NOW that the government is finally stepping in to lend a hand in public bus operations, many long-suffering commuters are likely to say " it' s about time" .

After repeatedly refusing to run buses itself - even as it acknowledged that commercial operators plan bus routes based on commercial considerations - the government will now own buses and other operating assets, previously the domain of public transport operators.

It will manage these assets and determine bus routes as it invites private operators to tender for them, thus insulating these companies from operational losses - which have plagued the existing operators in recent years and dissuaded them from raising capacity and service levels.

This competitive tender model is not new London Buses subscribes successfully to it and Singapore' s ComfortDelGro is one of the many private operators running some of its routes profitably (ComfortDelGro unit SBS Transit operates three-quarters of Singapore' s public buses, while SMRT runs the remainder).

 

[SINGAPORE] The new government contracting model for public buses is expected to be positive for both SBS Transit and SMRT, although things are likely to be rosier for the former.

" Overall it' s a long-term positive given that both the bus operators are currently making operating losses of more than $40 million a year," said DBS Bank' s Andy Sim. " With the transition to this new contracting model, that will be taken off their income statements."

Last year, SBS Transit' s (SBST) bus business suffered a loss of $14.3 million, while SMRT Buses bled $28.4 million. SBST operates about three-quarters of the approximately 4,500 public buses in Singapore, while SMRT accounts for the remainder.

After August 2016, when the Bus Service Operating Licences for the two public bus operators expire, operators will be contracted to run services through a competitive tendering process.

As part of this new bus industry model, the government will own all buses as well as infrastructure such as depots. SMRT' s bus assets are estimated at $250 million while SBST' s are valued at $800 million.

So an asset-light SBST and SMRT, with depreciation off their balance sheets, are expected to be strong even with the introduction of competition.

For a start, 20 per cent of bus services will be tendered out, with implementation from the second half of 2016. The remaining 80 per cent of buses will continue to be operated by the incumbent operators at negotiated rates.

" Because of the phased approach, in the intermediate term, it will take some time for both operators to see the actual financial benefits flow to the bottom line," says Mr Sim.

But the tendering system is likely to reverse losses and Maybank-Kim Eng estimates the two operators' profit next year will rise by 18-22 per cent if they retain their current market share and their bus units achieve a 10 per cent margin under the new business model.

But of the two, OSK DMG' s Edison Chen believes ComfortDelGro will fare better.

" ComfortDelGro stands a high chance because of its track record of operating under the tender model in Australia and the United Kingdom, so SBST will have an edge," he says.

Mr Chen adds that with ComfortDelGro' s 2013 earnings before interest and taxes (Ebit) margin of 8.4 per cent in the UK, it should be able to earn 8-9 per cent here from 2017 onwards, assuming the negotiated rates are in line with the operator' s expectations.

" Compare that with SBST' s 2013 margin of 1.7 per cent, including advertising," he says.

Apart from its overseas experience, ComfortDelGro is also expected to benefit more than SMRT because of SBST' s bigger bus fleet.

But the downside is that with increased competition, there is a risk of losing market share.

" The whole point of moving to this model is to introduce competition, so the government will make it attractive enough for new players to come in," says Maybank-Kim Eng' s Derrick Heng.

But he does not see a parallel with the ground handling industry here where two strong incumbents dominated at Changi and the new third player had to eventually exit.

" The new player does not have to spend on capital expenditure and staff. Both labour and assets can be taken over by the new tenderer if it wins the package," says Mr Heng.

DBS Bank' s Mr Sim agrees.

He says: " With 20 per cent of bus services tendered out, we will see new players come in. But given the incumbents' natural benefit because of their experience, they should still be well-positioned."

This is especially so because with the other 80 per cent intact, there is little risk of losing market share.

Another factor is that tender awards are unlikely to be based on pricing alone track record and service quality are equally important.

But as one analyst says, even if some market share were lost, it should be put in perspective.

" It' s okay to lose some lines that were unprofitable in the first place."

 

Under the new system, the government will own the buses as well as bus infrastructure such as depots, while contracting routes out in 12 packages via a tender process to local and foreign players. Operators will be paid a fee to run and maintain the services, while the government will retain all fare revenue, the Land Transport Authority (LTA) announced on Wednesday.

The shake-up is largely aimed at raising service standards by increasing competition and creating a more flexible system where the government can make tweaks more swiftly and nimbly in response to changes in ridership and commuter needs. Higher service standards will also be built into the operators' contracts to ensure bus services arrive at shorter intervals during peak periods.

To start, three packages - consisting of 20 per cent of existing bus routes - will be offered up for tender starting from 2H2014, with the new operators to start handling the routes from 2H2016. The contract for each package will last five years, with a possible two year extension based on performance.