First International Conference on Construction In Developing Countries (ICCIDCI) Advancing and Integrating Construction Education, Research & Practice

August 4-5, 2008, Karachi,, Pakistan

Application of Public Private Partnership (PPP) in Hong Kong Special Administrative Region the Critics Perspectives
Albert P.C. Chan (Professor and Associate Head, Department of Building and Real Estate, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong, PR China)

bsesther@polyu.edu.hk
Patrick T.I. Lam (Associate Professor, Department of Building and Real Estate, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong, PR China) Daniel W.M. Chan (Assistant Professor, Department of Building and Real Estate, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong, PR China) Esther Cheung* (Research Associate, Department of Building and Real Estate, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong, PR China)

Abstract
The term Public Private Partnership (PPP) indicates the two main parties who are involved in the process. Although the views from the public and private sectors are important, it is also interesting to realise the critics perspective on conducting PPP projects in the Hong Kong Special Administrative Region (referred to as Hong Kong from here onwards). Therefore as part of a comprehensive research study looking at implementing PPPs in Hong Kong, face-to-face interviews with experienced local industrial practitioners were conducted. Amongst these interviews, three were launched with experts from outside the public or private sectors. These interviewees included an academic and two legislative councillors from Hong Kong. This paper presents the analysis of these interviews which helps to fill in the gaps unrealised by the public and private sectors. The academic view is that further research was needed on how to decide on the concessionary period of the projects. Also, relational contracting could be considered in PPP projects. A regulation system for projects was necessary and a public sector comparator should be adopted. Projects with fewer competitors would be appropriate for PPP such as infrastructure, power transmission or network, and water and gas supply. In addition, due to the high costs involved in PPP projects those with a larger project sum would be considered to provide a better business case for the private sector. The legislative councilors suggested that the most ideal projects would be those that were task specific, and where the timeline and milestones would be foreseeable. The project nature itself would not be important. Critical success factors identified by the academic included: Government to leave more flexibility rather than prescribing specification; Clear legal structure and regulation mechanism; Business case; Technical and financial capability of concessionaire; and Fair handling of risks. The legislative councilors also suggested that PPP must have Clear objectives; Transparent approach; Adequate public consultation; Clear output specification and timeframe; Political environment; and Administration / financial services lead. Other problems related to PPP projects raised

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by one of the legislative councilors included the tendency in Hong Kong for projects to be labeled as PPP when actually they are not of the same nature.

Keywords
Public Private Partnerships (PPP), Procurement, Infrastructure Projects, Hong Kong.

1. Introduction
Hong Kong being the international gateway to China and possibly even Asia represents a huge business market filled with opportunities and attractions. As a result of the profits foreseeable Hong Kong has the potential to draw companies from across the world. Money coming in from outside is beneficial to the local Government. The local Government having seen the success stories experienced by others is keen to bring innovation and efficiency into their public works projects. In recent years the Efficiency Unit of the Hong Kong Special Administrative Region Government has been heavily involved in PPP research. The Governments interest in utilizing PPP is obvious. The approaches that they have taken mainly involve gaining international experience from particularly Europe and Australia. One of the early documents produced by the Efficiency Unit on private sector involvement was a guideline to help governmental bureaux and departments to familiarize with private sector engagement (Efficiency Unit, 2001). These guidelines were published in 2001 and showed the governments interest in adopting the idea of PPP. Only two years later they also produced a comprehensive introductory guide to PPP (Efficiency Unit, 2003). This guide was aimed for the use of the civil service but is also made available for the publics interest to understand the governments approach. After the publication of this report much interest was drawn from the public due to the possibility of the increased business opportunities available. More recently, the Efficiency Unit published two more guidelines on PPP (Efficiency Unit, 2007; 2008). The first publication shows how more knowledge on the issues of PPP have been learnt, it also identifies areas of concern to local practitioners as well as civil servants, and it tries to provide some insights into these areas. The second publication is much more specific on how to establish a PPP project. The guideline is aimed at coaching civil servants on how to conduct a PPP project by looking at the business case, dealing with the private sector, managing the risks, funding and payment issues, managing performance etc.

2. Obstacles in conducting PPP projects

There is no one best procurement method which can be applied to deliver all types of projects (Chan et al., 2001) and PPP is no exception. As part of this study the authors carried out a comprehensive literature review to identify the potential obstacles of PPP. Six key obstacle groups were determined by Chan et al. (2008) as follows: 1) Misallocation of risks The impact of risks to project objectives in completing a PPP project is usually significant, and these risks arise from multiple sources including the political, social, technical, economic and environmental factors, due mainly to the complexity and nature of the disciplines, public agencies and stakeholders involved. Both the private and public sectors need to have a better understanding of these risks in order to achieve an equitable risk allocation and enable the project to generate better outcomes (Chan et al., 2006; ETWB, 2004; Gunnigan and Eaton 2006; Koppenjan 2005; Li 2003; Merna and Owen 1998; Mustafa 1999; Ng and Wong 2006; Satpathy and Das 2007; Xenidis and Angelides 2005; Zhang 2001; Zhang and AbouRisk 2006). In fact, a fair and reasonable allocation of various risks is vital to PPP success. If risks are inequitably or wrongly allocated beyond the capacity of the parties concerned, PPP projects would fail (e.g. demand risk resulting from town planning falling on private consortia).

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2) Private Sector Failure PPP projects may fall apart due to failure on the part of the private sector participants. In contracting out the PPP projects, the government should ensure that the parties in the private sector consortium are sufficiently competent and financially capable of taking up the projects. Due to a lack of relevant skills and experience of project partners, PPP projects are more complex to procure and implement (e.g. London Underground). The operating company of the British National Railway after privatization, Railtrack, had allowed the skills and experience in engineering services and infrastructure operation vital to its success to fall into the hands of its suppliers, making it insolvent in 2001, and causing its replacement by the Network Rail (Higton 2005). 3) High Transaction Costs and Lengthy Lead Time PPP project arrangements are complex and involve many parties with conflicting objectives and interests. Hence, PPP projects often require extensive expertise input and high costs and take lengthy time in deal negotiation. The high transaction costs and lengthy time may not represent good value to all parties and as a result the deal may not materialize in the beginning or may falter in the end. PPP projects may incur higher transaction costs than those under the conventional public sector procurement. The legal and other advisory fees would be included as lawyers are involved in all stages of a PPP project, as well as the cost of private sector finance, and the price premium for single point responsibility arrangement. The potential high transaction costs may have a negative impact on the objective of securing the best value (Corbett and Smith 2006; ETWB 2004; Grimsey and Lewis 2004; Li 2003; Li et al. 2005; Merna and Owen 1998; Zhang 2001; Zhang and AbouRisk 2006). Complex PPP projects require inputs from many parties of different expertise. Therefore, the projects should be economically viable to cover such costs. One common problem encountered in PPP projects is the high bidding costs, which is owing to increasing project complexity and protracted procurement process. The private sector incurs high bidding costs partly due to the consideration of the clients and their financiers objectives. Lengthy negotiations and especially the cost of professional services may increase the bidding costs further (Chan et al. 2006; Corbett and Smith 2006; ETWB 2004; Li 2003; Li et al. 2005; Mustafa 1999; Xenidis and Angelides 2005; Zhang 2001). The PPP bidding process is also regarded as lengthy and complicated. For example, bidders are required to prepare tender proposals attached with a bundle of additional materials. Such a process may take three to four months. Besides, another several lengthy negotiations will be required for the formation of the contract. Clearly, setting up a complicated agreement framework for successful PPP implementation can slow down the bidding process (Chan et al. 2006; ETWB. 2004; Grimsey and Lewis 2004; Li 2003; Li et al. 2005; Merna and Owen 1998; Mustafa 1999; Zhang 2001). 4) Political/Social Obstacles One other reason for failure is the stakeholders opposition and public opposition. Whether the proposed project is consonant with the interest of the public is important as public opposition can adversely affect the funding for the project from the public sector (El-Gohary et al. 2006; Grimsey and Lewis 2004; Zhang and AbouRisk 2006). PPP in public projects typically incur political and social issues like land resumption, town planning, employment, heritage and environmental protection. These could result in public opposition, over-blown costs and delays to the projects. Another common complaint by the public is the high tariff charged for the services provided. More often, the private sector would face political uphill in raising tariff to a level sufficient to cover its costs and earn reasonable profits and returns on investment. The participation of the private sector to provide public

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service will undoubtedly bring innovations and efficiencies in the operation, but may produce a fear of downsizing in the public sector. To a certain extent, there would be fewer employment opportunities if no regulatory measures were implemented (Li 2003; Li et al. 2005; Zhang and AbouRisk 2006). 5) Lack of Well-established Legal Framework The introduction of PPP exerts unprecedent pressure on the legal framework as it plays an important role in economic development, regeneration and mechanism for developing infrastructure. Still, some countries do not have a well established legal framework for PPP projects and the current legal framework is only supposed to deal with the traditional command and control model. Although PPP involves a great deal of legal structuring and documentation to deal with potential disputes amongst PPP parties, a water-tight legal framework is still lacking (e.g. protection of public interests vs legitimate rights of private sector). Without a well-established legal framework, disputes are inevitable (Grimsey and Lewis 2004; Li et al 2005; Satpathy and Das 2007). 6) Non-conducive Financial Market Private sector investors bear financial risks in funding of the investment. Seeking financially strong partners in a PPP project is regarded as difficult. In most PPP arrangements, the debt is limited-recourse or non-recourse, where financiers need to bear risks. In fact, most stakeholders are not willing to accept excessive risks. The lack of mature financial engineering techniques on the part of the host countries can also be another problem (Grimsey and Lewis 2004; Zhang 2001). Unattractive financial market (e.g. politically unstable or high interest rate) is often an obstacle to PPP success. Therefore, a conducive financial market is important for the private parties to drive PPP projects.

3. The Research Framework

The findings presented in this paper are part of an on-going research project looking at developing a best practice framework for implementing PPPs in Hong Kong. As part of the data collection, interviews were conducted with PPP critics, which included two legislative councilors and one academic in Hong Kong.

3.1

Design of Interview Questions

Utilizing in-depth literature findings, interview questions linking up to the project objectives were derived. The following questions were derived for the legislative councilors interviewed: 1. 2. 3. 4. 5. What should be the main criteria for PPP proposal assessment? What are the reasons behind success/failure of PPP projects in Hong Kong? How does PPP affect the public? Which type of project do you feel would best benefit the public by using PPP? In general, what do you think are the critical success factors leading to successful PPP projects?

And the following questions were derived for the academic interviewed: 4. Have you conducted any research looking at local case studies? And if so, could you share your insights? 4. How would you compare PPP with traditional procurement methods? 4. Which type of project do you feel is best suited to use PPP? 4. What do you feel are the key performance indicators in a PPP project? 4. In general, what do you think are the critical success factors leading to successful PPP projects?

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3.2

Selecting Respondents

The target respondents of the interviews were practitioners with experience in PPP who neither belonged to nor acted for the public or private sectors. Amongst the three interviewees, two were members of the legislative council in Hong Kong (one with a law background and the other with an engineering background). The third interviewee was an academic and researcher in PPP from a local university. Table 1 shows details of these interviewees. Table 1: List of Interviewees from the Public sector in Hong Kong No. C1 C2 C3 Position of Interviewee Member of Legislative Council (Legal background) Member of Legislative Council (Engineering background) Professor Organization of Interviewee Legislative Council Legislative Council Local University

4. The Critics Perspective on PPP

4.1 Interviews with Legislative Councilors

1. What should be the main criteria for PPP proposal assessment? Interviewee C1 is a member of the Legislative Council of Hong Kong. At the same time he is a legal practitioner and has been working closely on the Western Kowloon Cultural District (WKCD) project in Hong Kong. He described that: There is no general guideline for all projects. The Efficiency Unit PPP guide is quite comprehensive, so to follow their logistical steps should be sufficient. Interviewee C2 who is also a member of the Legislative Council of Hong Kong has an engineering background. He believed that the local government has been reluctant to adopt PPPs: Legislative councilors have suggested this to the government many times, but they have ignored us. Maybe it would be better for the academia to bring this suggestion up. He further added that: If the financial services sector takes a lead then other bureaux will follow. 2. What are the reasons behind success/failure of PPP projects in Hong Kong? Interviewee C1 explained that PPP projects in Hong Kong are normally unsuccessful as they are not proper PPPs. He further explained how PPPs are defined by a PPP expert invited to Hong Kong by the WKCD project working group: Looking back at the Cyber Port and the WKCD the policy objectives were not clear. WKCD has just literally been thrown to the private sector to develop, which should not be the case. According to this expert all PPP projects in U.K. have a clear target to what they want delivered. The society knows exactly why the government cannot deliver themselves. Therefore the result is a project in name a PPP but not in substance which is the reason for WKCDs failure. Interviewee C2 shared similar views that the WKCD project was not a success:

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For WKCD the case is not successful. As it will be developed by one consortium, there has been much criticism. Interviewee C2 also described how another PPP project had faced problems: Shatin water treatment plant is an example where not only the general public but even the existing 4000 staff in the Department was not given any details of the transfer to PPP arrangement. These 4000 employees just wanted to know about their future, but they were made to wait seven months before the government secretary was willing to speak to them. This showed that the government did not know how to handle the situation and did not consult the general public before finalizing their plans. 3. How does PPP affect the public? Interviewee C1 discussed how real PPP projects will actually provide positive affects: The advantage is that the government will receive a facility. If a PPP project is done well there should be no disadvantages. In addition, Interviewee C2 explained that: It is a partnering arrangement so there must be more consultations between the government and the general public The best way to inform the public is by public forums and open meetings. 4. Which type of project do you feel would best benefit the public by using PPP? Interviewee C1 did not mention the best type of project suitable procured by PPP, but instead he suggested that the project: must be task specific, the project itself is unimportant If the task is very specific and articulated there should be no major problems for most PPPs the timeline and milestones should be foreseeable. Interviewee C2 believed that PPPs are not limited to specific types of projects: It is not a problem which type of PPP is adopted. But the type of arrangement must be agreed on before the start of a project. After the arrangement has been fixed the government must inform the general public the reasons and benefits for adopting this arrangement. In addition, throughout the process the general public must be informed of the progress, achievements and social benefits For each type of PPP the suitability criteria will be different. 5. In general, what do you think are the critical success factors leading to successful PPP projects? Interviewee C1 believed that he was not in the position to answer this question, but instead: Should ask people who have participated in PPP projects for many years. On the other hand, Interviewee C2 suggested: a transparent process and consultation with the public to keep them fully informed of details and arising events of the projects are essential to foster success. 4.2 Interview with Academic

1. Have you conducted any research looking at local case studies? And if so, could you share your insights? Interviewee C3 is an active researcher in the PPP field. His research was also based on the practice of PPPs in Hong Kong, Mainland China and the U.K. He explained the scope of his study:

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The five Hong Kong tunnel projects were studied. In Mainland China they were interested in expanding the use of BOT during the early 90s. From his study there were three main recommendations: For future studies we can consider developing a methodology to decide on the length of the concessionary period. The raise of toll differs for each tunnel. These factors show that Hong Kong requires a coordinated system for all the tunnels. The toll adjustment mechanism should be coordinated amongst various tunnels. Another observation is that each of the five tunnels has a separate ordinance, they are similar but with slight variations. These projects should use the same ordinance and hence regulation is necessary. Other findings derived from his study included: Evaluating criteria and measures were identified for PPP projects. A scoring system was derived, and based on the multiple of criteria the projects could be compared and evaluated by a score. 2. How would you compare PPP with traditional procurement methods? Interviewee C3 explained in much detail the differences between PPP and traditional procurement methods: For PPP there is only one concessionaire comprising of the financier, designer, contractor and operator. Conflict is eliminated. Projects are more likely to be completed on time. PPP projects are based on revenue which can be affected if the market changes from good to bad. PPP involves large construction costs and if the project is delayed more interest is normally paid. In terms of procedure there is little difference but a concessionaire needs to be constituted for a PPP project. Traditional procurement method involves lots of separate parties but excluding maintenance personnel, resulting in a lack of co-operation and low level of buildability In a traditional procurement the government will pay for the project so the risk is not high for the private sector. For PPP projects there is little risk for the government as it is transferred to the private sector The main purpose for adopting PPP is to save on the overall cost as the private sector can complete a project at a lower operational cost. But transaction costs for a PPP project are much higher as there are many parties involved such as lawyers. Also, it is much more expensive for the private sector to borrow money. The government normally borrows money 3% lower than the private sector Also, it is easy to encourage the private sector to use innovative measures to reduce the construction cost the construction period included in the concessionaire period gives the consortium a large driving force to complete ontime or even earlier. 3. Which type of project do you feel is best suited to use PPP? Interviewee C3 believed: Normally consider PPP projects as involving construction and long term operation Projects which are suited include infrastructure projects, power transmission or network, and water and gas supply. These types of projects are more suited as there are fewer competitors. If there are too many competitors the risk is higher PPP is also suitable when the government lacks money to provide public facilities or services while enhancing the operational efficiency by the private sector. It also depends on market trends and needs. 4. What do you feel are the key performance indicators in a PPP project?

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Interviewee C3 believed: Depends on different projects but quality, time and cost are the most important criteria. 5. In general, what do you think are the critical success factors leading to successful PPP projects? Interviewee C3 suggested: A clear legal structure and regulation mechanism There needs to be a market in order for the initial investment to be recovered from the revenue as well as for the private sector to have reasonable profit margins The technical capability and financial capability of the concessionaire are also important. Also, the results of a questionnaire study he had conducted found that the financial aspect was the most important: The financial strength was the most important constituting approximately 40%, followed by technical and managerial competence each approximately 20% and environment, safety and health approximately 15%.

5. Conclusions
This paper has presented the findings of three interviews conducted with PPP critics in Hong Kong. It was found that projects in Hong Kong have failed due to unclear objectives, criticism that projects are handed over to one consortium and because of unclear procedures related to the dealing of staffing issues. The legislative councilors felt that PPP projects do not have to be limited to certain types, but the academic believed that the projects need to be long-term services with little competitors. Critical success factors include: a transparent procurement process; sufficient public consultation; a clear legal structure and regulation mechanism; available market; and capability of concessionaire in terms of financially, technically and managerially. Also, the academic suggested many differences between PPP and traditional methods, in particular for PPP projects: more parties are involved; more likely to be completed on time; economic projects are heavily based on the market; a concessionaire is developed; the construction costs tend to be higher; maintenance is considered; transactions costs are much higher; the private sector tends to be more innovative; and there is more drive from the private sector to speed up the project. Lastly the academic provided several suggestions towards PPP, these included: develop a method for deciding on the concessionary period; a coordinated toll adjustment mechanism for PPP tunnel projects in Hong Kong; and develop PPP legislation. A follow-up empirical questionnaire survey to solicit various opinions on the key issues regarding the application of PPP model had also been launched in both Hong Kong and Mainland China. The major survey findings will be collated and disseminated towards the research community and the practitioners through subsequent refereed publications in the form of journal articles and conference presentations.

6. Acknowledgements
The work described in this paper was fully supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (RGC Project No. PolyU 5114/05E). Sincere thanks goes to those industrial practitioners, who have kindly participated in the interviews reported in this paper.

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