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Why The Government Bus Contracting Model Is A Double-Edged Sword For Bus Operators

One major change in Singapore’s land transport industry happened in 2014.

The government officially announced on 21 May 2014 that Singapore would transit from the existing Bus Service Operating Licences (BSOL) model to a bus contracting model. Under the new model, the government would own all bus infrastructure and operating assets, such as depots, the buses, and fleet management systems. The existing BSOL is set to expire on 31 August 2016.

The reason for the drastic change is that the government found that bus operators were finding it tough to increase capacity and improve service standards in a responsive manner.

Two major changes

For investors, the major question is what do these changes mean to existing BSOL players such as SMRT Corporation Ltd (SGX: S53) and SBS Transit Ltd (SGX: S61)? The implications are wide, but I see two important changes.

The first is that there would likely be increased competition in the future.

Under the new bus contracting model, all bus routes in Singapore are divided into 12 packages. The first bus package had been won by Tower Transit which began service on 29 May 2016. This marks the official start of the new bus contracting model and brings the total number of public bus operators from two to three.

Given that there are 12 packages, theoretically speaking, there can be as many as 12 public bus operators in Singapore. While it is unlikely that we will have so many bus operators as it would present a regulatory challenge to the Land Transport Authority, the trend towards more competitors is clear.

The second is that bus operators can become asset light businesses.

Under the bus contracting model, there’s no need for bus operators to hold capital-intensive assets that would incur costs such as regular maintenance and enhancements. The government will be paying bus operators a fee to operate a bus package while retaining fare revenue.

Foolish Conclusion

Of the 12 bus packages, the first is already in operation as mentioned and the second has been awarded to the Go Ahead Group. The third is in the tender process and should be implemented only from 2018 onward.

The remaining nine packages would be managed by the existing bus operators (SMRT and SBS Transit) after the expiry of their BSOL for a period of around five years.

In other words, the Singapore bus industry is changing slowly but steadily. While the government had given existing bus operators the ability to operate on an asset-light model, the operators are also kept on their toes because of the potential for higher competition. Indeed, the new government bus contracting model is a double-edged sword for bus operators.

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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 Ong Kai Kiat does not own shares in any companies mentioned.