For discussion
FCR(97-98)105
on 20 March 1998
ITEM FOR FINANCE COMMITTEE
LOAN FUND
NEW HEAD "BUILDING SAFETY"
New Subhead "Building Safety Improvement Loan Scheme"
Members are invited to approve the creation of a new Head "Building Safety" and, under the new Head, a new Subhead "Building Safety Improvement Loan Scheme" under the Loan Fund with a commitment of $500 million to provide loans for owners of domestic and domestic/commercial buildings who need financial assistance to participate in the Building Safety Inspection Scheme.
PROBLEM
A growing portion of the existing stock of private domestic and domestic/commercial buildings is facing rapid deterioration because owners of these buildings lack the financial means to carry out necessary inspection and maintenance works to the buildings on a regular basis.
PROPOSAL
2. We propose to create a new Head "Building Safety" and, under the new Head, a new Subhead "Building Safety Improvement Loan Scheme" under the Loan Fund with a commitment of $500 million to provide loans for owners of domestic and domestic/commercial buildings who need financial assistance to participate in the Building Safety Inspection Scheme (BSIS).
JUSTIFICATION
3. We estimate that in ten years' time, more than 40% (about 260 000 units) of the private housing stock in the urban area will be over 30 years old and reaching obsolescence, compared with 20% (about 113 000 units) today. This problem is compounded by the poor maintenance of many of these buildings, causing serious dilapidation and structural defects which will pose a hazard to the general public.
4. The Building Safety Improvement Loan Scheme (BSILS) will encourage owners of these buildings to carry out regular maintenance and improvement works to prevent dilapidation and, at the same time, extend the habitable life of the buildings, thereby deferring the need for them to be redeveloped, and thus alleviating the pressure for urban renewal.
5. The BSILS will offer loans at the "no-gain, no-loss" interest rate to owners of domestic and domestic/commercial buildings who need financial assistance to carry out inspections and works under the BSIS as detailed in Enclosure 1. The Director of Buildings (D of B) will be the loan administrator responsible for administering and approving the loans under the BSILS. He will be supported by an advisory committee consisting of Government officials and non-official members appointed from the building industry and owners' corporations.
6. We estimate that the average cost of the inspection and works for a flat/unit within a building is about $40,000. For calculating the initial funding requirement, we have assumed that 30% of owners of buildings showing signs of structural defects who have been invited to take part in the BSIS will apply for loans to undertake inspections and carry out improvement works and that some voluntary participants from owners of other dilapidated buildings will also apply for the loans on their own initiative.
7. We will review the adequacy of the commitment after the first year in the light of experience and the popularity of the BSILS. The parameters for the proposed loans under the BSILS are at Enclosure 2.
8. The "no-gain, no-loss" interest rate is calculated on the basis of the time-weighted average return achieved by the entire Exchange Fund over a period of 18 months. There is no subsidy element over time in granting the loans at this rate as the return on the fiscal reserves placed with the Exchange Fund will, with effect from 1 April 1998, earn a return based on that achieved by the entire Exchange Fund. The rate will be reviewed once every six months. In line with the existing practice for interest-bearing loans from the Loan Fund, we will charge interest on the outstanding loan at the prevailing rate.
9. In order to minimise administrative cost given the size of the loans (at an average of $40,000) and to widen the participation in the BSIS, we will not require applicants to be means-tested.
10. We approached the Hong Kong Association of Banks in early July 1997 to gauge its initial views on the possibility of providing a similar loan scheme to assist owners to carry out the inspection and subsequent improvement works to their buildings. The Association's response was not encouraging, signifying that commercial sources of financing are unlikely to be readily available to willing owners.
FINANCIAL IMPLICATIONS
11. The BSILS is a revolving loan facility with a commitment of $500 million. The interest rates are set to ensure there will be no resultant gain or loss to Government. For implementation of the BSIS, we have provided 45 posts at a full staff cost of about $27 million in the Buildings Department. These staff will be responsible for administering the BSIS and processing the loan applications under the BSILS.
Consultation
12. We consulted the Provisional Legislative Council Panel on Planning, Lands and Works on 27 February 1998. Members of the Panel were generally supportive of the Scheme.
Timetable
13. We aim to start inviting applications for loans in mid-1998. We will provide owners of domestic and domestic/commercial buildings with information on the proposed BSILS when they participate in the BSIS.
BACKGROUND INFORMATION
14. At present, section 26A of the Buildings Ordinance provides that where, on inspection, the Building Authority finds any dilapidation or defect in a building, he may by order require the owner of the building to carry out investigation and/or remedial works. Should the owner fail to do so, the D of B will carry out the investigation/works and recover the costs from the owner.
15. The Building Authority now intends to step up action on buildings aged 30 years or above which show signs of dilapidation or defect and, at the same time, to encourage owners of these buildings to participate on a voluntary basis in the BSIS. The D of B will assess the condition of the buildings to determine whether orders under section 26A of the Buildings Ordinance need to be issued. When such orders are justified, the Building Authority will invite their owners to participate in the BSIS, i.e. to undertake comprehensive inspections and carry out maintenance, repair and improvement works to meet building safety standards in respect of structural stability, integrity of external finishes, and fire safety. Owners not so invited by the Building Authority may also participate in the BSIS and apply for the loans on their own initiative.
16. In the meantime, we are also examining whether the BSIS should be made mandatory, and, if so, in what form and timing. The BSILS will also apply to owners of buildings covered by the mandatory BSIS when introduced.
17. The setting up of a loan scheme to improve building safety is one of the commitments made by the Chief Executive in his Policy Address given on 8 October 1997.
Planning, Environment and Lands Bureau
March 1998
Enclosure 1 of FCR(97-98)105
Activities to be Covered by the Building Safety Improvement Loan Scheme
The loans will be offered to owners of domestic and domestic/commercial buildings who need financial assistance to carry out under the Building Safety Inspection Scheme -
- works pertaining to the improvement of the structural stability of the building;
- works pertaining to the improvement of the integrity of external finishes of the building;
- works pertaining to the improvement of the fire safety aspects of the building;
- inspection work and related professional services; and
- any incidental or consequential works related to (a), (b) or (c) above.
Enclosure 2 of FCR(97-98)105
Parameters for the grant of loans under the Building Safety Improvement Loan Scheme (BSILS)
The BSILS will be operated on a revolving basis with the Director of Buildings (D of B) as the loan administrator. The terms and conditions of loans granted under the BSILS are given below -
Purpose of the Loan
The BSILS will offer non-means-tested loans to owners of domestic and domestic/commercial buildings who participate in the Building Safety Inspection Scheme (BSIS) and need financial assistance to carry out inspections/works under the BSIS as detailed in Enclosure 1.
Maximum loan amount
The loan amount to be granted to an individual owner will be determined after taking into account the total cost of the inspection/works, and the number of owners who wish to participate in the BSIS, subject to a ceiling of $200,000 per owner. In exceptional cases, the D of B may, subject to the prior agreement of the Secretary for the Treasury, approve a larger loan. We will require the applicants, in support of their applications, to provide details of quotations/tenders of the required works from the registered contractors and/or authorised persons registered under the Buildings Ordinance.
Release of loans
We will release the loans by stages according to the works schedule and the actual progress of works. The borrowers will be required to submit progress reports certified by the registered contractors and/or authorised persons. The D of B will conduct random inspections to ensure that the required works are carried out according to the schedule and that loans are spent for the intended purposes.
Interest
Borrowers will pay interest at a rate determined by Government on the "no-gain, no-loss" principle. The D of B may, on the advice of the advisory committee, grant an interest-free loan based on an assessment of the level of income and assets of the applicants, for special cases where owners are in particular financial hardship, e.g. elderly singletons with little savings.
Repayment
Borrowers will repay the loan principal and interest by instalments within a period of up to 36 months. The first instalment will become due one month after the final drawdown of the loan. With the prior approval of the D of B, borrowers may opt for early repayment of the loan. We will charge interest at the prevailing best lending rate to cover administrative costs on any unauthorised overdue amount until it is fully repaid.
Security
We will require borrowers to provide adequate security for the loan, which may take the form of a legal charge registered against the property, or a bank guarantee, or such other form of security to the satisfaction of the D of B. The D of B may also waive the requirement for the provision of security for the loan after considering the circumstances of individual cases.
