Chart of the Day: What are the effects of the Government Contracting Model on Singapore’s transport stocks?

Is it time to explore other sources of revenue?

Over the weekend, UK bus operator Tower Transit Group Limited has clinched the first tendered bus package - Bulim Bus Package - from the LTA under the new Government Contracting Model.

According to Nicholas Teo of CMC Markets, under the Government Contracting Model, LTA provides public bus services through competitive tendering for operators to run. Fare revenue goes to the government, and operators are paid a fee to operate the bus services.
“With just the responsibility of running the business to an acceptable service level, the operator for the package is free from the weight of accounting for the assets in terms of maintenance and replacement capex. These were key considerations that played heavily on both Comfort’s and SMRT’s numbers in previous years,” Teo adds.

After the Tower Transit Group transaction, of the 26 services in the Bulim package, SBS now runs 17, and SMRT nine.
Teo says that yhe jury is still out with regards to the impact of this Government Contracting Model on the business of local operators and especially on the shares of both Comfort Delgro and SMRT. On the one hand, losing their duopoly and dominance here may see them having to explore other sources of revenue. On the other, both operators may benefit from this ‘fee-based‘ revenue without the accompanying burden of accounting for fixed assets.