SINGAPORE: Like Hyflux, other bidders for a PUB desalination plant project likely also offered discounted water prices and were also exposed to risks of the electricity market, a court heard on Wednesday (Sep 3).
It was also not unusual for banks to have concerns when evaluating projects seeking finance, and it was part and parcel of their usual process to study the issues, the court heard.
This emerged in the defence's cross-examination of prosecution witness Nah Tien Liang, a former finance employee of now-defunct water treatment firm Hyflux.
Mr Nah was responding to questioning from Hyflux founder Olivia Lum Ooi Lin's lawyer, Senior Counsel Davinder Singh.
The prosecution's case is that Hyflux leaders at the time had deliberately misled the investing public by downplaying the electricity sales component of the Tuaspring Project.
According to Mr Singh, it is "central" to the prosecution's case that because the banks had concerns about the power component of the project, the Hyflux leaders somehow had a motive to downplay the electricity sale component in their announcements.
Lum, 64, is on trial along with former chief financial officer Cho Wee Peng, 56, and four former independent directors of Hyflux.
They are contesting various charges relating to the alleged omission of details about electricity sales in the Tuaspring Project, either to the Singapore Exchange or to the investing public.
Hyflux had won the tender put out by PUB, which was for a desalination plant where the successful bidder was required 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 water tariff price proposed by the bidder.
Hyflux had no experience in the power market.
The prosecution's case is that the Hyflux leaders pitched the Tuaspring Project to the investing public primarily as a desalination plant.
This was while downplaying the fact that the power plant it was building to supply electricity to the desalination plant would sell electricity to the grid, and that the entire project's profitability depended on such electricity sales.
The prosecution's case is also that Hyflux made it appear that the primary purpose of the power plant was to supply electricity to the desalination plant, when in fact the "overwhelming majority" of the electricity produced by the power plant was projected to be sold to the grid.
The Tuaspring Project eventually led to Hyflux's downfall as the company incurred massive losses on the back of a weak power market in Singapore.
Hyflux entered liquidation, with about 34,000 investors owed S$900 million (US$700 million).
On Wednesday, Mr Singh led Mr Nah through question after question in an attempt to poke holes at the prosecution's case.
Mr Nah agreed with Mr Singh that Hyflux could not have bid for PUB's project with only the desalination plant. The sale of power was "necessary and indispensable".
In Singapore at the time, Hyflux
Mr Singh showed Mr Nah a document listing tariffs from various bidders for PUB's project, including Hyflux.
Hyflux had the lowest first-year price for water, at S$0.45000 per cubic metre, undercutting its competitors by at least 27 per cent.
The next two lowest bids were made by Leighton Engineering & Construction (Singapore) and Keppel Seghers Engineering Singapore Consortium at S$0.62013 and S$0.67000 respectively.
Mr Nah said that while Hyflux was not privy to the details of each bid, it was possible to make an "educated guess" based on the tariff list which other bidders had to give "some form of discount".
He explained that, if the electricity price was 13 cents per kWh,
Mr Nah agreed that a bidder who gave a discount like this would be locked in to the water tariff they offered to PUB, and would be "stuck" with the price of electricity that was discounted for the purposes of the lower tariff.
He also agreed that if the price of electricity went up after the bid was won, the bidder would be in trouble if it did not have a power plant, because it would have to buy electricity at a higher price.
However, if the bidder did have a power plant and the electricity prices went down along with the "spark spread", it would also face challenges as it would earn less from the sale of electricity.
A spark spread is the difference between the market price of electricity and the cost of producing it with gas.
Mr Nah had earlier explained to the court that electricity prices could also go down if there is an oversupply of gas.
He agreed with Mr Singh that a bidder for the PUB project would be exposed to the electricity market, because of the way PUB structured the project such that the supplier had to take care for the cost of power for the desalination.
Mr Nah also concurred with the lawyer that nobody would know for sure what would happen the next week or month, let alone three or four years later, but all bidders would have carefully considered their cost implications versus their revenue implications.
He also agreed that Lum had been the one to direct that the project's financial model be shared with the banks they were seeking loans from, and to be "completely open and transparent".
The financial model, with its permutations and scenarios, were openly available to be reviewed by anyone receiving it from Hyflux, Mr Nah agreed.
He also agreed that because of the "national importance" of the project, PUB would have had consultants looking at the model.
"So would I be right to say that for the purposes of this bid, Hyflux was completely honest, open and transparent to its consultants, to PUB, to PUB's consultants, to the banks and to the banks' experts of what its thinking was, and its view that it had taken of the electricity market?" asked Mr Singh.
"Yes," answered Mr Nah.
He agreed that the "completely open, honest and transparent" way Hyflux was acting would have been the style and way that Lum dealt with the matter.
At one point, Mr Singh told the judge that the defence had made a request to the prosecution to obtain the correspondence and exchanges Hyflux had with "all the banks".
However, the prosecution was "refusing" to do this, he claimed.
Deputy Chief Prosecutor Christopher Ong said some of the requests had been acceded to and others had not, adding that he had not been expecting Mr Singh to bring this up now.
Explaining the importance of obtaining the correspondence, Mr Singh said it arose in Mr Nah's evidence that the prosecution sought to make an impression that the banks were reluctant to finance the project, and Hyflux was having difficulty raising money for it.
Mr Singh said he needed the full set of exchanges with the six banks that the prosecution said had "concerns" with the power component of the project, and also exchanges with other banks in order to present a fuller picture.
Mr Singh said that it was central to the prosecution's case that because the banks had concerns, Hyflux leaders somehow had a motive to play down the sales of electricity to the grid.
"If that's the case they are running, they cannot be selective because you can't just pick a few letters from these banks to say, 'oh you see there were concerns', without showing what happened after the due diligence (was) done and whether there were any remaining concerns," said Mr Singh.
The judge said Maybank did eventually extend a S$720 million loan to Hyflux and this was already a fact, asking Mr Singh what else he wanted. After some back-and-forth, he asked the prosecution to review the defence's request and get back.
After this, Mr Singh continued his cross-examination of Mr Nah, who agreed that it was not unusual for banks, in considering financing projects, to say they needed more time to think about certain project aspects.
He also agreed that it was not unusual for banks to say they needed to look at other features of the proposals and to ask for more time.
He said that the banks also put in resources when discussing the project with Hyflux, and that banks can have various kinds of structures and levers when it comes to project financing and they could be taking the time to consider which levers they can pull to "de-risk" themselves.
The trial continues with Mr Nah on the stand.
If convicted of consenting to Hyflux's intentional failure to disclose the electricity sale information to the securities exchange, Lum could be jailed for up to seven years, fined up to S$250,000 or both.
For making an offer of securities to the public with omissions about the electricity sales, she could be jailed for up to two years, fined up to S$150,000, or both.
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It was also not unusual for banks to have concerns when evaluating projects seeking finance, and it was part and parcel of their usual process to study the issues, the court heard.
This emerged in the defence's cross-examination of prosecution witness Nah Tien Liang, a former finance employee of now-defunct water treatment firm Hyflux.
Mr Nah was responding to questioning from Hyflux founder Olivia Lum Ooi Lin's lawyer, Senior Counsel Davinder Singh.
The prosecution's case is that Hyflux leaders at the time had deliberately misled the investing public by downplaying the electricity sales component of the Tuaspring Project.
According to Mr Singh, it is "central" to the prosecution's case that because the banks had concerns about the power component of the project, the Hyflux leaders somehow had a motive to downplay the electricity sale component in their announcements.
Lum, 64, is on trial along with former chief financial officer Cho Wee Peng, 56, and four former independent directors of Hyflux.
They are contesting various charges relating to the alleged omission of details about electricity sales in the Tuaspring Project, either to the Singapore Exchange or to the investing public.
Hyflux had won the tender put out by PUB, which was for a desalination plant where the successful bidder was required 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 water tariff price proposed by the bidder.
Hyflux had no experience in the power market.
The prosecution's case is that the Hyflux leaders pitched the Tuaspring Project to the investing public primarily as a desalination plant.
This was while downplaying the fact that the power plant it was building to supply electricity to the desalination plant would sell electricity to the grid, and that the entire project's profitability depended on such electricity sales.
The prosecution's case is also that Hyflux made it appear that the primary purpose of the power plant was to supply electricity to the desalination plant, when in fact the "overwhelming majority" of the electricity produced by the power plant was projected to be sold to the grid.
The Tuaspring Project eventually led to Hyflux's downfall as the company incurred massive losses on the back of a weak power market in Singapore.
Hyflux entered liquidation, with about 34,000 investors owed S$900 million (US$700 million).
On Wednesday, Mr Singh led Mr Nah through question after question in an attempt to poke holes at the prosecution's case.
Mr Nah agreed with Mr Singh that Hyflux could not have bid for PUB's project with only the desalination plant. The sale of power was "necessary and indispensable".
In Singapore at the time, Hyflux
TARIFFS BY OTHER BIDDERS
Mr Singh showed Mr Nah a document listing tariffs from various bidders for PUB's project, including Hyflux.
Hyflux had the lowest first-year price for water, at S$0.45000 per cubic metre, undercutting its competitors by at least 27 per cent.
The next two lowest bids were made by Leighton Engineering & Construction (Singapore) and Keppel Seghers Engineering Singapore Consortium at S$0.62013 and S$0.67000 respectively.
Mr Nah said that while Hyflux was not privy to the details of each bid, it was possible to make an "educated guess" based on the tariff list which other bidders had to give "some form of discount".
He explained that, if the electricity price was 13 cents per kWh,
Mr Nah agreed that a bidder who gave a discount like this would be locked in to the water tariff they offered to PUB, and would be "stuck" with the price of electricity that was discounted for the purposes of the lower tariff.
He also agreed that if the price of electricity went up after the bid was won, the bidder would be in trouble if it did not have a power plant, because it would have to buy electricity at a higher price.
However, if the bidder did have a power plant and the electricity prices went down along with the "spark spread", it would also face challenges as it would earn less from the sale of electricity.
A spark spread is the difference between the market price of electricity and the cost of producing it with gas.
Mr Nah had earlier explained to the court that electricity prices could also go down if there is an oversupply of gas.
He agreed with Mr Singh that a bidder for the PUB project would be exposed to the electricity market, because of the way PUB structured the project such that the supplier had to take care for the cost of power for the desalination.
Mr Nah also concurred with the lawyer that nobody would know for sure what would happen the next week or month, let alone three or four years later, but all bidders would have carefully considered their cost implications versus their revenue implications.
He also agreed that Lum had been the one to direct that the project's financial model be shared with the banks they were seeking loans from, and to be "completely open and transparent".
The financial model, with its permutations and scenarios, were openly available to be reviewed by anyone receiving it from Hyflux, Mr Nah agreed.
He also agreed that because of the "national importance" of the project, PUB would have had consultants looking at the model.
"So would I be right to say that for the purposes of this bid, Hyflux was completely honest, open and transparent to its consultants, to PUB, to PUB's consultants, to the banks and to the banks' experts of what its thinking was, and its view that it had taken of the electricity market?" asked Mr Singh.
"Yes," answered Mr Nah.
He agreed that the "completely open, honest and transparent" way Hyflux was acting would have been the style and way that Lum dealt with the matter.
THE SIX BANKS ISSUE
At one point, Mr Singh told the judge that the defence had made a request to the prosecution to obtain the correspondence and exchanges Hyflux had with "all the banks".
However, the prosecution was "refusing" to do this, he claimed.
Deputy Chief Prosecutor Christopher Ong said some of the requests had been acceded to and others had not, adding that he had not been expecting Mr Singh to bring this up now.
Explaining the importance of obtaining the correspondence, Mr Singh said it arose in Mr Nah's evidence that the prosecution sought to make an impression that the banks were reluctant to finance the project, and Hyflux was having difficulty raising money for it.
Mr Singh said he needed the full set of exchanges with the six banks that the prosecution said had "concerns" with the power component of the project, and also exchanges with other banks in order to present a fuller picture.
Mr Singh said that it was central to the prosecution's case that because the banks had concerns, Hyflux leaders somehow had a motive to play down the sales of electricity to the grid.
"If that's the case they are running, they cannot be selective because you can't just pick a few letters from these banks to say, 'oh you see there were concerns', without showing what happened after the due diligence (was) done and whether there were any remaining concerns," said Mr Singh.
The judge said Maybank did eventually extend a S$720 million loan to Hyflux and this was already a fact, asking Mr Singh what else he wanted. After some back-and-forth, he asked the prosecution to review the defence's request and get back.
After this, Mr Singh continued his cross-examination of Mr Nah, who agreed that it was not unusual for banks, in considering financing projects, to say they needed more time to think about certain project aspects.
He also agreed that it was not unusual for banks to say they needed to look at other features of the proposals and to ask for more time.
He said that the banks also put in resources when discussing the project with Hyflux, and that banks can have various kinds of structures and levers when it comes to project financing and they could be taking the time to consider which levers they can pull to "de-risk" themselves.
The trial continues with Mr Nah on the stand.
If convicted of consenting to Hyflux's intentional failure to disclose the electricity sale information to the securities exchange, Lum could be jailed for up to seven years, fined up to S$250,000 or both.
For making an offer of securities to the public with omissions about the electricity sales, she could be jailed for up to two years, fined up to S$150,000, or both.
Continue reading...