16 May 2002
Investigation report on West Rail contracts published
 
Ernst and Young have completed their investigation into Kowloon-Canton Railway Corporation’s (KCRC) tender evaluation and contractual performance systems in respect of the Siemens telecommunication contract and two other West Rail contracts and the report has been accepted by the Steering Committee and the Managing Board.
The investigation report, published today, found that KCRC management was concerned about the impact that any delay on the Siemens contract would have on the timely completion of West Rail, the financial impact on a number of interrelated West Rail contracts, and the significant time and cost implications if Siemens was replaced by another contractor.
Ernst and Young concluded that in the circumstances, the decision to negotiate a supplemental agreement was correct. However, they found that the Managing Board was not advised in a timely manner of the severity of the Siemens problem, and by the time they were informed, it was too late for them to consider any alternative course of action.
The investigation discovered that the late reporting of the Siemens problem to the Managing Board was also attributable to different criteria used for two sets of internal reports monitoring progress of West Rail contracts. The internal reports which went to the Board did not indicate the serious delays in the Siemens contract.
In general, Ernst and Young found that KCRC’s contract management and monitoring procedures compare favourably with industry norms and best international practices.
However, there are areas for enhancement, and Ernst and Young made a number of recommendations including:
to complement the existing Managing Board's knowledge and experience in contract management, consideration should be given to appointing one or two Board Members with specific knowledge and experience of major projects;
the composition of the New Railway Projects Steering Committee of the Managing Board should be strengthened to include expert Board Members from outside KCRC and the Committee should meet much more regularly to consider and recommend to the Managing Board appropriate solutions to problems of individual contracts;
to minimize the risk of receiving an inadequate number of conforming bids, the number of firms to be pre-qualified for tendering for major contracts should be increased from four to six;
the criteria used in different internal reports to monitor the performance of contracts should be the same;
specific procedures should be put in place for approval of negotiation plans for supplemental agreements, and prior approval of these plans is required in order to establish the relative priority of the objectives of the negotiation.
On the whole, the Managing Board acknowledged the problems which could arise from extremely low bids, and will ensure that in future management will put in place systems which can exert greater control over contractors in respect of contractually binding milestones and key dates, and strengthen the ability to re-enter if necessary. For its part, the Managing Board will exercise a greater degree of vigilance when it examines proposals and reports from management.
Ernst and Young also looked into the circumstances of supplemental agreements entered into in respect of two other major West Rail contracts for the construction of Tuen Mun Station and Mei Foo Station respectively.
In both cases, it concluded that the action taken by senior management to resolve the delay and claims issues was in the best interest of KCRC. However, the report expressed the same concern as in the Siemens contract that the Managing Board was not advised in a timely manner.
The investigation was carried out under the supervision and guidance of a steering committee chaired by the KCRC Chairman, Mr Michael Tien with the following independent members:

1.              Sir John Swaine, Senior Counsel and a former President of the Legislative Council;
2.              Professor Lee Chack Fun, Professor (Chair) in Geotechnical Engineering and Pro-Vice Chancellor, University of Hong Kong;
3.              Mr Denis George Levett, a senior quantity surveying professional and a former Chairman of the Royal Institution of Chartered Surveyors, Hong Kong Branch.