Impact of Hyflux’s Recent Challenges on Singapore's Water Supply

5 Mr Seah Kian Peng asked the Minister for the Environment and Water Resources (a) what is the impact of the recent challenges facing Hyflux on our water supply; (b) what contingency plans are there in place, in particular whether PUB has the operational capacity to take over the desalinisation plant; (c) what is the extent of private sector involvement in our water provision; and (d) whether any review should be done in light of what has happened to Hyflux.

The Minister for the Environment and Water Resources (Mr Masagos Zulkifli B M M): Mr Speaker, I thank the Member for his question. I know that many Singaporeans are concerned about what the on-going Hyflux restructuring means for our water supply.

Water is an existential issue for Singapore. PUB's priority has been and will always be to ensure Singapore's water security. Over many decades, we have diversified our water sources and built up our four national taps. NEWater and desalinated water are integral to our water security, as they are weather-resilient and can supply water even during dry spells.

As part of our plan to build up our desalination and NEWater capacities for our water security, the Government has partnered the private sector to design, build, own and operate some of our desalination and NEWater plants. Today, we have five NEWater plants and three desalination plants. Out of these, three of the NEWater plants and two of the desalination plants, including Tuaspring, are based on a Public-Private Partnership, or PPP, model. The remaining three plants, as well as all our other water supply assets, are owned and operated by PUB.

The PPP model has been useful in allowing us to tap on private sector innovations and cost efficiencies to deliver water services more effectively. To ensure that water security is never compromised, PUB has put in safeguards as part of the PPP contracts. Even though PUB does not interfere with the business decisions made by the concession companies, PUB monitors the performance of the plants under the PPP model to ensure that the concession companies can meet their contractual obligations to PUB. Where there are issues, PUB will require the concession companies to rectify them, failing which, PUB may exercise its rights to terminate the PPP contracts and take control of the plants. We do not exercise these termination rights lightly but will not hesitate to do so when it becomes necessary to safeguard our water security.

As PUB continues to operate its own desalination and NEWater plants, PUB has the operational capabilities, experience and manpower to take over and operate the private plants, should the need arise.

Hyflux is currently involved in two PPP projects with PUB: the SingSpring Desalination Plant or SSDP and the Tuaspring Integrated Water and Power Project or TIWPP. SSDP is owned by SingSpring Trust, which is majority owned by Keppel Infrastructure Trust, with Hyflux owning a minority stake. The SSDP is not affected by Hyflux's debt and business reorganisation, nor is it subject to the moratorium that has been imposed by the court.

As for the TIWPP, it is owned by Tuaspring Pte Ltd, or TPL, a wholly-owned subsidiary of Hyflux. Let me briefly recap the events leading up to today. In 2010, PUB called an open tender for a 70 million gallons per day desalination plant, to be completed by 2013. In its tender bid, Hyflux proposed a different business model – one of an integrated desalination and power plant. Hyflux made a business decision to build the power plant that has a capacity significantly more than what the desalination plant needed, with the intention of selling excess power to the national power grid.

Hyflux’s bid met PUB’s requirements for constructing and operating a desalination plant and was the most competitive bid among the submissions. PUB also took into account Hyflux's expertise and track record. Thus, PUB awarded the tender to Hyflux in 2011. As with other such PPP projects, PUB built in safeguards in the Water Purchase Agreement, or WPA, signed with TPL.

Since 2017, TPL has been experiencing difficulties fulfilling its contractual obligations under the WPA. These include a failure to keep the plant reliably operational as required. More recently, it has also failed to produce financial evidence to demonstrate its ability to keep the plant running for the next six months. PUB gave time to TPL to try to sort out its problems but PUB’s concerns have been growing over time. To safeguard our water security, PUB issued TPL with a default notice on 5 March 2019 to require TPL to remedy the defaults within the default notice period. If they failed to do so, PUB will terminate the WPA and take over the desalination plant. This is to ensure that a critical asset remains in safe hands and avoids uncertainty over the operations of the desalination plant. Ultimately, PUB’s actions are based on our over-riding objective of ensuring Singapore's water security and that water continues to be reliably produced at the plant to meet the needs of Singapore and Singaporeans.

The purchase price for the desalination plant will be determined by an independent valuer in accordance with the WPA. Based on current valuation, the purchase price is negative and TPL will hence have to pay PUB a compensation sum. TPL itself has stated that there is a high likelihood for this. The desalination plant has been and will likely continue to lose money for the next few years. In addition, PUB would have to incur costs to make good the plant and ensure that it operates reliably for its remaining lifespan.

However, given TPL's current financial position, PUB is unlikely to recover the compensation sum from TPL. PUB has therefore indicated that it is willing to waive the compensation sum and purchase the desalination plant at zero dollars.

Let me be clear: PUB’s actions do not weaken either TPL or Hyflux, and do not disadvantage those who have invested in Hyflux. Indeed, it is quite favourable to TPL. TPL has in fact noted in its letter to PUB on 20 March 2019 that if PUB terminates the WPA, it would alleviate the pressure on the rest of the Hyflux group. It positively impacts Hyflux's value and hence the value of the Hyflux shares being offered. In its announcement on 26 March 2019, Hyflux further stated that SM Investments Pte Ltd, the prospective investor of Hyflux, had concerns over working capital requirements post-investment and that PUB’s actions should alleviate such concerns.

The current situation with Hyflux does not mean that we should dismiss the PPP model altogether as our other PPP projects are working well. The safeguards that PUB has built into the PPP contracts have worked well to ensure our water security. In fact, TPL provides an example of how these safeguards are robust and have served their purpose. That said, we are always studying ways to strengthen the safeguards and enhance our operations and we will continue to do so.

Let me assure members of the House and all Singaporeans that PUB will always act to ensure Singapore's water security. Water is an existential issue for Singapore. Water security is integral to Singapore’s national security. PUB's recent actions reinforce that. We will never allow Singapore's national or water security to be compromised.

Mr Seah Kian Peng (Marine Parade): I thank the Minister for his answers. I have two supplementary questions for him. The first is, the Minister has said that the PPP model still works. Given that these are critical water assets, and having seen what has happened and the assurance from the Minister that the Ministry is looking further into the safeguards that are currently provided, I would like to ask the Minister which are these areas that we think need to be further improved on. The fact of the matter is that it did occur here and this is an area which we know we cannot take chances on.

My second supplementary question, we would all have residents who are also investors in Hyflux. The current actions by PUB and Government, the question that will be asked would be, "Should we bail out Hyflux and in the process help all residents and investors, many of whom are Singaporeans?"

Mr Masagos Zulkifli B M M: I thank the Member for the supplementary questions. Firstly, we have to look at many areas but there are two important areas that we always have to focus on. One is the operational ability of the company to make sure that we continue to be able to produce water, almost at will. And that has been compromised in the last few months with the inability by Hyflux or TPL to assure us they can do so. And that is connected with the second one somewhat, which has to do with the financial ability to support it.

So, we will continue to work on these two issues because they are the most important ones. They ensure that we continue to have plants that will continue to operate while under PPP model.

The second question is whether we should bail out our investors. The financial performance of companies, as mentioned by Minister Ong Ye Kung in a previous answer, depends on many factors. It could include global business conditions, competition, performance of specific projects and also its own business decisions. Therefore, investors in search of returns must understand that returns come with some risks.

Before I answer specifically to that question the Member has asked, let me reiterate what I have said in my answer.

First, the current valuation of the purchase price for the Tuas desalination plant is negative; that is clear. In fact, while it is a current valuation and after the formalities are done, we are certain it will continue to be negative.

Second, because of this, TPL has to pay PUB, but PUB recognises its inability to do so and PUB has indicated it will waive the compensation sum. Like I mentioned just now, it is actually a positive impact on TPL.

We can understand the concerns and anxiety of the retail investors and we are saddened by their plight. But the Government cannot use taxpayers' monies to help investors recoup their investment losses. Even if there are any proceeds from the takeover of the Tuas plant, we must remember there is an order of who gets what first. In this case, Maybank will still receive payments from TPL before all other general creditors, including PUB.

Mr Speaker: Mr Pritam Singh.

Mr Pritam Singh (Aljunied): Thank you, Mr Speaker. Minister, according to a Straits Times report, Hyflux's financial woes was a direct reason explaining why the company was unable to replace poorly performing membranes promptly in early 2017, a state of affairs which affected the quality and quantity of water that was produced by the Tuaspring desalination plant. To that end, I have a few questions for the Minister.

Firstly, as the quality of water was affected, did this compromise public safety at any point in time?

Secondly, which entity eventually paid for the membrane replacement and was any compensation paid or owing to PUB as a result of Hyflux's failure to ensure the quality and quantity of water produced by the Tuaspring desalination plant in early 2017?

My final question is: how often has this situation developed in the Tuaspring plant? Was it just in early 2017 or was it an on-going occurrence?

Mr Masagos Zulkifli B M M: PUB conducts many, many tests on our water system to ensure water safety, including TSDP. Therefore, we are certain that water supplied to our consumers is safe to drink and for use. Even during the times when we had concerns about their operations, they were able to address these concerns. But more recently, because of the financial situation, it begs us to question whether that is sustainable. Therefore, we have put in the default notice to them to say that we are concerned: one, that operationally they are not able to address the issues to assure us they can continue to produce water; and secondly, that they are financially distressed and that they have not proven that they can sustain the plant for the next six months.

There was another question.

Mr Pritam Singh: How many times has this happened in the past? Did it just occur in early 2017 or was it on-going?

Mr Masagos Zulkifli B M M: No, this was very recent since 2017.

Er Dr Lee Bee Wah (Nee Soon): I would like to ask how does the Minister justify using taxpayers' monies to take over negative-valued asset from Hyflux?

Mr Masagos Zulkifli B M M: Well, we have two options. One is to assert our rights, stress Hyflux even further by asserting that right, and after the whole process we may not get anything at the end of the process. Therefore, we have made the decision that because we are not likely to get anything from claiming the compensation, we have decided to not claim for the compensation.

Dr Lim Wee Kiak (Sembawang): Mr Speaker, I would like to ask the Minister: in hindsight, could more actions have been taken earlier on before it got to this stage? We do have a lot of other big projects that are under the PPP model and we do have critical assets such as power plants that are operated privately. In that sense, how do you monitor all these assets and make sure that they are financially okay? I was just wondering whether something could have been done in hindsight for this Hyflux case, rather than to wait until this stage?

Mr Masagos Zulkifli B M M: Well, as with any DBOO plants, PUB monitors the desalination plant – in this case TSDP – to ensure that it is operating reliably and executing its contractual obligations to PUB.

And then when troubles emerge, the responsible and fair thing to do is for PUB to require TPL to rectify it, and not to immediately issue a default notice. In fact, to give them time to do so. When these things happen – it is not just in the case of TSDP, it happens in other plants too – there is a need to give them time to rectify. If they can rectify them well and to the satisfaction of PUB, then the contract has not been violated.

PUB has been in talks with TPL regarding its defaults all this while and has given TPL as much time as possible. Our duty is to ensure water security and take all the necessary steps within its contractual rights, primarily to protect Singapore's water security. So, I think we have done that.