Arts hub may cost taxpayers extra HK$16b

Construction of the West Kowloon arts hub could cost taxpayers up to HK$16 billion extra because of a sharp rise in project costs and lower-than-expected returns on investments to help fund it.

According to the latest budget estimate for the HK$21.6 billion project - carried out by University of Hong Kong Professor Chau Kwong-wing - an additional HK$9.2 billion to HK$16.4 billion would be needed to maintain the scale and quality of the planned 40-hectare cultural precinct.

Chau, head of the university's Department of Real Estate and Construction, was asked by the South China Morning Post to review the project's budget. His first assessment, which he conducted in 2008 at the request of lawmakers, predicted a shortfall of HK$6.4 billion.

According to the Architectural Services Department's tender price index, which reflects materials and labour, the construction costs of public tenders have jumped by 76 per cent since the third quarter of 2006 - when consultancy GHK put the project cost at HK$21.6 billion, which is still the current estimate.

The lower range of Chau's estimated budget shortfall is based on a smaller increase of about 42 per cent in the cost of private tenders compared with government tenders, as the former is considered to have passed its peak in 2008.

The rise in construction costs is set to continue as the department has released figures dated only to the second quarter of last year.

'The consultant obviously underestimated the budget and overestimated the return' [on investment], Chau said.

Michael Lynch, chief executive of the West Kowloon Cultural District Authority, which is responsible for the project, also thinks the current funding is inadequate. Appointed as the authority's CEO in May last year, Lynch said it might have been 'a little too prudent' in its past investment and that he had hired a team of professionals to look for better options.

The authority had begun talks with the government about issuing bonds as a financing solution and reviewing the commercial feasibility of the performance venue, he said.

The government's original estimate was based on assumptions that construction costs and inflation would rise by 2 per cent a year and the annual rate of investment return would be about 6 per cent. Instead, inflation over three years has been between 3 and 8 per cent. The apparently prudent investment approach of setting aside half of the project's funds in short-term HK dollar and yuan deposits and the other half with the Monetary Authority brought an annual rate of return of 1.1 per cent in 2009 and 3.4 per cent in 2010.

'In the past we are a little too prudent [in investment],' Lynch said. 'We now have a much more professional team working on the finances. The last thing I want to find is that we are getting involved in [investment] activities that work against the long-term interests of the project.'