The Government is currently seeking supplementary provisions from the Legislative Council (LegCo) for certain works projects, while the estimated annual capital works expenditure of the Government is expected to exceed $70 billion in the next few years. This has sparked concern in the LegCo and within the community over two issues, namely the accuracy of the Government’s estimate of capital works expenditure, and over-spending in capital works projects.
Let us first review Category A works projects from 2003/04 to 2012/13. Within this 10-year period, there was a total of 600 works projects with Approved Projects Estimates (APE) amounting to $620 billion. Seventy of these projects required supplementary provisions from the LegCo Finance Committee, with total supplementary provisions amounting to about $21 billion. In other words, about 10 per cent of the projects required an increase in the estimates and this amount amounted to 3.4 per cent of the total APE.
Regarding completed works projects, 330 projects were commenced and completed from 2003/04 to 2007/08, and the total APE was $92 billion. Among these projects, 14 required a total of $8 billion in supplementary provisions. Together with other projects that did not require supplementary provisions, the cost of completing these 330 projects amounted to $87 billion. In other words, the APE was sufficient to cover all the projects and the amount required for supplementary provisions with about $5 billion still remaining. As a whole, there was no over-spending in the 330 completed projects. This suggests that the project estimates prepared by the works departments are reliable and their ability in controlling spending is satisfactory.
The reasons for over-spending in capital works projects are complicated. They can be roughly summarised as follows:
(1) Price factors
On average, the annual capital works expenditure was about $20 billion from 2003/04 to 2007/08. It is estimated that starting from 2013/14, the annual expenditure will approach $70 billion for the next few years. Over the past few years, there have been substantial increases in workers’ wages and construction materials, both of which have increased by more than 30 per cent since 2009. Two items accounted for 50 per cent and 35 per cent of total expenditure respectively, and as a result there was an increase of 27 per cent in total expenditure.
(2) Works delay due to unforeseeable circumstances
Although we have been launching works projects in an orderly fashion, there were still unforeseeable circumstances, such as legal challenges (e.g. the Central-Wan Chai Bypass project and the Hong Kong-Zhuhai-Macao Bridge), extensions of public consultation periods, and extra works to meet the needs of the community during the construction phases, which have caused delays in some projects. For example, the Kai Tak Development Areas went through many rounds of consultation and revised planning schemes, and consequently the start of the project was delayed for years. These delays have not only affected the cost of works projects, they also cause fluctuations in the amount of capital works.
(3) Risk premium
Risk premium is usually involved in major capital infrastructure projects. As the construction period of these projects is relatively long, they are prone to be affected by economic cycles. In addition, their complexity and uncertainties such as legal challenges and lack of experienced contractors in certain projects will also lead to additional risk premium. Moreover, in recent years the construction industry has been facing a low unemployment rate, an aging workforce and a skills shortage. As a result, there is a shortfall in the labour force and wages are rising. Even if contractors are willing to pay higher wages, they still find it hard to hire enough workers. As delays in the completion of works projects will result in fines, the labour shortage will in turn add to the risk premium. In this regard, we have been adopting a multi-pronged approach to resolve the manpower shortage problem in the construction industry over the past few years. I explained the issue in “My Blog” earlier this year, so I shall not repeat here.
(4) Estimates of works’ expenditures
Generally speaking, after the completion of technical feasibility studies, the relevant departments will make a preliminary estimate of works expenditures according to acquired information. Then they will seek provisions from the LegCo Finance Committee to upgrade the capital works projects to Category A when they become mature. However, it usually takes several years, or in some cases more than 10 years, for a project to be upgraded to Category A after its initiation. The scope and requirements of works projects will be amended many times, and therefore the estimates of the projects have to be revised accordingly. Seeking additional provisions from Legco for works projects is sometimes unavoidable.
Investment in infrastructure is crucial in enhancing Hong Kong’s competitiveness and its sustainable development. As a responsible government, we will continue to invest in worthwhile infrastructural works and prioritise capital works projects according to their benefits for the community and their overall financial affordability.
Over the past few decades, infrastructural projects have contributed to Hong Kong’s urban development and are closely related to the city’s economic growth. The Government’s capital works projects expenditure accounts for an average of 3.4 per cent of real GDP in the long term. During the core construction period of the airport in the 1990s, this ratio reached a peak of 5.5 per cent and later maintained a level of 2 per cent even when our economy slowed down. As 10 major infrastructure projects have commenced in recent years, the ratio has gradually risen above 3 per cent. However, compared to our neighbouring regions and countries, the proportion of Hong Kong’s construction industry in relation to GDP is still relatively low.
Looking ahead, we have to achieve the housing target over the next 10 years and commence other major works projects, including the North East New Territories and Hung Shui Kiu New Development Areas, and the Tung Chung New Town Extension plan. In addition, there are other public works projects and maintenance works as well as private sector construction works in the pipeline, so the total amount of capital works is enormous. We also have to overcome the challenges of a shortage of construction manpower and an increase in construction costs. We will continue to explore measures to increase the cost effectiveness of infrastructural works and will launch infrastructural projects in an orderly way, so as to promote economic and social development, create jobs and improve the living environment of the community.
9 March, 2014
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