What the Kai Ching saga tells us about risk management

Chief Executive Leung Chun-ying (left), flanked by Anthony Cheung and Secretary for Development Paul Chan, announces measures to address the Kai Ching lead contamination crisis. Photo:HKEJ

Proper and effective internal controls are key to maintaining good governance.

The water contamination scandal in Kai Ching estate is a good case study.

A proper internal control regime means the cost of maintaining it is lower than the potential risks.

The Housing Authority is responsible for making sure public housing estates have safe drinking water.

Tests are carried out at regular intervals but rarely on a daily basis because these are too expensive and difficult to execute.

Effective internal controls will bring potential risks within expectations.

These could include using lead-free water pipes or cleaning water tanks and checking the water supply system regularly.

There are three main internal control measures -- preventive, detective and corrective.

In addition, there are strict regulations on the construction and installation of water supply and plumbing systems.

The Waterworks Ordinance prohibits anyone other than licensed professionals to carry out these tasks.

They are required to obtain regulatory approval for the materials they're going to use.

Non-compliance could make them liable to severe penalties, even revocation of their license.

And their work has to be inspected by other professionals.

These various measures are aimed at preventing problems and are deemed most effective.

The effectiveness of these measures will be confirmed through detective controls.

These are carried out by inspectors who will test water samples in various areas of the housing estate.

In the case of Kai Ching estate, both preventive and detective measures failed.

That led to corrective measures such as setting up a special team to investigate the water system in the entire complex, expand the area of water samples and replace water pipes.

Also, there are multi-tier internal controls including entity-level controls and transaction-level controls.

A complete internal control system should cover both.

Supervision of licensed plumbers is entity-level control while sample testing, construction materials declaration and system checks are transaction-level controls.

Secretary for Transport and Housing Anthony Cheung has appealed for more public understanding, saying the agency does not have enough manpower to deal with the crisis.

Meanwhile, Kai Ching residents are wondering how much longer they have to put up with it.

A man said the first thing he does in the morning is look for safe drinking water. A mother said she is afraid to breast-feed her baby for fear of lead in her body.

This article appeared in the Hong Kong Economic Journal on July 17 under the pen name Bittermelon.

Translation by Julie Zhu

[Chinese version中文版]

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