LCQ16: Enhancing tendering system for public works projects

     Following is a question by the Hon Benson Luk and a written reply by the Secretary for Development, Ms Bernadette Linn, in the Legislative Council today (February 8):

Question:

     It is learnt that in recent years, some public works projects put out to tender by the Government have repeatedly experienced the situation of "cut-throat bidding" and low bids winning. There are views pointing out that the award of projects to low bids will affect the progress, quality and proceeds of projects, and this situation may persistently affect the overall progress and quality of infrastructure projects in Hong Kong. Although the Government has introduced certain measures to optimise the tendering system, including adjusting the score weightings given to price and quality under the "two-‍envelope system", they have failed to significantly reduce the problems arising from low bids winning. In this connection, will the Government inform this Council:

(1) of the amount of expenditure on public works projects directly put out to tender and supervised by the Government, and its percentage in the amount of expenditure on all public works projects (including the public works projects of the MTR Corporation Limited, public organisations (e.g. the Hospital Authority) and the various universities funded by the University Grants Committee), in the past five years;

(2) among the public works projects directly put out to tender by the Government under the two-envelope system in the past five years, of the number of works projects which were awarded to the lowest bids and the amount of expenditure involved, as well as their respective percentages in the overall number of and amount of expenditure on public works projects; whether it knows if government-funded public organisations have adopted the two-envelope system in the tender exercises for their public works projects; if they have, among such works projects, of the number of works projects which were awarded to the lowest bids and the amount of expenditure involved, and their respective percentages in the overall number of and amount of expenditure on public works projects; if relevant data has not been kept, the reasons for that;

(3) whether it will introduce measures to curb the undesirable phenomenon of cut-throat bidding, including setting a minimum estimated price (or "unsuccessful tender price") for each public works project for shortlisting a certain number of qualified tenderers, making the final selection based solely on factors such as design, quality and specifications (excluding price), and withdrawing the project for re-tendering when all tenderers' bids are lower than the unsuccessful tender price; if so, of the details; if not, the reasons for that; and

(4) whether it will introduce measures to deter contractors which frequently abuse the mechanism for compensation claims because of unduly low tender prices, including publishing a statistical table of claims and compiling a blacklist; if so, of the details; if not, the reasons for that?

Reply:

President,

     The Government has been adopting the principles of "achieving best value for money" and "maintaining open and fair competition" for the procurement of public works contracts with clear guidelines and procedures set out for tender invitations and evaluations. Tender evaluation of public works contracts comprises two parts. First, we will assess tenderers' technical competence and past performance, followed by considering their tender prices. Finally, a combined score for each of the tenders will be derived. In other words, such system does not use "the lowest bid wins" as the guiding principle. Depending on the nature of the works, the weighting of the technical score is generally 40 per cent of the overall score, which will be increased to 50 per cent for highly complex projects. The tender with the highest combined score will normally be accepted. However, to prevent tenderers from winning the bids through submitting unreasonably low bids, we have put in place a mechanism to exclude tenders which obtain the highest combined scores but are regarded as unreasonably low bids. Such tenders will not be accepted.

     The above-mentioned tender evaluation method not only follows the public finance principles, but also enables us to select competent contractors to undertake the works. In fact, Hong Kong has been amongst the top-rank cities in the world in respect of infrastructure competitiveness over the years, which reflects that our procurement method has been effective.

     Our responses to the four parts of the question raised by the Hon Luk are as follows:

(1) In the past five years (2018 to 2022), the annual expenditure of the Capital Works Reserve Fund (Note) increased gradually from about $70 billion to about $84 billion in which about 85 per cent of the expenditure is on public works projects undertaken by the Government directly (i.e. tenders invited and works supervised by the Government).

(2) In the past five years, for public works contracts awarded by the Government in accordance with the above-mentioned tender evaluation mechanism based on combined scores derived from technical considerations and tender prices, about 60 per cent of the projects (about 50 projects) on average were awarded to the lowest bidders each year in terms of number. If expressed in terms of value, the percentage was about 50 (about $38 billion in total). When examining each tender obtaining the highest combined score, we will carefully consider whether its tender price is reasonable. Only after the tender price is considered reasonable will the tender concerned be accepted. Furthermore, based on our records, there has been no apparent difference in the performance during construction stage between contractors who are awarded with the lowest tender prices and those who are not.

     Regarding projects undertaken by non-government organisations through entrustment or subvention, such organisations will make reference to the practice adopted by public works projects and formulate tender evaluation methods to cope with their management systems and available human resources. For example, tender evaluation method similar to that of public works projects will be adopted for some large scale projects, while tender evaluation based on price only will be adopted for small scale projects. Among these non-government organisations, the large ones including the Hospital Authority, the MTR Corporation Limited, etc will select successful tenderers based on combined scores derived from technical considerations and tender prices similar to the mechanism adopted by public works projects. These organisations also have a mechanism in place to exclude tenders with unreasonably low bids. We do not have the relevant information about works contracts awarded by non-government organisations to the lowest bidders.

(3) We have established clear guidelines to assess and exclude tenders with unreasonably low bids under the current tender evaluation mechanism. This will avoid contract default or other risks due to inadequate tender prices. In assessing whether a tender price is reasonable or not, apart from considering whether the contractor has proposed effective or innovative construction methods, we will also assess several key factors, including (1) comparison of the tender price with those of other bidders, the estimated contract value and the recent price of the same type of works; (2) comparison of the tender prices of the major types of works in the contract with the market prices; and (3) whether the tender has adopted a bidding strategy with a "front-loaded" cash flow (i.e. pricing higher value for works items to be completed at the early stage of the contract in order to get substantial contract payment earlier). Based on our records, in the past five years, a total of 14 public works tenders with the highest combined scores were not accepted because their tender prices were considered as unreasonably low.

     The above-mentioned mechanism to exclude tenders with unreasonably low bids, together with the tender evaluation method based on combined scores derived from technical considerations and tender prices, has been effective which enables us to select competent contractors to undertake the works at reasonable prices. It conforms to the principle of "achieving best value for money" and ensures the proper use of public funds.

     Regarding the suggestion of pre-setting an "unsuccessful tender price" for each public works contract for shortlisting qualified tenders across the board before tender evaluation, as every project has its own unique circumstances, individual contractors may be able to propose more effective or innovative construction methods, thereby making their tender prices more competitive. However, such competitive tenders may be excluded by the pre-set "unsuccessful tender price" before tender evaluation. We therefore consider that our current mechanism can assess the reasonableness of tender prices more comprehensively, rendering it more preferable and beneficial to the sustainable development of the industry.

(4) We also have a mechanism in place to assess whether public works contractors have lodged unreasonable claims. If there are cases of unreasonable claims, relevant departments will reflect the contractors' performance in their quarterly performance reports. Such records will adversely affect the contractors' opportunity in winning future public works tenders. We consider that this mechanism has sufficient deterrent effect. Based on our past experience, the lodging of unreasonable claims in public works contracts is infrequent and such cases of unreasonable claims have no direct relationship with contractors being awarded with the lowest bids or not.

Note: Projects under the ambit of the Capital Works Reserve Fund include public works projects undertaken by the Government directly, public works projects undertaken by non-government organisations (e.g. the MTR Corporation Limited) through entrustment by the Government, and projects undertaken by subvented organisations (e.g. the Hospital Authority, universities funded by the University Grants Committee, etc).
 
Ends/Wednesday, February 8, 2023
Issued at HKT 12:05

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