Debated in Parliament on 14 Nov 2012.
Mr Yee Jenn Jong asked the Minister for Transport (a) if he will provide a breakdown of the costs arising from the major changes from the original plan for the Downtown Line that have led to the huge increase in the construction budget; and (b) what are the lessons learnt in terms of budgeting, planning and structuring of contracts for future train lines.
Mr Png Eng Huat asked the Minister for Transport (a) which stage of the Downtown Line (DTL) contributed the most in the $8.7 billion cost spiral; (b) which contractor filed the most claims in additional cost; (c) why are the DTL contracts structured to subject LTA to fluctuation risk in construction cost; and (d) are the contracts for the Thomson Line structured the same way as well.
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Mr Speaker, with your permission, I would like to take Question Nos 6 and 7 together.
Yes, please.
Sir, we announced an original budget of $12 billion for the Downtown Line in early 2007. Subsequently, we revised the budget upwards to $20.7 billion.
Approximately half of the increase is due to the increase in construction costs from late 2007 onwards, because of the sharp growth in overall construction demand in Singapore. The prices of construction materials also increased significantly. For example, market prices for key materials, such as steel bars and concrete, spiralled upwards by 60% and 14% respectively from late 2007 to mid 2008. Actual tender prices were therefore higher than what we had originally envisaged in early 2007, when we planned the $12 billion budget, and we had to revise the budget upwards.
The increase in budget was also required to make enhancements to the line that was initially based on a set of preliminary engineering and planning parameters drawn up in 2006-2007. For instance, the original alignment was extended from 40 km to 42 km and an additional station was added. Also, for several of the stations, we decided to improve their design to provide for more entrances and underground links to improve connectivity and access for commuters and pedestrians.
Sir, let me explain that the initial planning for the Downtown Line, including the original $12 billion budget, was based on preliminary studies. Detailed engineering and architectural plans were finalised only later, as is typically the case for such major projects. These detailed plans also took into account URA's long-term land use plans which were updated after 2007, and, hence, resulted in some significant changes to the original plans for the Downtown Line. Overall, when compared to the original $12 billion budget, most of the increase in the revised budget can be attributed to Downtown Line 1.
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Sir, Mr Png also asked about risks for fluctuating construction costs. As is the practice for LTA's major construction tenders, price fluctuation clauses for key materials were included in the Downtown Line tenders. This will also be the case for the Thomson Line contracts. In these clauses, LTA would bear the downside risk for any increase in the cost of key materials from the tender price. At the same time, LTA would also enjoy the upside savings should the cost of the materials come down. Moreover, because LTA bears this risk associated with the cost of key materials, which is beyond the contractors' control, tender prices would be lower because the contractors would not need to factor in this risk premium in their tender. This approach is in line with best practices across other Government agencies and across the world.
For example, the material costs for Downtown Line 3 were higher than tendered because market prices for materials went up subsequently. However, LTA enjoyed some savings for DTL1 and DTL2 contracts compared to the tendered prices, through the price fluctuation clauses, as the prices of key materials came down somewhat after the tenders were awarded. In case there is confusion, let me point out that these subsequently reduced market prices were still higher than in early 2007, when we planned the original $12 billion budget, but if the prices of materials remain at around current levels, then we should expect to see some savings from the revised budget of $20.7 billion.
Finally, Sir, let me assure Members that we are prudent in managing public funds. For all development projects, we ensure thorough scrutiny and review at various stages, and work closely with the Ministry of Finance on cost management and value maximisation. LTA also adopts best practices in its tendering and contracting processes, reaps economies of scale through bulk supply contracts, where possible, and attracts overseas international contractors to tender for rail projects as well, in order to keep prices competitive.
I thank the Minister for the answer. I have two supplementary questions. First, how many of the contracts were actually awarded to the lowest bidder? Second, in 2007, the ex-Minister of State for Transport said in Parliament that LTA was reviewing whether some stations required more than one entrance and making stations more user-friendly and handicap-friendly, and that any enhanced standards would also apply to the Downtown Line. Immediately after that, Downtown Line Stage 1 was started in about 2008. So, were those changes made known or incorporated into the tender?
Sir, if I may explain a little bit more about the tender process. Basically, it is a two-stage process. We, first of all, evaluate the tender returns based on the quality of the returns and thereafter we open the envelope to review the prices, and we take into account the composition between quality as well as the price of the tender in order to decide on which is the most suitable and appropriate bidder for that particular stage of the project.
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Secondly, with regard to provision for more entrances, I believe that part of the additional cost that I mentioned earlier came about as a result of an increase in about 30 entrances that we incorporated into the existing Downtown Lines. So, there were about 30 entrances that were built into the various stages of the Downtown Line.
I thank the Minister for the answers. I have a supplementary question. I noted that in the press report, it says that one of the measures that LTA is taking is to invite more firms to bid for the projects, to make it more competitive. I would like to ask whether that was done so previously, as in how many companies took part in the earlier bids and how competitive were these bids.
I thank the Member for the supplementary question. The answer actually depends on when the tender was put out. So, more recently, because of the lack of work around the world and also in the Middle East, we have actually seen more responders to the tenders that we have put out. And we hope that in this way, we also get more competitive pricing. But as much as possible, we try to make sure that for such major projects like this, we cut it up into many chunks of different sizes and in this way, we allow different-sized companies, including some of our local ones which may not be as significantly capitalised as some of the international companies, also the chance to participate in the tender.
Mr Png, last question.
The Minister said that most of the cost overrun came from Downtown Line Stage 1, and that is actually the shortest line with six stations. Can the Minister explain this?
If I may give a little bit more clarity on the total cost overrun. From an initial budget of about $12 billion, it went up to $20.7 billion. So, it is about $8.7 billion in total. If we take away the GST component for this $8.7 billion, it comes up to an increase of about $8 billion. Seventy-five per cent of that increase came about as a result of either construction cost, technical requirements or the improved connectivity that I was talking about. Why I said that Downtown Line 1 attributed to a larger part of this increase in cost is because of the time when the tender was called. And if Members recall, from 2007 to 2008, construction prices as well as material prices went up significantly.
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