There will be a revamp to our bus services in Singapore. Investors of SMRT, SBSTransit and Comfort Delgro look out!
Few weeks ago, The Land Transport Authority (LTA) announced a change to our public bus sector. This change refers to the government will own the buses, as well as the infrastructure such as depots. This kind of system is not novel. It has been successfully implemented in countries such as London and Australia.
Under this new system, the government will collect fares, and pay the operators for providing the service. LTA will contract out 9 packages from 2016 to 2022 which seeks to issue tender for operators to provide bus service and maintenance if awarded the contract. The tenure will operate for a period of 5 years, with the possibility of a 2-year extension after which the road package will be put up for new tender. Under this new system, the government will collect fares, and pay the operators for providing the service.
Commuters will stands to benefit from this scheme
This change is aimed to improve our current bus service standard. The government will set a new standard and determine the routes. One of the benefits for commuters is that the new standard aim to achieve greater efficiency by reducing the waiting time to be less than 10 minutes for at least 50% of bus services. Not bad.. but I wished it can be 100% instead. =P
New entrants are expected, and this will inject competition into the bus service sector. Therefore, by having healthy competition, the incumbent operators will be motivated to strive harder, so to secure a tender renewal.
Why it might be beneficial to current public transport service companies?
Private operators will be on asset light operation model where they don’t have to worry about managing physical assets anymore. If you follow closely on their annual reports, you will have already known that bus operators are making operating loses every year. Using last year figures, SMRT and SBSTransit suffered a loss of $28.4 millions and $14.3 millions respectively.
Under the new model, the government will own all the buses as well as infrastructures such as depots, the bus service operator will be asset-light, taking depreciation off their balance sheet. Currently, SMRT assets are estimated to be at $250 million whereas SBS Transit valued to be $800 million. Maybank Kim Eng estimates the two operators’ profit next year will rise by 18-22% under this new model, if they retain their current market share.
Is there any downside to the current public transport service companies?
As this whole new system purpose is to inject competition, the possible downside will be a risk of losing market share. With more players entering, the bus service provider will have to buckle up to make sure their service is up to the standard.
No matter is good or bad, commuters will be the winner. We are can expect better service from the providers.
As for investors, is your own call in which operators you think will benefit the most under the new model. Have an understanding on how this new system will affect the company balance sheet and its financial health, before putting your money into buying their shares.
I will be looking forward to this change both as a commuter and an investor.