Projected Share of Operating Costs for Thomson-East Coast MRT Line to be Covered by Fare Revenues Versus Government Subsidies

7 Assoc Prof Walter Theseira asked the Minister for Transport (a) what is the currently projected share or range of operating costs for the Thomson-East Coast MRT Line that is expected to be covered by fare revenues versus by Government grants and subsidies; and (b) in light of the financial difficulties faced by operators of the existing MRT Lines, what share or range of operating costs for these lines are expected to be covered by existing operators versus by Government grants and subsidies.

The Minister for Transport (Mr Khaw Boon Wan): Sir, the Government has invested and subsidised heavily to ensure that our rail network is reliable, convenient and affordable.

First, the Government fully bears the upfront cost of building new rail lines. For instance, over the next five years, the Government will be spending about $25 billion to expand our MRT network. The major railway lines that are being constructed during this period are the Thomson-East Coast Line (TEL), Jurong Region Line and the Cross Island Line. When completed, there will be a total of eight MRT lines, and eight in 10 households will live within a 10-minute walk from a train station.

Second, the Government will be spending around $4.5 billion over the next five years to build up, replace and upgrade rail operating assets on the rail network, including trains, signaling systems and power supply systems.

Under the current financing model, the operating and maintenance costs (O&M) are fully borne by the rail operators, SMRT Trains and SBS Transit. The rail operators have intensified their O&M regimes over the past few years in order to raise reliability. Coupled with LTA's asset renewal, rail MRT reliability has improved considerably. Last year, the MRT network achieved a Mean Kilometres Between Failure (MKBF) of 690,000 train-km. This is a significant improvement of over three times from 2017, when the network MKBF was at 181,000 train-km. We expect further improvement this year.

These efforts at raising rail reliability are costly. They have taken a financial toll on the rail operators. In the financial year ended 31 March 2018, SMRT Trains reported a loss of $86 million, against an operating cost of $838 million and commuters' fare income of $608 million. So, roughly, the losses were about 10% of the operator's cost and commuters' fare make up about 73% of the operator's cost.

In another example, SBST's Downtown Line also incurred a loss of more than $47 million for the financial year ended 31 December 2017, against an operating cost of $132 million and commuters' fare income of $69 million. So, here you see a new line – Downtown Line (DTL). The loss was about 36% of operator's cost and commuter's fare income just made up about 52% of the operator's cost. I think yesterday, SBST published their latest financial results. We are combing through the results, but I believe Downtown Line continue to be in pretty bad shape.

In the case of Thomson-East Coast Line (TEL), the Government recognises that the ridership in the initial years will be uncertain as the line will be opening in multiple stages over six years. This is a very long line and by necessity we will be opening it stage by stage and you can imagine the long lead time taken to build up traffic, but the fixed overhead cost is sunk and the operator has to shoulder that. And that is why the Government decided to bear the revenue risk by subjecting TEL to an arrangement similar to public buses, for its first concession period of nine years. Under this model, the Government collects fare revenue and pays the operator, SMRT, a service fee for O&M. This is unlike the arrangement for all the other railway lines.

Sir, rail reliability is a national priority. We will continue to work towards improving rail reliability, making our rail network among the most reliable in the world. Achieving such a goal requires a regular investment in substantial expenditures to support intensive maintenance. We will strike the right balance between what should be borne by taxpayers through direct Government funding, by commuters through fares, and by operators. We are however mindful that any decision to increase the level of Government funding for rail operations has to be weighed against competing needs such as healthcare and security.

Assoc Prof Walter Theseira (Nominated Member): I thank the Minister for his comprehensive reply. I have one clarification and two supplementary questions. The clarification is on the Thomson-East Coast Line (TEL) situation. I understand that the Government bears the revenue risk and is expected to subsidise the Line, at least in the initial years. I would like to know if we have an expected range or percentage of the operating cost that the Government has planned to subsidise based on the best available projections right now.

For the supplementary questions, first: the fare set by the Public Transport Council, the formula which is valid until 2022, it allows adjustments for capacity through the network capacity factor. But the fare formula does not account for the increased tempo of maintenance expenditures which are going to be the responsibility of the legacy operators. So, I would like to know what are the plans in the near term, for the current term of the current fare formula, what are the plans that the Ministry has if the operators continue to sustain substantial operating losses, which might threaten their commercial viability or affect their ability to carry out required maintenance?

The second supplementary question is: will the contracting model for the Thomson-East Coast Line (TEL) be evaluated as an alternative to the new rail financing framework for the legacy lines, and if so, what would be the criteria for such an evaluation? Before I end, I just would like to hope that Singaporeans appreciate the tremendous financial investments the Government is making to ensure that our rail system is safe and reliable.

Mr Khaw Boon Wan: I thank the Member for his thoughtful comments. These are serious comments and obviously he has put a lot of thought and some research into this subject. I have spent now more than three years on this difficult portfolio. I have exercised a lot of my time and energy on this one. Fortunately, after three years of hard work, we are beginning to see some results. The MKBF data that was released last week are extremely encouraging.

But do not forget, we are not yet out of the woods because, as I repeated in this House three years ago when I took on this job, the problem can be fixed but it is multi-year – it will take several years – and multi-billion dollars because you have to spend a lot of money. It is multi-year because the North-South, East-West Lines are old lines, and significant assets have to be renewed and replaced; and until they are completely renewed and replaced, well, you know, old trains are like old bodies. There are problems. At 67, my flu hit me hard in the last couple of months – when I was younger, three weeks, I am well, without any medication. This time took me more than two months. After the virus is cleared, it led to secondary cough, which I am still suffering. That is the worst thing because coughing is uncontrollable and it usually happens at night and, therefore, I do not get a good sleep. And, as you know, to get well, you need sleep. Sorry, for sharing with you my personal experience. But looking after the train is the same as looking after the body. If you neglect your train, you will suffer for it. When the trains are new, it does not matter because you do not experience the ill results of the negligence. But for old trains, it will show up.

Back to this Thomson Line, for the first concession period of nine years, at Year 9, we are talking about fares – assuming today's fares and adjusted through the fare formula – will be less than 50%, less than half of the operating costs of Thomson Line at Year 9. This implies a very significant subsidy on the part of the Government.

Do not forget, over the next 10-year period, it is not just Thomson Line, there is Jurong Region line and there is Cross Island line. Again, those are long lines and, therefore, I think, we will have no choice but to adopt the Financing Model based on a Gross Cost Model; otherwise, no operators will take on this tender.

The PTC formula as noted by the Member has not taken into account the substantial increase in operating cost in order to fix the reliability problem. But, we have to be fair to operators and the other stakeholders. That is why we need wise men and women in the PTC. Their job is to try to be fair and reasonable to operators as well as commuters.

What we have learned in the last three years is reliability is an engineering problem; it can be fixed but you need money, you need resources and you need time. Having pumped in the money, the second order question is how do you share the burden. And, really, you are talking about sharing between taxpayers through Government subsidy, or commuters through some fare adjustments. I look to PTC to think through this problem. I am also spending some time thinking about it. Now that I have a little bit more time to breathe, I will be focusing on this particular problem on the optimal model of financing MRT as well as buses.

It is not clear whether a Gross Cost Model is superior to a Net Cost Model. Each has its pros and cons. It is also not clear whether buses should follow some model whereas MRT follow the other. My preliminary thinking is that it depends on the state of maturity of a particular bus package, or a particular MRT line. When the line has reached steady state, with predictable volume of commuter traffic, and if the market is competitive, then I think a Net Cost Model is suitable. But when it is still in transition, and especially if the market is not naturally competitive, then I think a Gross Cost Model may be more relevant. But this is preliminary thinking.

Again, because buses and rails are different, buses, if you call an international tender, there will be many bids. An MRT line actually is a local monopoly. Inevitably, the Government has to come in to regulate the operator, and to make sure that there is no profiteering. But, at the same time, be reasonable to the operator, because nobody will set up a company to bleed every year; they are not charities. Our job is to make sure that they do not "gold-plate" the engineering department, in other words, overstate specifications, overdo things, pushing up costs and they do not profiteer.