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This is How SBS Transit Ltd Will Change Under the New Bus Contracting Model

Change is coming for Singapore’s public transport companies.

Last week, SBS Transit Ltd (SGX: S61) announced that it will be transiting to the new Bus Contracting Model (BCM) on 1 September 2016 after its existing Bus Service Operating License expires at the end of August.

The company also revealed details about the BCM contract it has with the Land Transport Authority (LTA). The contract marks another milestone in the transition of SBS Transit’s public bus business to a new model.

Change is afoot

Under the BCM, the Singapore government will own bus infrastructure such as depots, buses, and fleet management systems. Bus operators will be contracted and paid a fee to operate bus services while the government will retain the fares collected.

To facilitate this transition, all existing bus routes had been bundled into 12 bus packages and progressively tendered out. The first two packages were won by British transport operators Tower Transit and Go-Ahead Group. The third tender is in progress.

The remaining nine bus packages will remain with the incumbents, SBS Transit and SMRT Corporation Ltd (SGX: S53). This represents 80% of the total public bus fleet.

With all this as a backdrop, this brings us to the new contract SBS Transit signed with the LTA. For investors, there are several points to note:

  1. SBS Transit will operate eight bus packages. The contract periods vary for each package, ranging from two to 10 years. The Bukit Merah contract is the only one which is contracted for two years. On average, the contract length is seven years.
  2. The eight packages will cover 196 bus services, five bus depots, three bus parks, 13 bus interchanges and 14 bus terminals. The fleet size required is around 2,900 buses. At the end of 2015, SBS Transit had a fleet size of 3,600 buses and operated 261 bus routes.
  3. To facilitate this change, SBS Transit will be leasing the 2,900 or so required buses to the LTA. The latter will pay SBS Transit a leasing fee based on the depreciation of the buses.
  4. The new scope of operations for SBS Transit will include operating, managing, and maintaining the buses, buses interchanges, and bus depots. SBS Transit may thus get to keep its lucrative advertising and rental income.
  5. SBS Transit is also expected to charge and collect fares on behalf of LTA. The bus operator is also expected to provide bus service information and general customer management services.
  6. SBS Transit estimated that it will collect fees of around $5.32 billion over the average contracting period of seven years. The estimate does not include some factors, such as incentive payments and adjustments for inflation.
  7. What comes after all the above is anybody’s guess. As my fellow Fool Ong Kai Kiat noted, the new bus contracting model could lead to an increase in competition for the bus packages. Notably, SBS Transit did not win the first two tenders.
  8. In 2015, close to 80% of SBS Transit’s revenue came from its bus segment. The company said that it does not expect the change to the BCM to have a material impact on its results for 2016. We can look at the year’s fourth-quarter earnings for signs on how the new model could affect its financials.
  9. SBS Transit believes that the new model will be more sustainable over the long-term. The bus operator has endured turbulence over the last five years.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.