Jump to the beginning of content

LCQ13: Cost estimates of infrastructure projects

Following is a question by the Hon Paul Tse and a reply by the Secretary for Development, Mr Eric Ma, in the Legislative Council today (March 1):

Question:

In recent years, situations of major infrastructure projects experiencing cost overruns and delays are not uncommon. There are views that as major infrastructure projects with "exorbitant construction costs" often involve huge expenditure, cases in which some people use all sorts of pretexts to take advantage of such a situation are heard of from time to time. It has been reported that eight major infrastructure projects in recent years involving a total estimated expenditure of over $600 billion are expected to incur cost overruns amounting to about $90 billion, tripling the surplus of $30.5 billion for the last financial year. The Government established the Project Cost Management Office (PCMO) in June last year to review public works projects at the planning and design stage with a view to lowering project costs by improving their designs. Since its establishment, the PCMO has reviewed over 60 public works projects to be submitted to the Finance Committee of this Council for vetting and approval. The Government has boasted of achieving a saving of over $10 billion in project costs. However, the construction cost of the Kai Tak Sports Park (KTSP) surges by nearly $8 billion instead of going down. In this connection, will the Government inform this Council:

(1) given that the construction cost of the KTSP was estimated at $25 billion in 2014 and the PCMO estimated after review that nearly $2 billion saving could be achieved (i.e. the lowest estimated construction cost was $23 billion), but the Home Affairs Bureau has released recently that the estimated construction cost of the KTSP is about $23.8 billion in the prices of September last year and about $31.9 billion in money-of-the-day prices, i.e. a difference of $8.1 billion between the two figures with the latter exceeding the lowest estimated construction cost by $8.9 billion, whether the PCMO has studied the reasons for the substantial increase in the construction cost of the KTSP; if so, of the details;

(2) among the aforesaid 60 public works projects reviewed by the PCMO, of the five projects with the largest differences between the construction costs before and after revisions;

(3) whether it has studied the reasons for the wrong estimations of the construction costs of those 60 public works projects; if so, of the findings, and whether they involve (i) intentional exaggeration of the cost estimates, (ii) transfer of benefits or (iii) mistakes in work;

(4) of the measures in place to follow up and monitor the construction progress of those 60 public works projects in order to avoid cost overruns or delays; 

(5) given that a number of major infrastructure projects that have already commenced (e.g. the West Kowloon Cultural District, the Expansion of Hong Kong International Airport into a Three-Runway System project and Hong Kong-Zhuhai-Macao Bridge) have experienced substantial cost overruns and delays, whether the PCMO will review the construction progress of such projects one by one in order to prevent the problems of cost overruns and delays from worsening;

(6) given that the PCMO will need to review some 300 projects in the coming two years, whether the Government (i) has assessed if the PCMO has adequate financial resources and staffing to meet its needs, and (ii) has considered allocating additional resources and manpower to the PCMO; if it has made such assessment and consideration, of the details; and

(7) whether it will extend the originally-planned three-year operation period of the PCMO or upgrade it as a permanent government department dedicated to reviewing the cost estimates of all infrastructure projects that will commence in the future; if so, of the details; if not, the reasons for that?

Reply:

President,

Hong Kong has been beset by the challenge of high construction costs in recent years. In this connection, the Development Bureau established the Project Cost Management Office (PCMO) in June last year to strengthen management over the construction costs and enhance the cost-effectiveness of public works projects in order to ensure that the public funds are spent properly and effectively. The PCMO formulates cost control measures and cost reduction initiatives, coordinates and monitors related work of the project client bureaux and works departments.

We also noted the media report cited by the Councillor, however, there are some misunderstandings in the report. To date, only four (Note 1) of the eight major infrastructure projects mentioned in the report have been approved on the additional provisions of project funding.  

The additional funding amounted to only about $50 billion in total instead of the "cost overruns amounting to about $90 billion" as quoted by the report.

In fact, we have maintained a good track record in preparing the estimates of public works projects. The LegCo Finance Committee (FC) approved a total of about 650 Category A projects with total funding amounting to $770 billion over the past ten years. Amongst these approved projects, around 70 required applications to the FC for additional provisions mainly due to unforeseeable reasons which amounted to about $60 billion in total. In other words, increased estimates are required in about 10 per cent of all these approved projects and the additional provisions amounted to about 8 per cent of the total funding approved.

Nevertheless, we must point out that many "cost-overrun" cases were misunderstood due to the following circumstances arisen:

(i) Generally, the construction period of a project spans from several years to well over ten years. During the interim, the construction costs and prices will change as a result of inflation. Since 1995, on the funding proposals submitted to the FC, it is the Government's practice to first work out the project estimates based on a constant price level followed by the incorporation of the inflation factor for conversion (Note 2) of the project estimates into money-of-the-day (MOD) prices (Note 3).  The FC may then approve funding for the project in MOD prices after examination. The conversion only reflects the anticipated factor of inflation. A price adjustment provision is thus made in the project estimate to cope with the anticipated expenditure arising from inflation and it cannot be taken as any deviation in project estimate or cost overrun.

(ii) After a project is initiated with preliminary estimate and prior to submission to the Legislative Council for funding application, the project estimate is subject to updates for reasons of various requirements, detailed refinements to design and changes in project requirements as a result of consultation, etc. These cases are different from those projects with funding approved but applying for additional provisions afterwards. Although there were projects that required additional funding owing to some individual circumstances, we generally managed to complete the projects under the Capital Works Programme within the original Approved Project Estimates (APE) overall and even with surplus. For example, about 850 Category A projects had the final accounts settled in the past 10 years. Their original approved estimates totalled about $240 billon as compared with the total final expenditure of about $210 billion. Though some projects needed to apply for additional provisions from the FC, the cost overruns were more than offset by surpluses from other projects. The balance amounted to about $30 billion. In short, the total expenditures of these projects at final settlement accounted for only about 85 per cent of their original APE.

My reply to the seven parts of the Hon Tse's question is as follows:

(1) In the case of the Kai Tak Sports Park (KTSP), the situation quoted by the Councillor fits the scenario mentioned in (i) above. As noted above, the Home Affairs Bureau followed the practice in converting the project estimate of $23.8 billion at 2016 prices into the MOD prices. The two prices represented the project estimate with the inflation factor excluded and included respectively and this cannot be taken as deviation in the project estimate. This practice of price level conversion is applicable to the funding applications of all capital works projects and is not exclusive to the KTSP. The table below shows the project estimate update and conversion for the KTSP:
 
Estimate in 2014 Latest Estimate in 2016
At 2014 Price Level $25 billion* At 2016 price level $23.8 billion #
  At MOD prices $31.9 billion
 
* The project estimate would exceed $25 billion at 2016 price level.
# The latest project estimate has been reduced to $23.8 billion after vetting by the PCMO.

(2) The funding proposals of the projects with higher project estimates and larger cost reductions after vetting by the PCMO which are planned for submission to the Legislative Council in the current legislative session include the KTSP, Central Kowloon Route, Tung Chung New Town Extension, Construction of Sandy Ridge Cemetery (Note 4), and Redevelopment of Junior Police Officers Married Quarters at Fan Garden, Fanling. As the client bureaux and works departments responsible for these projects are still refining the project designs and estimates, the cost saving details will be presented by the bureaux and departments concerned when the projects are submitted to the Legislative Council for approval.

(3) We did not find incorrect project estimates in the course of examination. The reduction in project estimates was mainly achieved through the collaboration between the PCMO and bureaux/departments of the projects concerned. Under the over-riding principles of not compromising functionality, quality and safety of works, we have explored various design options and construction methods to optimise the project designs based on the principles of "fitness for purpose and no frills". Non-essential contractual and design requirements were trimmed to reduce construction costs. As a result, the design and construction works of these projects have become more cost-effective.

(4) The client bureaux and works department are responsible for the implementation, coordination and management of their own projects from initial planning, design, construction to completion. During the construction stage, the bureaux and works departments concerned are responsible for the routine supervision, expenditure estimation, procurement and so on for the projects. They would endeavour to ensure that the projects are completed in accordance with the original schedule and within APE. Their roles will not be supplanted by the PCMO.

The PCMO will collaborate with the client bureaux and departments of the projects to control the overall construction costs and avoid project delay. In the process, we will monitor the expenditure and progress of individual projects. In case of deviations from the planned expenditure or anticipated completion dates or major alterations to the project designs, the responsible departments will be required to make notifications as well as formulate and implement practicable measures.

(5) Generally, projects that do not fall into the Capital Works Programme such as the works of the Third Runway System funded by the Airport Authority Hong Kong or those requiring special arrangements for implementation (e.g. entrustment agreement, etc.) owing to exceptional circumstances are generally excluded from the purview of the PCMO. Besides, the PCMO was not able to deal with the cases of the West Kowloon Cultural District and Hong Kong-Zhuhai-Macao Bridge which occurred prior to the establishment of the PCMO. However, the PCMO will undertake the monitoring work mentioned in part (4) above for the remaining construction periods of these projects.

(6) The Government will maintain a high level of investments in public works over the next few years in order to meet the keen demand for public facilities from the community. This will certainly impose pressure on the manpower of the PCMO. But in the interests of cost effectiveness, the PCMO will optimise the use of existing resources and outsource some support services to consultants for proper implementation of cost control in public works projects. We will also review the workload and staffing position of the PCMO from time to time and, when necessary, consider taking on additional staff. But there is no plan to increase the manpower at the moment.

(7) The PCMO has achieved initial success in strengthening control over the construction costs of public works projects. For instance, we have completed vetting of about 60 projects with a total estimated value of $170 billion and reduced their estimates by about $13 billion. With the collaboration of the stakeholders and under the current economic situation, the Building Works Tender Price Index that has been on the upward trend for the past few years has reversed and gradually stabilised. Many of the measures initiated by the PCMO for controlling construction costs require continuity in order to put in place effective industry reforms that are conducive to the sustainability of public finance and the long-term development of the construction industry. We will also make reference to overseas organisations and institutions for controlling construction costs when reviewing the need to extend the operation period of the PCMO or turning it into a permanent office.

Note 1: They include Hong Kong-Zhuhai-Macao Bridge, Hong Kong Section of Guangzhou-Shenzhen-Hong Kong Express Rail Link, Liantang/Heung Yuen Wai Boundary Control Point and Central-Wan Chai Bypass.

Note 2: Price adjustment factors derived from Government Economist's forecast of trend rate of change in the price deflator of public sector building and construction output is used to convert the cash flow of project cost estimated at the constant price level into MOD prices.

Note 3: For example, if the project estimate is worked out to be $10 billion in 2014, it will become $11 billion when converted to 2016 prices. Assuming that the project will commence in 2018 and take four years to complete, the project estimate in MOD prices will be around $14.5 billion. If the construction period is six years, the project estimate in MOD prices will then be about 15.5 billion.

Note 4: Site formation and associated infrastructural works for development of columbarium, a crematorium and related facilities at Sandy Ridge Cemetery.

Ends/Wednesday, March 1, 2017
Issued at HKT 16:28

NNNN

Back.