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LCQ20: Major infrastructure projects experiencing cost overruns and delays

Following is a question by the Hon Holden Chow and a written reply by the Secretary for Development, Mr Eric Ma, in the Legislative Council today (June 7):

Question:

The Shatin to Central Link (SCL) project, the implementation of which was entrusted by the Government to the MTR Corporation Limited (MTRCL), is underway. The project has experienced delays and is likely to incur cost overruns. It has been reported that the estimated amounts of the cost overruns will be as high as $20 billion, causing the total project cost to rise from the original $79.8 billion to almost $100 billion, which is even higher than the project cost of the Hong Kong section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link. Moreover, a number of other major infrastructure projects in recent years have also experienced serious cost overruns and delays, and the amounts of the cost overruns for individual projects have continuously increased from a few billion dollars in the past to $20 billion in the present case. Some members of the public query the ability of the Hong Kong Government and MTRCL to control the expenditures and progress of the projects. In this connection, will the Government inform this Council:

(1) whether, in view of the current situation of the SCL project experiencing cost overruns and delays, the authorities have conducted, in collaboration with MTRCL, a review to see if there are areas for improvement in the internal systems currently deployed by the company for auditing project expenditures and monitoring project progress; if such a review has been conducted, of the outcome and the ways in which improvement will be made; if such a review has not been conducted, whether the review will be conducted; if so, when it is expected to commence and complete;

(2) whether the authorities have studied if the cost overruns and delays experienced by a number of major infrastructure projects in recent years involve blunders of the Government in its budgeting, policy implementation, etc.; if they have studied, of the outcome; if they have not studied, whether the authorities will consider conducting such a study; and

(3) whether the authorities will adopt new measures to prevent the projects under planning from experiencing cost overruns and delays in future; if so, of the details?

Reply:

President,

The Government has been implementing public works projects in an orderly manner with a view to improving people's quality of living, enhancing Hong Kong's long-term competitiveness and promoting the economic development.

Given the longer planning horizons and implementation timeframes required for mega works projects, they are bound to be more susceptible to the uncertainty and fluctuation of economic cycles over a longer time span and therefore are more exposed to the risks of cost overruns and delays. Notwithstanding that there have been instances of cost overruns and delays in delivering certain mega projects in recent years due to unforeseeable circumstances that arose in the course of implementation, we have maintained consistently good performance in cost estimation for projects under the Capital Works Programme as a whole.

The Finance Committee (FC) of the Legislative Council (LegCo) approved a total of about 650 Category A projects with funding amounting to $770 billion over the past 10 years. Among these approved projects, around 70 required application to the FC for additional provisions totalling about $60 billion. In other words, increased estimates were required in about 10 per cent of all these approved projects and the additional provisions amounted to about eight per cent of the total funding approved.

Although there were projects that required additional funding owing to 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 APE totalled about $240 billion as compared with the total final expenditure of about $210 billion. Though some projects needed to apply for additional provisions from the FC, the surplus from other projects were not only able to offset the cost overruns but also managed to leave behind a balance of $30 billion. In short, the total expenditure of these projects at final settlement accounted for only about 85 per cent of their original APEs.

My reply to the three parts of the Hon Chow's question is as follows:

(1) Regarding the additional costs of the works of the Shatin to Central Link (SCL), as advised by the Transport and Housing Bureau (THB), the progress report submitted to the LegCo Subcommittee on Matters relating to Railways (RSC) in November 2014 had pointed out that, due to the archaeological discoveries at To Kwa Wan, the contingencies allowed for the SCL project would not be sufficient to meet the additional costs of the works. The subsequent quarterly reports submitted to the RSC also pointed out that, in addition to the archaeological discoveries and conservation works in To Kwa Wan, the construction costs were increased due to the additional costs arising from the enabling works for the topside development of Exhibition Station, the deferred site handover at Wanchai North and the construction difficulties and challenges encountered at other sites. As mentioned in the quarterly report submitted by the THB to the LegCo RSC in June 2016, the MTR Corporation Limited (MTRCL) pointed out that the SCL project was complicated and the remaining works of the Hung Hom to Admiralty Section would still be affected by a number of factors. To provide a more accurate estimate for the cost of the main works, it is necessary to wait until the second half of 2017 in order to have a more practical assessment. As such, the cost estimate for the works of the SCL is yet to be available. Also, the Highways Department has been coordinating and overseeing the construction of SCL with a view that MTRCL commits to recover some of the delay of SCL, and part of the delay of the Tai Wai to Hung Hom Section caused by the archaeological discoveries has been recovered by the construction team. Since both the cost estimate and the time for completion are not yet finalised, the review has to be followed up in the next stage.

(2) As for cost overruns of projects under the Capital Works Programme as a whole, the Development Bureau (DEVB) has conducted an analysis of completed public works projects and summarised the major reasons for applying for additional funding provisions, which include provisions for price adjustment to cover higher-than-expected increases in construction costs; increased project contingencies to cover additional works and unforeseen circumstances; and higher-than-expected tender returns.

Whereas for project delays, serious delays in some major projects were mainly caused by unforeseen circumstances, such as the handling of related judicial reviews, extension of the public consultation period, additional works required, worse-than-expected ground conditions and inclement weather.

For individual projects, according to the current relevant DEVB requirements, all works departments are required to conduct reviews upon the completion of major projects to conclude circumstances encountered during the course of implementation. For ongoing major projects which require additional funding provisions, the responsible departments will also conduct reviews upon the completion of the projects so as to learn from the implementation experience, and also for the reference of other projects.

(3) The DEVB established the Project Cost Management Office (PCMO) in June last year. By formulating cost control measures and cost reduction initiatives, coordinating and monitoring related work of the project client bureaux and works departments, the PCMO strives to strengthen the management of the public works projects in order to uplift their cost-effectiveness and to ensure that public funds are spent properly. The PCMO is now forging ahead with a series of measures to ensure that public works projects will be completed on time and within the APEs. These ongoing measures include:

(i) enhancing project management capabilities by improving the skill and performance of internal staff, including project leaders and professionals, on project management and cost estimation through provision of contemporary and comprehensive project management training;

(ii) formulating new project management measures and managing the total costs of the projects in collaboration with client bureaux and departments. In the process, we will monitor the expenditure of individual projects. In case of deviations from the planned expenditure or major alterations to the project designs, the responsible departments will be required to make notifications as well as formulate and implement practicable measures to manage costs;

(iii) optimising the cost estimation of the projects, for example, by considering the incorporation of Reference Class Forecasting to supplement the current cost estimation method and enhance the accuracy of the estimation and

(iv) promoting the use of "target cost contract" option under the New Engineering Contract works contracts in major public works projects so as to enhance contract management efficiency and cost effectiveness. The "target cost contract" option provides a pain/gain share mechanism, under which the employer and the contractor share the cost saving and overrun between the actual construction cost and the final target cost. The objective is to set a common goal for the contracting parties to complete the works in a more cost-effective manner and within a shorter period of time.

In addition, the bureaux and works departments concerned will continue to perform their duties in project management, cost estimation, procurement, site supervision, etc., for the projects. They will continue to collaborate with the PCMO to ensure that the projects can be completed on time and within the APEs.

Ends/Wednesday, June 7, 2017
Issued at HKT 17:40

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