SINGAPORE — Singapore’s water agency PUB announced on Thursday (March 21) that it is moving to take over Hyflux’s Tuaspring desalination plant if it cannot fix its defaults by April 5, a development that could affect the water treatment firm’s restructuring plans.

The PUB said in a media release on Thursday night that its role is to “safeguard Singapore’s water security”, which was why the national water agency had issued a default notice to Tuaspring Pte Ltd on March 5 for failing to keep its desalination plant “reliably operational” under the Water Purchase Agreement (WPA).

The agreement requires Tuaspring to deliver up to 70 million gallons of desalinated water every day to PUB from 2013 to 2038.

The PUB had for some time been concerned about Tuaspring’s financial position and its inability to keep the desalination plant “reliably operational”, said the water agency. It stated that it would terminate the WPA and purchase only the desalination plant if Tuaspring was unable to “fully resolve all defaults within the default notice period”.

It is understood that the plant had been experiencing operational issues since early 2017 and Tuaspring was unable to replace the facility’s poor-performing membranes promptly, affecting the quality and quantity of its water. There were numerous occasions when Tuaspring was unable to supply PUB with the required 70 million gallons of desalinated water.

On Wednesday, Tuaspring had sought PUB’s clarification on whether the latter would buy the entire Tuaspring water and power project, or just the desalination plant, if the WPA was terminated, said the agency.

Tuaspring had also indicated that the water plant had been and would continue to lose money for the next few years and that its power plant was also in the red.

As there was a high likelihood that Tuaspring would have to pay PUB compensation under the WPA if the latter only purchased the water plant, Tuaspring indicated that it was unlikely to be able to pay up due to its financial position. The company had also asked PUB if it would claim compensation.

In response, the PUB said a day later that the current valuation of water plant by an independent valuer was that its purchase price was in the negative, and that Tuaspring would have to pay PUB a compensation sum under the WPA.

But PUB informed Tuaspring on Thursday that it is willing to purchase the water plant for “zero dollars” and waive the compensation sum. It had done so because it was unlikely to recover the sum given Tuaspring’s current financial position, said the water agency.

With the default notice, Tuaspring was supposed to have until April 5 to consult with PUB on the steps it must take to resolve its defaults.

Otherwise, PUB has the right to terminate the water contract by giving written notice of not less than 30 days to Tuaspring.

PUB is expected to take over the plant in early May if the contract is terminated.

The water agency’s announcement on Thursday means that the earlier agreement for SM Investments — made of Salim Group and Medco Group — to buy 60 per cent of Hyflux would be thrown into disarray.

A deal was made last October for the Indonesian consortium buy over a portion of the embattled water treatment plan for S$530 million.

Hyflux said in previous media reports that its restructuring agreement with SM Investments may be terminated due to Tuaspring’s defaults.

Hyflux has been undergoing a court-supervised reorganisation since May last year after chalking up over S$2 billion in debt.

The PUB noted in its media release that Hyflux’s announcement on March 18 said that SM Investments had issued a Notice to Remedy to Hyflux which stated that Tuaspring had to resolve PUB’s default notice within two weeks under the Restructuring Agreement (RA) between SM Investments and Hyflux. If that was not done, SM Investments may assert rights to terminate the agreement.

“However, Hyflux itself has noted that PUB’s actions, in the event PUB elects to terminate the WPA, would be favourable to Tuaspring as this alleviates the pressure on the rest of the Hyflux Group, and also positively impacts Hyflux’s value and hence the value of the Hyflux shares being offered,” said the PUB.

“This will also increase the chances of Hyflux being successfully restructured. PUB’s actions should therefore not be used as the basis for SMI’s decision to withdraw from the RA.”

Analysts told TODAY that PUB’s announcement is a positive development for Hyflux as this means the company will be getting rid of a loss-making entity.

But the next move now lies with SM Investments and whether the investor will be willing to accept the change in the terms of agreement.

“SM Investments has to agree to this arrangement, this proposal by PUB.” said Mr David Gerald, President of the Securities Investors Association of Singapore.

He also added that this is a good development for SM Investments as “nobody wants to run a  loss-making business”.

Corporate governance expert Mak Yuen Teen said PUB’s statement is a message to SM Investments that it should not use the potential takeover as an “excuse” to pull out of the agreement, given that the water agency is taking an entity with a negative value out of its hands.

However, Associate Professor Mak, who is from the National University of Singapore, also pointed out that SM Investments could counter with the argument that it does not agree that Tuaspring has a negative value.

“Maybe if SM Investments think that if they operate it efficiently, the costs (of operating the plant) will be lower and will not be of negative value,” he added.

In a company filing to the Singapore Exchange (SGX) after PUB’s statement, Hyflux stated that it has reached out to SM Investments on a “without prejudice” basis. It acknowledged that SM Investments is not obligated to vary the Restructuring Agreement.