TOKYO/SINGAPORE -- When Mahathir Mohamad made his surprise comeback as Malaysia's prime minister, leading an upstart opposition party, some young netizens in Singapore noted the change in its neighbor's long-ruling government through the ballot box -- something that has not happened in the city-state. But for some older Singaporeans who remember the days of Mahathir's previous tenure, his return reminded them of the time when they were almost completely reliant on Malaysia for its fresh water.
It was only during the government of Najib Razak, who became prime minister in 2009 but was pushed out by Mahathir last month, when worries over Singapore's water security eased on the back of improved relations. The reduced threat to Singapore also was the result of the development of new sources of water from sewage and the sea.
Playing a crucial role in that development: Hyflux, a homegrown startup founded in 1989 by the Malaysia-born entrepreneur Olivia Lum Ooi Lin, the company's chairman and CEO. Hyflux is rare in Singapore in that it is not linked to the government or any family conglomerates.
It is now responsible for about 30% of Singapore's daily water needs through recycling and desalination.
But on May 22, less than two weeks after Mahathir's return, the Singapore-based company and its five subsidiaries sought court protection in order to restructure its bloated debt load. The filing sent shockwaves throughout the city-state, where water security carries great importance.
"Every other policy has to bend at the knees for our water survival," Singapore's first prime minister, Lee Kuan Yew, declared decades ago. Those words served as his mantra.
The island nation, which separated from Malaysia in 1965, had no options but to rely on its northern neighbor for its water supply. A 1km-long causeway connecting both sides of the Straits of Johor opened in 1923, carrying not only a road and railway, but also an aqueduct. Water has been transported to Singapore along the causeway since the first agreement was reached in 1927, when both sides were still under British rule.
The agreement has been renewed and transferred in the decades after independence and separation, but there is a lingering sense in Singapore that water remains an effective tool for Malaysia to use against its neighbor. Lee wrote in his memoir about his exchanges with his first Malaysian counterpart, Tunku Abdul Rahman, saying he "tried to use three levers -- the military, economy and water -- to force Singapore to follow Malaysia's lead." Singapore was able to overcome the first two, but not water.
"Practically, they [Singapore] get their water free," Mahathir was quoted as saying in 2002 by the English-language newspaper New Straits Times, criticizing the price to provide water to Singapore as unfairly low.
Singapore, in fact, pays for the water and is entitled to draw up to 250 million British imperial gallons (1.137 billion liters) a day, based on the 1962 agreement binding both sides until 2061. Still, Singapore has been determined to find new water sources to reduce its reliance on Malaysia.
In addition to the conventional method of catching more rain water by increasing its number of reservoirs, Singapore has encouraged the development of recycled water, known as NEWater, and desalinated sea water.
The first NEWater plant, installed by Hyflux, opened in 2002. With a daily capacity of turning 32 million liters of sewage water into potable water, the company had broken new ground. Its capacity has since more than doubled. It also has been a trailblazer on desalination. It operates the country's first desalination plant, SingSpring, which was commissioned in 2005 with a capacity of 136.38 million liters a day. Eight years later, Hyflux built another desalination plant, Tuaspring, with more than double the capacity.
NEWater, produced in five facilities by various operators, now provides 170 million imperial gallons a day, and the two desalination plants supply 100 million imperial gallons, which account for about 40% and 25%, respectively, of Singapore's daily demand of 430 million imperial gallons, according to PUB, Singapore's water authority. While PUB expects demand to grow 25% by 2030, the government's plan is to double desalination capacity and increase NEWater treatment by 50% to cover about 80% of total water demand by then.
Prime Minister Lee Hsien Loong praised Lum and Hyflux at the opening of the Tuaspring plant in 2013, saying, "What was once our strategic weakness has become a source of thought leadership and competitive advantage."
Hyflux and Lum have received awards and honors from companies and organizations such as global accounting firm Ernst & Young, U.S. consultancy Frost & Sullivan and U.K.-based Global Water Intelligence. On the strength of its track record, the company has expanded into other water-scarce regions, including the Middle East, North Africa and mainland China.
Lum's personal background has added to the admiration for her and the company. She was orphaned as an infant and grew up poor in a small Malaysian town with her adoptive family. She earned a chemistry degree with honors from the prestigious National University of Singapore and eventually started her own business. She is Hyflux's single-largest shareholder, with more than a third of the shares.
The company's filing for court protection last month came as a surprise. Lum, in her letter to shareholders on the day of the filing, stressed that the move "will not only protect our viable core businesses but position us for long-term sustainable growth," while the court-supervised liabilities reorganization would "provide much-needed space and time" for the company to realign its strategy. Still, shareholders are feeling the strain, as the court granted a 30-day moratorium on debt payments in accordance to the recently amended Companies Act.
Moody's Investors Service wrote in a note that Hyflux's restructuring will be "negative for its creditors," as it "could include [a] combination of haircuts, debt maturity extension or adjustments to interest rates, and could lead to financial losses."
A spokesperson for DBS Group Holdings, which has outstanding loans with Hyflux, told the Nikkei Asian Review that "the impact on its earnings will not be material."
A corporate banking executive, who requested anonymity, told Nikkei that his bank will have to wait for Hyflux's court submission, which will provide details of the company's plan to deal with its tight financial condition. The court will open its first hearing on the case on June 19.
Trading in the company's shares have been halted since it sought court protection, and a 15-million Singapore-dollar ($11.2 million) interest payment for a bond scheduled on May 28 was suspended. Hyflux said on June 11 that the bond's trustee notified the company it had defaulted on the payment.
David Gerald, president and CEO of the Securities Investors Association (Singapore) expressed concern on behalf of retail investors, requesting equal treatment with institutional investors. The association has previously honored Hyflux as a "transparent company."
Lum has pointed to two main culprits for the company's woes: depressed electricity prices in Singapore and the stalled sales of its two major desalination facilities, Tuaspring in Singapore and Tianjin Dagang in China. The miscalculation on electricity stems from the Tuaspring plant, where Hyflux ventured into power and added a gas turbine generator.
The bid involved the operation of both the desalination plant and a power generator to supply electricity to both the plant and the national grid. But a chronic oversupply of electricity in Singapore pushed prices lower, and Hyflux started to bleed cash on an industry in which it lacks expertise.
And that in turn has led to its second problem of not being able to sell Tuaspring. Given that the water treatment industry is capital intensive, Hyflux follows an asset-light strategy, in which it sells its completed facilities in order to recycle its capital and use it for future projects. The company maintains an income stream from the operation of those facilities and provisions of key parts.
The money-losing power generator is hindering Hyflux's ability to find a buyer for Tuaspring. Its desalination plant in Tianjin, the largest of its kind in China, also has not attracted a buyer. That has put pressure on the cash-collecting cycle, which pushed the company into court protection.
Signs of a cash squeeze are apparent from past financial statements. Even though the company recorded its first net loss attributable to shareholders in 2017, its operating cash flow -- a basic indicator of how much cash is being generated from business activities -- has remained negative since 2010. That means the company has had to pump up its investment cash flow, such as selling assets, in order to keep its free cash-flow positive. Otherwise, its cash losses would have to be made up through external funding, like issuing shares, bonds or loans.
The company's free cash flow was negative between 2008 and 2016, indicating that assets sales were not always smooth. During that period, the company issued preferred shares and a series of perpetual capital securities, a type of bond, along with taking out bank loans, which have ballooned to S$1.527 billion. Including outstanding perpetual securities, its debt exceeds S$2 billion.
Hyflux's return on equity, or ROE, took a sharp dive in 2011, to 5.8% from 17.6% a year earlier. The trigger was the Arab Spring, the pro-democracy uprising, when the company's main foreign markets of the Middle East and North Africa suffered, causing its revenue and net profit from those regions to fall 18% and 40%, respectively.
Lum expected the turmoil to be short-lived, and the company continued its aggressive expansion policy and issued S$400 million worth of preferred shares, guaranteeing a hefty 6% dividend. "We continue to invest in the future," she said in the 2011 annual report. "We will be ready when the market picks up."
Markets picked up but the company was not able to boost its profits under its enlarged equity base, and its ROE sank into negative territory last year. And because the company failed to redeem its preference shares in April, the rate is now 8%, adding an additional S$8 million a year.
"Hyflux seems to have borrowed too much and the debt is a millstone around your neck when the environment becomes adverse -- as in the case of Singapore's electricity market where prices have plummeted," Nitin Pangarkar, associate professor at the NUS Business School, said in a statement. "Companies with [a] strong balance sheet will often survive these downturns, but too much debt can bring down a company," he said.
"Technologically, the water industry is a slow-moving market as compared to telecom or automotive," said Melvin Leong, associate director for energy and environment business at Frost and Sullivan. "Technological innovation is there, but the adoption is sporadic and not as fast as it should be."
On top of the capital-intensive nature of the business, a weak capital base due to the lack of strong institutional backing weighs more on Hyflux. The market capitalizations of global conglomerates Veolia Environnement and Suez stood at 10.9 billion euros and 7.1 billion euros ($12.8 billion and $8.3 billion), respectively, on June 14, which dwarf Hyflux's S$181 million ($135 million).
Earning profits in the water business outside Singapore is not easy. "Singapore will allow [an] expensive desalination project to continue for the purpose of securing alternative source to imported water from Malaysia," said Tetsuji Yoneda, CEO and president of Osaka Gas Singapore. A $600 million joint venture project with Hitachi and Itochu announced in 2012 to build India's largest desalination plant has been stalled.
The Tianjin Dagang desalination plant -- a 50-50 joint venture with JGC Group, a major Japanese engineering house -- was intended to develop into something larger. Despite much fanfare at the 2009 launch, JGC recently told Nikkei that it sold all joint venture stakes to Hyflux in 2015 and all shares in the company, representing a 2% stake, in April at a loss.
Even though Hyflux's management has vowed to complete its debt reorganization within six months, it remains to be seen on how creditors will respond.
The company, which has enhanced self-sufficiency of Singapore's water supply, is now stuck in a financial crisis. How the Singaporean government will address the situation, if at all, remains an open question.
Pangarkar of NUS does not think the government will rescue the company, even though water is of essential importance. "The government may not want to send a signal to companies that if you are in trouble they will come and bail out," he said.
Meanwhile, Singapore International Water Week, a biennial five-day event on global water solutions that was first held in 2008 and was inspired by Lee Kuan Yew, will open on July 8. For the first time, Hyflux will not be a sponsor.