One of the world`s most efficient electric power utilities to be privatized

Singapore has announced that it will privatize its electric and gas supply industries, thus enabling it to compete internationally

Douglas J. Smith

Managing Editor

When Singapore completes the privatization of its electric and gas systems, it will have gone full circle: from the generation of electricity by private companies in 1906 to the early 1920s when the Municipal government, believing it would be in the public interest, decided to undertake the generation of electricity themselves, to 1995 when the electric and gas departments of Public Utilities Board (PUB) will again return to private ownership. The new company will be known as Singapore Power (SP).

In 1906, the Municipality of Singapore supplied the country with its first electricity. During the period 1906 through 1924 electricity was purchased in bulk from the Singapore Tramway Co. and distributed to the municipality`s customers. However, due to increased demand, the municipality was forced to purchase additional supplies of electricity from the Singapore Harbor Board in 1926. By the early 1920s, the Municipal Commissioners decided that it would be in the public interest to generate their own electricity rather than purchase it from private electric power generators.

The first municipality-owned power station began construction in 1924 and was put into commercial operation in 1926. This was the 2-MW coal-fired St. James Power Station. As the demand for electricity grew, additional capacity was added, and by 1937 the station`s capacity had reached 32 MW. Submarine cables were installed in 1929 to provide electricity to the island of Pulau Brani, and in 1941 Singapore inaugurated its 22-kV primary transmission network.

May 1963 saw the dissolution of the City Council and the establishment of PUB. PUB was formed to take over the task of providing Singapore with electricity, gas and water. A full-scale rural electrification scheme was implemented in 1963, and by 1974 most of the rural areas of Singapore had been electrified. In 1976 a new 230-kV transmission network was put into service, and in 1979 the Power System Control Center, shown on the cover of this issue, began operation. At the same time new submarine cables were installed to supply electricity to the offshore islands of Pulau Merlimau, Pulau Ayer Chawan, Pulau Bukom, Sentosa, Pulau Brani and Pulau Ayer Marabou.

PUB now operates four power stations: Sunoco, Pulau Seraya, Jurong and Pasir Panjang with a total installed capacity of 4,513 MW. The power is transmitted and distributed by PUB through more than 19,700 km of main cables and 6,500 substations.

All of the generation, transmission and distribution of electricity is remotely controlled and monitored round the clock via computers at the Power System Control Center at Ayer Rajah, cover photograph. One computer system controls the generation of electricity and 88 transmission substations, and another computer system controls more than 1,800 distribution substations. According to PUB, the distribution system is the largest computerized system of its kind in the world.

The circle completed

Although SP is not yet a public company, Ho Kwon Ping, the executive responsible for overseeing the corporatization and privatization of PUB`s gas and electric segments, has received permission to start setting up the company. Mr. Ho said that the mission of SP is not only to be an efficient and competitive provider of electricity in Singapore, but also to be a major player in the Asian power market. As a private company SP will be more market-oriented and responsive to the needs of its customers. Helping Mr. Ho in the management and operation of SP is its new president and CEO, Brigadier-General Boey Tak Hap.

SP was incorporated as a wholly owned subsidiary of Temasek Holding, the Singapore government`s investment arm, on September 15, 1994; and if everything goes to schedule, the new company will be corporatized in September 1995 and listed publicly in the middle of 1996.

The new company, SP, will consist of five operating subsidiaries:

– two independent generation companies

– a transmission and distribution company

– an electric supply company and

– a gas supply company.

At privatization, PUB will take on the responsibility for regulation and licensing of the industry. In addition, PUB will continue to manage the water department.

Mr. Ho`s plans for SP

In an exclusive interview with this editor, Mr. Ho, SP chairman, said that other countries have privatized their utilities as a way of getting inefficient, bloated state enterprises to become more competitive, efficient and possibly profitable. However, Mr. Ho said that Singapore`s public utilities have always operated very efficiently and have been competitive and profitable. According to the World Competitiveness Report, for the period 1989 through 1993, Singapore`s PUB was ranked number one in the world for electric power utilities. The World Bank also mentions Singapore as a classic example of how state enterprises should be run, said Mr. Ho.

Given that PUB has always been operated with very healthy operating surpluses and their electricity tariffs are extremely competitive within the region (even when compared to countries with their own fuel resources), the rationale for privatization in Singapore is quite different from that of other countries, Ho said. There are several reasons for Singapore privatizing its electric and gas industries. However, one of the major objectives is allowing citizens to own more of the country`s national assets and, thus, give them a stake in the country. Mr. Ho said that this could be called the semi-political, or national objective. Singapore wants to build up a relationship where the consumers have a stake in the utility and are also interested in how well it is run. This is the major objective of privatization in Singapore, said Mr. Ho.

The second objective is that Singapore wants to broaden and deepen its capital markets. The stock market in Singapore, since it separated from Malaysia, has had the objective of building up the domestic face of large public companies. This was one of the major reasons for privatization of its telecommunications industry. A third objective is that Singapore wants to regionalize via “Singapore Inc.” To accomplish this, Singapore will become proactive in developing projects in China, Indonesia and the rest of the Asia-Pacific region.

The final reason is to increase competitiveness and operating efficiency. However, this is not the most important objective, as SP`s plants are already quite efficient and competitive.

Although Singapore`s electric power industry is very efficient, Mr. Ho still believes privatization will further increase operating efficiency. Unlike other countries, where the relationship between management and the unionized work force of the electric utilities prior to privatization was not good, Mr. Ho said that Singapore has a very good relationship with its union. To quote Mr. Ho, “Our labor productivity is extremely high, and the productivity growth for PUB has annually been one of the highest of all enterprises in Singapore.”

In the opinion of Mr. Ho, one way of improving efficiency might be to change the role between the regulator and the one being regulated. Under this scenario there could be a reconsideration of what spinning reserve should be required of SP, and maybe the utility can be a little more aggressive in terms of the security of supply. “Because SP will no longer be a statutory board, we think we can squeeze out more efficiencies, but they will be marginal and not major ones like you have seen in the United Kingdom,” Mr. Ho said.

During our interview, Mr. Ho clarified the relationship of SP, PUB and Temasek Holdings. After privatization SP will become the operating and holding company for all electricity and gas assets. Temasek Holdings (the government investment arm) will own SP, while PUB will continue to operate and manage Singapore`s water utilities and resources. In addition, PUB will be SP`s regulator, Mr. Ho said.

Expanding regionally

In outlining SP`s aim to expand regionally, Mr. Ho defined the region for expansion as the Asia-Pacific region, including the Pacific Rim and possibly the Indian Ocean. “I don`t think we will be looking toward the Atlantic or Mediterranean areas for the time being, although we would not preclude it as a long-term strategy. I think everyone acknowledges the bulk of the independent power projects (IPPs) are in the Asia-Pacific region,” he said. Mr. Ho said that when they talk about regionalization, SP is looking at participation in IPPs and at the possibility of acquiring shares in companies that need to be privatized for business reasons.

SP, through its investment arm–Power Gas Investments (PGI), has a mandate to invest outside of Singapore. The company will invest largely in the Asia-Pacific region, in both IPPs as well as in existing power companies. In addition, they will look at power-related joint ventures other than IPPs. Mr. Ho said SP is currently in the process of conducting a strategic analysis of investments that could involve some degree of diversification for the company. However, only areas that have synergies with SP would be considered.

In answer to a question about the funding for joint ventures and the bidding for multimillion-dollar projects, Mr. Ho said that SP will supply equity funding, but commercial debt would be financed by banks.

SP is expected to have sufficient cash to take a very significant minority equity stake in all of its IPPs. “One of the strengths we have and why so many people have come to us already, even though we have been set up for only a short period of time, is our experience in operating and managing power plants efficiently and economically.”

Mr. Ho said that in Asia there are two kinds of participants in IPPs. One is companies experienced in the operating of power facilities; these include companies such as Mission Energy, Enron and SP. The other kind is new entrepreneur companies. Although the entrepreneur companies may have a base in construction, commodity trading and so forth, they have no background in electric power. Mr. Ho said that the entrepreneur companies may be successful in negotiating IPPs, but the banks usually have reservations about funding the projects. According to Mr. Ho, because of SP`s experience, the banks are more inclined to finance IPPs in which SP has a stake.

Environmental issues

At the end of 1994 Mr. Ho became the chairman of the National Council on the Environment (NCE). Formed in 1990 as a non-governmental, non-profit organization, NCE`s mission is to educate, inspire and assist individuals, business organizations and environmental groups to care for and protect the environment. When asked if there was a conflict of interest in Mr. Ho being both the chairman of NCE and an electric power and gas company, he responded by saying that one could see it as either a potential conflict of interest or as an opportunity for environmental consciousness to play a role within the power industry in Singapore.

He said, “I personally don`t see a conflict of interest because NCE does not have any regulatory or enforcement powers, and over the years PUB has been quite responsible in pollution control anyway.” Mr. Ho further pointed out that Singapore is not a system built up on adversarial relationships and conflict of interests. Although PUB may be a statutory board, it is the Ministry of the Environment that sets environmental standards, and PUB and SP are expected to comply with the standards. “I think my being NCE chairman and SP chairman is an opportunity where I can bring environmental groups and my colleagues from the power industry into a relationship where we feel that it is increasing consultation.”

NCE is an umbrella group that tries to facilitate, nurture and assist all of the different views concerning the environment in Singapore. NCE is definitely not an enforcement arm of the Ministry of the Environment, said Mr. Ho. In the opinion of Mr. Ho, it was the Ministry of the Environment that encouraged the creation of the NCE because the Ministry felt that education and community involvement, in regards to the environment, should not be a government function. According to the Ministry of the Environment, the proper role of government is to set policy standards and enforce them, he said.

Historically, Singapore has used oil-fired power plants for the generation of electricity, but in recent years the country has been increasing the use of natural gas in power generation. Currently, Singapore imports natural gas from Malaysia. However, Mr. Ho said that if they are to increase the utilization of natural gas, they will have to broaden access to natural gas and its delivery. Studies are already under way to find alternative supplies of natural gas and to determine the best means of transportation.

Mr. Ho stated that the usage of natural gas is already a step forward in decreasing emissions from power plants. “We look at controlling emissions from two angles–the input side and the output side; and therefore, we are looking very seriously at clean fuels rather than just controlling what comes out. The long-term objective is to use more gas.”

Use of coal and renewable fuels for electric power generation is not currently an option, but Mr. Ho said that renewable fuels is not something they would rule out. However, Mr. Ho does not see the use of wind or solar energy as primary sources of energy for Singapore.

A competitive market

SP will face competition as legislation is passed by the Singapore government which will allow other independent generating companies to be set up. As electricity demand grows in Singapore, new IPPs will be given permission to construct and operate power plants. In addition to the competition from IPPs, the two separate SP generating companies will compete with one another to sell their electricity.

Although the generating companies are subsidiaries of SP, they will have separate budgets and accounts. All of the financial data will be made available to the public, as well as to the holding company–SP.

Mr. Ho said that SP has already identified certain niche areas related to the kinds of technologies they can exploit. One particular area is their sophisticated SCADA systems that is used in Singapore for monitoring the country`s transmission and distribution systems. According to Mr. Ho, most of the electric utilities in the region do not have this expertise. As a consequence, SP is looking at forming joint ventures to market high-tech SCADA systems.

POWER-GEN Asia `95, to be held in Singapore September 27-29, will coincide with the launch of SP as a private company. Mr. Ho will be the keynote speaker at the opening ceremony for this year`s POWER-GEN Asia.

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Sunoco power station is largest in Singapore. Photograph courtesy Singapore Power.