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The real costs of rail

Credit: Land Transport Guru.

This is a stark change from before the New Rail Financing Framework (NRFF) came into full effect in 2018, when operators owned operating assets like trains and funded replacements with fares - a regime which worked initially, but eventually resulted in patchy service.

Under NRFF, the Government owns all assets, and operators pay a licensing charge and collect fare revenue. The charges can vary according to an operator’s profitability.

In response to queries from The Straits Times, the Land Transport Authority (LTA) said licensing fee collection for the financial year ended on March 31 last year “was only around $3 million”, as rail operations have not been profitable.

Meanwhile, there was a depreciation charge of about $578 million in operating assets for the same year, the LTA said. “The difference will need to be subsidised by the Government, as operating subsidy.”

When the licence charge paid by operators to use operating assets is not enough to cover the depreciation cost of eventually replacing them, the Government will have to use taxpayer monies to top up the difference. The subsidy, which is put into a railway sinking fund managed by the LTA, ensures that there will be sufficient funds set aside for the eventual renewal of the system, an LTA spokesman said.

She attributed the operators’ poor financials to recent efforts to improve rail reliability that have increased their costs. The MRT network currently has one delay for every 1.6 million train-km clocked, compared with 133,000 train-km in 2015.

Much of the improvement came from the renewal of the North-South and East-West lines that cost more than $2.5 billion to undertake.

Beyond that, operators have had to do significantly more preventive maintenance, which often entails changing parts well before they wear out. This is a change from the previous practice of carrying out largely corrective maintenance.

The LTA said: “Commuters benefit from this shift, and we have seen a decisive shift from private to public transport over the years.”

I frequently critique official policies with regards to transport and urban development, but I also give credit where it is due (really!). In this case, taxpayers’ money has indeed been well-spent on subsidising rail line renewal and preventive maintenance. The plunge in frequency of significant delays in rail service is evidence of this. As LTA said, commuters benefit. And more people will be convinced to ditch private transport for public transport. It’s a positive feedback loop.

Singapore University of Social Sciences transport economist Walter Theseira reckons the country is headed for “an eventual government bailout” of rail operators if they are consistently unprofitable.

He noted that if rail operators’ lack of profitability is because the fare revenue they collect is not enough to cover the level of rail service demanded by regulators and operators, “then it is actually more appropriate for the Government to just subsidise the system transparently, the same way that buses are subsidised”.

Dr Theseira added that the bus contracting model - where the Government pays operators fixed fees to run services and collects fares - would allow for more transparency and predictability in the subsidy amount. It could also allow for more competition and thus cost benchmarking.

But he noted that the Government spent about $1 billion on bus subsidies last year. This came about when fare revenue fell short of the value of contracts awarded to operators.

The contracting model has been positive for bus operators, though. SBS Transit posted record earnings of $80.1 million for the year ended Dec 31, 2018.

Observers reckon costs will have to be recovered partly through fare adjustments.

In an interview with Lianhe Zaobao earlier this week, Transport Minister Ong Ye Kung noted that Deputy Prime Minister Heng Swee Keat had announced that there will be no increase in government fees because of the pandemic.

These relatively new rail and bus contracting models - put in place for only a few years - have been promising in pushing transport companies to focus less on maximising profits and more on optimising commuter service and preventive maintenance. However, COVID-19 remains the biggest challenge to them thus far - what with a steep drop in ridership and hence fare revenue, and the economic downturn not making it kosher to raise fares to cover the shortfall.

Although public transport fares are not considered government fees, Mr Ong said he hopes the Public Transport Council (PTC) “will also take this policy into consideration” during its annual fare review exercise.

Responding on how it would act in the exercise, slated to start this month, the PTC said it considers “all relevant information, including the macroeconomic indices and prevailing economic conditions as well as the need to balance fare affordability, financial sustainability and the impact of its fare decision on various commuter groups”.

The council said it will announce its decision when it is ready.


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