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Monday, February 25, 2019

The Failure of the much touted Public-Private-Partnership Model in Singapore - Hyflux

Disclaimer: I am not an investment advisor. Heck, i am not even working in the financial industry. Below are my interpretation and i am grateful if you will let me know if anything i say is wrong and i will correct it in a reasonable time. I am not an expert and don't wish to be assumed to be one. I make losses frequently.

In 2004, the Ministry of Finance undertook a public consultation to seek views about the Public-Private-Partnership model. This initiative took root based on the studies about the successes of the PPP model in countries including the United Kingdom, Ireland, Australia, Hong Kong and Canada.

And lo and behold, the poster girl to spearhead this PPP model was Ms Olivia Lum who was the "highlight of the Forum."

A list of FAQs about the PPP model was also crafted here.
In addition, a PPP handbook has been uploaded by MOF here.

In 2014, there was a drive to promote Singapore as Asia's Infrastructure Hub in a joint effort by the Monetary Authority of Singapore and the International Enterprise of Singapore.

The marketing materials for this is here.

My Thoughts

Tuaspring is meant to be a Public-Private- Partnership model between the government and Hyflux. Based on the PPP handbook released by the Ministry of Finance(MOF) in March 2012, the PPP model is structured as a Win-Win deal. It must deliver value for money to government and also present commercially attractive business opportunities for the private sector.

2.3.3 Similarly, for the private sector, there should be sufficient revenue, either from Government or directly from the users, to recover the initial investment and the costs incurred by the private sector. - Quote from page 27 of the handbook

The problem with Tuaspring is that it is an integrated water and electricity project. Water comes under the Public Utility Board (PUB) while electricity comes under the Energy Market Authority (EMA). It is very strange indeed that Tuaspring is placed under the auspices of PUB when only 10% of Tuaspring's revenue comes from water while 90% comes from electricity, according to Olivia Lum in the first townhall. In addition, Tuaspring needed an electricity license given by EMA to run and so is governed by the Electricity Act. In my opinion, the demise of Tuaspring may be symptomatic of the lack of collaboration between the two agencies.

How then can it explain why Tuaspring, being a PPP project, meaning Hyflux should be able to recover the initial investment and costs , end up in this pitiful state?

How then did Singspring, the first PPP project, which deals solely with water, end up successful and as i understand is currently still profitable?

In my opinion, i think it was a mistake right from the start for PUB to award Tuaspring or to allow Tuaspring to be an integrated water and electricity project if it was to be it's baby. This is because its very difficult to envision sufficient revenue for Tuaspring ( based on the PPP handbook guideline 2.3.3) since a very large percentage of its revenue is dependent on the USEP price of electricity which is market driven and PUB has no control over. EMA would have been a better fit for the job.

How then did PUB, when it awarded Tuaspring, justify that Tuaspring would have sufficient revenue to cover investment and cost according to 2.3.3 of the PPP handbook?

Putting it another way, it was wrong of whoever that arrowed PUB instead of EMA to award this integrated, predominantly power project. Or at the very least that whoever should have placed the integrated Tuaspring as a baby of both PUB and EMA to make sure they collaborated.

It seems to me that without EMA having any responsibilities for Tuaspring, the electricity market was allowed to go into excess, 80% of electricity reserve instead of the target 30% of electricity reserve.

Contrary to what some people say that it is only due to management incompetence, i would beg to differ since the whole electricity industry are facing losses or very low profitability, so its an industry wide malaise that could only be caused by a regulatory failure.

This reminded me of the question asked during the MOF consultation process in 2004. It is currently enshrined under the list of FAQs on MOF website.

How did the Ministry of Finance ensure that the public agencies work closely together in this Tuaspring project? Your guess is a good as mine.

And by the way, MOF has modeled the PPP model after UK.

Similar to the concept of UK PPP taskforce, there is a unit within MOF that creates awareness of PPP, handles PPP policy and provides guidance on PPP matters.

- point 17 on MOF FAQ

Guess what has happened in the UK PPP model now according to this article released in 2017.

It is indeed a blow to the reputation of Singapore in its quest to be Asia's Infrastructure Hub especially when 60% of Hyflux's revenue is from the Singapore government.

And another blow to the reputation of Singapore in another of its quest to be the regional Debt Restructuring Hub if the restructuring of Hyflux fails.

The stakes are too just too high.

The " not spoken much" dirty little thing about the Restructuring Proposal - the $33 million - Hyflux

I think there is a psychological play going on here. It seems mostly everywhere is showing a 24.7% recovery to the unsecured banks ( meaning for every $100, they will get back $24.7). It is not accurate . Instead, the recovery to unsecured banks are in a range of between 24.7% to 38%, depending on how much of the contingent liabilities materialises.

24.7% is the worst case scenario that the unsecured banks will get. They could be getting back 38% too.

And it seems Olivia Lum and her Board of Directors are so magnanimous as to give up their retention ordinary shares of 1.26% of the company to the Preference and Perpetual Securities Holders. This "story" of magnanimity has been blown way out of proportion by many mainstream media, with one even wasting precious column space on the article " 6 things to know about Embattled CEO Olivia Lum" , casting her in a positive light.

Unknown to many who don't read the affidavits, categorized under segment of " Unsecured Claims Scheme Parties" is this little arrangement where some money is allocated to the management as incentives.

( page 32 of the 15 Feb Affidavits).

This is how the "Unsecured Claims " are going to be split up among the banks, MTN noteholders, contingent claimants and the management. $412 m ( $232 m in cash+ $180 m in implied value) is the total amount allocated to this group. Based on the proportion of contingent claims value compared with the other unsecured claims, $166 m is placed in an escrow account for a "just in case" basis. This $166m will be further split into 20% for management and 80% for additional recovery to the banks and MTNs. See below flow chart.

It must be noted that contingent claims are claims that may never come about. They materialize only when things do not go according to agreement, for example, projects not completed in time.

Also, there is a lot of leeway for Hyflux to attach a value to this, therefore, i am very skeptical about the value of contingent claims.

Based on assumptions ,it may be inflated to give more to management.

It would also make the recovery to the unsecured claims party more reasonable as people will look at a very large amount of unsecured claims but actually, a large part are actually contingent claims that may never happen.

** I have earlier mentioned that $82 million could be allocated to the management and this is wrong. The amount should be around $33 million.

This was edited due to a reader highlighting it.

My thoughts

There is no mention as to who this group of management recipients are. It is not unreasonable to think that Olivia Lum or the CFO may be among these management recipients. What is giving up 1.26% in shares ( total $8 million in shares only) to the Perpetuals and Preference shareholders , as compared to $33 million?

Let's even imagine that Olivia Lum or the CFO are not among these management recipients.

This incentives is still ridiculous.

How can incentives be classified under unsecured claims together with bank loans?

Why are the creditors who have already lost most of their money due to the management's incompetence, be the ones now to share the pool of money to incentivise this incompetenet management to complete their projects? The onus of incentivising management should be the responsibility of the new owners, Salim, not those whose debts are extinguished and have little future benefits from the projects when completed.

What the hell is wrong with Hyflux's human resource policy, where incompetence is rewarded?

An employee screws up and is paid more to make sure he corrects that mistake he created.

Is this policy breeding a culture of incompetency or what?

VOTE NO

because the proposal is bad and it can certainly be improved.

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Monday, February 25, 2019

The Failure of the much touted Public-Private-Partnership Model in Singapore - Hyflux

Saturday, February 23, 2019

The " not spoken much" dirty little thing about the Restructuring Proposal - the $33 million - Hyflux