Budget Overrun and Gateway Process for Huge Public Projects

Mr Yee Jenn Jong asked the Deputy Prime Minister and Minister for Finance (a) what is the basis for selecting S$500 million as the cut-off point below which public sector projects need not be subjected to the Gateway Process; (b) whether there are plans to extend the Gateway Process to projects between S$100 million and S$500 million; and (c) whether there are plans to make available to the public the reports of completed public sector projects made by the Value-for-Money Review Office.

Mr Yee Jenn Jong asked for data regarding major public projects. Let me first outline the approval framework for major projects funded by the Government.

A system is in place and has been strengthened over the years, with emphasis on fiscal prudence, transparency and accountability. It involves rigorous assessment of proposals by the Ministry in charge of the project as well as MOF. The system also subjects projects of higher value and risk to greater scrutiny; proposals must pass several rounds of reviews by specialists before tenders are called and works allowed to begin.

Examples of projects exceeding $100 million which Mr Yee asked about include the construction of hospitals, waterworks and MRT projects like the Downtown and Thomson Lines. After a major project proposal by a Ministry or Statutory Board passes its review by MOF, budget approval must be obtained from the Development Planning Committee or DPC which comprises three Ministers before it is allowed to proceed. The three Ministers are the Minister for Finance, Minister for Trade and Industry, and the Minister overseeing the Ministry which submitted the project proposal.

If a project is estimated to cost above $500 million, it is put through the Gateway Process where it is subject to a series of further reviews before it is submitted to the DPC for budget approval. These projects are reviewed by the Development Projects Advisory Panel,

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which comprises senior public officers and industry practitioners with deep technical expertise and experience in major infrastructure development. The reviews seek to optimise the overall design, space take-up and cost-effectiveness of the project, and include the Value Management workshops which bring key project stakeholders together to refine the project design. This process helps to ensure that projects draw on the relevant expertise and best practices within and outside the public sector.

The Gateway Process described above is mandatory for all projects with estimated budgets exceeding $500 million. Complex major projects of smaller values may also be subject to the same process before they are allowed to proceed. One example is the Goh Keng Swee Centre of Excellence.

We have found the Gateway Process to be highly relevant in providing a useful second opinion to agencies' project plans. For example, the Gateway review of the Singapore University of Technology and Design campus project helped to reduce the footprint of the campus, thus freeing up land for other purposes. This was achieved through the re-routing of a service driveway and the relocation of the tennis courts to the roof of the indoor sports hall instead of on the adjacent ground.

The process I have outlined above ensures that project proposals submitted to the DPC for approvals have been carefully assessed. Therefore, the budgets approved by the DPC are best estimates, which, for projects such as the construction of hospitals or MRT lines, are generally determined by broad cost norms of projects with comparable scope and design.

When a tender is eventually called by the Ministry or Statutory Board in charge of the project, there is also independent assessment before an award decision is made. To ensure impartiality and transparency, the tender approving authority comprises individuals who are neither involved in project proposal or implementation and officers handling procurement must declare and excuse themselves if there is conflict of interest, for instance, if they are related to any of the bidders. This helps to ensure that the tender process is a fair and transparent way for true price discovery.

Given the complex nature of major projects, there can be material changes to the project scope or design between the time budget approval is obtained and when tenders are called. The tender prices may also exceed the original budget estimates by more than the acceptable thresholds specified during the approval process. Further, for major construction projects, there may be price fluctuation clauses for key materials, so that contractors do not have to bear the financial risks when those prices change in response to market forces. This means that it is quite possible that the budget needs adjustment after approval if there are

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sharp increases in material prices during the construction phase.

For higher value projects, any cost increase exceeding 10% or $100 million, whichever is lower, will be scrutinised again by MOF to ensure that there are valid reasons for the budget revisions. For proper accountability, the agency must also seek re-approval from the three Ministers in the Development Planning Committee.

Taken together, there is a well-functioning system of checks and balances to ensure prudent use of public funds. Cost increases from the original budget must also be justified and documented before projects are allowed to continue.

In the past 10 years, there had been 12 public sector projects with original budgeted cost of $100 million or more which experienced more than 50% increases in project costs, with a majority of these occurring between 2007 and 2010. The total value of cost increases was $13 billion, of which nearly 80% was attributable to the Downtown Line and Marina Coastal Expressway. To put this amount in context, this is out of over $100 billion in expenditure for public infrastructure over the same period.

One key reason was the sharp increase in construction costs as a result of global demand and supply factors which drove prices of materials and resources significantly above cost norms used in the original budget estimates. This factor alone contributed to almost half of the cost increases. As was fully explained by the Minister for Transport in Parliament in 2012, market prices for key materials such as steel bars and concrete spiraled upwards by 60% and 14% respectively from late 2007 to mid 2008, leading to higher costs for the Downtown MRT Line.

The project budget for the Downtown Line was also increased to accommodate one more station as well as to provide for more entrances and underground links to improve connectivity and access for commuters.

Unforeseeable findings are another key driver of cost increases. When conducting detailed soil investigations for the Marina Coastal Expressway, for example, LTA discovered that certain stretches of the proposed Expressway would have to be built in soil conditions that were weaker than originally thought. To ensure safety during construction, LTA had to put in more robust and deeper temporary structures and perform additional works to improve the soil.

In all of the above projects, MOF independently scrutinised the cost increases and verified them against the prevailing industry data. The relevant agencies then sought re-approval from the Development Planning Committee. In other words, they had to go back

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to the Development Planning Committee, explain the process of verifying the items that led to the cost increases that had already been scrutinised by MOF, and then proceeded, only if the DPC had granted re-approval.

In addition to the introduction of the Gateway Process in 2010, the Centre for Public Project Management was also set up in 2011 to improve cost management for major projects. In recent years, we have seen fewer cases of tender prices being significantly higher than their original budget estimates.

Mr Yee has also asked if there are plans to make public the reports of completed public sector projects by the Value-for-Money Review Office. These reports are part of the public sector's internal processes to help identify learning points and best practices. They include sensitive information such as internal tender deliberations and cost norms that could result in less competitive bidding from tenderers if revealed.

Nonetheless, like other internal documents, such as internal audit reports or project approval papers, these are made available to the Auditor-General's Office, or AGO, for their regular review. Where there are concerns in relation to irregularities or extravagance or waste in the expenditure of Government agencies, AGO has the authority to conduct audits and will report the matter publicly and table their reports to Parliament if warranted.

Mdm Speaker, I thank the Senior Minister of State for the very comprehensive answers. I just have a couple of supplementary questions. The first is on the Gateway Process. I understand that other governments, such as the Australian government, also have some sort of a gateway process, and their cut-off is at $30 million for projects and $50 million for programmes. I was wondering if our $500 million threshold is set a little too high.

Also, for those projects below $500 million, I understand the Senior Minister of State said that some projects are also subjected to a similar process. Given that there are some projects that are above $100 million that have also significant budget overruns, is the current process effective without this Gateway Process, and should we extend the Gateway Process to maybe a lower threshold?

Lastly, on the Value-for-Money Review Office report, I was wondering if it is possible for certain sensitive information to be de-sensitised. For example, tender prices and so on may not have to be put in, but perhaps the key lessons learnt so that public projects could be more accountable to the public and for people to look at to see what are the learning points for everybody.

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Madam, I thank the Member for his supplementary questions. I should add that although there are occasions where the project costs are higher than originally estimated, there are equally projects with cost savings. In other words, the utilised budget is actually less than what was originally estimated. One that I can think of immediately is LTA's own provision of barrier-free accessibility to current MRT and LRT lines. The utilised budget was almost $30 million lower than the original approved budget of $116 million. It turned out that it was only $87 million when the original approved budget was $116 million.

The point that I am trying to make is that it is not always the case that actual project costs are higher than the budgeted estimate. When we think about the process that we would subject major project proposals to, we have also got to weigh the time as well as the significant administrative resources that will have to be put in, in order to fulfil the review requirements appropriately and to make sure that the reviews are thorough. So, if you want to do a proper job of the reviews, you have got to set aside the proper resources.

As a result, the approach that we adopt is to look at project proposals based on value and also the risk that could be involved. As I had mentioned in the reply earlier, the Gateway Process is mandatory for projects that have an estimated budget of $500 million or more, but if there are projects of smaller value, we do not hesitate to put them through the Gateway Process if we assess that the risk involved is significant as well.

As to what the appropriate threshold would be, I think we have to look at our own situations and also look back at projects for which tenders have been called and compare them against our estimates. So far, it appears that this $500 million threshold works reasonably well for us. But we take the Member's suggestion into consideration. If there is a need to revise the threshold, we would consider doing so.

The Member's other question relates to Value-for-Money or VFM Review Office reports. I should say that while the VFM reports are not publicly published, it does not mean that the findings and learning points are not shared within the Government. In fact, there is a very deliberate effort to share the findings and learnings through forums such as Cabinet meetings, Committee of Permanent Secretaries meetings, Director of Finance meetings and agencies' own internal forums. The Centre for Public Project Management also collates best practices in managing infrastructure projects and shares those across the public service through various physical and online platforms. So, in response to the Member's question, there is a very deliberate effort to make sure that the learnings are shared. We will continue to do so to make sure that best practices continue to be adopted across the public sector.

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