LC Paper No. CB(1)1266/98-99
(These minutes have been
seen by the Administration)

Ref: CB1/PL/FA

LegCo Panel on Financial Affairs and
LegCo Panel on Planning, Lands & Works

Minutes of joint meeting held on
Thursday, 7 January 1999, at 12:10 pm
in the Chamber of the Legislative Council Building

Members of the LegCo Panel on Financial Affairs

Members present :

Hon Ambrose LAU Hon-chuen, JP (Chairman)
Hon Eric LI Ka-cheung, JP (Deputy Chairman)
Hon Kenneth TING Woo-shou, JP
Hon James TIEN Pei-chun, JP
Hon David CHU Yu-lin
Hon Cyd HO Sau-lan
Hon NG Leung-sing
* Hon Ronald ARCULLI, JP
* Hon James TO Kun-sun
Hon CHEUNG Man-kwong
Hon Ambrose CHEUNG Wing-sum, JP
Hon HUI Cheung-ching
Hon Bernard CHAN
Hon SIN Chung-kai

Members absent :

Hon Albert HO Chun-yan
Dr Hon David LI Kwok-po, JP
Hon Margaret NG
Dr Hon Philip WONG Yu-hong
Hon Jasper TSANG Yok-sing, JP
Hon Timothy FOK Tsun-ting, JP
Hon FUNG Chi-kin

Members of the LegCo Panel on Planning, Lands & Works

Members present :

Hon Edward HO Sing-tin, JP (Chairman)
Dr Hon TANG Siu-tong, JP (Deputy Chairman)
Hon HO Sai-chu, JP
Dr Hon Raymond HO Chung-tai, JP
Hon LEE Wing-tat
Hon WONG Yung-kan
Hon TAM Yiu-chung, JP

Members absent :

Hon LAU Kong-wah
Hon LAU Wong-fat, GBS, JP
Hon Andrew CHENG Kar-foo

* also a member of the LegCo Panel on Planning, Lands and Works

Members attending :

Hon Martin LEE Chu-ming, SC, JP
Prof Hon NG Ching-fai
Hon CHAN Yuen-han

Public officers attending :

For Agenda items II & III

Miss Emma LAU
Deputy Secretary for the Treasury

Mr James HERD
Principal Assistant Secretary for the Treasury (Works)

Deputy Secretary for Works (Works Policy)

For Agenda item II

Director of Territory Development

Deputy Director for Architectural Services Department

Clerk in attendance :

Ms Estella CHAN,
Chief Assistant Secretary (1)4

Staff in attendance :

Ms Pauline NG,
Assistant Secretary General 1

Miss Odelia LEUNG,
Chief Assistant Secretary (1)1

Ms Connie SZETO,
Senior Assistant Secretary (1)1

I Election of Chairman

Mr Ambrose LAU Hon-chuen was elected Chairman for the joint meeting.

II Estimates of consultancy fees for public works projects
(L C Paper No. CB(1)708/98-99(01))

2. At the Chairman's invitation, the Deputy Secretary for the Treasury (DS/Tsy) briefed members on the paper which provided information on the circumstances under which the Government employed consultants to undertake public works projects, the methodology adopted for estimating cost of consultancy services, and the procedures for selecting, appointing and remunerating such consultants.

3. Mr Edward HO Sing-tin declared interest as a partner of an architectural company which had undertaken consultancy services for public works projects. Dr Raymond HO Chung-tai declared interest as an engineer who had also participated in public works-related consultancy projects.

4. Mr Edward HO commented that the information contained in Enclosure 1 of the information paper could be misleading. Although the average cost of consultancy services for engineering projects, expressed as a percentage of total project cost, was only slightly higher than that for building projects as illustrated, the difference could be very significant in terms of the actual cost. He pointed out that the average total project costs of civil engineering projects selected for making the comparison, which ranged from less than $500 million to more than $2,000 million, were much higher than that of building projects, which only averaged $150 million.

5. Dr Raymond HO remarked that because of different variables, such as nature and complexity of projects, professional and technical expertise required etc., it would be difficult and inappropriate to make a direct comparison between consultancy costs for building and civil engineering projects, and among different projects in the same category. He referred members to the letter from the Association of Consulting Engineers of Hong Kong (ACEHK) tabled at the meeting, which explained further the way in which civil engineering consultancy fees were estimated and illustrated that in some public works projects the civil engineering consultancy fees were lower than building consultancy fees.

(Post-meeting note: ACEHK's letter was circulated to members after the meeting vide LC Paper No. CB(1)729/98-99)

6. The Deputy Director for Architectural Services Department (DD/ASD) explained that statistics in Enclosure 1 were for indicative purpose only and had been worked out based on tender prices for public works projects undertaken in the last four years. Although building projects selected were with an average cost of $150 million, some were of very large scale and very complex in nature with per project cost exceeding $2,000 million . For example, the estimated total project costs for the building projects of "Convention Centre Extension" and "Lok Ma Chau Border Facilities" were $4 billion and $1.2 billion respectively. The corresponding indicative costs of consultancy services for these two projects were 7.8% and 9.6% of the total project costs respectively. For smaller scale building projects, such as "design and build" projects for the Hospital Authority, the average consultancy fee usually stood at about 4.5% of the total project cost.

7. Mr James TIEN Pei-chun was concerned that as unreasonably high standard multiplier factors had been used for estimating the consultants' overhead costs, the resultant cost estimates for the consultancies were inflated and this was inconsistent with the current downward trend in market prices. He also expressed concern that as funding submissions to the Finance Committee (FC) and the approved cost estimates were information available to the public, it was highly likely that consultants bidding for the contracts would set their tender prices close to the approved cost estimates.

8. In response, DS/Tsy said that the Administration had been reviewing the standard methodology for estimating consultancy costs periodically since it was introduced in 1996 to ensure that the methodology was in line with market trends over time. It was concluded in the latest review that the existing approach was conceptually sound and appropriate and therefore should be retained with the exception of the standard multiplier factors. In comparing the estimation of consultancy costs with the actual tendered fees on a periodic basis, an analysis of the winning bids of all the consultancies awarded in the last two years with their respective approved cost estimates revealed that there was a significant differential between the two. On average, winning bids tended to be some 20% lower than the departmental estimates. Hence, to reflect more closely the trend in market prices during the last two years, the Administration was adjusting the standard multiplier factors downward by 20%. As regards the concern that a high cost estimate would inflate tender prices, DS/Tsy stressed that whilst costs estimates for consultancy services were prepared for resource allocation purpose only, the actual fees for providing the services were determined by open and competitive tender which reflected prevailing market forces. The Director of Territory Development (D/TD) supplemented that notwithstanding that some winning bids for consultancy contracts were higher than the approved cost estimates, some were very much lower. In this connection, Dr Raymond HO also remarked that due to extremely keen competition in the market, consultant firms were putting in "cut-throat bids" in order to win a contract.

9. Whilst expressing support for preparing more realistic cost estimates for consultancy services to reflect the current market situation, Mr Edward HO cautioned that the quality of service delivered might be compromised if estimates for consultancy services were set too low.

10. In reply, DS/Tsy remarked that the general decrease in tender prices for consultancy services reflected "market considerations" relating to staffing costs, overheads and profit margins specific to individual firms rather than reduction in overall manpower input of winning consultants. The Administration observed that the consultants had delivered the required services and the quality of the output remained generally satisfactory.

11. DD/ASD explained the process for selecting consultants in the competitive bidding exercise under which the Technical Proposals submitted by consultants were assessed and ranked firstly in order of merits. The Fee Proposals were then considered and combined with the technical assessments to determine the winning bid. He added that if the tender price of the winning bid was found unreasonably lower than the approved estimates, the concerned bidder would be required to confirm its technical proposal against the tender price offered. The relevant consultants selection boards would also take into consideration factors such as, whether the tender price reflected the market situation and the possible risk of the successful bidder being unable to complete the assignment due to the low profit margin set, before determining the successful bidder.

12. Noting that a consultant firm would not be recommended for further government consultancy works if it had accumulated three consecutive adverse performance reports, Mr CHEUNG Man-kwong opined that the present monitoring system on consultants' performance was too lenient and urged the Administration to review the mechanism to include stricter penalties such as, tightening the present system so that a consultant who received two consecutive adverse reports would not be recommended for further government works, imposition of fines and deduction of consultant fees.

13. D/TD explained that the managing department was responsible for assessing the performance of the appointed consultant on a project basis. Performance appraisal reports on individual assignments were submitted to the Engineering and Associated Consultants Selection Board at six-monthly intervals and to the Architectural and Associated Consultants Selection Board at quarterly intervals. The Director of Civil Engineering also assumed the responsibility for monitoring the overall performance of engineering and related consultants in the governments' consultant directory list under a centralized system. The reporting period would be shortened in the event that a consultant was performing poorly and an "adverse" report was issued. A consultant firm which received three consecutive adverse reports from any of the government assignments it was undertaking was not recommended for further government projects. Appointed consultants were very concerned about their performance assessment reports and often took prompt action to improve their performance and rectify problems identified accordingly. Cases of a consultant receiving two consecutive adverse reports were rare. The Administration considered the existing monitoring mechanism satisfactory and there were sufficient deterrents in place to ensure reasonably good performance of appointed consultants. Hence, there was no intention to introduce changes to the evaluation and assessment system at the moment. DS/Tsy added that the two consultants selection boards would take into account of the consultants' past performance in previous assignments in their assessment of the suitability of the consultants for undertaking new projects.

14. Miss CHAN Yuen-han said that she had the general impression that consultancy contracts were often awarded to foreign consultancy firms. She enquired whether there was a breakdown on the number of contracts awarded to local and foreign consultancy firms in the past few years.

15. In reply, DS/Tsy stressed that all tender bids were subject to the same vetting and assessment procedures of the competitive tendering exercise. The Administration did not favour or discriminate against any consultancy firms on ground of their origin. She remarked that it might be difficult, if not impossible, to list categorically local and foreign consultancy firms appointed in the past. Nevertheless, she undertook to look up and provide relevant information pertaining to Miss CHAN Yuen-han's enquiry.FB

16. Mr LEE Wing-tat asked whether the "scale fee" approach was still used in tendering consultancy services and queried the rationale for government departments to charge a 16% "on-cost" for providing consultant services for works projects undertaken by public funded organizations such as the two Municipal Councils and the Hospital Authority. He opined that the percentage "on-cost" charged was significantly higher than the prevailing market prices and questioned whether the services delivered were value-for-money.

17. In response, D/TD said that a "lump sum" approach was generally adopted as the basis for tendering civil engineering consultancy contracts since 1991 and building consultancy contracts since 1995 whereby consultants were remunerated by means of lump sum fees independent of the total cost of the project. However, "scale fee" was still in force for contracts awarded prior to the new arrangement under which consultant fees payable were calculated as a percentage of the total cost of the works involved. DD/ASD supplemented that for urgent building projects of estimated total cost under $50 million per project and with the prior approval of the Architectural and Associated Consultants Selection Board, the "scale fee" approach might still be used for calculating consultancy fees so as to obviate the need for a tendering exercise which might take a long time to complete. He stressed that the "scale fee" approach was only applied to a small number of projects.

18. As regards the concern about "on-cost" charged by ASD for providing consultant services for works projects of public bodies, DD/ASD explained that the 16% "on-cost" covered all consultant and management services provided by government departments for a works project which might include preparation of contract documents, tender assessment by the Central Tender Board, contract administration and legal fees. The "on-cost" was a standard percentage charge based on the total cost of a project irrespective of its size. The arrangement had streamlined the complicated accounting procedures for calculating costs for services provided by various departments and had achieved better administrative efficiency. It would be costly to administer an accounting system under which costs of different services were to be calculated with reference to market prices which fluctuated from time to time. DD/ASD also stressed that ASD had to absorb all necessary costs incurred in a project before construction was actually commenced on site. The client bodies would only be required to pay "on-cost" in phases after the project had commenced on site. Interest forgone arising from the initial expenses paid on behalf of client bodies was not recovered.

III Financial monitoring of public works projects
(L C Paper No. CB(1)708/98-99(03))

19. In briefing members on the information paper, DS/Tsy stressed that the Administration was committed to providing enhanced information on public works project to facilitate effective financial monitoring by the Legislative Council. She advised that besides existing financial information on individual project expenditures published in "Estimates, Volume II - Funds Accounts", "Annual Accounts of the Government" and "Quarterly Report on the Public Works Programme (PWP)", the Administration planned to issue a report on projects finalized during a fiscal year on an annual basis which would provide information on outturn expenditure for each project when the project account had been finalized.

20. Mr Edward HO opined that in order to facilitate members' understanding of the overall financial situation of a project, a comprehensive list including information on the approved project estimates, revision of estimates, if any, and the relevant amount applied for, should be provided for each project.

21. In reply, DS/Tsy explained that after FC had approved the scope and the cost estimates for a project, no further submission was made to the Public Works Subcommittee (PWSC) and FC unless the project cost appeared likely to exceed by more than $15 million the project estimate approved by FC and such an increase required a submission to FC via PWSC. Cost increases up to a maximum of $15 million per project were approved by the Secretary for Treasury under delegated authority by FC. She further explained that the column on "revised estimate" in the Capital Works Reserve Fund (i.e. Enclosure 1 of the paper) referred to revised estimate sought for a project for the current financial year and the column on "amended estimate" in the Annual Accounts of the Government (i.e. Enclosure 2 of the paper) was the revised cash flow figure for the year in question where the original approved estimate was supplemented by an additional allocation of fund. Information on changes in total cost estimates for a project was provided in the Quarterly Report on PWP (i.e. the last column of the Report at Enclosure 3 of the paper). Since the Quarterly Report on PWP only provided information of selected projects, in order to facilitate members' easy perusal and understanding of revision in cost estimates, DS/Tsy undertook to include information on revised total cost estimates, the amount involved and date of approval in the report on projects finalized during a fiscal year which the Administration intended to provide to Members in due course. FB

III Any other business

22. There being no other business, the meeting ended at 1:00 pm.

Legislative Council Secretariat
7 May 1999