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LCQ17: Cost overruns and delay of major infrastructure projects

Following is a question by the Dr Hon Lam Tai-fai and a written reply by the Secretary for Development, Mr Paul Chan, in the Legislative Council today (December 3):

Question:

It has been reported that in recent months, several major infrastructure projects have experienced significant cost overruns and delay one after another. These projects include the Hong Kong-Zhuhai-Macao Bridge Hong Kong Related Projects, Hong Kong Section of Guangzhou-Shenzhen-Hong Kong Express Rail Link, Shatin to Central Link and South Island Line of MTR, Liantang/Heung Yuen Wai Boundary Control Point related works, West Kowloon Cultural District, etc. The amounts of such cost overruns range from a few billions to over 10 billion dollars.  Some members of the public query the authorities' ability to control the expenditures and the progress of public works projects. They also worry that the public works projects under planning, including the Multi-purpose Sports Complex (MPSC) at Kai Tak and the Three-Runway System Project at the Hong Kong International Airport (TRS Project), may also experience cost overruns and delay. In this connection, will the Government inform this Council:

(1) of the following information in respect of each of the aforesaid works projects: (i) the latest cost estimates, (ii) the latest projected completion date, (iii) the projected amount of cost overrun, (iv) the projected amount of supplementary provisions to be sought from the Legislative Council (LegCo), and (v) the date for submission of application for supplementary provisions to the Finance Committee of this Council (set out in table form);

(2) whether it has assessed the reasons for the cost overruns and delay of the aforesaid works projects, as well as whether blunders on the part of government officials in respect of personnel, finance, administration and policy-making are involved; if so, which government officials should be held responsible, and whether the officials concerned will be required to take the blame for the cost overruns and delay of these projects and resign; if such officials will not be required to do so, of the reasons for that;

(3) whether it has reviewed the existing mechanisms for estimating project expenditures, and for monitoring and controlling the expenditures and progress of works projects, so as to minimise cost overruns and delay; if it has reviewed, of the details; if not, the reasons for that;

(4) whether it has, in view of the cost overruns in the aforesaid projects, stepped up the risk management of works projects and introduced a pain share/gain share mechanism; if it has, of the details; if not, the reasons for that;

(5) whether it has assessed the impacts of the delay of the aforesaid works projects on Hong Kong's economy and people's livelihood, the exchanges and co-operation between Hong Kong and the Mainland, the international image of Hong Kong, public confidence in the Government's governance, as well as LegCo's confidence in the Government's control of public works expenditures; if it has assessed, of the outcome; if not, the reasons for that;

(6) as some of the aforesaid works projects are cross-border facilities, whether it knows the economic loss to the Mainland and the impacts on mainland people's livelihood brought by the delay of such projects; whether it has assessed if such delay will affect the Central Government's confidence in the ability and the governance of the Government of the Hong Kong Special Administrative Region; if it has assessed, of the outcome; if not, the reasons for that;

(7) whether it has explored methods to enable the aforesaid works projects to catch up with the progress; if it has, of the details of such methods and the additional expenditures involved; if not, the reasons for that;

(8) apart from the aforesaid works projects, of the public works projects cost overruns or delay of which have been confirmed, and the relevant details (including the latest cost estimates, amounts of cost overruns and details of such delay, etc.);

(9) of the latest cost estimates and projected completion date of MPSC currently under planning; whether it has reviewed the planning of the project and taken measures, so as to ensure that neither cost overrun nor delay will occur; if it has reviewed and taken measures, of the details; if not, the reasons for that;

(10) of the latest cost estimates and projected completion date of the TRS Project; what feasible measures are in place to ensure that neither cost overrun nor delay will occur; whether it will draw up financial contingency plans for implementation when there is cost overrun so that the works can be completed without the need to seek the approval of the Finance Committee of this Council for supplementary provisions;

(11) of the specific measures that it will take to prevent the public works projects under planning from experiencing cost overruns and delay;

(12) whether it has assessed if the manpower supply of various trades of the construction industry in the coming five years can meet the manpower demand of the public works projects under planning; if it has assessed, of the details; if not, the reasons for that; and

(13) whether it will review the policy on importation of construction workers afresh, so as to import sufficient construction workers to meet the manpower demand of major infrastructure projects and to reduce construction costs; if it will, of the details; if not, the reasons for that?

Reply:

President,

Infrastructure investments help boost Hong Kong's economic development, improve people' s quality of life and enhance our long-term competitiveness.

Regarding the cost estimates for public works projects, the costs shown in the funding applications submitted to the Legislative Council (LegCo) are only estimates based on available information at the time of funding application. They do not reflect the actual expenditures of a project. Under the principles of prudent management of public finances and close monitoring of project expenditures, the works departments will prepare the most accurate project estimates based on the available information and in light of the latest developments. We will never earmark excessive funding lest internal resources are frozen unnecessarily and the implementation of other projects would be affected. The Government always manages public works expenditure prudently. Our records show that LegCo Finance Committee (FC) approved a total of 620 Category A projects with total Approved Project Estimates (APE) amounting to $620 billion over the past ten years, i.e. from 2004-05 to 2013-14. Amongst these approved projects, 67 required applications to FC for increase in APE which amounted to about $29.2 billion in total.  In other words, increased estimates are required in about 10% of these projects and the additional provision amounted to about 4.7% of the total APE. Though there were individual projects that required increase in APE owing to actual circumstances, we generally managed to complete the projects under the Capital Works Programme within the original APE overall.

From our past experience, serious delays in some major projects were mainly caused by unforeseen circumstances, including the handling of related judicial reviews, prolonged public consultations, etc. As regards the construction period of public works projects, we will allow reasonable extension of time in accordance with contract terms for additional works required, longer-than-expected consultation periods, unforeseen ground conditions or inclement weather apart from the delays caused by contractors.

We will continue to work closely with relevant bureaux and departments to implement infrastructure projects in an orderly manner so as to meet public expectation and help promote economic and social development of Hong Kong.

My reply to the 13 parts of Dr Hon Lam's question is as follows:

(1) The information on the latest cost estimates, the latest projected completion dates, the estimated amounts of increase in APE required to be sought from LegCo and the relevant dates for submitting these applications to FC in relation to the local works of Hong Kong-Zhuhai-Macao Bridge (HZMB), the Hong Kong Section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link (XRL), the Shatin to Central Link (SCL) and the South Island Line (East) (SIL(E)), the Liantang/Heung Yuen Wai Boundary Control Point and associated works, and the West Kowloon Cultural District works is set out at Annex A.

(2) In general, the main reasons for increases in APE include increases in the project contingency costs, higher-than-expected tender returns, and increased provisions for price adjustments to cover higher-than-expected increases in labour and material costs. Indeed, the increases in tender prices often exceeded that of construction costs in recent years. This might be attributed to the robust construction market and the longer construction periods for major works projects in recent years. Under the circumstances, contractors generally set a higher tender premium to take into account anticipated changes in wages, costs of materials and other basic expenditures, which in turn leads to rising tender returns.

Moreover, a capital works project generally takes several years or even over ten years to be upgraded from initiation to Category A and, in the process, undergoes numerous revisions in terms of scope and requirements with corresponding changes in project estimate to meet latest development needs and demands raised by the community regarding work procedures and works content during public consultations. There would also be a higher tender premium for major infrastructure projects with long construction periods which are susceptible to the impact of economic cycles. Hence, the project estimates shown in the funding application submitted to LegCo may be higher than the initial estimates.

There are considerable difficulties in formulating accurate cost estimates for mega projects with longer construction periods. As mentioned above, under the principles of prudent management of public finances, we do not earmark excessive funding lest the implementation of other worthwhile projects unduly affected.

In case a major infrastructure project requires an increase in APE, the concerned policy bureau will submit funding application to LegCo in accordance with the established procedures with reasons for the increase and latest estimates provided.

For individual projects like the Hong Kong Boundary Control Facilities (HKBCF) of HZMB, its APE has to be increased mainly because the tender prices/estimated tender prices for the works contracts awarded/to be awarded are higher than the estimate when the Government sought approval from LegCo in 2011 due to the surge in wage levels of construction workers, prices of construction materials and machinery, etc., in recent years. As mentioned in Annex A, the Transport and Housing Bureau (THB) will give a detailed account to the LegCo Panel on Transport at its meeting in December and then seek funding approval for the increase in the approved project estimate from LegCo.  

Regarding the Hong Kong section of the XRL, the most important work for THB now is to press ahead with the implementation of the XRL project for completion as soon as possible, and this would require the full co-operation of the MTR Corporation Limited (MTRCL). The Government will act in accordance with the Entrustment Agreement as regards the overrun of APE and the parties' responsibility for bearing the relevant costs.  In order to avoid affecting the progress of works, THB will assess at an appropriate juncture MTRCL's obligations regarding project implementation, works delay and project cost overrun, and will reserve all the rights to pursue the warranties and obligations from MTRCL. At the same time, the Government appointed in May 2014 an Independent Expert Panel, chaired by a retired judge with two overseas experts in engineering as members, to conduct a thorough examination of the project management and cost control mechanism and practices of MTRCL, as well as the existing project supervision mechanism adopted by the Government.  The objective is to identify problems and the reasons behind them, as well as to make recommendations on improvement. The review is expected to be completed within this year. The report will be submitted to the Chief Executive and will be made available to the public.

For SCL, the Government will act in accordance with the Entrustment Agreement as regards the overrun of APE and the parties' responsibility for bearing the relevant costs. In order to avoid affecting the progress of works, THB will assess at an appropriate juncture MTRCL's obligations regarding project implementation, works delay and project cost overrun, and will reserve all the rights to pursue the warranties and obligations from MTRCL.

For SIL(E), as it is an "ownership" project, MTRCL will be responsible for the financing, design, construction, operation and maintenance of these railway projects and will own the railways. MTRCL will bear the additional expenditure arising from the delay of the railway works.

(3) and (13) There are established mechanisms under the Administration for preparing, monitoring and reviewing project estimates. All works departments have set up dedicated committees in accordance with the guidelines of the Development Bureau to review the estimates and monitor the progress of all public works projects under their purview. For large infrastructure projects, the works departments will engage professional engineering consultants, including architects, engineers, quantity surveyors and other cross-discipline professional teams to closely supervise the progress and quality of works.

We will also duly review and introduce measures to further enhance our capacities in estimating project costs, controlling project expenditures and supervising works progress. In this regard, we have commissioned an internationally renowned professor to conduct a study on major infrastructure projects in Hong Kong, with a view to enhancing the accuracy in formulating preliminary cost estimates taking into account the actual situation of Hong Kong.

We will continue to keep track of the market trend of the construction industry, and study and formulate effective measures for controlling project costs. We will also closely monitor the works progress to prevent delays.

(4) The Government has been pursuing partnering approach in public works contracts in order to enhance the management efficiency and cost effectiveness of the works contracts as well as adopting risk management mechanisms which are more compatible with the complex construction environment nowdays.  Starting from 2009, we have adopted the New Engineering Contract (NEC) form, which emphasises mutual trust and co-operation, in some pilot projects. The NEC form adopts a pain share/gain share mechanism, with a view to encouraging the contracting parties to commit to the common goal of completing the works at reduced costs and within shorter construction period.

Moreover, we will split mega infrastructure projects into several medium-sized contracts which can be more easily managed, so that difficulties encountered during construction could be handled by various contractors. Further, contractors can choose to participate in form of joint ventures for bidding the public works projects in accordance with relevant provisions to raise their capability of taking forward the projects.

Regarding the cost of the HZMB HKBCF, HyD has implemented a series of measures to strictly control the project expenditures. When devising the design of the HKBCF, HyD has optimised and adopted as far as possible cost-effective design and materials for stringent cost control. On tendering and procurement, HyD has examined in detail the appropriate arrangement and packaging of works. As such, the superstructure works of the HKBCF have been divided into a number of civil, building as well as electrical and mechanical contracts and the scope of the contracts have been reduced as far as possible to increase the number of contractors capable of undertaking the works, thus resulting in more competitive tender prices.

Regarding the Hong Kong section of the XRL, the MTRCL Independent Board Committee (IBC), established to review the revised schedule for the commissioning of the Hong Kong Section of the XRL, has published two reports. The reports have recommended enhancements to MTRCL's system and processes, e.g. the MTRCL Board should establish a Capital Works Committee to oversee any project involving design and/or construction with a capital value of a certain material size, etc.  Also, as mentioned in the reply to Part (2) above, the Government appointed in May 2014 an Independent Expert Panel to conduct a thorough examination of the project management and cost control by MTRCL, as well as the project supervision mechanism, to make recommendations on improvement.  

As for SCL and SIL(E), please refer to the reply in Part (2).

(5) As mentioned above, there are many challenges for the delivery of mega infrastructure projects, rendering that the completion dates for these projects would be more likely to be longer than expected. However, as these projects are aimed at the long-term economic benefits of Hong Kong, the impact of extended project completion date on the short-term economy would be relatively limited.

(6) For cross-border projects, the relevant policy bureaux and works departments of the Government of the Hong Kong Special Administrative Region maintain close collaboration and liaison with the Mainland counterparts on work progress and coordination. While catering to actual demands of the construction works, both parties will from time to time review the project estimates and expected completion dates based on the actual needs, as well as to pay joint and dedicated effort to ensure that the works would be completed within the latest budget and schedule.

(7) We will seek to catch up with the works programmes with appropriate mitigating measures, which will be formulated with due regard to the progress and circumstances of individual projects to minimise delay of works.

Regarding the Hong Kong section of the XRL, as stated in the MTRCL's progress report, the overall progress of the Hong Kong section of the XRL was 63.6 per cent as at the end of September 2014, broadly comparable to the progress planned in the Programme to Complete (PTC).

MTRCL estimates the overall cost required for commissioning the XRL project by end 2017 based on estimating the required risk allowances and additional insurance costs as well as the unit rates adopted, which includes costs required to catch up works progress.  Based on the information provided by MTRCL, HyD with the assistance of its monitoring and verification consultant (M&V consultant) has largely completed the review of MTRCL's Cost to Complete (CTC). HyD and the M&V consultant identified a list of items which have not been included in the CTC or which would need to be reviewed to ensure adequate coverage in the risk allowances. Upon receipt of all relevant information, HyD and its M&V consultant will conduct further review.

HyD and its M&V consultant will continue to use appropriate mechanisms to systematically monitor the implementation of the Hong Kong section of the XRL project by MTRCL. If any progress delay or works deficiency is found, HyD will urge MTRCL to follow up and take effective improvement measures accordingly.

The SCL project is implemented under the "concession approach". MTRCL has been entrusted to provide management and monitoring service to the SCL project. HyD and its consultant will continue to systematically monitor the implementation of the SCL project. If any progress delay or works deficiency is found, HyD will urge MTRCL to follow up and take effective improvement measures accordingly.

SIL(E), being owned by MTRCL, is an "ownership" project. MTRCL will bear the additional expenditure arising from the delay of the railway works and endeavor to catch up with the programme. HyD will closely monitor the progress of works and the construction situation as well as facilitate MTRCL to early resolve the problems encountered in the construction works.

(8) For the some 200 projects under construction, apart from the aforesaid projects, it is expected that 3 projects would require applications to LegCo for increase in APE in the current legislative session. Please see Annex B for details.

Apart from the aforesaid projects, the public works projects with extended completion dates are listed at Annex C.

(9) The Home Affairs Bureau (HAB) is working on the pre-construction work of the Kai Tak Multi-purpose Sports Complex (MPSC). Subject to securing funding approval from the Legislative Council for the pre-construction work in early 2015, we hope to complete MPSC by the end of 2020. The project will cost, at a rough estimate, over 25 billion in September 2014 prices. HAB is reviewing the cost estimates of MPSC. The Government will also continue to consult the stakeholders on various issues of the MPSC project, such as planning, design and management.

(10) The Airport Authority (AA) is reviewing the cost estimates and formulating the financial arrangement proposal for the implementation of the Three-Runway System project, with a view to commissioning the project in 2023. Upon completion of the above works, AA will submit its recommendation for consideration by the Government. Since the above works are still in progress, we are unable to provide the requested information.

(12) and (13) With the booming construction industry in recent years, the Government and the Construction Industry Council (CIC) are committed to enhancing training for construction workers and publicity so as to attract more new entrants, particularly young people, to the industry. According to CIC, the number of registered construction workers is increasing. We hope that this rising trend can continue over the coming years to meet the manpower demand of construction workers.

CIC assesses the manpower demand and supply of construction workers, with due regard for the number of in-service workers and their age distribution as well as training and its limitation, and publishes its findings on a regular basis in order to project the supply of construction workers over the next few years. In addition, CIC has also projected the demand for construction workers with reference to the forecast construction output. According to the latest report on manpower forecast for construction workers released by CIC in September 2014, the construction industry still needs additional skilled workers of about 10 000 to 15 000 from 2015 to 2018.  

The construction industry needs to import skilled workers in a timely manner, with due regard to the principle of not affecting the employment of local construction workers and not lowering the wages of local workers. This will not only help meet the manpower demand of the industry but will also make room for local in-service skilled workers to nurture local semi-skilled workers.

CIC set up a Task Force on Short-term Labour Supply (the Task Force)(Note: The Task Force comprises representatives of the Hong Kong Construction Association, the Hong Kong Federation of Electrical & Mechanical Contractors Ltd., the Hong Kong Construction Industry Employees General Union, the Federation of Hong Kong Electrical and Mechanical Industries Trade Unions, the Construction Site Workers General Union of the Hong Kong Confederation of Trade Unions, Mass Transit Railway Corporation Limited, the Hong Kong Housing Authority and the Development Bureau.) in early 2014 to consider the relevant manpower studies (including the aforementioned manpower forecast report of CIC), surveys and training schemes. After thorough discussion, 26 shortage trades have been identified by the Task Force. CIC will duly review the list of shortage trades to reflect the latest market situation and adjust its training measures accordingly to cope with the manpower demand.

After consultation with the Labour Advisory Board, the Labour Department collaborated with relevant policy bureaux and departments in rolling out a new arrangement in mid-April this year to expedite the preparatory work for processing applications submitted by contractors of public sector works for importing workers in the 26 shortage trades identified by CIC under the Supplementary Labour Scheme. The arrangement will save time for administrative work and facilitate timely importation of skilled workers for public sector works with genuine needs, thereby relieving the shortage of skilled workers in the aforementioned shortage trades for the construction industry on the whole. The Labour Department is processing the related applications for importing workers raised by the concerned contractors. The Government will liaise closely with the industry to review the effectiveness of the arrangement in a timely manner for meeting the existing tight manpower demand in the industry, and introduce appropriate measures as required.

Attachments:

Ends/Wednesday, December 3, 2014
Issued at HKT 23:36

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