LTA taking over SMRT's rail assets for S$991mil to improve train reliability
More Timely Capacity Expansion, Asset Replacement and Upgrade; New Maintenance Performance Standards to Improve Train Reliability
The Land Transport Authority (LTA) and SMRT Trains Limited (SMRT Trains) have concluded discussions on the transition of the North-South and East-West Lines (NSEWL), the Circle Line (CCL) and the Bukit Panjang LRT (BPLRT) to the New Rail Financing Framework (NRFF), which had been announced by the Government in 2008 and implemented for the Downtown Line (DTL) in 2011. The transition will benefit commuters by bringing about five changes.
First, SMRT Trains and SMRT Light Rail will transfer ownership of their respective operating assets, such as the trains and signalling system, to LTA. This will put LTA in the driving seat to make timely investments in capacity expansion and the replacement and upgrading of operating assets.
Second, SMRT Trains, relieved of ownership responsibility over the rail operating assets, will be able to better focus on the operations and maintenance of the rail network.
Third, LTA will shorten operating licences from 30-40 years under the previous financing framework, to 15 years under the NRFF. This allows LTA to re-tender the operation of rail lines more often, making the industry more contestable.
Fourth, LTA will impose new Maintenance Performance Standards (MPS) to improve maintenance performance and consequently the reliability of the rail system.
Fifth, the new licence under the NRFF provides for some risk and profit sharing between SMRT Trains and LTA, to make for a more financially sustainable rail system. For example, the structure provides for an increased Licence Charge to be paid by SMRT Trains should their profits outperform.
Table A: Comparison between Previous and New Rail Financing Framework
New Rail Financing Framework
Under the previous financing framework, rail operators own operating assets, such as trains and the signalling system. They are hence responsible for building up, replacing and upgrading the operating assets. However, as operators bear the full financial risk, they may be too cautious to undertake costly capacity expansion, replacement and upgrading works. They may also be less responsive to growing rail ridership and commuter expectations.
That is why the Government announced the NRFF in the 2008 Land Transport Master Plan. In 2010, the Rapid Transit Systems Act was amended to implement the NRFF. The NRFF was first implemented in 2011 for the DTL, operated by SBS Transit. In addition to owning the DTL rail infrastructure such as stations and depots, LTA (instead of SBS Transit) also owns the DTL operating assets, and makes the decisions to build up, replace or upgrade these assets. SBS Transit in turn will pay an annual Licence Charge for the right and responsibility to operate and maintain the DTL and earn revenue from it.
LTA has since 2011 been discussing with SMRT Trains to transit their existing MRT and LRT lines to the NRFF.
Commuters are the main beneficiaries in the transition to the NRFF
The NRFF ensures that commuters’ needs are better served in three ways.
First, rail services will be more responsive to increased ridership as LTA will henceforth decide on capacity expansion and be able to ensure that it is done in a timely fashion. Likewise, LTA will be able to ensure more timely replacement and upgrading of operating assets.
Second, the rail operators, relieved of heavy capital expenditure, can focus on providing reliable and well-maintained rail services for commuters.
Third, because the operators are now asset-light, LTA can shorten their licence tenure from 30 to 40 years under the previous framework, to 15 years. This makes the industry more contestable. 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.
The conclusion of discussions will pave the way for the NSEWL, CCL and BPLRT to be on the NRFF from 1 October 2016, with a licence for SMRT Trains to operate the lines until 30 September 2031, pending SMRT shareholders’ approval of the asset transfer to LTA. If approved by shareholders, SMRT Trains and SMRT Light Rail will transfer to LTA their respective operating assets for the NSEWL, CCL and BPLRT at Net Book Value as at 30 September 2016.
LTA will conduct asset condition surveys for the older operating assets, and make payment for them in tranches: 60% of the payment will be made on the date of transition, with 15%, 15% and 10% of the payment made on the next three anniversaries of the transition.
SMRT Trains has provided warranties on the condition of the assets, and LTA is entitled to withhold payments for assets requiring rectification or replacement. As the transition only involves the transfer of ownership of operating assets without affecting day-to-day rail operations, it will not impact the employees of SMRT Trains and SMRT Light Rail.
LTA is still in discussion with SBS Transit on the possibility of transiting its North East Line and Sengkang-Punggol LRT to the NRFF.
Higher reliability requirements with the Maintenance Performance Standards
As part of the transition to the NRFF, SMRT Trains will comply with a set of new MPS to improve its maintenance processes. To meet these enhanced standards, SMRT Trains intends to increase its maintenance staff by 20 per cent, equivalent to about 700 employees, over the next three years. To effectively implement the MPS, LTA will step up its maintenance checks and audits, and similarly increase headcount for its maintenance and engineering team.
More financially sustainable rail system
In addition to enhancing commuters’ interests, the NRFF is intended to create a more financially sustainable rail network.
For the right to operate and earn revenue from the lines, SMRT Trains will pay a Licence Charge into the Railway Sinking Fund, as SBS Transit is obliged to do for the DTL. These Licence Charges, supplemented by Government funds, will be used for building up, replacing and upgrading the operating assets.
The Licence Charge, which comprises fixed and variable components, is structured to allow SMRT Trains to achieve a composite (fare and non-fare) Earnings before Interest and Taxes (EBIT) margin of about 5 per cent. Comparable asset-light rail operators in other jurisdictions earn similar margins. The structure offers some protection for the operator in case fare revenue growth fails to keep pace with cost growth, as LTA will share some of the shortfall of SMRT Trains’ fare revenue and profits.
At the same time, the structure provides for an increased Licence Charge to be paid by SMRT Trains, should their profits outperform. In addition, LTA may reimburse SMRT Trains, or vice-versa, when new regulatory changes initiated by LTA lead to changes in SMRT Trains’ operating costs or composite revenue.
Commuter interests at the heart of the NRFF
Commuter interests are at the heart of the transition to the NRFF. The transition is an integral part of our effort to enhance the quality, reliability and sustainability of our rail system. Commuters will benefit from higher-quality rides and a system that is more responsive to their needs.
 Please refer to Table A for a comparison between the previous and the New Rail Financing Framework.
 The existing North-South and East-West Lines and the Bukit Panjang LRT licences expire on 31 March 2028, with a possible extension for a further period of 30 years, while the Circle Line licence expires on 3 May 2019, with a possible extension for a further period of 30 years. With the NRFF, the licence for these lines will expire on 30 September 2031, with a possible extension to 30 September 2036.
 The Net Book Value of assets refers to the value of the assets as indicated in a company’s financial statements. It is equal to the original cost of the assets minus any accumulated depreciation. In this case, it refers to the value of operating assets on SMRT Trains and SMRT Light Rail’s financial statements as at 30 September 2016, which amounts to S$991 million (S$1,060 million including GST).