTA to replace an operator with consistently poor performance.
SMRT said yesterday that the current system has become "unsustainable", as it is obliged to comply with changes in regulatory standards "at its own cost". Over the next five years, it estimates that its capital expenditure could reach $2.8 billion.
SMRT chief executive Desmond Kuek said the new framework will allow the company "to better focus on fulfilling its role as a public transport operator to deliver high levels of operational reliability, safety, and service for the benefit of our commuters".
SMRT will call for an extraordinary general meeting soon to seek shareholders' approval for the proposed asset sale to LTA. It said it does not intend to distribute the proceeds of the sale in the form of a special dividend.
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