Industrials

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Transport Minister Khaw Boon Wan is Singapore's Handy Manny, and hola, it looks like he has already put his tools to work.

SMRT Corp., the city-state's biggest train operator, is being relieved of the misery of upgrading, replacing and expanding its network with private capital. It will offload S$991 million ($735 million) in trains, signaling systems and related assets to the national transport regulator.

With network reach, congestion and reliability becoming the government's problem, SMRT can hopefully get down to providing a better-oiled service. Last year, Singapore's mass rapid transport system saw 14 major disruptions, more than the nine in 2011 when packed trains and breakdowns flared up as an election issue.

Breaking Bad
The number of service delays on Singapore's MRT network has been climbing
Source: Land Transport Authority, Singapore
* First quarter, 2016

Cutting SMRT and its rival SBS Transit down to size will please commuters, who were recently informed that 26 out of 35 Chinese-made trains delivered by Kawasaki Heavy Industries-CSR Sifang to SMRT had hairline cracks. From their perspective, it's just as well the far more resourceful Singapore government has decided to get back into the driver's seat. What would have annoyed them about the deal, however, was the 9 percent jump in SBS Transit's shares on Friday. (Trading in SMRT is currently halted.)  

It did seem strange that nationalization of a part of Singapore's public transport business, which shareholders saw as a threat to their juicy dividend payouts in 2012, should four years later arrive as a $48.5 million one-day increase in market value of the smaller company -- in other words, a gift. But then, sanity returned. Analysts ran their numbers and found that Khaw wasn't giving the operators a green signal to make out like bandits. SBS shares reversed some of their gains Monday.   

Rocky Ride
Ebit margins for both SMRT and SBS Transit have been on a downward trajectory
Source: Bloomberg

Singapore's Land Transport Authority will let operators achieve a 5 percent Ebit margin -- earnings before interest and taxes as a percentage of revenue; but any bumper profit would have to be shared with the government. During a downturn, the LTA's share of the operator's suffering will be capped at the annual license fee paid by the latter. SMRT's return on equity may drop to 9.1 percent in two years from 12.3 percent now, according to OCBC Investment Research.

It's a bailout, not a boost, says CIMB Securities. Even then, the picture isn't all gloomy. State investor Temasek, which owns 54 percent of SMRT, is weighing a buyout offer for the remaining shares, Joyce Koh of Bloomberg News reported on Monday. That would be just the course Gadfly recommended in December, when it argued that the Singapore zoo, which is owned by Temasek and Singapore Tourism Board, is the right ownership model for SMRT.

From battling the deadly SARS epidemic of 2003 to tackling a housing shortage eight years later, Khaw is the government's trusted problem-solver. Last October, when he got the mandate to pull the city's creaking subway system up to international standards, the Straits Times described his appointment as "Mr. Fix-It called on again." 

What's needed, though, is not a quick fix, but a massive upgrade. It would cost taxpayers billions of dollars, but the benefits would filter through to everything from property prices to retail and tourism. Temasek can capture a large part of those gains for its shareholder, the finance ministry. A full, friendly nationalization of Singapore's subway -- both infrastructure as well as services -- makes perfect sense.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net