Taxpayers should not pay more than their fair share for overpriced incinerator

Tom Yam calls on legislators to scrutinise the sums before any approval

PUBLISHED : Wednesday, 02 July, 2014, 3:20pm
UPDATED : Thursday, 03 July, 2014, 2:58am

Tomorrow, the Legislative Council's Finance Committee faces a crucial vote on whether to fund the Environment Bureau's mega incinerator to be built on Shek Kwu Chau island. The bureau wants HK$18.24 billion in initial capital and HK$402 million per year in recurring costs over 15 years for an incinerator capable of burning 3,000 tonnes of waste per day.

Have legislators scrutinised the numbers? It's up to them to do so because, despite demanding such a staggering amount of taxpayers' money, the bureau has repeatedly issued misleading information on the project, and refused until April to release cost data.

An analysis of the cost breakdown raises serious concerns. First, the bureau has located the incinerator on an isolated island with no infrastructure, instead of near an existing landfill. This will cost an extra HK$3.2 billion, or 18 per cent of the initial capital, comprising HK$2.43 billion for reclamation and HK$774 million for electric systems on the island and laying cables to a power substation on Lantau.

Construction will also take two years longer, contradicting Environment Secretary Wong Kam-sing's claims of urgency in building the incinerator.

Subtracting the island-related cost of HK$3.2 billion from the capital cost of HK$18.24 billion leaves HK$15.04 billion for the incinerator itself, with an annual recurring cost of HK$402 million over 15 years. And here's the second problem: such a cost profile does not match the bureau's "design, build, operate" model. In such a model, the vendor pays for the capital costs of designing, building and operating the incinerator, then recovers the costs and makes a profit over a period of time by charging an annual "tipping fee". This is the model used for most incinerators in the rest of the world.

The bureau, however, wants to pay for everything with our money: it is asking the Finance Committee to approve HK$15.04 billion for the capital costs of designing and building the incinerator - even though this should be paid by the vendor under the model. It is also asking for money for recurring costs, equivalent to an annual tipping fee of HK$367 per tonne of waste, which is in the mid-range of such fees charged by vendors in the US, Europe and Singapore.

If vendors elsewhere have borne the front-end capital costs, why are taxpayers here being asked to bear the capital costs as well as the tipping fee? We are taking on the financial risk instead of putting it on the vendor, where it belongs. Perhaps the bureau plans to pay the operator only the tipping fee, and some of the HK$15.04 billion is actually earmarked for a second incinerator? Without holistic waste management, one 3,000-tonne-per-day incinerator will not be enough for the 9,000 tonnes of waste generated daily in Hong Kong.

Then there's the third problem: the capital cost of HK$15.04 billion is too high compared with that of other high-capacity incinerators. In 2003, for example, the Dutch built a 1,400-tonne-per-day incinerator costing €233,600 per tonne. Adjusted for inflation and expressed in 2014 value, it cost about HK$3.88 million per tonne. By contrast, the bureau's incinerator will cost HK$5 million per tonne (HK$15.04 billion divided by 3,000 tonnes). Why so much more?

These are important questions the committee needs to ask. Unless legislators can force the bureau to give real answers, they should reject funding the world's most expensive incinerator.

Tom Yam is a Hong Kong-based management consultant. He holds a doctorate in electrical engineering and an MBA from the Wharton School of the University of Pennsylvania