The Losers from the New Public Bus Contracting Model

A revamped contracting model for the Singapore public bus system was announced a few weeks ago. The changes have given the major public transport companies in Singapore, SMRT Corporation (SGX: S53) and SBS Transit (SGX: S61), a much need boost to their future prospects as both companies have been facing fast-declining profits over the past four to five years.

However, the new public bus service model has its possible drawbacks for the public bus operators too.

The drawbacks

One of the big advantages of the new public bus service model for the bus operators is that the government would assume ownership of all related assets and infrastructure. This would save both SMRT Corporation and SBS Transit from having to spend millions on capital expenditures in the future for the maintenance and purchase of buses, essentially tilting both companies’ business models toward the asset-light spectrum.

But, what is crucial here is that both companies will also likely lose the advertising and rental rights on their buses and depots respectively.

The advertising and rental services have been very important profit drivers for both companies in the past few years. For instance, operating profit from SBS Transit’s advertising and rental segment had made up 130% (yes, the bus and rail operations for SBS Transit had made losses) of its overall operating profit of S$15.5 million for 2013. Without advertising and rental income, both companies’ earnings would have been much lower. That’s the first possible drawback with the new public bus service model.

The second drawback is this: After SBS Transit and SMRT Corporation’s current contract for providing bus services finishes in 2016, it’s very likely that competition within the public bus service space would heat up as other operators would be allowed to bid for the new contracts.

Currently, SMRT Corporation and SBS Transit enjoy a duopoly type of operating environment. With the new changes to the bus industry, they might find themselves in a free market environment in the future. In light of that, it’s easy to see both ending up enjoying a smaller slice of the whole market over the long run.

The indirect loser

Possible negative consequences stemming from the new public bus contracting model do not afflict just the bus operators.

Government and non-profit organisations tend to suffer from lower efficiency. According to billionaire philanthropist Bill Gates, this is due to the lack of a feedback loop for such entities. For-profit companies use the level of their profit as an indicator of how well they are performing. As profit-making is not the primary objective for a government, it becomes hard for them measure the progress they are making, which in turn reduces their operating efficiency.

Therefore, if the transition for the public bus service industry is not handled well, tax-payers might indirectly end up having to bear the higher costs involved with maintaining the system. If such a scenario comes to pass, Singapore might be better off just allowing the service operators to raise fares in tandem with inflation and then subsidizing the necessary groups of citizens.

Unfortunately, there is no way of knowing for sure what might result from the restructuring until it has been fully implemented. All we can do now is wait.

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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.