News analysis

An equitable deal with focus on commuter welfare

Christopher Tan That the creation of a new rail financing framework spanned the tenure of three transport ministers underscores the complexity of arriving at a deal that is equitable to both operator and state.

But the real focus of the deal has always been the welfare of the commuter, as it should be.

Mooted in 2008 when Mr Raymond Lim helmed the transport portfolio, and passed in Parliament in 2010, the new framework allows the state to assume a more direct and active role in funding operating assets such as trains and engineering equipment.

This paves the way for a more timely replacement and upgrading of assets. At the same time, it frees the operator from heavy and lumpy capital expenditures so that it can focus fully on meeting service standards and maintaining the system in good running order.

The capital expenditure issue can be a contentious one. It was a recurring topic during the public inquiry into the December 2011 breakdowns, a proceeding which concluded that SMRT had not done enough to keep the system in acceptable running order.

This was denied strongly by the previous management.

But even the new management has come out several times to say that the current framework is not sustainable.

In April, chief executive Desmond Kuek said that the company was hoping for a system that would help distribute revenue risk, which was "entirely borne by SMRT".

It looks like Mr Kuek got what he wanted. The new framework embodies 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.

Together with the bus contracting system, it symbolises a sea change for a government that has long been loath to take revenue risk.

This sets the stage for more stable earnings for SMRT, even if its profit margin won't be as fat as before.

Shareholders may baulk initially at a 5 per cent Ebit (earnings before interest and taxes) margin, but they should be glad their company will be financially stable in the long term.

Previously, management might have been tempted to hold back on capital expenditure to distribute more dividends. Such a policy will lead to only one outcome over time.

But going forward, stakeholders won't have to worry about a company torn between appeasing shareholders in the short term and sustainability in the longer run.

In a way, shareholders would be invested in an entity that is more sound and more focused on serving its customers. And that can only be a good thing, because what is good for the customer will eventually be good for shareholders.

Think of companies like Google, Microsoft, Apple and Toyota.

So, can SMRT customers - its commuters - really look forward to better service? While proof of the pudding is in the eating, they can be sure that a government which bears a much heavier financial responsibility in the new set-up will work harder to ensure the operator keeps its end of the bargain.

For starters, SMRT has said that it will ramp up its maintenance staff by 20 per cent - or 700 people - over the next three years. This follows an expansion which saw its total staff strength rising by nearly 30 per cent from 7,000 in 2012 to more than 9,000 today.

If the employees are well trained and empowered, the company is on track to greater things. Because what is good for employees is usually good for customers and shareholders, eventually.

A version of this article appeared in the print edition of The Straits Times on July 16, 2016, with the headline 'An equitable deal with focus on commuter welfare'. Print Edition | Subscribe