PUB gives Tuaspring 3 more weeks to settle defaults; CEO answers investors' queries

SINGAPORE — National water agency PUB is giving the operator of Hyflux’s Tuaspring desalination plant three extra weeks to resolve its operational and financial defaults, failing which the agency will move to take over the loss-making facility.

In a press statement on Friday (March 29), PUB said that Tuaspring had written in on Wednesday to ask for a deadline extension to April 30, which it has granted.

In a default notice issued earlier this month, PUB had given Tuaspring until April 5 to remedy its defaults.

The notice was sent because Tuaspring failed to keep its desalination plant "reliably operational". Under a water purchase agreement signed in 2011, Tuaspring has to deliver up to 70 million gallons of desalinated water a day to PUB for a 25-year period from 2013 to 2038.

PUB said on Friday that the deadline extension was subject to “conditions” that it did not disclose. The agency said that Tuaspring had noted that it was making losses and would require financial support from its parent company Hyflux.

Hyflux’s ability to do so, in turn, hinges on whether it can complete its restructuring and secure funding from SM Investments, an Indonesian consortium that agreed in October last year to buy a 60 per cent stake in the ailing water-treatment firm.

PUB’s announcement came three days after the Securities Investors Association Singapore (Sias) wrote an open letter to PUB about its takeover move due to the “serious concerns” raised by the firm’s investors.

In the letter addressed to PUB’s chief executive officer Ng Joo Hee, Sias’ president David Gerald set out 16 questions from investors. Sias is Singapore’s retail investor watchdog.

In his response to Mr Gerald on Friday — a copy of which the PUB released to reporters — Mr Ng sought to tackle concerns about the timing of PUB’s move and its motivations for doing so.

Here are the key points from his reply:

WHY PUB CANNOT CHANGE RATES

Investors’ concern: PUB, the investors noted, buys water from Tuaspring at 45 cents per cubic metre, but charges consumers rates from S$2.74 per cubic metre. They asked if PUB could have allowed a price revision, knowing that the company had been incurring losses year after year.

PUB’s reply: Mr Ng said that PUB buys desalinated water from Tuaspring at rates specified under the water purchase agreement. Hyflux proposed these rates during the project’s tender in 2010.

It would be “unfair” to other firms that responded to the tender if the agency were to allow a successful tenderer to renegotiate the rates in its proposal, he added.

“It would also set an unhealthy precedent by encouraging companies to request to renegotiate contracts for other public-private-partnership projects. Clearly, doing so would put all parties in a situation of moral hazard.”

TIMING OF PUB’S MOVE

Investors’ concern: They asked if PUB would agree to allow Tuaspring more time to remedy the defaults arising from the water purchase agreement.

“If not, why? Wouldn’t giving more time help all parties to focus on the restructuring process?” the investors asked.

PUB’s reply: Mr Ng said that PUB has given Tuaspring “sufficient” time, but it has not been able to keep the plant “reliably operational” and is now at a stage where major renewal work is needed.

Tuaspring has also been unable to produce financial evidence to demonstrate that it can keep the plant running for the next half a year.

EYE ON WATER SECURITY, NOT OTHER REASONS

Investors’ concern: They asked why PUB could not have waited until after Hyflux’s rescue plan is put to a creditors’ vote in a scheme meeting on April 5, and if the water agency took action because of a petition signed by thousands of people urging the Government to take back Tuaspring.

PUB’s reply: Mr Ng clarified that the decision to serve the default notice was driven by the need to ensure water security. It was not prompted by the petition or the scheme meeting. Mr Ng reiterated that if PUB terminates the agreement, it will buy the desalination plant and its main priority is to restore it to “good operating condition” quickly.

The Tuaspring project comprises a desalination plant and a gas-turbine power plant. PUB will not buy the power plant, which Tuaspring will continue to own and run.

WORKING OUT THE PURCHASE PRICE

Investors’ concern: They wanted PUB to explain how it arrived at its offer to buy the desalination plant at zero cost. “Shouldn’t the purchase price be the equivalent replacement cost of (the) building or an equivalent plant?” Sias had asked in its letter.

PUB’s reply: Mr Ng said that an independent valuer would determine the plant’s purchase price.

Previously, PUB said that an independent valuer had put this price in the negative and Tuaspring would have to pay PUB compensation under the agreement.

PUB then told Tuaspring that it was willing to buy the water plant for “zero dollars” and waive the compensation, since the agency was unlikely to recover the sum due to Tuaspring’s financial position.

Mr Ng said that PUB would, however, not take over Tuaspring’s loans and liabilities, which will remain its responsibility.

PUB will have to incur costs to make good the plant and ensure it operates reliably for the rest of its lifespan.

TAKING THE PRESSURE OFF HYFLUX AND INVESTORS

Investors’ concern: They asked PUB why it could not have waited until Hyflux’s restructuring reaches an outcome. There have been concerns that PUB’s move could derail the firm’s restructuring plans.

PUB’s reply: Hyflux, Mr Ng said, has noted that PUB’s move to terminate the agreement would ease the pressure on the rest of the Hyflux Group, and improve Hyflux’s value and that of its shares.

Besides raising its chances of being restructured, Mr Ng said that the move would benefit all stakeholders, including the 50,000 or so retail investors and about 3,000 Central Provident Fund members who used their money to buy Hyflux shares.

The PUB’s actions would be “favourable” to Tuaspring and should not be the basis for SM Investments’ decision to withdraw from the restructuring deal, Mr Ng added.