H is a firm that specializes in water technologies. In recent years, it has decided to diversify internationally (especially into Africa, China, and Middle East) as well as into energy. One of its Singapore projects, Project T, involves a co-located gas-fired power plant (411 MW) and desalination plant, with a total cost of $1.1 bn. The power plant (completed in 2016) provides part of the electricity to the desalination plant and sells the rest in the open market through the national grid. The desalination plant is a Build-Operate-Transfer (BOT) PPP project. It has a 25-year (2013-2038) water purchase agreement with the national water agency (PUB) to supply 70m gallons of desalinated water per day. The initial water price is based on tender, with annual tariff adjustment based on fixed and variable components. The contractor and operator of the plant are subsidiaries of H.

 

Question: 

Because H cannot deliver the water as specified in the water purchase agreement, PUB has decided to "step-in" and take over the desalination plant at no cost. PUB's rationale is that of national water security, and the value of plant is negative. Explain why the value of the plant, according to PUB, is negative.

Answer rating: 100% (QA)

According to the scenario provided PUB has decided to take over the desalination plant due to Hs inability to deliver water as specified in the water ... View the full answer