FC3 2012.pdf

TsyB W 00/530-1/5/0
GOVERNMENT SECRETARIAT
HONG
KONG

17 July 2012

FINANCIAL CIRCULAR NO. 3/2012

Capital Works Programme

(Note
:

Distribution of this Circular is Scale C.
Directors of Bureaux, Controlling Officers and
all officers dealing with capital works projects,
resource allocation and annual Estimates under
the Capital Works Reserve Fund should read it.)

--------------------------------------

This Circular updates the procedures for creating and managing a
capital works project under the Capital Works Programme (CWP). Financial
Circulars No. 4/95 and No. 11/2004 are hereby cancelled.

CAPITAL WORKS PROGRAMME

2.
CWP comprises works projects funded by the following Heads of
Expenditure of the Capital Works Reserve Fund (CWRF) –
(a)
government works projects under Heads 702 to 707, 709 and 711
(collectively, they are called the Public Works Programme); and
(b)
capital subventions projects under Head 7081.

/DELEGATIONS .....

To:  Directors of Bureaux
Controlling
Officers
_____________________________________________________________________________________

1
Head 708 funds “Capital Subventions” and “Major Systems and Equipment” projects. Only the part of
Head 708 relating to capital subventions forms part of the CWP.

- 2 -

DELEGATIONS FROM FINANCIAL SECRETARY TO
CONTROLLING OFFICERS FOR THE ADMINISTRATION OF CWRF

3.
In accordance with the Legislative Council (LegCo) Resolution
setting up the CWRF, the Financial Secretary (FS) may delegate his power of
administration to other public officers.  By virtue of the Interpretation and
General Clauses Ordinance (Cap. 1), the aforesaid reference to “Financial
Secretary” also means the Secretary for Financial Services and the Treasury
(SFST).

4.
The Controlling Officer for each Head in CWRF is specified in the
Memorandum Note on CWRF in the Annual Estimates. For expenditure items
under Heads 701 to 704, 706, 707 and 709, FS has designated various Heads of
Departments as Controlling Officers. For expenditure items under Head 705,
Head 708 (part) – Capital Subventions and Head 711, SFST has designated
Permanent Secretaries as well as Heads of Departments as Controlling Officers.

CATEGORIES OF CAPITAL WORKS PROJECTS

5.
There are four categories of capital works projects. While
Category D projects cover pre-construction works (such as design studies and
site investigations) for major projects and standalone minor works items each
costing not more than the delegated financial limit, the remaining three
Categories (i.e. Category C, B and A) reflect the different funding status of a
project under the capital works resource allocation system. Details of the
different categories are set out in the following paragraphs.

/CATEGORY .....

- 3 -

CATEGORY C

Pre-requisites for inclusion in Category C

6.
A project would attain a Category C status any time of the year
upon submission of a Project Definition Statement (PDS) and a Technical
Feasibility Statement (TFS) 2 approved by the Works Branch (WB) of the
Development Bureau. The requirements for the compilation of PDS and TFS
are set out in Financial Circular No. 4/2012. In case the scope of works/project
estimate of a Category C project has been revised and becomes substantially
different from that in the approved TFS, a replacement TFS for consideration by
WB and re-confirmation of the Category C status of the project by Treasury
Branch of the Financial Services and the Treasury Bureau (TsyB) is required.

7.
For a project in Category C, Directors of Bureaux (DoBs) may not
incur any CWRF expenditure on any pre-construction work3 for the project,
except with the prior approval from SFST.

Deletion from CWP register

8.
DoBs should, in collaboration with the relevant works directors,
keep a close watch on Category C projects which have not been upgraded to
Category B within three years from the date of entry into Category C, and
should provide justification in writing to TsyB for the retention of the project in
Category C prior to the expiry of a three-year validity period. In the absence of
any such written request from the relevant DoBs, TsyB will delete such projects
from the CWP without advance notice after three years. Reactivation of deleted
projects for inclusion in Category C should follow the normal procedures
outlined in paragraph 6 above.

/CATEGORY .....

_____________________________________________________________________________________

2
As set out in Financial Circular No. 4/2012, TFSs are generally not required for projects which are
themselves studies, non-works items (e.g. purchase of property), or renovation works. In such cases,
works agents may apply to WB for a waiver of the TFS requirement. Irrespective of whether a waiver will
be granted, the works agent should define the scope of works and work out the project estimate with
itemized cost breakdown and payment schedule.


3
Pre-construction work, which usually includes site investigation, feasibility studies, design and preparation
of tender documents, ensures that a project will be ready in all respects to start works on site once funding
for the construction works  is approved. The costs of pre-construction work can be charged to the
appropriate works-related block allocations under the CWRF subject to their expenditure ceiling. Land
resumption, undertaken by the Director of Lands with funding met from block allocations under CWRF
Head 701─Land Acquisition, is regarded as an enabling factor for the project, but not as part of the pre-
construction work.

- 4 -

CATEGORY B

Pre-requisites for obtaining Category B status

9.
DoBs may seek to upgrade a Category C project to Category B by
submitting bids in the annual capital works Resource Allocation Exercise
(RAE). Bids for upgrading a project to Category B must be supported by a TFS
which has been approved by WB . For TFS completed three or more years ago,
the information contained therein should be updated as appropriate. DoB should
also comply with the requirements as set out in the annual Capital Works RAE
call memo.

10.
Bids approved by the Star Chamber for capital funding will attain a
Category B status. TsyB will notify DoBs of the capital resources allocated for
successful bids under their respective policy portfolio during the entire project
period as well as the RAE planning horizon (the latter being normally a six-year
span covering the current and subsequent five financial years). For
exceptionally urgent projects which need to acquire a Category B status in
between two annual RAEs, an in-year bid will need to be made. Please refer to
paragraph 31 below for the relevant requirements.

Pre-construction work chargeable to block allocations

11.
Once a project has attained a Category B status, works directors,
with the support of DoBs, may undertake the necessary pre-construction work
as so to render the project ready in all respects for upgrading to Category A and
subsequent commencement of construction works. If funding for such
pre-construction work is estimated to exceed the delegated financial limit of a
Category D item and cannot therefore be charged to the relevant CWRF block
allocation, part of the Category B project would need to be upgraded to
Category A for funding the pre-construction work.

/Changes .....

- 5 -

Changes prior to upgrading to Category A

12.
DoBs who intend to substantially vary the scope4, project estimate
or programme of a Category B project should consult TsyB as early as possible,
irrespective of whether there will be consequential capital and recurrent cost
implications. The Star Chamber may need to be consulted depending on the
degree of variation, particularly when the change involves an increase in project
estimate and raises the issue of whether it is justifiable to pursue the project. If
additional resources are required, the DoB concerned is expected to first meet
these from within the total resources allocated for Category A projects under his
policy portfolio. Failing that, the additional resources should be sought from
the RAE.

Downgrading from Category B

13.
If there is a change in policy, user requirements and/or delivery
programme which necessitates a revised TFS, or if there is no longer any
justification for a project (or the remainder of a partially-upgraded project) to
retain its Category B status (i.e. the project may be downgraded to Category C
or deleted from the CWP), the lead DoB, in consultation with the works director
concerned, should notify TsyB as soon as possible so as to release the
earmarked resources to the Centre for re-allocation. Where the pre-construction
work of the to-be-deleted project has been outsourced to consultants, the
Controlling Officer of the project should take steps to discontinue the related
consultancy agreements immediately or as early as practicable. If the
Controlling Officer does not consider it appropriate to do so, he should consult
the relevant DoB(s), WB, TsyB and possibly the relevant consultant selection
board.

/CATEGORY .....

_____________________________________________________________________________________

4   Please refer to Environment, Transport and Works Bureau Technical Circular (Works) No. 30/2003
“Control of Client-Initiated Changes for Capital Works Projects” for details of the procedures on the
control of changes in scope of works.

- 6 -

CATEGORY A

Upgrading to Category A

14.
DoBs may schedule to seek the endorsement of the Public Works
Subcommittee (PWSC) and approval of the Finance Committee (FC) to upgrade
a project to Category A when all necessary pre-construction preparation has
been completed or substantially completed. Statutory procedures and public
consultation required for a project should have been completed before putting
forth the funding proposal to PWSC and FC. Guidelines for preparing PWSC
submissions are set out in Financial Circular No. 4/2010.

15.
Upgrading of projects costing $15 million or less each to be funded
under Head 708 (part) – Capital Subventions to Category A can be approved
by TsyB under delegated authority from FC.

Money-of-the-day project estimates

16.
All PWSC/FC papers should provide estimates at constant prices
and their money-of-the-day (MOD) equivalents5. Once approved, the project
estimate in MOD prices will form the approved project estimate (APE) of the
project. TsyB will normally announce price adjustments factors to be used for
converting constant prices into MOD prices twice a year (in March and
October).

17.
The relevant rules in using MOD estimates and the method in
──
deriving MOD prices are set out in Annex A.

LegCo Panel consultation

18.
DoBs should consult the relevant LegCo panels prior to submitting
a funding proposal to PWSC. Prior discussion at Panel meetings enables the
Administration to be alert to LegCo Members’ concerns and to provide
clarification and supporting information as needed in the PWSC submission.
Panel papers on capital works projects should be cleared with TsyB.
/19. .....

_____________________________________________________________________________________

5   The same requirement applies to funding proposals submitted to TsyB for approval under delegated
authorities.

- 7 -

19.
For proposals of a lesser magnitude in terms of project estimate
and the likelihood of controversy, DoBs may consider circulating such
proposals to the relevant Panels for Members’ comments with an offer to
discuss at the panel meetings before putting them to PWSC/FC for
consideration.

FC approval

20.
FC is the ultimate authority for approving the project estimate
(which becomes APE after approval) and scope of works of a capital works
project. PWSC is established for the purpose of assisting FC in examining
capital works proposals. Unless FC has formally approved a funding application
from the Administration, the relevant DoB or works director concerned should
not commit funding on the project being upgraded, even if PWSC has clearly
expressed support.

21.
After the upgrading of a project to Category A by FC or under
delegated authority, the relevant works director should follow the procedures in
Financial Circular No. 2/2012 on making changes to the estimates of CWRF
and apply to TsyB for the release of funds and/or creation of a subhead in the
estimates for the project. To ensure timely delivery of capital works projects,
DoBs should adhere to the works commencement date as specified in the PWSC
funding submission in general; and where possible, strive to commence works
as soon as practicable.

22.
DoBs and works directors must ensure that works expenditure
stays strictly within the APE for each Category A works project and in strict
accordance with the scope of the project as approved by FC or under delegated
authority. The Controlling Officer of a project should seek to increase the APE
once he is aware that the project estimate is expected to exceed the APE.
Controlling Officers should alert TsyB once an increase in APE or change in
approved project scope appears to be likely. SFST may approve, under
delegated authority from FC, minor changes to project scope or increase in APE
which does not exceed $15 million. No contractual commitments may be
entered into prior to obtaining the necessary FC approval or approval under
delegated authority for an increase in APE and/or change in approved project
scope. Under section 32 of the Public Finance Ordinance (Cap. 2), the
Controlling Officers of project votes may be subject to surcharge if they have
improperly incurred expenditure. For details of the responsibilities of
Controlling Officers, please refer to Financial Circular No. 1/2004.

/Deviations .....

- 8 -

Deviations from FC approval

23.
Where the APE and/or the approved scope of a project in
Category A require a substantial change6, the lead DoB should seek approval
from the PWSC and FC.

Completion of projects, finalisation of accounts and deletion from CWP
register

24.
DoBs and their works directors should finalise project accounts as
soon as possible and in any event no later than three years after commissioning
of the facilities7. Works directors must consult TsyB when this timescale could
not be met due to special circumstances. Upon settlement of all outstanding
balances and the finalisation of accounts, works directors should confirm with
TsyB in writing the readiness for deleting the projects from CWP. In turn,
TsyB will notify the Treasury of the deletion of the project votes, and compile
an annual report to PWSC listing out such projects with finalised accounts and
the respective outturn expenditure.

Cancellation and curtailment of projects

25.
The Administration has hitherto maintained a good track record of
being able to complete virtually all projects in Category A. For projects which
the approved scope of works can only be partially completed (i.e. curtailment)
or cannot be completed at all (i.e. cancellation), DoBs and works directors
should provide detailed explanation to TsyB and WB, apply to TsyB for
deletion of the projects from the CWP register, and consider informing
PWSC/FC of the cancellation/curtailment with justification.

/ANNUAL .....

_____________________________________________________________________________________

6
Substantial change includes all changes causing an increase in APE by more than $15 million or changes
which, albeit not increasing the APE by more than $15 million, constitutes a significant deviation from the
scope of the project approved by FC.

7   For a Design-Build-Operate contract (e.g. landfills), DoBs and works directors should finalise the
accounts of the “Design and Build” portions of the contract as soon as possible and in any event not later
than three years after the completion of the “Design and Build” portions.

- 9 -

ANNUAL FORECAST OF PWSC SUBMISSIONS AND EXCEPTION
REPORT

26.
At the request of PWSC, the Administration has undertaken to
provide an annual forecast of PWSC submissions to PWSC at the beginning of
each LegCo session. Our target is to issue the forecast before the first PWSC
meeting every year. DoBs are reminded to ensure that the items included or
explanations given in the forecast are consistent with all relevant government
commitments (e.g. Policy Address, papers to LegCo). The forecast will be
circulated to all relevant LegCo Panels. Furthermore, we need to provide
PWSC an exception report by the end of each LegCo session to account for
deviations between actual submissions and the forecast. DoBs/client
departments or organisations are accountable for any slippage, be it due to
changes in policies, priorities, programmes and user requirements.

CATEGORY D

27.
Category D projects funded under various block allocations cover
thousands of minor works items, works-related studies and site investigations,
e.g. pre-construction work for Category B projects, and standalone minor works
items each costing not more than $30 million. Every year, FC approves the
allocation for each block allocation on a lump-sum basis. Except for slope
works under Landslip Preventive Measures (Subhead 5001BX) and land
acquisition items (Subheads 1004CA and 1100CA) for which the delegated
authority from FC is without limit, the expenditure ceiling per Category D item
is $30 million. For projects with estimates beyond the threshold, DoBs have to
go through RAE and seek specific funding from FC for each project (by
upgrading to Category A ultimately). To avoid nugatory expenditure, DoBs and
works directors shall not create Category D items to fund detailed feasibility
studies or advanced planning work for major projects before the major project is
upgraded to Category B of the CWP, unless with the prior approval by SFST as
described in paragraph 7 above. Details on the procedures for creating and
managing Category D items are set out in Financial Circular No. 3/2011. For
the PDS / TFS for major projects, details are set out in Financial Circular No.
4/2012.

/LAND .....

- 10 -

LAND RESUMPTION

28.
Expenditure on land resumption should only be incurred for
projects in Categories A and B.

29.
For standalone Category D minor works items, an assessment on
the overall development cost (i.e. land resumption cost and construction cost)
should be conducted. If a proposed item involves disproportionately high land
resumption cost (i.e. compared with construction cost), the DoB who gives the
policy support, Director of Lands who controls the block allocations for land
resumption, and the relevant Controlling Officer(s) of the block allocations to
fund the construction cost should scrutinise the item and decide if it is worthy of
implementation.

RESOURCE ALLOCATION MECHANISM

Normal RAE bid

30.
The annual capital works RAE normally falls on the third quarter
of the calendar year. All capital works RAE bids will be processed in one
composite exercise so that the Star Chamber can have a comprehensive
overview of the funding requirements for all capital works projects.

In-year RAE bid

31.
Where a project proposal is found to be exceptionally urgent, the
lead DoB may submit an in-year RAE bid with full justifications and a TFS
approved by WB (for TFS completed three or more years ago, the information
contained therein should be updated as appropriate). The lead DoB must
demonstrate that the wait till the next annual RAE will compromise the project
delivery programme. Unless otherwise justified, the resources required for the
in-year bid would normally be met from within the total allocation for Category
A projects under the lead DoB’s own policy portfolio.

/Savings .....

- 11 -

Savings and administrative cap

32.
To avoid locking up resources unnecessarily, TsyB will internally
“freeze” all savings arising from contracts awarded at prices substantially lower
than the provision earmarked for these contracts in the APE8. DoBs/works
directors should not spend against the savings. For RAE purpose and
monitoring of project spending, the updated requirement for the project (i.e. the
reduced project estimate) will be the administrative cap on the project
expenditure. Should there be any subsequent increase in the estimated project
expenditure, DoBs/works directors can apply to TsyB for an additional
allocation of funds within the APE or an increase in the APE (increases in APE
exceeding $15 million must be approved by FC). In considering such
applications, TsyB will take into account the administrative cap of the relevant
projects. Any increase in project estimate (and the administrative cap) beyond
the APE should normally be met by offsetting savings identified from within
the administrative cap on other Category A projects. Where the cost of a
project turns out to be substantially lower than the APE, DoBs/works directors
should apply to SFST to reduce the APE of a project, or keep TsyB informed of
the reasons for not applying for a reduction in the APE.

Recurrent cost

33.
To best utilise existing resources, DoBs/project proponents should
first try to absorb the recurrent consequences arising from new capital works
projects through redeployment of resources within their operating expenditure
envelopes. If that is not possible, DoBs/project proponents may include the
request for recurrent cost in the RAE bid. The RAE bids would be considered
taking into account the merits of the proposals as well as the Government’s
affordability from both capital and recurrent resources angles. The detailed
arrangements will be set out in the annual Capital Works RAE call memo.

/Shadow.....

_____________________________________________________________________________________

8
The threshold for determining “substantially lower” contract prices is set at $15 million. Please refer to
TsyB’s memo of 18 March 2010 on “New mechanism for calculating the administrative cap of capital
works projects”.

- 12 -

Shadow bids

34.
There are times when the Government wishes to have non-
government developers to fund and construct public facilities (e.g. a public open
space) and surrender the facilities upon completion for management and
maintenance by the Government. In such cases, policy bureaux of departments
responsible for the management and maintenance of the facilities may submit a
“shadow” bid (“shadow” in the sense that no capital funding by the Government
is involved) for the recurrent cost required and such bid will be considered on a
competitive basis as if it were a regular Capital Works RAE bid.

35.
If the capital cost of the public facility concerned is $30 million or
less, project proponents are required to absorb the recurrent cost from within
their existing allocations as with other minor capital works projects funded
under CWRF block allocations. Bureaux and departments must not commit the
Government to shoulder the management and maintenance responsibility of any
such public facilities constructed and paid for by the private developer without
first confirming availability of the necessary recurrent resources either from
within their own envelopes, or from the Centre through RAE.

AUTHORITY FOR ENTRUSTMENT OF CAPITAL WORKS
PROJECTS

36.
From the procurement perspective, a request to entrust a capital
works project to a non-government party such as a private developer, a utility
company or a public corporation (including but not limited to the Housing
Authority and the MTR Corporation Limited) is, in effect, a request for waiving
the tender procedures to entrust the project to the entity concerned. Such a
request requires the prior approval of TsyB, and Controlling Officers should
submit detailed justifications and the entrustment details to TsyB for
consideration.

RELATED FINANCIAL CIRCULARS

───
37.
Financial Circulars relating to the CWP are set out at Annex B.
For an update of the Financial Circulars in force, please refer to the Financial
Circular on “Retention of Financial Circulars” issued at the beginning of each
calendar year.

/ENQUIRIES .....

- 13 -

ENQUIRIES

38.
Please contact ‘W’ Division for capital works projects procedures,
resource divisions on recurrent resources for capital works projects, and Tender
Division of TsyB on entrustment covered in this circular.

Professor K C Chan
Secretary for Financial Services and the Treasury

Annex A

Converting project estimates in constant prices
to money-of-the-day prices

Rules in using money-of-the-day estimates

Money-of-the-day (MOD) approved project estimates (APE)
represent the total cash payments estimated for a project. We can make
MOD APE the cash-limited budget for the project when seeking funding
approval from the Legislative Council Finance Committee (FC). Bureaux
and departments should complete all works under the approved project
scope within the MOD APE. If the APE is insufficient to meet the total
estimated cost of a project, bureaux and departments should carry out
relevant measures to strive to remain within the APE1, or seek approval for
an increase in APE from the FC or by the Treasury Branch of the Financial
Services and the Treasury Bureau (TsyB) (under delegated authority)

2.     All PWSC papers should provide project estimates at constant prices
and their MOD equivalents, including the calculations for deriving MOD
equivalents. The MOD project estimate will form the APE of the project
for approval by the FC. The following rules will apply -

(a)  all PWSC submissions should quote the project
estimate (including the contingency sum), as
endorsed in the latest Resource Allocation Exercise
(RAE), subject to any changes agreed by TsyB.
MOD project estimates should be derived with
reference to constant price estimates and the
prevailing price adjustment factors as explained in
paragraphs 4 and 5 below;

_____________________________________________________________________________________

1
Finance Committee’s prior approval is required for substantial change to the approved project scope,
regardless of whether the change will lead to an increase in the APE of the project.

- 2 -

(b)  the cost breakdown for the project should include
an item named “provision for price adjustment”,
which is the difference between the constant price
project estimate (including the contingency sum)
and the MOD project estimate. The contingency
sum should be shown at constant price separately
from provision for price adjustment;

(c)  we should endeavour to use the provision for price
adjustment only for meeting inflationary price
increases during the construction period, and
should refrain from using it as a secondary
contingency item to pay for real increases in the
cost of the project due to unforeseen works items
as far as possible; and

(d)  we can award contract(s) under a project only if the
cumulative total of all tender prices for the
contract(s) plus allowance(s) for inflation 2    falls
within the ceiling of the MOD APE.

3.     Provision for price adjustment is designed to meet inflationary price
increases and should be used primarily for this purpose. The above rules
should help ensure that the costs of additional works under the project will
not be met from provision for price adjustment unless it is justifiable to do
so. Additional costs for unforeseen works items which are within the
approved project scope should first be met from contingency and savings in
construction costs. Only if there is genuine surplus in the provision for
price adjustment (e.g. lower-than-expected actual contract price fluctuation
payments) and no other project sum (including the contingency) can be
identified to meet additional cost should the provision for price adjustment
be used for meeting the additional cost for unforeseen works items. If the
combined effect of higher-than-expected contract fluctuation payment and
construction costs is such that the original MOD APE will be exceeded,
FC’s approval should be sought.

_____________________________________________________________________________________

2
Allowances for inflation mainly take the form of estimated contract price fluctuation payments.

- 3 -

Derivation of MOD prices

4.     MOD prices are derived by –

(a)  splitting up a project estimate in constant price into a cashflow
forecast showing the estimated expenditure in each financial
year; and

(b)  multiplying the constant price forecast in a certain year by the
price adjustment factor for the same financial year.

5.     The Government Economist forecasts the trend rate of change in the
prices of public sector building and construction output, based on which
TsyB derives price adjustment factors for converting project costs at
constant prices into MOD prices. Sample calculation is provided in the
Enclosure to this Annex. TsyB normally announces the price adjustment
factors half-yearly (in March and October).

Savings

6.      To determine the amount of savings in constant prices available for
funding new projects or covering increases in MOD APE,
bureaux/departments should determine the difference in dollar terms
between the original MOD APE and the latest forecast outturn MOD cost.
Bureaux/departments should then apply deflation factors to deflate the
MOD savings to the constant price base of the current RAE to determine the
constant price savings that can be quoted to fund new projects or cover real
cost increases of other projects.

7.     In preparing proposals for increase in APE, bureaux/departments
should provide TsyB the calculation of savings for vetting purpose. Sample
calculation is provided in the Enclosure to this Annex.

Annual Resource Allocation Exercise

8.     Although APEs approved by the FC will be in MOD prices, the
annual RAE for capital works projects will continue to be on a constant
price basis. During RAEs, we will update constant price estimates for
projects with reference to the constant price estimates approved in the
previous RAE and the prevailing price adjustment factors.

- 4 -

Enclosure to Annex A

Sample Calculations

The following sample calculations illustrate:

(a)   how project estimates in constant prices are converted into
project estimates in MOD prices; and

(b)   how to determine the amount of savings in constant price
required for supporting a proposed increase in APE in MOD
prices.

(a) Converting constant price project estimates into MOD price project
estimates

The following example is extracted from PWSC(2009-10)83 on “30LJ
–  Additional courtrooms and associated facilities in the High Court
Building”.

“FINANCIAL IMPLICATIONS

We estimate the capital cost of the project to be $50.9 million in MOD prices,
broken down as follows –

$ million

(a)  Site works and demolition
7.5

(b)   Building
17.9

(c)   Building  services
7.5

(d)   Drainage
2.0

(e)   External  works
1.2

(f) Additional energy conservation
0.1

measures

(g) Furniture and equipment
1.5

- 5 -

$ million

(h) Consultants’  fees

1.9

(i) contract
administration
1.5

(ii)
management of resident site
0.4

staff

(i)  Remuneration of resident site
4.6
staff

(j) Contingencies
4.3

Sub-total
48.5
(in
September
2009 prices)
(k) Provision for price adjustment

2.4

Total
50.9  (in MOD prices)
…

Subject to approval, we will phase the expenditure as follows –

Price

$ million
adjustment
$ million
Year
(Sept 2009)
factor
(MOD)

2010 – 11
5.0
1.02000 5.1

2011 – 12
26.0 1.04040 27.1

2012 – 13
11.5 1.06121 12.2

2013 – 14
5.0
1.08243
5.4

2014 – 15
1.0
1.11220
1.1
———

———
Total 48.5

50.9
———

———

We have derived the MOD estimates on the basis of the Government’s latest
set of assumptions on the trend rate of change in the prices of public sector
building and construction output for the period 2010 to 2015. We will
award the contract on a lump-sum basis because we can clearly define the
scope of the works in advance. The contract will provide for price
adjustments.”

- 6 -

(b)  Example to illustrate how to determine the amount of savings in
constant prices required for supporting a proposed increase in APE in
MOD prices

Table I. Cashflows in MOD prices ($ million)

APE /
Change
Cum

admin
in APE /
exp up
10/11 11/12 12/13 13/14 14/15 15/16
cap
admin
to Mar
cap
2010
Original
111.5
project
(APE &
estimate
0  10 20.9 32.8 23 12.1 12.7
admin

cap)
Project X

10.7

Proposed
122.2
project
(APE &
estimate
0  10 26.1 38.3 23 12.1 12.7
admin

cap)

Original
108.8
project
(APE &
estimate
10  10 20.9 32.8 23 12.1  0
admin

cap)
Project Y

(11.2)

108.8
Revised
(APE)
project
97.6
10  10  20.9 27.4 17.2 12.1  0
estimate
(admin

cap)

10/11 11/12 12/13 13/14 14/15 15/16
Price adjustment factor (as of March 2011)
1
1.04250 1.09463 1.14936 1.20682 1.27169

Table II. Cashflows in constant prices (September 2010 prices) ($ million)

Total
Change in
Cum

projec
total
exp up
10/11 11/12  12/13  13/14 14/15 15/16
t cost  earmarked
to Mar
funding
2010
Original
100
project
(a)
0  10 20  30  20 10 10
estimate

10
Project X
Proposed
A=(b)-(a)
110
project
(b)
0  10 25  35  20 10 10
estimate

Original
project
100
10 10 20  30  20 10 0
estimate
(c)
Project Y

(10)

Revised
B=(d)-(c)
project
90
10 10 20  25  15 10 0
estimate
(d)

- 7 -

Illustration

1.  The original APE and administrative cap (admin cap)3 for Project X is $111.5
million in MOD prices. An increase in APE of $10.7 million in MOD prices
is being sought.

2.  To determine the amount of savings (at the constant price level of the current
RAE) 4 that Project X needs to quote from other project(s) –
(i)  applying the price adjustment factors to deflate the original and proposed
cashflows in MOD prices to September 2010 prices; and
(ii)  determining the difference between the original and proposed project
estimate in September 2010 prices i.e. $10 million in September 2010
prices (“A” in Table II).

3.  Owing to lower-than-expected tender prices, the project estimate of Project Y
has been revised from $108.8 million to $97.6 million5 in MOD prices. To
determine whether sufficient savings can be quoted from Project Y to cover
the proposed increase in APE for Project X (i.e. $10 million in September
2010 prices) –

(i)  applying the price adjustment factors to deflate the original and revised
cashflows in MOD prices; and

(ii)  determining the difference between the original and revised project
estimate in September 2010 prices i.e. $10 million in September 2010
prices (“B” in Table II).

4.  Hence, sufficient savings can be quoted from Project Y to cover the proposed
increase in APE for Project X.
_____________________________________________________________________________________

3
To avoid locking up resources unnecessarily, TsyB will internally “freeze” all savings arising from
contracts awarded at prices substantially lower than the provision earmarked for these contracts in the
APE. DoB/works directors should not spend against the savings. The updated requirement for the
project (i.e. the reduced project estimate) will be the administrative cap on the project expenditure.

4
The savings required should be deflated to the constant price level of the current RAE. For the
present illustration, we have assumed the constant prices at September 2010 level.

5
$97.6 million becomes the admin cap for Project Y.

Annex B

List of Financial Circulars relating to
the Capital Works Programme Now In Force

Financial
Subject
Circular
No. 4/89
Furniture and Equipment
No. 9/90
Furniture and Equipment for Projects in the Public Works
Programme
No. 4/93
Procurement of "Non-standard" Equipment Items
No. 9/96
Estimates of Consultants’ Fees for Projects in the Public
Works Programme and for Capital Subvention Building
Projects
No. 14/97
Stores and Procurement Regulations
No. 2/99
Estimates of Consultants’ Costs for Projects in the Public
Works Programme, for Capital Subvention Building
Projects and for Works-related Studies funded under the
General Revenue Account
No. 6/2000   Powers of Write-off – Public Finance Ordinance: Section 38
No. 6/2001   Use of Trading Fund Services
No. 1/2004   Responsibility of Controlling Officers
No. 9/2004   Guidelines on the Management and Control of Government
Funding for Subvented Organisations
No. 2/2005   Recurrent Consequences of Capital Project
No. 6/2006   Fees and Charges
No. 2/2008   Correctional Services Industries
No. 2/2009   Initiating Works-related Tendering and Consultant Selection
Procedures Before Funding is Secured
No. 3/2009   Simplified Tendering Arrangement for Capital Works
No. 5/2009   Impact of Funding Proposals on Fees and Charges

- 2 -

Financial
Subject
Circular
No. 4/2010
User Guide on the Finance Committee, Establishment
Subcommittee and Public Works Subcommittee
No. 3/2011
Capital Works Reserve Fund
Delegated authorities in respect of block allocations
No. 2/2012
Procedures for making changes to the Estimates
of the Capital Works Reserve Fund
No. 3/2012
Capital Works Programme
No. 4/2012
Requirements for Project Definition Statement and
Technical Feasibility Statement for Capital Works Projects
No. 5/2012
Optimisation of Site Utilisation for Capital Works Projects