SINGAPORE POWER (Efficiency and productivity)

Mr Stephen Lee Ching Yen asked the Minister for Trade and Industry whether he is satisfied that Singapore Power has done enough (i) to improve efficiency and productivity and (ii) to control costs internally, as means to improve company profitability rather than through tariff increases.

The Minister for Trade and Industry (Mr Yeo Cheow Tong): Sir, I am satisfied that the former PUB Electricity and Gas Departments, and now SP, have been operating efficiently. I am requesting the Clerk to hand out the comparative charts for Members' reference. Mr Speaker, while waiting for the charts, could we proceed to the next Question first and I will take up this Question in a few minutes' time?

Mr Speaker: All right.

[Later - After Question No. 5]

Mr Speaker: Mr Yeo, your charts are ready. Would you like to give your answer now?

Mr Yeo Cheow Tong: Thank you, Sir. As I was saying just now, I am satisfied that the former PUB Electricity and Gas Departments, and now SP, have been operating efficiently. The Clerk of Parliament has distributed the comparative charts (Cols. 749 - 762) and Members may wish to refer to them. charts - (A) Comparison of Productivity Indicators with Regional Power Companies, (B) SP's Electricity Supply Reliability Indicators (Cols. 749 - 762)

Firstly, in comparison with other utility companies, SP ranks among the best in terms of many performance measures: electricity produced and sold per employee; installed capacity per employee; thermal efficiency, unit cost, and losses in transmission and distribution.

Secondly, the reliability of SP's supply is also high and has been improving steadily year by year. This is so whether measured in terms of system interruption time, supply interruptions per day, interruptions per 1,000 customers, or interruption duration.

Thirdly, The World Competitiveness Report has ranked Singapore best in the world for having a power supply infrastructure which meets business requirements.

Fourthly, in December 1994, MTI commissioned an independent review of PUB's Electricity Department, in preparation for its corporatisation as Singapore Power. The review was done by Deloitte & Touche, who had been consultants to the British Government when it privatised the electricity industry in Britain, and were therefore experts in this area. Deloitte & Touche concluded that the PUB Electricity Department had been managed and operated efficiently. Their Report gave the following reasons to support their conclusion:

(a) PUB's electricity tariff has fallen in real and nominal terms over the past 10 years;

(b) PUB has been able to finance additional capacity required without increasing its long term debt even though tariffs have fallen;

(c) PUB has efficiently run, well-maintained power generation stations and a sophisticated dispatch system;

(d) power losses are very low - the standard of system security is high;

(e) unit costs of customer services activities are low; and

(f) manning levels have declined although the electricity undertaking has grown by all normal measures of output and activity levels, including maximum demand, energy supplied and customers connected.

Some Singaporeans have commented that SP's profitability may be low because SP is over-capitalised or its assets have been over-valued. This is not the case.

SP is not over-capitalised. We restructured SP's balance sheet upon corporatisation to give it a gearing ratio of one-third. This is a prudent balance between debt and equity. It gives SP enough shareholder funds to invest and grow without over-capitalising the company.

Normally, increasing the gearing of a company will improve its return on equity (ROE) because the cost of borrowing is lower than what the company can earn on its shareholder funds. But in SP's case, this increased gearing only improved its ROE very slightly, because SP's return on equity had been low - only slightly higher than its borrowing costs.

On the question of asset valuation, SP's land and buildings were revalued to market value upon corporatisation. The valuations were done by an independent property consultant, Jones Lang Wootton, with inputs from the Chief Valuer.

This revaluation was necessary, for SP's accounts to reflect accurately the true costs of producing and distributing electricity to Singaporeans. The land occupied by power stations and SP's office buildings represent scarce and valuable resources, especially in Singapore. There is a high opportunity cost to using them. This cost is as much part of the cost of producing and distributing electricity, as the fuel oil and natural gas which the power stations consume.

SP's profitability is low primarily because of the low electricity tariffs. Our tariffs are lower than many countries in the region, even though our land and labour costs are higher than most countries. SP will continue to improve its efficiency and productivity, and to control costs internally to improve profitability. However, this is unfortunately not sufficient. It is therefore also necessary to raise electricity tariffs by 12-14% over 3-4 years, to correctly reflect the full economic costs of producing and distributing electricity in Singapore.

Mr Stephen Lee Ching Yen (Nominated Member): Sir, does the Minister agree that even before corporatisation PUB was already very efficient? Since corporatisation, have we seen substantial improvements or do we expect to see substantial improvements? My second question is on the gearing. If SP is now asked to gear to one-third, who are they borrowing from and what sort of interest rate do they have to pay and what impact does this interest have on the bottom line?

Mr Yeo Cheow Tong: Sir, as the charts show, the former PUB had actually run a very tight ship in terms of capacity per employee, sales per employee, thermal efficiency, etc. So it has already been performing well. But I think there is still room for improvement. As SP regionalises and as they gain access to different modes of operation, I think they should be able to transfer those lessons to their operations in Singapore. We hope to see SP continue to improve on the foundations that PUB handed to them.

Secondly, in terms of the gearing, Mr Lee has asked about the impact of the borrowings on the bottom line. Sir, when we corporatised SP and SP geared up to 30%, the Government actually provided SP with an interest-free loan of $1.7 billion, rather than requiring SP to go out into the commercial market to borrow. So in actual fact, the interest-free loan of $1.7 billion represents a subsidy of over $100 million a year to SP.

Mr Stephen Lee Ching Yen: Sir, can the Minister enlighten the House whether or not the Government plans to continue to extend the interest-free loan to SP or whether this is an interim measure and, if so, for how long?

Mr Yeo Cheow Tong: Sir, this is an interim measure. The Government will extend the interest-free loan to SP for a few years. SP is still in the process of finalising their accounts and their accounts will be ready in a few months' time and we will know the actual picture.

Over the next few years, as SP's operations are consolidated, and as the figures become more readily available, we will review whether we need to continue giving the interest-free loan.

Mr John De Payva (Nominated Member): Is the Minister aware that the vast majority of Singaporeans would prefer to keep the old structure of PUB where they pay lower tariffs as opposed to paying higher tariffs to Singapore Power so that Singapore Power can be attractively profitable and it could then go on to pay good dividends to shareholders, some of whom may not even be Singaporeans? If this is so, what justification is there to list Singapore Power and what are the advantages to the Singaporean?

Mr Yeo Cheow Tong: Sir, now that we have corporatised SP and the full data are available, I think it is incumbent upon the Government to ensure that the tariffs are correctly priced in order to obtain a reasonable return on this very crucial infrastructure. So whether or not we privatise SP, SP would need to raise its tariffs to obtain a reasonable rate of return. In terms of the privatisation programme, that is a separate matter. As I mentioned just now, the tariffs will have to be correctly set regardless of this privatisation programme. But the main reason for privatisation is to enable Singaporeans to have a direct stake in the economy. This is part of the asset enhancement programme of the Government. We will decide on the privatisation of SP in the coming years.

Mr Leong Horn Kee (Thomson GRC): Sir, the Minister has said that the Government has given SP an interest-free loan. If we were to impute the interest cost into SP, will we still be operating a profitable or loss-making entity?

Mr Yeo Cheow Tong: With the interest-free loan of $1.7 billion, the return on equity for SP is 7.6%, based on the figures that we currently have. If SP had to borrow, at prime rate, this sum of $1.7 billion, its return on equity will go down to 6.4%. SP will still be profitable. It is just that the return would be lower.

Mr John De Payva: Sir, the employees have transferred their gratuity to Singapore Power as a result of the restructuring. With the delay in listing, what will happen to their gratuity? And will there be retrenchment in Singapore Power's bid to want to be efficient? If there is retrenchment, will the retrenchment benefits be calculated to include the service of the employees since the PUB days?

Mr Yeo Cheow Tong: Sir, the gratuity which has been agreed upon will remain. On the question of retrenchments, I have not heard of any plans to retrench. What SP intends to do is to consolidate the operations and to make sure that the existing staff are deployed meaningfully.

Mr Low Thia Khiang: Just now the Minister mentioned about reasonable return on capital investment, and whether or not it is going to be privatised, the increases in tariffs are inevitable. That is what I understand. The question now is: who is the return for - the 12%-14% increases that the Minister proposed over the next three years? Is it for the Government?

Mr Yeo Cheow Tong: Sir, the proposed increase of 12% to 14% over the next three to four years will result in SP having a return on equity of 10% to 11%. Who owns SP? At the present moment, the SP shares are owned by the Government and this represents assets of the people. Why should we ensure that electricity tariffs are set properly? The main reason is that electricity is consumption. It is better that we price electricity properly and let the people and companies decide on how much to use. For example, if a company wishes to have its building lit up like a Christmas tree the whole day, and is prepared to pay the price, so be it, because it is paying the economic price. If companies feel that they want to save on power, then they can decide to light up for a shorter number of hours. And similarly at home, whether to leave the lights on the whole night or to switch them off when they go out for dinner. This is a decision which is within the capability of each of us to make.

So once it is priced properly, we leave the decision to you, because at the end of the day we have not just to import all the fuel but the cost of building new stations is also very, very high. A new power station now costs billions of dollars. So it is better that we price properly and encourage Singaporeans to use electricity efficiently so that we do not have to incur any more expenses than we need to.

Mr Low Thia Khiang: Sir, I suppose I was right to say that the return right now is for the Government's investment, and not whether or not SP is going to be privatised.

The next supplementary question is this. Based on the Minister's answer about tariff, is he saying that electricity tariff in the past was not set properly? And if it is so, why? And when did he discover that it was not set properly?

Mr Yeo Cheow Tong: Sir, it is not that the tariffs were not set properly. The tariffs in the past were set based on the accounting system that PUB had. And based on that accounting system, PUB appeared to be making very reasonable returns. What was the old accounting system? In earlier years PUB had to borrow from the World Bank. As a World Bank borrower, the World Bank imposes on the borrower the requirement that the borrower must use the World Bank's system of accounting. This is so that all the borrowers have the same system. The World Bank's system, like most public sector systems, was a simpler system of accounting and which did not take into account the working capital and operating capital needs of a company. So when SP was corporatised, and SP used the normal commercial accounting system and standards, all these other operating costs were then captured. And these are real operating costs because the working capital of the company can be very significant. We have to price that capital into it. When SP was corporatised, all these figures came to light, and that was when we realised that the old set of tariffs was based on a different accounting requirement and therefore we should use what is the normal accounting system now, which is being applied to all the statutory boards and all private sector companies.

Mr Low Thia Khiang: Is the Minister saying that in the past, the operating cost of PUB was not taken into account in the accounting system?

Mr Yeo Cheow Tong: Yes, in the past, under the World Bank's accounting system, for example, work-in-progress was not taken into consideration. And as you know, it now costs about a billion dollars to build a power station. So from the time you start to the time you finish, all those requirements were not captured in PUB's accounts. But under the normal accounting system, all these costs - work-in-progress and working capital - have to be in the accounts. Is the World Bank's system wrong? I do not think so. It is an accounting system which is required by the World Bank and which measures a certain level of capital needs. I think what we failed to recognise was that the World Bank's accounting system was a very simplified form of accounting system. If it had realised that, then PUB would have, I think, moved away from the World Bank's system much earlier.

Dr Kanwaljit Soin (Nominated Member): Two supplementary questions, Sir. Firstly, do we owe any more money to the World Bank where Singapore Power is concerned? And secondly, if Singapore Power were not privatised, what would the Minister consider to be a reasonable return on equity?

Mr Yeo Cheow Tong: The answer to her first question is no, PUB does not owe any more money to the World Bank and therefore we could have moved away from the World Bank's accounting system earlier. Secondly, if SP were not privatised, what would be a reasonable rate of return? A 10%-11% rate of return would be reasonable. In fact, that is close to what PUB was obtaining when it was using the World Bank's system of accounting.

Mr Leong Horn Kee: The Minister was saying earlier that even after accounting for the interest cost, SP will achieve a 6%-plus return, and he mentioned that a 12%-plus return is even more justifiable. But compared to, say, the case of SBS that obtained listing and aimed for 8% return, why not go for a lower percentage like 8%, rather than going for a higher 12% return? Because in the end, if you are going for a higher return just for the sake of getting a listing, then is it worth it? Should we go for a listing for a higher return?

Mr Yeo Cheow Tong: Sir, I did not say 12% return. I said, 10% to 11% return, lower than what SBS is earning today, and lower than what all the other utility companies are earning today.

Mr Low Thia Khiang: Sir, I refer to the Charts distributed by the Minister. The productivity indicators show that the productivity of countries like Indonesia, Malaysia and Thailand is much lower than Singapore, whereas in terms of average tariffs charged by regional power companies, Indonesia, Thailand and Malaysia are able to charge lower tariffs than Singapore Power. Why is this so?

Mr Yeo Cheow Tong: Sir, two reasons. Firstly, wages and land cost are lower. Secondly, their energy costs are also lower, because these are all energy producers as well.

Mr Umar Abdul Hamid (Ang Mo Kio GRC): Sir, the Minister said that SP intends to maintain the 10% to 11% rate of return under the new accounting system. What is the expected percentage increase of the tariffs if it intends to maintain the 10% to 11% of return?

Mr Yeo Cheow Tong: Sir, as I mentioned just now, SP would need to raise its tariffs by 12% to 14% over the next three to four years. I think what Members may also be interested in is to have a picture of what such increases translate into at the individual level. A 5% increase in tariff - we are saying 12% to 14% over three to four years - would mean that the tariff will increase by about 3% to 5% per year. What will the 5% increase in tariff translate into at the household level? For a 3-room flat, a 5% increase in electricity tariff will translate into a bill size increase of $1.40 per month. For a 5-room flat, the 5% tariff increase will translate into $2.20 increase in the SP bill size per month. And for private housing, since they use more electricity, the private households would incur an increase in bill size of $5.30 per month.

Mr Cheo Chai Chen (Nee Soon Central): ( In Mandarin): Mr Speaker, Sir, I would like to ask the Minister whether SP has plans to build new power plants. If so, how many new plants will be built and where will they be built?

Mr Yeo Cheow Tong: Sir, the Government has under construction at this present moment a new power plant in Tuas. This new power plant would have a generating capacity of 1.2 gigawatts or 1,200 megawatts of electricity and the investment would be in the region of about $1.8 billion for the plant. The plant would be ready and operational in the year 1999.

Mr Low Thia Khiang: Sir, just now the Minister said that because the cost of other countries is lower than ours, that is why they can afford to charge lower tariff. But please refer to Chart 5 where it is shown that Indonesia's cost per unit produced and distributed, compared to Singapore, is only less than a cent lower. And their loss as percentage of units generated is 14%, compared to 9.2% for Singapore Power. Whereas the tariff charged by Singapore Power, compared to Indonesia, is more than 3 cents. Would the Minister explain that?

Mr Yeo Cheow Tong: Can he repeat that again?

Mr Low Thia Khiang: In Chart 5, Indonesia charges 7.36 cents per unit (that is the cost per unit); Singapore Power, 8.04 cents. The difference is less than a cent. In Chart 6, under "Losses as Percentage of Units Generated", Indonesia, 14%, compared to Singapore Power, 9.2%. And in Chart 12, Indonesia charges 9.77 cents while Singapore Power charges 12.37 cents.

Mr Yeo Cheow Tong: Sir, there is a chart which is not available here, and that is, the return on equity of the regional companies. It shows that the rate of return for the Indonesian utility companies is extremely low.

Mr Chiam See Tong: Will there be a tax on electricity consumption when SP is finally listed?

Mr Yeo Cheow Tong: There is a 10% tax on SP bills?

Mr Chiam See Tong: Yes.

Mr Yeo Cheow Tong: Whatever the present figure is, it will still remain.

Mr Chiam See Tong: That means there will still be a tax on electricity.

Mr Yeo Cheow Tong: Yes. Whatever tax there is now on utility bills will remain unchanged when SP is privatised.

Mr Chiam See Tong: What is the purpose of a tax then? Is it to cover the present tariffs which are not properly worked out? Or is it really for consumption? As the Minister has said, anybody can use any amount of light they like as long as they can pay.

An hon. Member: You pay more.

Mr Chiam See Tong: Yes. But is the tax to cover for the losses which PUB would have made if the tariffs were properly priced?

Mr Yeo Cheow Tong: Sir, this tax on utility bills goes to the Government. If Mr Chiam were to refer back to the time when the tax was first implemented, the tax is meant to encourage conservation, since utilities are the biggest users of fuel oil.