I. Singapore Mass Rapid Transit (SMRT) and Its Operations

A cosmopolitan society, Singapore is known for its cultural diversity. Forty percent of Singaporeans are foreign-born, compared to other internationally diverse cities such as Dubai (89 percent) and Toronto (49 percent) (Khanna, 2015).¹ The city-state blends Malay, Chinese, Indian, Arab, and English cultures. The four official languages of Singapore are Mandarin, Malay, Tamil, and English. Because of its global business involvement, English has been the de facto, the language for commerce and trade. As one of the so-called “Four Asian Tigers,” Singapore's enormous growth since the 1960s has made it the world's fourth largest financial center, and its harbor is among the busiest ports in the world. Singapore is an economic giant supported by financial services, shipping, crude oil refining, tourism, and the electronics and chemical industries. The city-state has the third-highest proportion of millionaire households in the world. Singapore also has the highest gross domestic product per capita in the world at $56,532.²

Naturally, a high population density (8,274 people per square kilometer in 2018) combined with more than 17 million international visitors annually means Singapore faces a unique set of transportation challenges from curb pollution to traffic congestion. The number of private cars on the road is restricted by stringent government-regulated car ownership quotas. Only one in 8.25 residents owns a car, although many of the residents can afford it.³ Therefore, the burden of providing efficient and broadly available commuter transportation rests on the government. To facilitate mobility, it attempts to make public transportation easily accessible, safe, reliable, comfortable, and relatively inexpensive. As Singapore's Land Transport Authority once put it, “…a high standard of [local] transport enhances the quality of life, is good for economic growth and helps us maintain our competitive edge. . . .”⁴

The publicly listed Singapore Mass Rapid Transit Corporation (SMRT) was incorporated in early 2000.⁵ The public train transport system is run by two companies: SMRT Corporation operates Mass Rapid Transit (MRT) and public buses, and its subsidiary, SBS Transit, operates Light Rail Transit (LRT), which takes people almost directly to their neighborhoods. Like most transportation utilities, these areas of operations are regulated. With an average daily MRT ridership of 2.76 million in 2014, MRT forms the nucleus of the rail network. This case focuses primarily on MRT.

SMRT's business segments dedicated to transportation services create value by helping people get to wherever they need to be. Two major costs that the company incurs for its operations have to do with the network of trains that it maintains (depreciation, repairs, and maintenance) and its employees (wages). Most of these costs are fixed or semi-fixed in relation to the volume of train operations. SMRT's revenue is quite “liquid” and comes from passengers (fares), while some of the major expenses, such as depreciation on the train infrastructure, do not require cash outlay in the year the expense is recorded. In contrast, personnel costs are essentially recurring costs each accounting period, require cash outlay, and are largely fixed relative to train operations volume. Almost all the revenue is variable. With many fixed costs, achieving revenue volumes high enough to maintain an adequate margin of safety (that is, revenue more than the break-even point) is a key factor in generating positive earnings over the years.

There are currently five lines in operation within the MRT network: North-South, East-West, North-East, Downtown, and Circle Line. SMRT operates more than 100 trains daily from about 5:30 a.m. until 1 a.m., with intervals of approximately three to eight minutes to service almost 100 stations within the MRT network. Every station is equipped with general ticketing machines (GTMs), a passenger services center, and LED and plasma displays that show train service information and announcements. The multifunctional GTMs take care of many of the passengers' ticketing needs: buying paper tickets with cash or a charge card, getting refunds of deposits, checking the value stored on EZ Link cards, adding to the cash balance of, or “topping up” existing EZ Link cards, and viewing past transactions (see Part II for a detailed discussion).

Fare regulation and bus service standards are under the purview of an independent body, the Public Transport Council (PTC). In contrast to the use of fare zones in other subway systems (e.g., London Underground), the network's approach to fare setting can be called incremental, based on approximate distances between stations. Since Singapore's public transport system is fully integrated, commuters need to pay only one fare and pass through two fare gates (once on entry, once on exit) for an entire journey, even when transferring between lines operated by different companies within SMRT.⁶ While concessionary fares are in place for senior citizens and students, we limit the scope of this case to the vast majority of other travelers, including adult resident travelers and visitors from overseas.

A passenger can make up to five transfers within a single journey, with a 45-minute allowance between each transfer; the train network should be entered and exited only once in a journey, regardless of the number of transfers sought by the passenger. Depending on the distance traveled, journeys within the MRT/LRT network need to be completed within the set time limits.⁷ If the time limit is exceeded, the previously paid fare becomes void and access to the platform area will be denied by the fare gates. The passenger should return to a GTM and purchase a new fare.

II. Two Major Fare Options

Nearly all Singaporeans take the train almost every weekday for work, while others travel for personal purposes. Because these commuters take the train routinely, almost all of them own a payment card, called the EZ Link transit card (EZL), which we discuss below. EZL is a debit card; that is, it is a card with money “loaded” on it so that it can be spent (electronically withdrawn by the service provider right away).

Visitors and those who travel occasionally may purchase a paper ticket for a single journey or for multiple (but limited number of) trips. Except for very few cash transactions, the rest of the revenue is collected through a third-party electronic payment system that processes EZL transactions.

III. SMRT's Revenue Cycle for Transportation Services

In a manufacturing or retailing environment, the revenue cycle has four subsystems (Romney & Steinbart, 2014): sales order, order fulfillment (shipping), billing, and collection (cash receipt). A primary activity in each, respectively, is: obtain sales order, complete the obligations under the order, invoice the customer, and collect cash. In the services area, such as train travel, you buy the ticket first, then you travel from origin to destination. The purchase of a ticket or its equivalent results in a cash receipt for SMRT; however, the commitment to provide travel services is completed only when the passenger reaches the destination station. Until then, the purchase of a ticket, strictly speaking, is a prepayment (revenue received in advance). Note, however, that this time period – particularly for paper tickets – may be very short, perhaps no longer than the amount of time required for travel to the destination.

An interesting question is: How does the train operation capture revenue earned? For this purpose, train stations are typically divided into two areas: paid and unpaid. Access to the paid areas is restricted by fare gates, also known as access control gates, which greatly facilitate the assurance that the fare has been or will most likely be collected from those who enter the paid (train) area.¹⁰ Directly linked to SMRT's computer systems, access control gates can create, read, or update electronic records of passenger travel. Each gate can hold up to 50,000 transactions in its local data storage. Colorful LED displays show the operating status of the gates so that commuters can easily determine whether a gate serves as an entry or exit gate.¹¹

Every SMRT train station has an unpaid area that is open to prospective travelers. The paid area is defined using controlled access gates. A person cannot enter the paid area – or train operations area – without prepaying in some form (i.e., buying a paper ticket or having enough balance on the EZL card). Once you are “in,” you are a passenger in transit. When you exit at the destination, you are leaving the physical boundaries of SMRT, thus completing the journey. The passenger's presence in the system is noted when the EZL card is swiped at the entry gate; the journey is complete when the passenger swipes the same card at the exit gate at the destination. Upon exit, the passenger is no longer physically present within the train operations or logically in SMRT's information system. The exit at the destination determines the final fare and charges it to the passenger's EZL card. At this stage, the revenue is earned. A simplified flow chart of the train travel is shown in Figure 1.

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How do fare gates (entry and exit gates) work with the tickets to capture existing data or generate new data? If you are traveling with a paper ticket, the ticket needs to be inserted into a reader device at the entry gate at your origin and then again at the exit gate at your destination. The SMRT system performs some tasks in a split second (about 0.20 second); for example, it would likely log the originating station code, your starting time, and the date. Using an EZL card is as simple as using any other ticket option. It grants users access to the train platforms with a simple tap on a fare gate at the entry station; a transaction log is initiated for your journey.¹²

When you tap your card on the card reader mounted on top of the exit gate at the destination, the fare is automatically calculated and deducted from your EZL card and the transaction log is completed, for the journey is now over.

It is important to distinguish between a cash collection event and a revenue recognition event for both ticketing options: EZL card and paper tickets. Since the EZL card is a debit card, the cardholder adds value (“tops up”) in any amount believed to be necessary for future use. Any time an upload of cash to the debit card occurs, including when using a GTM, the cash belongs to the card-issuing company. When a passenger travels using the EZL card, the commitment of the fare charged becomes revenue for SMRT. The card-issuing company remits this amount to SMRT periodically. For paper tickets, all cash received (except the deposit) coincides with revenue recognition for three reasons. First, the amount paid is for a certain travel only; second, the travel needs to happen within a fairly short period of time following the purchase of a ticket; and third, money is not refundable (except the deposit).

IV. Risk Exposures

The train operations of SMRT face several risk exposures related to the revenue cycle, including:

• Non-availability of services.

• Non-availability of computer-based systems and networks.

• Risk of over- or under-charging the fares.

• Incomplete or inaccurate data.

• Theft of cash.

If the rail services are “down,” the revenue is lost until services resume. Train services could be disrupted due to various reasons, such as collision between trains, derailment, or power outage. Downtime directly impacts the revenue performance of SMRT. More important, the city comes to a standstill, for other forms of transportation are limited and probably overcrowded during disruption in train operations. Singapore, and therefore SMRT, owes reliable and continuous service to its residents and visitors. SMRT's 2016 Annual Report (p. 46) notes that their Mean Kilometer Between Failure for delays lasting more than five minutes improved from 65,000 km in 2012 to 140,000 km in 2015. Accidents happen, but SMRT is striving to improve reliability.

SMRT's revenue generation and data capture is heavily automated. If the computer-based networks are unavailable, data capturing devices (e.g. entry gate, exit gate) may not work unless backup power is available. The cause of disruption could be other than electricity. For example, the hardware or firmware on entry/exit gates is not working properly.

The fares SMRT charges are a part of the system that counts fare at the GMT and at exit gates. Fare charges would be inaccurate if someone made unauthorized changes to the fare table stored in the system. Undercharging results in loss of revenue, while overcharging may cause a significant effort to return the fare difference to passengers entitled to the refund.

It is also likely that data could be missing, incomplete, or inaccurate. Reading errors can occur at the entry or exit gate. Also, some travelers could enter the train area without scanning their EZL card or logging the paper ticket at the initiation of a journey. In such cases, it would be impossible to determine the proper fare to charge because of missing data.

Finally, cash is the most liquid of all assets. Theft of cash from GTMs is likely unless proper controls exist to detect or prevent such compromises.