The Tuaspring tender

Someone shared this article which provides more details about the Tuaspring tender. This was the project that Hyflux won and it became the project that caused Hyflux to get into big financial problems.

It appears that the Tuaspring tender put out by the Public Utilities Board only asked for the desalination plant.

It was Hyflux decision to build the power generation capacity as part of the integrated plant. It was the power plant, especially the electricity sold to the grid, that caused Hyflex to lose a lot of money. The power generation was not a requirement of the tender.

In this respect, it would appear that the board and management of Hyflux was solely responsible for the decision to include the power generation capacity to the plant.

However, I am still troubled by this key aspect of the tender. The tenderer is supposed to quote a fixed price for the supply of water over the 25 years of the concession.

The tender specified that there would be “no pass-through on the cost of power” for the project. That is to say, the owner of the plant would not be compensated with higher water tariffs if electricity tariffs rose.

How can any party guarantee the price of the water when it largely depends on the cost of energy? The concession of 25 years is a very long time.

Was it possible for Hyflux to buy 25 years of energy supply at a fixed price, so that it could generate the water at a fixed price to sell to PUB?

Even if it was possible to find a party willing to take this risk, the cost of the hedging would be extremely prohibitive. There must be a limited party of insurers who are able to take this kind of speculative risk.

The report indicated that the next higher tenderer quoted a price that is 50% higher than Hyflux and that other bidders quoted up to 3 times of the lowest price.

If Hyflux had not submitted a low bid, the cost of water would have been much higher, as the operator need to add a big margin to protect against the uncertainty.

It was a bad business judgement of Hyflux to submit a tender to supply water at such a low price that is fixed for 25 years.

It would have been better for PUB to allow the price of desalinated water to fluctuate in line with the cost of energy, so that there is no need for the operator of the desalination plant to take the risk of the cost of energy. A price that varies according to the cost of energy would have been more beneficial for consumers over the long run.

There is no need for PUB to ask the supplier to fix the price of water for 25 years as PUB itself does not fix the price of the water that it charges to the consumers.

I still put a share of the blame on the PUB for putting out this kind of tender, i.e. “no pass through on the cost of power”, although the board and management of Hyflux needs to take a larger share of the blame.

It is sad that the retail investors in the preference shares and perpetual securities have to bear a large part of the losses, amounting to over 80% of $900 million.

 

Tan Kin Lian

 

 

 

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12 Responses to “The Tuaspring tender”

  • LIONS:

    Once a DARLING,now shunned!

    sharks waiting to devour.
    PUB is just a greedy shark like all the other govt vehicle$$$$$$$$$$$$$$$$$$.

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  • Samuel S:

    This government followed LKY who signed agreements with Malaysia for 3 cts ringgit with no right to adjust for 25 years. This is the style of this government and they never guarantee the price of water to Singaporean will not be raised in the next 25 years!

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  • Dear Mr Tan Kin Lian:

    How many percent does the electricity cost contribute to the total cost of production of the water?
    Hyflux power plant generates electricity, in fact fuel price has dropped since Hyflux bid, hence the electricity tariffs. So how would a floating water price to PUB help save Hyflux water plant, if Hyflux was allowed to peg the water price at 2011 electricity price?
    In business (in the case of hyflux) and investment (in the case of preference share, perpetual securities, common share, bond holders, lenders), one need to take calculated risks.
    People who lost money in their investment would claim misselling or misled by brokers or banks ike the Lehman minibond.
    The big fish of the banks, financial institutions get away scot-free.
    You were CEO of NTUC Income. If your fund invested in Hyflux, the insured and investors in your ILP lost money, yes it may be a small percentage of the fund, but it is still money lost, you would still keep your CEO’s position.
    It is the same for Temasek Holding’s Ho Ching.

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  • rukidding:

    Typical character of Pimps and prostitutes…..Meat we take,..Bones you take !!!

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  • Hagen-Diaz:

    The ‘design-build-own-manage’ example of Tuaspring with Hyflux involved in all parts of the utility chains should be exemplar for companies to examine at where their strengths are and converge on that. They don’t needs to be involved in the whole supply chain.

    The on-site gas turbine power plant, which generate electricity for the desalination plant and sells the remainder to the public grid, lacked a ‘comprehensive’ suppliant contracts. The corporation has been so fixed on its’ ledger worth which does not take into calculation element like market predicaments and precariousness in electricity cost. An oversight by Hyflux’s Directors and lawyers?

    After all these years of running excessive cash outflows, it is evident that their trade model of building up assets then monetizing them is flimsy. This will be something that they need to rethink if they can accomplish their restructuring .

    However, if creditors consent to haircuts under its proposed restructuring scheme, Hyflux will return to a net asset position of S$1.1 billion, according to the group’s pro forma calculations. Mr Gerald said: “This means that the company may have positive value post restructuring.”

    Post-restructuring, Hyflux’s pro-forma net tangible assets (NTA) per share would be 4.2 Singapore cents, based on an NTA of S$815.3 million distributed across an enlarged share base after an equity injection and various debt-for-equity swaps.

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  • Bad Boy:

    Investment comes with risk.
    Investors have to do homework and assessment.

    A lot of things in the beginning alot of vibes and hype looks good on the surface but in the end turn sour. E.g. bike sharing biz.

    航拍江苏盐城爆炸现场晨雾散去现巨坑_资讯频道_凤凰网

    https://news.ifeng.com/c/7lFWG9WcAD2#imgnum=1

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  • NotMyProblem:

    @Mr. Tan; those people signing the tender were not idiots, I am sure there were lawyers and consultants present. Hyflux did not signed the documents blindly.

    I think the reason for the failure of this project was greed. Biting more than it could chew. It was right for PUB to fix the price for certain period, because electricity tariff changes every quarter. Because of that, Hyflux also like to venture into electricity generation, hoping it could control the cost of electricity.

    Hyflux failed in this, because it was not in the business of electricity generation.

    Greed was the cause of Hyflux’s failure, on top of the obscene pay of the CEO.

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  • it ties with separation terms:

    Samuel S:
    This government followed LKY who signed agreements with Malaysia for 3 cts ringgit with no right to adjust for 25 years. This is the style of this government and they never guarantee the price of water to Singaporean will not be raised in the next 25 years!

    The water agreement with Malaysia is a different issue and totally different case. It concerns the terms of separation and the price of treated water singapore sells to Malaysia. If raw water price adjusted, then the need to adjust the price of treated water. Here we can see, the cost of treated water is not cheap. See the desalination plant initial cost to the tune of PnP investments of $900m.

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  • Dear writer:

    Mr Tan,

    This contract probably a tender ( i m not sure but since from G ) and companies who take up the contract will have to do their calculations whether they can make profit and in the worst case break even ( whether to maintain good relationships with G ). Even if not tender but direct offer , Hyflux not first day in business and secondly nobody point a gun at her or a machete up her neck to take up the project. Not worth it, dont sign the contract.

    Contract only involved water but Hyflux wants electricity as well ( probably venture into new avenue of growth and business ). Our G also never object, as long as the company can manage and not jeopardize the contract agreements on water supply.

    Similar to the case with Creative many years back where they ventured into PC CD players / recorders.

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  • These not ordinary businesses!:

    All were grinning from ear to ear at the big fanfare opening ceremony.
    Obviously confidently backed all round.
    With showings of confidence, investors poured in.
    Water and electricity set-ups are important and crucial and strategic; of a different stature and position unlike other businesses.
    Then they appear cocksure of the impressive modernity and state-of-art technology and the future direction.
    Surely experts were involved from the very beginning in all the stages of the plannings and approvings etc..
    And they piggyback conveniently riding on the glory of these promising set-ups.
    Now they are in trouble and somebody got to shore up and help them stay afloat.
    Under the circumstances, who should rightly rescue them?

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  • PUB/Govt should step in:

    These not ordinary businesses!:
    All were grinning from ear to ear at the big fanfare opening ceremony.
    Obviously confidently backed all round.
    With showings of confidence, investors poured in.
    Water and electricity set-ups are important and crucial and strategic; of a different stature and position unlike other businesses.
    Then they appear cocksure of the impressive modernity and state-of-art technology and the future direction.
    Surely experts were involved from the very beginning in all the stages of the plannings and approvings etc..
    And they piggyback conveniently riding on the glory of these promising set-ups.
    Now they are in trouble and somebody got to shore up and help them stay afloat.
    Under the circumstances, who should rightly rescue them?

    If PUB is taking over for free, then PUB or the govt should step in to rescue the pnp investors who were mostly retirees. Something is very wrong when such toxic bond are sold to layman grandma and granddad at atm using even cpf funds. How can our govt allow such to happen. On the one hard govt appears like trying to protect citizens, restricting its withdrawal of cpf funds, thru drips and draps till age 93 and at the same time allow such unethical business dealings to cheat retirees of their hard earned monies.

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  • got problems later on:

    //How can any party guarantee the price of the water when it largely depends on the cost of energy? The concession of 25 years is a very long time.//

    alamak. when trying to secure something (tender ?), all the matrix or assumptions will sometimes be tweaked (by so-called talented people) until it justifies lor (usually very very positive forecast or outlook) ??

    when sense that got problems later on, run road lor and pass the baton to the next person to answer lor ??? that’s what long term planning is all about (the longer the better) because sometimes the people responsible for the planning may not be around to clear the “shit” of such planning lor ??

    even white idiots get to tweak (correct ?) their ‘wrong’ assumptions (on long term planning) by raising price, rent-seeking or increase tax lor (having such powerful benefits).

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