Publish Date : 18-Jul-2016
SMRT welcomes the transition of its North-South, East-West and Circle Lines (MRT), and the Bukit Panjang Light Rail Transit (LRT) to the New Rail Financing Framework (NRFF). This transition comes after extensive consultations with the Land Transport Authority (LTA) since 2011. As part of the transition to the NRFF, LTA will purchase the MRT and LRT operating assets held by SMRT. The NRFF is a more sustainable model that will allow SMRT to continue fulfilling its role to deliver high levels of service and reliability for commuters.
Focus on rail reliability and commuter experience: As a result of this change, SMRT Trains will operate under an asset-light model, focusing on two main operational areas: providing quality service to commuters and maintaining the trains to ensure smooth operations. The transition will not impact SMRT Trains' employees as the Company will continue to operate and maintain its rail services.
SMRT Trains remains committed to meeting the networks higher capacity needs and reliability requirements, in accordance with the Maintenance Performance Standards set out by LTA. To achieve this, SMRT Trains will continue to employ or allocate at least 700 additional maintenance headcount or equivalent to approximately 20% increase, over the next three years. This is in addition to the 30% increase in technical workforce that SMRT Trains had made in the last three years. SMRT Trains will also continue to make further investments in service quality enhancements.
Towards a sustainable rail business: The Current Rail Financing Framework (CRFF) has become unsustainable. SMRTs rail fare margins have been declining since Financial Year 2012 as operating expenses have increased significantly due to our rigorous maintenance regime and replacement programmes for the ageing network. On the other hand, actual fares over the years have not kept pace with the cumulative maximum allowable fare adjustments based on the prescribed fare adjustment formula by the Public Transport Council. Under the CRFF, SMRT Trains as an operator is also obliged to comply with changes to regulatory standards at its own cost.
Over the next five years, the total estimated capital expenditure of SMRT Trains under the CRFF could reach about S$2.8 billion. This includes the procurement of new trains and taking over of the operating assets of the Circle Line where applicable, while keeping up with the provision of enhanced service levels to the commuting public.
NRFF risk-sharing and EBIT margin: The NRFF will lower the business risks for SMRT Trains in the future as it will offer some protection in terms of fare revenue and profitability. LTA will take over the responsibility for the addition, replacement and renewal of operating assets for an expanded network. In return, SMRT Trains will pay a licence charge to LTA which will go into the Railway Sinking Fund1 that has been set up.
As stated by LTA in its press release issued earlier today, under the NRFF, the licence charge has been structured by LTA to allow SMRT Trains to achieve a composite (fare and non-fare) Earnings before Interest and Taxes (EBIT) margin of about 5%, similar to the margins of comparable asset-light rail operators in other jurisdictions. The licence charge will be implemented through a cap and collar structure (please refer to Paragraph 9 below).
Additionally, LTA may reimburse SMRT Trains, or vice-versa, when regulatory changes lead to changes in SMRT Trains operating costs or revenue. The reimbursement will be by way of a grant which SMRT Trains can apply for, and is given at LTAs discretion. Relieved of its capital expenditure obligations, coupled with LTA sharing certain revenue and operating risks, SMRT Trains will be better positioned to operate and maintain its rail services.
While the NRFF will provide a measure of risk mitigation and earnings stability that SMRT Trains presently does not have under the CRFF, there is no certainty that SMRT Trains will earn an EBIT margin of 5%. The licence charge structure provides a revenue shortfall sharing, and a profit sharing mechanism based on a tiered EBIT cap starting at 5% and collar set at 3.5%. Any EBIT deviations beyond the cap and collar would be shared with LTA. Going forward, SMRT Trains will do its best to mitigate the key operating risks under the NRFF Licence. However, the risks relating to fare adjustments, operating expenditure increases, timing of asset renewal and regulatory changes that may impact SMRT Trains profitability remain significant.
Asset Sale under NRFF: As part of the transition to the NRFF, LTA will purchase the operating assets of the NorthSouth, East-West and Circle Lines held by SMRT Trains as well as the operating assets of the Bukit Panjang Light Rail Transit held by SMRT Trains' wholly-owned subsidiary, SMRT Light Rail Pte Ltd. The LTA will purchase these assets at an estimated total Net Book Value as at 30 September 2016 of S$991 million (S$1,060 million including GST), in accordance with the terms of the sale and purchase agreements signed between the parties. Payment for the assets will be made in tranches: S$797 million will be made on the initial completion date, with the balance of the consideration payable over the next three anniversaries of the completion date. SMRT Trains has provided warranties on the conditions of the assets. LTA will also carry out an assessment of the condition of the assets and is entitled to withhold payment for assets requiring rectification or replacement.
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