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Speech by Dr Hon Eric LI Ka-cheung, GBS, JP

Chairman, Public Accounts Committee

in tabling the Public Accounts Committee Report No. 42

in the Legislative Council on 23 June 2004

Madam President

On behalf of the Public Accounts Committee, I have the honour to table today our Report No. 42, which corresponds with the Director of Audit’s Report No. 42 on the results of value for money audits, which was tabled in the Legislative Council on 21 April 2004.

At the time when the Committee’s last Report was tabled, our deliberations on the subject “The acquisition and clearance of shipyard sties” were continuing.  The Committee has now concluded its deliberations and has tabled the supplemental report on this chapter together with this Report.

In considering this chapter, the Committee is dismayed that the Government has no legal authority to enter private sites for conducting environmental impact assessment investigations.  As such, it had to incur an estimated cost of $440 million for the decontamination work on the Penny’s Bay shipyard site after a detailed site investigation revealed that the level of contamination there was more serious than originally expected.  The Committee is also gravely dismayed that the Lands Department had not critically evaluated the potential risks and financial implications of accepting the “as is” clause, or included an indemnity clause in the Deed of Surrender of the site, when it should have been aware of the possibility of a greater extent of contamination at the site.

On the Director Audit’s Report No. 42, as in previous years, the Committee has selected for detailed examination only those chapters which, in our view, contained more serious allegations of irregularities or shortcomings.  The Report tabled toady covers our deliberations on the five chapters selected.

I now turn to the substantive issues covered in this Report.

Hong Kong Harbour Fest

The various problems encountered during the organisation of the Hong Kong Harbour Fest (“Harbour Fest”) have led to a great deal of negative publicity and widespread public concern.  Following the publication of the Audit Report, the Independent Panel of Inquiry on the Harbour Fest submitted its Report to the Chief Executive on 15 May 2004.  It was made available to the Legislative Council (“LegCo”) on 17 May 2004.

The Committee has held four public hearings to receive evidence from the Administration on the findings and observations of the Audit Report.  As Chapter 2 and 4 of the Inquiry Panel’s Report are directly relevant to Audit’s review, the Committee drew on the materials contained therein, where appropriate, at its third and fourth hearings.

I now report the Committee’s main conclusions and recommendations.

In respect of project conceptualisation and approval, the Committee is gravely dismayed that the Economic Relaunch Working Group (“ERWG”), chaired by the Financial Secretary (“FS”), had approved too hastily the proposal of the American Chamber of Commerce in Hong Kong (“AmCham”) for the Government to sponsor the Harbour Fest.  As such, it had put the substantial amount of $100 million of public fund at risks as early as the inception stage of the event.

In arriving at this conclusion, the Committee has had regard to the fact that before agreeing to support the proposal in principle at its meeting on 2 July 2003, the ERWG had failed to thoroughly assess the complexity and risks involved in organising the Harbour Fest, as well as the benefits.  It failed to ask for a proper business plan from AmCham, thus depriving itself of the detailed information required for conducting a proper project appraisal.

The Committee notes that at a meeting on 26 June 2003, the relevant government departments had already commented that the concept of the Harbour Fest was ambitious.  During the ERWG’s discussion on 2 July 2003, the Commissioner for Tourism had also expressed the view that sufficient head time must be available for marketing the Harbour Fest.  The Committee considers that such comments of the departments should have alerted the ERWG to the need to properly assess the risks involved in AmCham’s proposal.  However, the ERWG still failed to call for the views of experts within the relevant departments on the feasibility of the Harbour Fest despite their initial reaction.

In addition, the ERWG appointed Invest Hong Kong, which had little hands-on experience in organising such mega event, as the subject department without considering other available options.  It also failed to explore the options of organising the concerts in-house, outsourcing to the private sector through a competitive selection process, or co-organising the Harbour Fest with AmCham.

As regards project monitoring, the Committee condemns the Director-General of Investment Promotion (“DGIP”) for the following reasons.

The Committee noted that ERWG gave its in-principle approval on 2 July on condition that Invest Hong Kong scrutinise and satisfy itself that AmCham’s detailed budget for the Harbour Fest project was reasonable and acceptable to the Government.  However, during the critical initial stages of budget-vetting and monitoring processes, the DGIP failed to take positive steps to consult the government bureau and departments with expertise in the entertainment filed.  Neither did he engage outside show business experts, or make reference to their relevant practices.

The DGIP also failed to seek the Department of Justice’s advice on the three Memoranda of Understanding (“MOUs”) with AmCham, which are legally binding.  Each MOU effected payment of $25 million, or 25%, of the total sponsorship to AmCham.  He even rejected the Department’s advice to include provisions, in the agreement with AmCham, for access to documents in AmCham’s possession.

Moreover, the DGIP failed to adhere to the basic management principles and to put in place an appropriate system of cost control or monitoring to oversee the project.  In particular, he failed to adequately supervise Invest Hong Kong in the discharge of his responsibilities over the Harbour Fest.  This was evidenced by the fact that he was absent from Hong Kong for 60 days during the three-month lead-up to the Harbour Fest, as well as by his ignorance of the signing of two legally binding MOUs during his absence, and of the payment of $50 million to AmCham.

The DGIP failed to conduct any due diligence checks on AmCham and Red Canvas Limited.  He also failed to inquire into AmCham’s ability to pay the difference between the cost of the Harbour Fest and the government sponsorship.

The DGIP failed to ensure that there were proper risk management and contingency planning on the Harbour Fest.  Instead, he chose to rely on a liberal interpretation of “sponsorship” in order to justify his monitoring the event from a distance.

In this connection, the Committee notes the FS’s comment that irrespective of whether the Harbour Fest is financed by the Government through sponsorship or other modes of subvention, the responsibilities of the Controlling Officers remain the same, i.e. they should satisfy themselves that an appropriate system of cost control or monitoring is in place.  The Committee concurs with this view.

As for the ERWG, the Committee is seriously dismayed that it failed to carry out appropriate supervision over such crucial matters as Invest Hong Kong’s scrutiny of the budget for the Harbour Fest and its monitoring of the actual progress in the organisation of the event.  The ERWG also failed to ensure that the DGIP exercise the appropriate level of supervision over the sponsorship of the Harbour Fest, which is effectively close to its full cost.  Neither had it considered downsizing the scale of the event.

To follow up the matter, the Committee urges Invest Hong Kong to liaise with AmCham to make arrangements for the Government to have access to all Harbour Fest records of AmCham, Red Canvas Limited and the project subcontractors, in order to facilitate any necessary follow-up actions by the Government and the Audit Commission.  The Committee also invites the Director of Audit to consider conducting a value for money audit on other events and activities sponsored by Invest Hong Kong, to ensure that they did not similarly suffer from the lack of proper cost control.

In addition, the Committee urges the Administration to consider taking disciplinary action against the DGIP, having regard to the gravity of his failure in discharging his duties.

I should mention here that the Committee has examined the minutes of the ERWG’s meetings, including those held on 2 and 12 July 2003, to ascertain the details of the ERWG’s discussion on matters relating to the Harbour Fest.  The Committee discovers that the minutes were brief.  There was no record of the matters raised with the AmCham representatives, or details of the ERWG’s deliberations.  The scanty information contained therein feel far short in recording the rationale behind the ERWG’s decisions.  The Committee considers that the records of such high-level committees as the ERWG should contain sufficient detailed information to be the basis for audit trails of the decisions made.

The Committee also has cause for concern about the approach adopted by the Administration in monitoring high-risk projects.  To the Committee, in deciding that the Government would act as the sponsor only for the Harbour Fest, the ERWG had intended to distance itself from the project and to limit its role.

Funding of projects under the Applied Research Fund

On the “Funding of projects under the Applied Research Fund (“ARF”)”, the Committee is dismayed that the Applied Research Council’s existing management agreements with fund managers give them absolute discretion on matters concerning the disposal of ARF investments.  They might in their absolute discretion realise, or sell, any of the investments of the ARF at such times and prices and in such manner as they might decide.  Thus, the Applied Research Council could lose control of the disposal of the investments.  The Committee is also dismayed that the three management agreements concluded in November 1998 did not make co-investment as a requirement.  The absence of such a requirement renders the agreements open to abuse by fund managers.  The Committee is therefore seriously concerned that the money of the ARF has not been safeguard.  The ARF investments have not been subject to close monitoring commensurate with the risky nature of the investments.

The Committee is also seriously concerned that, as at November 2003, the ARF had a large cash balance of $434 million.  The Committee is dismayed that such a large amount of surplus funds was earning a relatively low rate of return.  The Committee considers that such funds, being public funds and having been left idle for a significantly long time, should earn a rate of return which should at least be comparable to that earned by the Government on the fiscal reserves placed with the Exchange Fund.  The Committee therefore urges the Commissioner for Innovation and Technology to consider measures, in consultation with the Director of Accounting Services, to improve the rate of return for the surplus funds.

Harbour Area Treatment Scheme Stage I

On the subject “Harbour Area Treatment Scheme Stage I”, the Committee is seriously dismayed that, despite the various guidelines, the Drainage Services Department (“DSD”) did not reduce the approved project estimates (“APEs”) of the three tunnel completion contracts even though the accepted tender prices were much lower than the estimated contract sums in the APEs.  The DSD only informed the Finance Committee (“FC”) of the shortfall for Contract E without revealing the true total cost increase.  It failed to inform the FC of the over-provision in the APEs for Contracts C and D at all.  Neither had it informed the FC that it had used such over-provision to cover the cost increase of these two contracts, which was largely used for setting claims submitted by the contractors concerned.

The Committee considers that the heads of works departments are given too much discretionary power to decide whether or not to adjust the APE even when the accepted tender price was much lower than the estimated contract sum in the APE.  In particular, the APE might be used to cover huge sums of highly uncertain dispute settlements and contract variations.

To ensure the LegCo’s effective monitoring of the use of funding for works projects, and to minimise the possibility of works departments’ covering up their administrative bundles and settlement of claims of substantial amount, the Committee recommends that the following arrangements be put in place.

The works departments concerned should inform the LegCo, with full justifications provided, when the difference between the accepted tender price and the estimated contract sum in the APE is $15 million or more.  This should be done irrespective of whether or not there will be any substantial variations in the contract cost that may warrant an adjustment of the APE or that may require the FC’s approval of an increase in the APE to cover the ultimate outturn price.  The works departments concerned should also inform the LegCo when the expenditure relating to dispute settlement under a works contract amount to $15 million or more.

Regarding the claims arising from the use of forfeited plant, the Committee notes that the three contractors had been given the opportunity to inspect the forfeited plant, including the mucking systems, before tendering.  The decision to use the plant had been taken by them voluntarily and effected by the provision of an exclusion clause in the contract and the signing of a No Claim Statement, which clearly stipulated the contractor’s liability in connection with the use of the forfeited plant.  The Committee is seriously dismayed that, despite all these safeguards, the DSD subsequently incurred an additional cost of $135.7 million in settling the claims by the contractors for replacement of the defective mucking systems, in order to avoid further delays of the works.

It appears to the Committee that it is the Government’s policy not to take legal proceedings against contractors of public works projects as far as possible in order to avoid causing delay in works, incurring significant legal cost and festering its working relationship with the contractors.  The Committee urges the Administration to critically examine the circumstances and merits of each case when deciding whether legal action should be pursued, as undertaken by the Secretary for the Environment, Transport and Works.

Concluding remarks

Madam President, as always, in performing our duty, the Committee is mindful of our role in safeguarding the public interest by continuing to prod for the delivery of high quality public services in an efficient and cost-effective manner.

I wish to record my appreciation of the contributions made by members of the Committee.  Our gratitude also goes to the representatives of the Administration who have attended before the Committee.  We are grateful to the Director of Audit and his colleagues as well as the staff of the Legislative Council Secretariat for their unfailing support and hard work.

Thank you.

 

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