Ex-Hyflux deputy CEO Sam Ong not aware of ‘magnitude of losses and profits’ of Tuaspring project

SINGAPORE – Former Hyflux deputy chief executive Sam Ong Eng Keang was aware that the water treatment firm was going into the business of selling electricity in the Tuaspring project, but maintained that he was not aware of the “magnitude of losses and profits”.

Mr Ong – the eighth prosecution witness to take the stand in

the criminal trial of Hyflux founder and former chief executive Olivia Lum,

former chief financial officer Cho Wee Peng and four independent directors – was asked by both the prosecution and the defence about his understanding of how revenue generated from the power plant could subsidise the desalination plant.

On Day 18 of the criminal trial on Sept 22, Mr Ong told the court that the desalination plant could be subsidised as “the power tariff is, quantum-wise, higher than the water tariff”.

When asked by Deputy Chief Prosecutor (DCP) Christopher Ong to explain his answer fully, Mr Ong said: “As an integrated project, it would be viable.”

When asked the same question in his cross-examination by Lum’s lawyer, Senior Counsel Davinder Singh, Mr Ong said that “subsidising could mean subsidising profits or optimising of cost savings”.

Mr Singh said: “Therefore, it is clear from these words that revenue and profits from power would subsidise the cost of desalinated water?”

Mr Ong replied: “Correct, but I don’t know the extent of it.”

While Mr Ong agreed that the financial model is such that revenue and profit from electricity sales would be used to subsidise the water tariff from the desalination plant, he said he did not have “details of the model and how, over a 25-year life cycle, (inflationary) adjustments will impact the subsidy”.

Hyflux’s wholly owned subsidiary, Tuaspring, signed a 25-year water purchase agreement with national water agency PUB in 2011 to supply 70 million gallons, or 318,500 cubic m, of desalinated water daily from 2013 to 2038.

“I am not part of the task force for this project. My focus was on the Middle East and North Africa (Mena) region,” Mr Ong said.

Mr Ong joined Hyflux in 2006 as its chief investment officer, and had served in various capacities, including as chief financial officer and deputy CEO. In his role as deputy CEO, he was tasked with managing the Mena region, which accounted for 80 per cent of the company’s business at one point.

He told the court that Tuaspring was “an important project as it would enable Hyflux to diversify away from the Middle East and North Africa market to 50 per cent from 80 per cent”.

When asked by the prosecution why the task force was set up to handle Tuaspring, Mr Ong said it was a “monumental project that was close to $1 billion in project size. For confidential purposes, only a limited number of people were assigned to the task force”.

DCP Ong asked: “You were not aware of the extent and significance of electricity sales to the project? As deputy CEO, someone in your position was not aware of the particulars of this project?”

Mr Ong replied: “That’s how the company works... It’s accepted by all parties that the deputy CEO helps with projects outside Singapore, not with the Tuaspring project.”

When asked about Lum’s management style, Mr Ong described her as “a very tough boss, who demanded a lot from the team”. “She is intellectually and emotionally involved in all aspects of the company. This is her baby,” he said.

When asked about his dealings with Cho, Mr Ong, who had been finance director with Dow Chemical Company before joining Hyflux, said he “was my able and capable right-hand person, and succeeded me as chief investment officer, and most of my roles in Dow Chemical”.

Mr Ong added that Cho joined Hyflux after him, and that he was the one who hired Cho from Dow Chemical.

Lum, Cho and four independent directors are contesting charges relating to non-disclosure of material information about the Tuaspring project’s electricity sales component in a March 2011 announcement and an April 2011 preference shares issue.

The prosecution’s case is that Tuaspring was pitched as a desalination plant to investors, and the power plant’s main purpose was to supply electricity to the desalination plant, when in fact nearly 92 per cent of power produced by the plant was projected to be sold to the national grid and only 3 per cent was meant for powering the desalination plant.

Because Tuaspring’s revenue was a big component of the group’s strategy, its failure due to weak electricity sales led to Hyflux’s collapse.

When asked by DCP Ong if he had any concerns about Hyflux’s power strategy, Mr Ong said he did not have enough details “to have concerns”.

“But I did mention to Olivia that we have to make sure that we look at earnings, and the multiple of earnings.”

By that, Mr Ong said he meant looking at earnings “in terms of quantum and multiple of earnings for the valuation of the company... and maximising shareholders’ value”.

When asked why the selling of electricity necessitated looking at the multiple of earnings, Mr Ong said: “Based on my understanding, electricity sales earnings are different from water technology earnings in how they are rewarded in the marketplace.

“Hyflux’s earnings are 20 times multiple and the power plant company’s earnings are 10 times multiple,” he added.

“So the power aspect is valued less than the water technology aspect?” DCP Ong asked.

Mr Ong replied: “That’s based on my observation, at the time, of the SGX (Singapore Exchange).”

The defence also took Mr Ong through the minutes of risk management meetings from May 4, 2010, to Jan 21, 2011, as well as a Feb 22, 2011, board meeting, and asked if the attendees knew that former Hyflux legal head Yang Ai Chian and former corporate secretary Lim Poh Fong attended those meetings.

When asked why they attended, Mr Ong said it was to “ensure that risk issues were reflected in the records”, and discussions about risks were meant to be done openly in the presence of the company’s senior management and legal staff.

The hearing continues on Sept 24.