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New Business Model For Public Bus Services: How Are SMRT Corporation and SBS Transit Affected?

The Land Transport Authority of Singapore had just announced a massive restructuring of the public bus industry yesterday. What are the details for the authorities’ new plan and how would it affect the two main bus operators in Singapore, SMRT Corporation (SGX: S53) and SBS Transit (SGX: S61), from an investor’s standpoint?

Scrapping of the old model

The current public bus industry operates under the old Bus Service Operating Licences (BSOL) which will be expiring on 31 August 2016. Under the BSOL, licenses are granted to selected operators to provide public bus services in Singapore. However, all investments made for assets (i.e. the busses) and infrastructure had to be borne by the operators themselves. This has since created a problem: There’s high demand for more bus services in Singapore, but the bus operators’ lack of profitability does not give them any reason or justification for an expansion in routes.

After the BSOL expires, the government will not be renewing those licenses. Instead, it would be opening up the public bus sector with a new contracting model.

The LTAs’ new model

Under the new model announced by the LTA, a number of key changes would be made:

1. Under the new model, which is based on the public bus service models found in London and Australia, the government will own all bus infrastructure and assets, unlike the current model under the BSOLs whereby operators own the assets directly.

2. The LTA will grant the rights to operate certain bus routes through an open tendering process.

3. There are a total of 12 bus service packages planned for bidding with each package consisting for 30 to 500 buses. The LTA will initially tender only three packages – consisting of 20% of existing buses – which will commence in the second half of this year. Winners of the bids are expected to start their bus operations from the second half of 2016.

4. Bus operators will receive a service fee for operating the routes while the fares that commuters pay will be retained by the LTA.

5. Under this new plan, the government will have greater ability to maintain the affordability of public transportation fares for commuters. In addition, the government can expand bus routes based on demand from commuters and not on profit considerations.

6. The new model has already been tested out under the City Direct Bus Services and Peak Period Short Bus Services.

7. SMRT and SBS Transit will be running the remaining nine packages and the LTA has the intention to sign on both operators to continue offering their services for the next five years based on the new contracting model once the BSOL expires. After the five year deals expire, the packages will then be gradually released to other operators for bidding.

Foolish Summary

The most obvious benefit for the operators in the new model is that they will save on capital expenditures that were previously required for the maintenance and expansion of their bus fleet. For instance, SMRT had spent more than S$75 million in capital expenditures on its bus service in its financial year 2013 alone.

Singapore will also likely see more new bus operators coming into the industry in the future as the new model for bus operators will be asset-light, hence lowering entry costs. For the two major incumbents in the market – namely SMRT and SBS Transit – it will take a number of years before they face serious competition. This marks a new era for the public transport industry in Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns SBS Transit.