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Government to take over SMRT's rail assets

LTA will pay S$1.06b for assets of 3 MRT and one LRT lines under the New Rail Financing Framework

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SMRT will transfer its rail assets to the government for S$991 million or S$1.06 billion after GST, subject to shareholder approval.


SMRT will transfer its rail assets to the government for S$991 million or S$1.06 billion after GST, subject to shareholder approval.

After discussions began in 2011, the Land Transport Authority (LTA) has arrived at an agreement with SMRT Trains on the New Rail Financing Framework (NRFF) to transfer the ownership of the North-South and East-West Lines, the Circle Line and the Bukit Panjang LRT; the operating assets include the trains, signalling system and maintenance equipment.

Under SMRT Trains' new NRFF licence, it will operate the above lines for 15 years from Oct 1, 2016 with the possibility of a five-year extension - much shorter than the original 30 to 40 years.

LTA will own the operating assets and share in an asset-light SMRT Trains' risks and rewards, with the aim of allowing the listed company to achieve an average EBIT (earnings before interest and tax) margin of 5 per cent.

LTA lists the following as key benefits of the transition for commuters:

  • It puts LTA in the driving seat to make timely investments in capacity expansion and the replacement and upgrading of operating assets;
  • Without ownership responsibility, SMRT can better focus on the rail network's operations and maintenance;
  • The shortened operating licence allows LTA to re-tender the operation of rail lines more often, making the industry more contestable;
  • A new set of maintenance performance standards will improve maintenance performance and the reliability of the rail system;
  • The NRFF provides for some risk and profit sharing to make the rail system more financially sustainable.

The last point mitigates both the downside and upside for SMRT. The operator's Licence Charge will be increased if its profits are higher than expected; similarly, any under-performance will be subsidised by LTA.

LTA said the 5 per cent EBIT target is comparable to other asset-light operators' margins.

The Licence Charge is paid annually for the right to operate and earn revenues from the rail lines. The amount comprises fixed and variable components.

LTA may also reimburse SMRT and vice versa when new regulatory changes initiated by LTA affect SMRT's operating costs or composite (fare and non-fare) revenue.

The framework will not have an impact on fares, which continue to be regulated by the Public Transport Council.

If the asset transfer goes through, SMRT will hand over its operating assets to LTA at net book value as at Sept 30, 2016.

Payment will be made in tranches - 60 per cent of the amount on the date of the transition, with 15 per cent, 15 per cent and 10 per cent paid on the next three anniversaries of the transition.

Commuters are the main beneficiaries of the NRFF, says LTA. This is because rail services will be more responsive to increased ridership, because LTA decides on costly capacity expansion, not the operator. LTA will also be able to ensure more timely replacement and upgrading of the operating assets.

With the operator relieved of heavy capital expenditure, it can focus on providing more reliable and well-maintained rail services.

Coordinating Minister for Infrastructure and Minister for Transport Khaw Boon Wan welcomed the conclusion of discussions between LTA and SMRT. In his statement, he said: "We first implemented this new model for SBS Transit's Downtown Line. We now look forward to its extension to all the SMRT train lines. Four out of six of our MRT and LRT lines will then be under the NRFF."

READ MORE: SMRT to pay off part of debt from asset sale cash

Changing hands

THE New Rail Financing Framework (NRFF) will meet commuters' needs better by being more responsive to growing rail ridership and commuter expectations.

Some key changes:

  • Land Transport Authority (LTA) owns operating assets and decides on investment, replacement and upgrading, while SMRT maintains them
  • Licence period shortened to a maximum of 20 years from 30-40 years previously
  • LTA to share in fare revenue risk with SMRT
  • SMRT's EBIT margin will be capped to an average of 5 per cent
  • SMRT to pay annual Licence Charge into the Railway Sinking Fund, which helps to pay for building up, replacement and upgrading of operating assets