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Public Private Partnerships {PPPs} in Hong Kong

PPPs are arrangements where both the public and private sectors bring their complementary skills, with varying levels of involvement, responsibility and risk, to a project for the purpose of creating an enhanced service delivery process.

An increase in pressure on government finances, particularly on capital expenditure budget and measures to reduce the fiscal deficit, has lead the Hong Kong Government to focus its attention on PPP schemes, as part of their Private Sector Involvement (PSI) initiative, for the delivery of public services and infrastructure. The construction industry having suffered a downturn over the last five years, is also keen to explore with the Government the development of PPPs.

The apparent success of PPPs in the UK and Australia, inspired the Government in August 2003 to release Serving the Community By Using the Private Sector - An Introductory Guide to Public Private Partnerships (the "Guide"). This publication, built upon the broader policy principles contained in the PSI Program, Serving the Community By Using the Private Sector, previously released in June 2001. In the Guide, the Government acknowledged the major benefits of PPPs as being:

• The ability of the Government to define the quality and quantity of services and the timeframes in which they are to be delivered.
• Responsibility of the private sector for delivering services leaving the Government to take the initiative in regulation and procurement.
• Establishment of long term relationships, typically between 10 and 30 years, depending on the nature of the facilities, assets and services to be delivered, such arrangements leading parties to focus on long term benefits, conducive for the formulation of meaningful strategic alliances.
• Ability to allocate responsibilities and risks to the party best able to manage them.
• Recoupment of investment by the private sector after financing (wholly or in part), from charges/payment made during the life time of the project.
• Encouragement of the private sector to make use of its innovation and flexibility to deliver good quality, cost-effective services throughout the project lifecycle in order to optimise capital and recurrent costs over the long term.
• Integration of different functions of design, construction, operation and maintenance.

There are a number of types of PPPs, each with different private sector participation models, for example, those where services sold are to the public sector, those which are financially free standing projects and joint ventures. A recently successful "joint venture style" PPP, where the private sector contributed 15% of the investment, can be seen in the Hong Kong International Exhibition Centre project.

Whilst most stakeholders endorse PPPs in principle, there are inevitably concerns from both the public and private sectors.

Perceived public sector concerns are, in particular, accountability issues, due to the mixing of the capital and current accounts and the "off balance sheer public accounting treatment, and also the civil service employment implications. The former is an accounting issue and if addressed properly, should not affect the transparency of the monitoring of public expenditure. On the latter issue, PPP advocates argue that the process can expedite project delivery and bring forward new projects thus creating and sustaining jobs in both public and private sectors rather than resulting in net job losses.

The private sector has voiced concerns about the expensive bidding process particularly in light of the bid challenge problems in the Tamar Central Government Complex project. A related concern, which is addressed below, is that the size of the projects under consideration will not be sufficient to enable the developer to make an adequate return on its investment.

In August this year, Lo Yiu-ching, the Hong Kong Permanent Secretary for Environment, Transport & Works, announced that the Government was set to take bids for two new projects to be financed through PPPs. The two projects, from a list of 10, are an ice-skating centre to be built at Tseung Kwan 0 and a new leisure cultural centre at Kwun Tong. Secretary for Home Affairs, Dr. Patrick Ho, described these projects as in line with the principle of "big market, small government" and are seen by the Government as pilot projects for the much bigger West Kowloon Cultural District project, construction for which is due to commence in April 2007.

Dr. Ho in his earlier Policy Address explained that the pilot schemes would "harness private sector resources, allow more efficient use of Government resources and speed up the delivery of facilities for public use". Dr. Ho said that in return for financing, designing, building and managing the core leisure and cultural facilities, private developers were encouraged to propose commercial facilities such as shopping malls, cinemas and serviced apartments, permissible under the Town Planning Board Guidelines for Government, institution or community zones. Income from the commercial facilities could be used to subsidise the cost of building and operating the core facilities.

These projects have been criticised as being too small for the efficient adoption of this type of PPP scheme; they are seen as essentially land premium deals. In the UK, where PPPs are very much more developed (over 530 PPP contracts signed since the early 90's) the trend now is that the smaller projects are being earmarked for PPP schemes. However, it has been suggested that in Hong Kong, where PPPs are relatively new and the significant costs involved need to be offset against project revenues, small projects are not suitable for PPPs and it may be better to look to other tools such as outsourcing, service or management contracts for private sector involvement.

The Secretary for the Environment, Transport & Works, Dr Sarah Liao explained, when questioned earlier this year on the Government's approach to PPPs, that it was essential for the Government to establish the justifications, urgency, economic benefits and technical feasibility. She stated that the following issues will be considered: policy objectives and needs of the respective bureaux and departments; the characteristics and requirements of the facilities concerned; the business opportunity brought by the project, and the cost-effectiveness of the partnership. She added that there was no hard-and-fast rule for determining the types of public works project to be delivered by way of the PPP approach.

Conclusion

PPPs can offer real advantages over traditional procurement methods for the Government and for the private sector. Whether these advantages are realised will depend in no small part on the Government's ability to bring forward projects of the right scale with the appropriate commercial characteristics.