16 May 2002
Statement by Mr Michael Tien, Chairman
Ernst & Young have completed their investigation into KCRC’s tender evaluation and contractual performance monitoring systems in respect of the Siemens telecommunications contract and two other West Rail contracts. They submitted their report on 30 April 2002, and the report has been accepted by the Steering Committee and the Managing Board.
I would now like to invite Sir John Swaine to say a few words on behalf of the Steering Committee.
Before going into details of the report, I should point out that after being the Chairman for more than four months, I have found that the Corporation’s senior management is on the whole dedicated and professional. Ernst & Young have by and large come to the same view, concluding that KCRC has developed sound systems and procedures, and a contract philosophy which reflects current international best practice in contract management and dispute resolution.
The investigation focused on a number of issues and I will highlight some of them:
For the Siemens contract, Ernst & Young pointed out that KCRC management was very concerned about the impact that any delay on this contract would have on the timely completion of West Rail, and the financial impact on a number of other West Rail contracts. Management was also concerned that, even if it had been possible to replace Siemens, there would have been significant time and cost implications. The investigation concluded that the decision to negotiate a supplemental agreement with Siemens was the correct one in the circumstances.
As for the other supplemental agreements, Ernst & Young point out that the use of such agreements is favoured by recent industry reports, and is commonly used in many countries including the USA and the UK. The Ernst & Young team concluded that it was almost inevitable that a large number of supplemental agreements would need to be negotiated with contractors, but it did not mean that the existence of such agreements represented higher overall costs to KCRC.
The Ernst & Young team also concluded that the systems and procedures developed by KCRC for contract procurement and monitoring compare favourably with industry norms and best practices. But this does not mean that the Corporation has been given a completely clean bill of health.
For the Siemens contract, Ernst & Young emphasised that the first time KCRC’s Managing Board was advised of the severity of the problem was when it was informed of the negotiation plan for the proposed supplemental agreement, when it was already too late to consider any alternative course of action. For this late reporting of the problem, our CEO had already apologised twice on behalf of the management team --once when the negotiation outcome was discussed by the Managing Board in December last year, and again when the Board met recently to discuss this investigation report. Management has pledged that these reporting procedures will be improved.
The Ernst & Young team also discovered that different criteria were used for two sets of internal reports monitoring progress of various contracts. Because of the different criteria used, the internal reports which went to the Managing Board did not indicate the serious delays in the Siemens contract. This is clearly not acceptable and Management has taken immediate steps to ensure that the same criteria are used for all reports from now on.
The Managing Board has expressed displeasure in the late reporting by management. It 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.
The Ernst & Young team also noted that the composition of the Managing Board included only one executive director (the CEO) and that it generally met once a month. The team felt that the Board had a heavy workload because of the size and complexity of the issues which it had to deal with for KCRC as a whole, and that Members should have been given adequate opportunities to assess and discuss specific problems arising from individual West Rail contracts. It suggested that the Government should consider complementing the existing Managing Board’s knowledge and experience in contract management by appointing one or two non-executive directors with specific knowledge and experience of major projects. It also suggested that the New Railway Projects Steering Committee, a committee of the Managing Board, should be strengthened to include expert members from outside KCRC, and that the Committee should meet much more regularly. This Committee would provide a forum for summary and exception reports in contract management, and for senior management to present problems on individual contracts with alternative courses of action. It would then be able to consider and recommend to the Managing Board appropriate solutions.

Apart from these, Ernst & Young recommended a number of constructive changes to the Corporation’s contract monitoring and management procedures. We accept these recommendations and will be taking steps to put them in place.

Ladies and gentlemen, before I invite questions, I would like to invite Mr K Y Yeung to speak on behalf of the management team.