According to the Budget, the government will provide funding for 550 buses while public bus operators will add another 250 buses on their own. The sum of $1.1b will be used to cover the cost of purchase of 550 buses as well as their running costs for the next 10 years. Such a huge sum seemed to be a big bonus for the Public Transport Operator (PTO), funding the provision of extra capacity. However, on a closer look, such scheme might turn out to be a big bane for the PTO.
Since SBS has a 75% market share in terms of bus fleet, we shall examine how they are going to be affected by this funding. I will be using the Annual Report FY10 of SBS as reference for the figures. Given that bus ridership is not likely to increase by 20% because of this extra capacity, we can conclude that if the funding is not able to cover the running cost, SBS is going to have its profit margin lowered.
The funded 550 buses
As the cost of purchasing buses is being sponsored, we shall check if the remaining fund will be able to meet the operating cost for the next 10 years. Last year, SBS ordered a total of 600 buses for $268 million. Therefore, of the $1.1 billion, around 250 million will be used to buy the buses, giving us a remaining sum of $850 million to cover the running cost of 550 buses for the next 10 years.
With a 75% market share, it is likely that SBS will get around $650 million to fund the running cost of approximately 425 buses for 10 years, or $65 million per year.
From the annual report,
SBS's bus segment has an EBIT of $15 million on Revenue of $549 million, while depreciation expense is $45 million. Operating cost of 3000 buses (SBS's fleet size) work out to be 549-15-45= $490 million.
Thus operating cost of 425 buses in a year work out to be 425/3000*490m = $69 million, which is $4 million more than what the government funds. This figure will be rather accurate given that most of the expenses in running a bus are variable costs like wages, fuel expenses, repair and maintenance.
Even if we will to say that my figure is inaccurate, there will still be a depreciation expense on the income statement though this will not affect its cashflow. Given that buses are depreciated over 17 years on a straight-line method, this will work out to be an extra $10 million in depreciation expense.
The non-funded 250 buses
Similarly, using 75%, it is likely that SBS will have to pay for around 185 buses on their own. The cost of purchase will work out to be $82 million
Operating expenses will be 185/ 3000 * 490m = $30 million
Depreciation expenses will be another $ 4.9 million
Total Additional Expenses incurred from the 800 buses
Funded - $4 million in operating expenses and $10 million in depreciation expense
Non-Funded - $30 million in operating expenses and $4.9 million in depreciation expense and a cash outflow of $82 million
Total - $49 million of expenses in income statement each year and a one-time sum of $82 million
To be more conservative since my figures may not be accurate, I shall cut the sum by 50% to $25 million
Against an EBIT of $15 million, SBS is still going to face a loss of $10 million from its bus segment. To counter such a loss, SBS will then have to increase their bus revenue by at least $200 million a year using a EBIT margin of 5%, which means it will have to increase its revenue by 40%.
I believe that SBS will rather that government funds its MRT which has much lower operating cost but a higher fixed cost. SBS is going to suffer rather badly in the years to come even with the government funding. After the 10 years funding period, SBS will then have to fund an additional operating costs of 425 buses.