Land Transport Authority (LTA) will pay $1 billion to SMRT Trains Limited (SMRT Trains) to purchase the latter’s operating assets under the New Rail Financing Framework (NRFF) after discussions concluded for the transition of the North-South and East-West Lines (NSEWL), the Circle Line (CCL) and the Bukit Panjang LRT (BPLRT).
The transition which took five years to negotiate, had been announced by the Government in 2008 and implemented for the Downtown Line (DTL) in 2011. LTA has since 2011 been discussing with SMRT Trains to transit their existing MRT and LRT lines to the NRFF.
Details of the transition were said to be confidential two years ago when former Non-Constituency Member of Parliament, Gerald Giam raised the question in parliament to former-Transport minister, Lui Tuck Yew. (read here)
Mr Lui had said in his replies that one of LTA’s considerations in the NRFF is that the valuation of SMRT’s business must take into account not only the value of the existing assets SMRT owns, but also its current and future capital expenditure obligations, as required under the existing licences.
When asked why the negotiations for the new NRFF took so long, SMRT president and group chief executive Desmond Kuek said it was an intricate and complex process, and the risk-sharing mechanism had to be sustainable for all parties.
LTA have said that the government is not nationalising the rail sector with the NRFF, as private rail operators continue to run the rail services.
As part of the transition to the NRFF, SMRT Trains will have to comply with a set of new Maintenance Performance Standards (MPS) to improve its maintenance processes. To meet these enhanced standards, SMRT Trains intends to increase its maintenance staff by 20 per cent, equivalent to about 700 employees, over the next three years.
Also under the new NRFF, SMRT Trains will pay a licence charge into the Railway Sinking Fund for the right to operate and earn revenue from the lines. LTA said that these licence charges, supplemented by Government funds, will be used for building up, replacing and upgrading the operating assets.
The licence charge, which comprises of fixed and variable components, is structured to allow SMRT Trains to achieve a composite (fare and non-fare) Earnings before Interest and Taxes (EBIT) margin of about 5 per cent which LTA claims to be comparable asset-light rail operators in other jurisdictions earn similar margins. At the same time, the structure provides for an increased Licence Charge to be paid by SMRT Trains, should their profits outperform.
However, LTA may choose to reimburse SMRT Trains, or vice-versa, when new regulatory changes initiated by LTA lead to changes in SMRT Trains’ operating costs or composite revenue.
LTA in its press statement states that the transition will benefit commuters by bringing about five changes.
- SMRT Trains and SMRT Light Rail will transfer ownership of their respective operating assets, such as the trains and signalling system, to LTA. This will put LTA in the driving seat to make timely investments in capacity expansion and the replacement and upgrading of operating assets.
- Second, SMRT Trains, relieved of ownership responsibility over the rail operating assets, will be able to better focus on the operations and maintenance of the rail network.
- LTA will shorten operating licences from 30-40 years under the previous financing framework, to 15 years under the NRFF. This allows LTA to re-tender the operation of rail lines more often, making the industry more contestable.
- LTA will impose new Maintenance Performance Standards (MPS) to improve maintenance performance and consequently the reliability of the rail system.
- New licence under the NRFF provides for some risk and profit sharing between SMRT Trains and LTA, to make for a more financially sustainable rail system. For example, the structure provides for an increased Licence Charge to be paid by SMRT Trains should their profits outperform.
The key differences before and after the transition can be seen in the chart below.
LTA said that the new NRFF will ensure that commuters’ needs are better served in three ways.
- Rail services will be more responsive to increased ridership as LTA will henceforth decide on capacity expansion and be able to ensure that it is done in a timely fashion.
- The rail operators, relieved of heavy capital expenditure, can focus on providing reliable and well-maintained rail services for commuters.
- Operators are now asset-light, LTA can shorten their licence tenure from 30 to 40 years under the previous framework, to 15 years, making the industry more contestable.
The conclusion of discussions will pave the way for the NSEWL, CCL and BPLRT to be on the NRFF from 1 October 2016, with a licence for SMRT Trains to operate the lines until 30 September 2031, pending SMRT shareholders’ approval of the asset transfer to LTA.
If approved by shareholders, SMRT Trains and SMRT Light Rail will transfer to LTA their respective operating assets for the NSEWL, CCL and BPLRT at Net Book Value as at 30 September 2016 which is S$991 million (S$1,060 million including GST). The payment will be made in tranches, 60% of the payment will be made on the date of transition, with 15%, 15% and 10% of the payment made on the next three anniversaries of the transition.
LTA is still in discussion with SBS Transit on the possibility of transiting its North East Line and Sengkang-Punggol LRT to the NRFF.