Hyflux Saga - Role & Responsibility of PUB, EMA, SP and MAS

Hyflux Saga - Role & Responsibility of PUB, EMA, SP and MAS

First of all, the board of management of Hyflux has to bear the most responsibility in creating such a big mess.They have made a lot of assumptions when they bid for the tender to build and operate the desalination plant.

For every assumptions made, there will always be risk involved that such assumptions may not hold at all. And with numerous assumptions made, the risk will be compounded exponentially.

Basically, the problem of the whole Hyflux saga is due to the system of pricing. Hyflux is trying to juggle around a few important variables. A fixed water price given by PUB for 25 years, a variable fuel price (gas in this case), variable labor and material cost, a variable electricity price, a required fixed output of electricity with variable demand and uncontrollable number of electricity producers, a Monopoly buyer for water PUB, a Monopoly buyer for electricity Singapore Power... etc. In economics terms, this is a formula for disaster.

We must recognize PUB, EMA , SP and MAS as government entities. They are not private companies. They have public administration roles and responsibilities.

MAS should not even allow retail investors to invest in perpetual bonds at all as the risk is higher with higher complexity of the structure. MAS should not even allow CPF to be used for such investment at all. Here again, like Minibond saga which happened 10 years ago, MAS must be sleeping on the job.

EMA allowed too many electricity producers to exist in Singapore, so much so that there is 80% overcapacity! Did they even plan and forecast properly? The rigidity in the rules and regulation coupled with a complex pricing mechanism has resulted in electricity producers losing big money. This is not sustainable at all.

One may be puzzled why our electricity tariffs over the few years were so high despite the fact that there is great overcapacity and wholesale pricing given to these producers are too low and breeding them badly! The result is obvious. SP, as the sole owner of the power grid and sole distributor of electricity to household (it is only now it was opened up), is the one which gained the most from such arrangement.

However, we must remember that SP, as a government agency, should not only look at profit maximization at the expense of all other electricity producers. The system is unsustainable and eventually, these producers may go bust. It will cost great disruption to our electricity supply if that happens.

Similarly for PUB. It should not always look at profit maximization at all cost. Water is even more strategic than electricity and it must make sure that any system of supply within its supply chain, must be sustainable.

Furthermore, PUB should not cannibalize on Hyflux when it is down and out. The logic of commercial valuation of Hyflux's desalination plant as "negative asset" is totally flawed.

First of all, there is a conflict of interests here. The desalination plant is considered as "negative asset" is due to the fact that the contractual price which PUB paid to Hyflux for the water is under cost and unsustainable.

While I do not agree for PUB to use taxpayer's money to bail out Hyflux, but neither do I agree for PUB to cannibalize on Hyflux either. The Fair Price for PUB to pay for the desalination plant should be the opportunity cost of building a brand new one by PUB itself to supply the same amount of portable water, plus the opportunity cost of waiting for another few years for the new plant to be completed.

It doesn't make sense for Hyflux to basically give PUB its plant FREE for PUB to continue produce water and make money by selling water to consumers!

Hyflux could have dismantle the whole plan and sell the parts to other people, sell the land .... etc so to repay its debts. Why would it just give away to PUB FREE to make money?

The logic of commercial valuation of Hyflux's plant may base on commercial terms but it is morally flawed and unethical for PUB to take full advantage of Hyflux.

Paying a Fair Price for Hyflux's plant, the intrinsic value of the plant, does not mean PUB is losing any money at all because the plant could well provide earnings for PUB in the long run.

The proper thing to do is either for PUB to renegotiate with Hyflux on the pricing mechanism or simply pay a fair price for the whole plant.

The primary aim and objective of PUB should focus on maintaining adequate supply of water instead of maximization of profit by cannibalizing Hyflux while it is in trouble. Paying a Fair Price instead of getting the plant free may cause the cost price of this 70 million gallons of water per day slightly more expensive but I believe PUB will still be earning a hefty profit because the water tariff is really high in Singapore with PUB as the sole monopoly of water supply.

PUB, EMA along with SP have been maximizing their profits acting as powerful monopolies. They are Monopolies as buyers as well as sellers of water and electricity. It is time to redefine the roles and responsibilities of these entities.

This Hyflux saga has exposed not only the incompetency of Hyflux board of directors but also the terrible greed and cannibalism tendency of PAP government agencies. They will do everything to squeeze the suppliers of water and electricity while on the other hand, instead of passing the savings, they maintain extraordinary high tariffs of water and electricity to us.

Some may think this Hyflux only affects those perpetual bonds investors but the implications are far more complex. It basically reflects on the kind of government Singaporeans have voted in. If they can do this to Hyflux, in such unethical manner, they can do it to any Singaporeans out there. The unfair bullying tactic of cannibalism is really disgusting.

Goh Meng Seng