Topic 6 2012

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Topic 6: Hong Kong Construction Industry

References:

1. http://www.econ.cuhk.edu.hk/~discusspaper/00011.pdf : C.K. Leung and K.S.Wong, The Construction and Related Industries in a Changing Socio-

Economic Environment: The case of Hong Kong, May 2005,2. http://www.tdctrade.com/main/china.htm .

3. T. Cheng, E. Wong and G. Soo, Construction Law and Practice in Hong Kong,

Sweet & Maxwell, 2004.

1.0 Building and construction industry in Hong Kong (latest dated July 2011)

1. The following are extracted from http://www.hktdc.com of the HKTDC athttp://www.hktdc.com/info/mi/a/hkip/en/1X003UNV/1/Hong-Kong-Industry-Profiles/Building-And-Construction-Industry-In-Hong-Kong.htm

2. Hong Kong's construction industry performed well in the first quarter of 2011,with the gross value of construction work performed by main contractors in

real terms amounted to HK$26.3 billion (US$3.4 billion), gaining 17%year-on-year (YoY). The ten major infrastructure projects announced in 2007

are being rolled out in phases as scheduled, boosting Hong Kong’sconstruction market. China’s twelfth Five-Year-Plan, which was released inMarch 2011, shows the country’s intention of further increasing investment on

the infrastructure development, offering great opportunity for Hong Kongcontractors.

3. Industry Data from Quarterly Report of Employment and Vacancies atConstruction Sites, Census and Statistics Department is as follows:

Mar-2010 Mar-2011 YoY %

Number of Construction Sites 1,006 1,053 +4.7

Public 396 466 +17.7

Private 610 587 -3.8

Employment 53,913 58,807 +9.1

Public 23,849 30,962 +29.8

Private 30,064 27,845 -7.4

4. The overall gross value of construction work performed by main contractors in

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Hong Kong (in real terms) has been rising since 2009. A strong growth of61.1% in the value of public sector sites drove up the construction activity by7% to HK$111 billion in 2010. As the ten major infrastructure projects are

being rolled out in phases as scheduled, the demand for construction servicesin Hong Kong, particularly demand from the public sector, will remain high.

Sector (in HK$ million) 2010 2010

YoY %

2011

Jan-Mar

2011

YoY %

Private sector sites 26,924 -12.3 6,183 9.3

Public sector sites 27,470 61.6 8,165 40.4

Location other than sites 45,883 -0.1 11,966 8.6

All group 100,278 7.0 26,313 17.0

5. Hong Kong's construction industry is characterised by a small number of largelocal contractors, a high level of subcontracting, the presence of many

overseas contractors, and a substantial number of companies being bothdevelopers and contractors.

6. Most of Hong Kong's construction companies are small in size, those with lessthan HK$10 million (US$1.3 million) in annual gross value of construction

work account for as high as 97% of the construction industry. The majority ofthe small ones act as subcontractors to the large companies, which tend to bemain contractors. There are quite a number of very big construction companies

that are capable of handling projects requiring sophisticated technology andstrong financial background and are expanding their business across the

region.

7. Many services professionals are involved in the building and construction

industry, notably architects, surveyors and engineers.

8. Apart from the ten major infrastructure projects, the HKSAR government has

also forged ahead with other works, such as Operation Building Bright andRevitalising Historic Building. In addition, the further development of Hong

Kong International Airport, including the construction of the proposed thirdrunway, is under discussion, according to the HKIA’s Master Plan. As a resultof these projects, the employment condition in the construction industry has

improved significantly, with the unemployment rate in the industry down torecent 4.5% from the post-tsunami peak of 12.8%.

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9. In the Budget 2011/12, the Hong Kong government estimated total public

spending on infrastructure to go up by 45% YoY to HK$58 billion (US$7

billion) for the fiscal year ending 31 March 2012.

10. Many Asian countries need to upgrade their basic infrastructure such as roadnetworks, port facilities, and housing. The rise of Asian consumerism has alsoled to rising investment in modernising their retail distribution channels.

Shopping malls are springing up in many Asian countries, typically India,Indonesia, the Philippines, Thailand, Malaysia and Vietnam. Hong Kong

construction companies are actively seeking opportunities in these markets.Luks Group, for example, engages in cement production and property

development in Vietnam.

11. The Middle East is another market which has attracted some Hong Kongcompanies, with many projects won in many Middle East countries. Hip Hing

Construction has won contracts in Abu Dhabi’s (the capital city of the UAE)carbon-free city Masdar, as well as contracts in Dubai to construct a 72-storey

residential building called HHHR Tower together with Al AhmadiahContracting & Trading. Paul Y, was awarded the contract worth US$77

million to build the 54-storey Arraya Office Tower in Kuwait. Another HongKong construction company, Chun Wo Development, with initial investmentsin two residential projects in Abu Dhabi, also entered the Middle East market.

12. Rapid urbanisation drives up China’s demand of infrastructure development.According to China’s 12th Five-Year-Plan, urbanisation is targeted to go up

by 4%, reaching 51% in 2015 from 47% in 2010. With the help of the RMB4trillion stimulus package introduced in the wake of the international financial

crisis in late 2008, infrastructure development on the Chinese mainland gainedgrowth momentum. According to the United Nations, China’s urbanisationrate is projected to reach 53.2% in 2020, and 72.9% in 2050. Infrastructure

demand is likely to remain robust in the foreseeable future.

13. China devoted around 9% of its GDP to public building and improvement

projects during 2005-2010, compared with the respective ratios of 2.4% and5% in the US and Europe, according to a report released by the U.S. Treasury

Department and the Council of Economic Advisors. More importantly, China

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will continue the trend of increasing spending on infrastructure as per thecountry’s 12th Five-Year-Plan.

2.0 Statistics of the Industry

14. Data on building works can be obtained from the Buildings Department’swebsite: http://www.bd.gov.hk/english/documents/index_statistics.html .

15. Data of the public sector construction project can be obtained from theEnvironment, Transport and Works Bureau’s website http://www.etwb.gov.hk

under “Publication and Press Release”.

a. Average Daily Wages of Workers b. Gross Value of Construction Work performed by Main Contractorsc. Number of Manual Workers engaged at Construction Sitesd. Overall Accident Rates for Public Works Contractors

16. Building Works Tender Price Index can be found from the Architectural

Services Department’s website: www.archsd.gov.hk under “Reports”.

17.

Construction Output is summarized under “Hong Kong Statistics” of Censusand Statistics Department www.censtatd.gov.hk .

3.0 Structures of the Construction Industry

18. Buildings, roads, and bridges are only some of the products of the construction

industry. The industry activities include the building of new structures as wellas alteration and addition to existing ones. The industry also includes

maintenance, repair, and improvements on these structures.

19. The construction industry may be divided into three major segments. We have

the general contractors mainly for superstructure constructions. Specializedcontractors perform specialized activities, e.g. foundation works anddemolition works. There are also civil engineering construction contractors for

sewers, roads, highways, bridges, tunnels, and other projects.

20. Pursuant to the Buildings Ordinance, there are registers of contractors and

professionals.

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a. Registered General Building Contractors, s8A

b. Registered Specialist Contractors, s8A: including Demolition Works;

Foundation Works; Site Formation Works; Ventilation Works; andGround Investigation Field Works

c. Registered Minor Works Contractors, s8Ad. Authorized Persons, s3(2): including List of Architects; List of

Engineers; and List of Surveyors

e. Registered Structural Engineers, s3(3)f. Registered Geotechnical Engineers, s3(3A)

g. Registered Inspectors, s3(3B)

21. Pursuant to the Engineers Registration Ordinance, there is a registration ofRegistered Professional Engineers under the various disciplines of the HKIE(e.g. civil, structural, geotechnical, mechanical, environmental, etc.).

22. Building constructions are usually carried out or coordinated by RegisteredGeneral Building Contractors, s9(1) Buildings Ordinance. They take full

responsibility, except for specified portions of the work that may be omittedfrom the contract for Registered Specialized Contractors, s9(2) Buildings

Ordinance.

23. The main contractors subcontract most of the works to other sub-contractors

who in turn further sub-sub-contracts part or all of the sub-contract works toother sub-sub-contractors.

24. Depending on the nature and terms of a sub-contract, a sub-contractor in the

carrying out of the sub-contract works may provide equipments, materials,

Main contractor

Sub-contractor Nominated sub-contractor

Sub-sub-contractor Sub-sub-contractor Sub-contractor

Sub-sub-sub-contractor

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labour, etc., or labour only (especially for sub-sub-sub-contractors).

25. There are also other sub-contractors for painting, carpentry, electrical works,

plumbing, heating, etc. They obtain orders for their works from generalcontractors, architects, or property owners. For instance, repair works is

mostly directly ordered from owners, occupants, architects, or rental agents.

4.0 Different Types of Construction and Employment

26. Construction processes are very complex and stretch from the concept of

development to the operation and disposal of the completed works.

Phase Details of works Key considerationFormulation Owners requirements examined Scope, budget and schedule

Planning Carry out studies Cost benefit analysis, feasibility studies

Design Detailed design Plans, specifications, contract

Construction To drawings and specifications Cost, schedule

Maintenance Management and maintenance Sustainable structures

Disposal Replacement of the building Demolition

27. Local construction activities can be broadly divided into three areas. One isrepresented by public housing projects undertaken by the Housing Authority.

There were at one time major backbones to the whole construction industryduring the 90s. However, with the HKSAR government’s change in the publichousing policy, construction activities in this area are now diminished. The

Planning

Disposal

Formulation

Design

Construction

Maintenance

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second area is represented by the public sector works. Last are the privatesector construction projects undertaken by the developers and account forabout 50% of the gross value of construction works.

28. It is because of the sub-contracting nature of the construction industry,

significant portion of the work force is employed on the basis of day-workersor outworkers. Such employment is very fragile and the workers are exposedto non-payment of wages. They are now well protected under s43C of the

Employment Ordinance:-

“(1) … if any wages become due to an employee who is employed by asub-contractor on any work which the sub-contractor has contracted to

perform, and such wages are not paid … such wages shall be payable to theemployee -

(a) where the sub-contractor has contracted with the principal contractor, bythe principal contractor; and

(b) where the sub-contractor has contracted with a superior sub-contractor, bythe principal contractor and every superior sub-contractor to the sub-contractor,

jointly and severally…”

29.

Any claim in respect of the wages payable under s43C(1) above can beapplied most of the time to the Labour Tribunal and sometimes to the MinorEmployment Claims Adjudication Board.

5.0 Government and Construction Industry

30. The Environment, Transport and Works Bureau is responsible for formulating,coordinating and monitoring the implementation of public works projects. The

Bureau is also responsible for policy matters on water supply, slope safety andflood prevention. These are all essential for improving our quality of life, andmeeting the immediate needs and the long-term development of Hong Kong.

Besides, the Bureau is the lead agency within the Government for coordinatingconstruction-related issues and implementation of the recommendations made

by the Construction Industry Review Committee (CIRC). The Bureau oversees

the implementation of such works policies by the Works Departments and isresponsible for the overall coordination of Works Departments’ functions for

the Public Works Programme (PWP). The PWP comprises public works on

port development, government building projects, drainage projects, civil

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engineering projects (e.g. reclamation and landslip preventive measures).

31. The Buildings Department facilitates and promotes the construction and

maintenance of quality buildings under the ambit of the Buildings Ordinanceand its related regulations. It strives to make the built environment safe and

healthy for the community. For new building development, it controls theapproval and consent process ensuring building safety and health. For existing

buildings, it takes rigorous enforcement action against dangerous and newly

erected unauthorized building works, dangerous buildings and slopes,defective drains and signboards. It also promotes timely maintenance of

buildings and administers a building safety loan scheme to help those in need.

6.0 China Market: differences in law

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7.0 New green initiatives

36. The Government has implemented initiatives to foster quality and sustainable

built environment and to promote wholesale conversion of industrial buildings.

37. The Chief Executive’s policy address in October 2010 has announced a package of measures, covering the following major elements, to promote a

quality and sustainable built environment.

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(a) Compliance with the sustainable building design guidelines on building separation, building set back and site coverage of greenery,

(b) Control of gross floor area concessions, and

(c) Enhanced energy efficiency of buildings.

38. These measures will be applicable to all new building plans or major revisionof building plans submitted to the government for approval on or after 1 st April2011.

39. The Government has implemented an initiative to encourage the revitalisationof existing industrial buildings through wholesale conversion of vacant or

under-utilised industrial buildings (see Practice Note Issue No.1/2010 issued by the Lands Administration Office of the Lands Department). The measures

are only valid for three years from 1 st April 2010, and the conversion worksrelated to revitalisation are to be completed within three years after issue ofthe waivers by the Lands Department.

40. Compared with building redevelopment, wholesale conversion of vacant orunder-utilised industrial buildings is considered to be a more sustainable way

to reduce waste and conserve natural resources.

Ir Dr Lam Siu Shu EddieMSc, PhD, PgD(Law), PCLL, CEng, FIStructE, MIMechE, FHKIE, RPE,

RSE, Class-1 RSE PRC,

Barrister-at-Law

Dated: 18 th August 2012

Topic 6 2012

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