Hyflux founder, ex-CEO Olivia Lum was determined to win Tuaspring bid, prosecution says

The Tuaspring project that brought Hyflux’s downfall

The Public Utilities Board (PUB) called for the Tuaspring project on Jun 30, 2010. It was Singapore’s second and largest seawater reverse osmosis desalination plant.

PUB considered the competitiveness of the tariff price at which the successful bidder would sell water to it, among other factors.

The agency also required the successful bidder to procure or produce electricity for the desalination plant at the bidder’s own risk and cost. This meant that the electricity cost of producing water had to be factored into the tariff price proposed by the bidder

In 2011, Hyflux won the tender to design, build, own and operate the project in Tuas for a concession period of 25 years, with an on-site power plant providing electricity to the desalination plant.

Hyflux’s tender had the lowest bid among the nine submissions, as it had intended to build a power plant and sell electricity to the power grid.

The first-year price that Hyflux quoted for the sale of water was S$0.45 per cubic metre, undercutting its competitors by at least 27 per cent.

Hyflux had strategised that it would win the tender at a very low bid price but heavily subsidise the loss-making desalination plant with revenue from electricity to be generated from the power plant.

The power plant would supply electricity to the desalination plant, but selling the vast majority of the power that it generated to the national grid, with electricity sales projected to account for 92 per cent of the project’s revenue.

Hyflux had no experience in power generation, much less selling electricity, noted the prosecution in its opening statement. The Tuaspring project would thus be the first time Hyflux entered the electricity market.

The draft announcement did not mention at all the sale of electricity, but the published version had the line “excess power will be sold to the grid” after PUB requested it to avoid the impression that the desalination plant would use all the electricity generated, according to the opening statement.

The announcement was approved by both Lum and then ex-chief financial officer (CFO) Cho Wee Peng, and circulated to the four directors for their comments.

Hyflux estimated the Tuaspring project’s costs to be S$890 million during the tender phase but it later increased the forecast to S$1.05 billion in July 2012.

It approached a consortium of six banks for S$527 million in term loans in October 2010, and managed to secure a written in-principle commitment letters indicating their willingness to finance the Tuaspring project.

However, the banks were allegedly not told about Hyflux’s strategy to build a power plant and sell excess electricity to the grid. In January 2011, they decided against the loans as it was not worth the additional risks of Hyflux using the sale of electricity to subsidise the sale of water to PUB.

Three of these banks proceeded to extend S$150 million in loans to fund the construction of the desalination plant. However, this was eventually replaced by an S$840.8 million shareholder’s loan from Hyflux to Tuaspring Pte Ltd (the subsidiary undertaking the project) and the S$400 million raised from the preference shares issue.

In the offer documents for the issuance of the preference shares, it was mentioned that “Hyflux will also be constructing a 411 megawatt combined cycle gas turbine power plant to supply electricity to the desalination plant. Excess power will be sold to the power grid”.

Investors and the market were led to believe by Hyflux’s statements that the Tuaspring project was primarily a desalination project, alleged the prosecution.

The desalination plant of the Tuaspring Project became operational on Sep 18, 2013, while its power plant was operational only two years later in August 2015, and began selling electricity on Feb 18, 2016.

However, lower electricity prices turned “what was intended as a flagship project into an engine of financial ruin”, noted the prosecution.

In March 2011 when Hyflux won the tender, the average uniform Singapore energy price was about S$187 per megawatt-hour, but it had fallen by over 70 per cent to around S$49.10 by February 2016.

The plunge in electricity price led to Hyflux reporting its first net loss, over S$115.5 million for FY2017, as it attributed the majority of the loss to the Tuaspring project.

It suspended trading of its shares on May 21, 2018, entered judicial management on Nov 16, 2020, and was wound up on Jul 21, 2021.