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LCQ4: Rising costs in public works

Following is a question by the Dr Hon Chiang Lai-wan and a reply by the Secretary for Development, Mr Paul Chan, in the Legislative Council today (March 19):

Question:

It has been learnt that recently, the expenditures of several public works projects have substantially exceeded the approved project estimates due to rising commodity prices and shortfalls of construction workers, etc. In this connection, will the Government:

(1) set out in table form the title, estimated costs and date for submission of each public works project which the authorities have planned to submit to the Finance Committee (FC) of this Council for approval within the next two years; and among the projects which have commenced or are yet to commence, the title and approved project estimate of each of the projects for which the authorities have envisaged that application for supplementary provisions to FC will be required within the next two years, as well as the amount of supplementary provision to be applied for;

(2) set out in table form the estimated number of public and private construction works projects which will commence within the next four years, as well as the respective numbers and shortfalls of workers and management personnel of various trades of the construction industry in the period; and

(3) inform this Council, as it has happened from time to time that the authorities had to apply to FC for supplementary provisions because of cost overrun in public works projects, whether the authorities have reviewed the existing process for calculating the project estimates of public works projects, with a view to narrowing the gap between the estimated and the actual expenditures so that the projects can be completed on time without the need to apply for supplementary provisions; if they have, of the details; if not, the reasons for that?

Reply:

President,

Infrastructure investment has helped propel Hong Kong's economic development and enhance the quality of life of the general public. With the commencement of many major infrastructure projects, annual expenditure in the Capital Works Programme (CWP) has gradually increased from $45.3 billion in 2009-10, and is expected to maintain at a level exceeding $70 billion for 2013-14 and the few years to come.

On the other hand, the booming private property market in the past few years has given rise to a sustained demand for construction services. Since 2009, construction worker wages and materials costs have increased by over 30% and the Building Works Tender Price Index has risen by 60%, reflecting a tight manpower situation and sustained escalation in construction cost that the construction industry is facing.

Having consulted the Financial Services and the Treasury Bureau, my reply to the Hon Chiang's question is as follows.

(1) About forty projects will be submitted to the Finance Committee (FC) for approval in the remaining sessions of the current Legislative Council (LegCo) year. As information on the projects has been listed in Annex I, I will not read out one by one.

As for the projects intended to apply for increase in Approved Project Estimates (APE), at the moment we are only aware of the "Liantang/Heung Yuen Wai Boundary Control Point and associated works – site formation and infrastructure works", details of which would be submitted later for deliberation in the relevant panel.

Information on capital works items to be submitted to FC for funding approval or increase in APE in the next LegCo session is not yet available. The Administration will draw up the relevant plan after taking into account various factors such as works progress, justifications, urgency and cost-effectiveness of the items as well as the Government's affordability. According to the established practice, we will submit to the Public Works Subcommittee (PWSC) in a timely manner an overview of capital works items planned for seeking PWSC's approval in the next LegCo session.

(2) Information on the capital works projects with funding already approved by FC and also to be commenced within one year is in Annex II, so I will not go through one by one. As for the launch of other public and private construction projects, they would be affected by the economic environment and other factors. Hence, it would be difficult to provide the exact figures at this moment. However, according to the latest forecast released by the Construction Industry Council (CIC) in end October 2013, the overall construction expenditure in the next few years would be maintained at a range of $160-$190 billion annually.

Currently, construction workers are registered as skilled workers/semi-skilled workers under the respective trades, or as general workers according to the "Construction Workers Registration Ordinance". The statistics of workers of different trades are voluminous and have been uploaded to the website of CIC. Dr Hon Chiang may refer to the website (www.hkcic.org) for details. They are therefore not listed in this reply.

Having regard to the latest manpower forecast study conducted by CIC and taking into consideration relevant factors including the construction expenditure forecast, the number of in-service registered workers, retirement of workers and local workers working outside Hong Kong, we project that in the next four years, the industry will need over 30 000 additional construction workers, in which over 20 000 are skilled workers. Yet, the manpower supplied by training is not included in the above estimates. However, the graduate trainees are only semi-skilled workers and it takes time for them to enhance their skills through training to reach the productivity level of skilled workers.

We will continue to strive to meet the manpower demand by training and attracting more new entrants to the industry. CIC will also continue to implement various initiatives to better utilise the potential workforce of the construction industry, which covers the unemployed and underemployed workers, and workers who have left the construction industry. Nevertheless, we project that from now till 2017, the industry will need nearly 10 000 to more than 10 000 additional skilled workers. Therefore, with due regard to the principle of not affecting the employment and reasonable income levels of local construction workers, we need to make full use of the "Supplementary Labour Scheme" to import skilled workers in a timely manner.

In addition, CIC is conducting a manpower forecast study on projecting the supply and demand of construction professionals, site supervisors/technicians and workers over a 10-year horizon. The findings will be available in the second half of this year.

(3) Regarding Member's concern on cost estimation for public works projects, I have to point out that the Government has established mechanisms to develop and review project estimates. All Works Departments have set up dedicated committees to vet the estimates of all public works projects under their purview.  They are also required to maintain updated unit cost database, taking into account the latest trend of labour cost, material costs, etc. for estimating project costs.

In fact, among the Category A projects approved by FC in the past 10 LegCo sessions, about 10% required increase in APE, and the amount involved accounts for only about 3.4% of the original approved funding. Although individual projects required additional funding under some special situations, for the overall Capital Works Programme, we can complete all the projects within the original APE. For example, for the total expenditure of the completed projects commenced during the period from 2003-04 to 2007-08, although individual projects required additional funding, surplus from other projects could cover the additional funding required, and also contributed to a net saving of around $5 billion for reverting to the Treasury. This has reflected the proven capability of Works Departments in estimating project cost and controlling project expenditure.

On the other hand, in order to enhance the delivery capacity of the construction industry, thereby reducing project costs, we have implemented a series of measures, including:

* Providing forecasts on public and private construction expenditure through CIC for the industry stakeholders' reference;
* Introducing the Innovation and Creativity Screening (ICS) procurement approach;
* Widening adoption of New Engineering Contract (NEC) form, in order to strengthen risk management and introduce pain share/gain share mechanism for construction cost;
* Implementing measures to attract more contractors and consultants, both local and overseas, into the construction market; and
* Actively exploring ways to achieve a more balanced workload distribution among different contractor groups.

Regarding construction cost control, we are conducting a study on the cost components of construction contracts and carrying out a survey on contractor's tendering considerations. We are also preparing for legislation on security of payment to reduce contractor's financing costs resulting from improved cashflow.

Thank you, President.

Attachment:

Ends/Wednesday, March 19, 2014
Issued at HKT 17:51

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