Public private partnerships in the Hong Kong public sector: a right approach?

ABSTRACT

Public Private Partnerships (PPPs) is a right approach to enhance public productivity by bringing in business practices and approaches. Nevertheless, the case study of Hong Kong shows that the PPPs formula neglected social, political, and personnel costs. Cautions must be paid when PPPs are implemented in developing, undemocratic, and conservative states.

1. INTRODUCTION

Based on the successful experience of achieving productivity gains through the Enhanced Productivity Programme, the Hong Kong government further adopted the business approach Public Private Partnerships (PPPs) to create a smaller government and to deepen the involvement of the private sector in the provision of public services. The Efficiency Unit of the Hong Kong government published An Introductory Guide to Public Private Partnerships in 2003, advocating the advantages of PPPs as well as introducing the procedures of implementing the PPPs. Michael O'Higgins, a leading consultant of PPPs, said that "PPPs are not just contracts. The emphasis is long term partnerships that put the onus on the service provider to establish the framework of the partnership." (South China Morning Post, 21 July 2003) Under the PPPs, the government sets the benchmarks for what it wants and then the private sector partner decides how best to provide this. They are then paid by the outcome. The biggest difference between the traditional methods of privatization and the PPPs is that the private sector under the PPPs model has to be willing to take on more risk than they would normally do with a government contract. Whereas in the traditional model of privatization, providers are paid for providing the service; in the PPPs, they are paid by the transaction. This is called "gain sharing".

The aim of the paper is to evaluate the theory and practice of PPPs in the context of Hong Kong public service. In the political context, Hong Kong is an undemocratic system with a low degree of political accountability and transparency in the political process. In the economic context, Hong Kong is still suffering from the Asian financial crisis and is also undergoing a painful process of economic transformation from a service-based to a knowledge-based economy. The success of the PPPs is recorded in the United Kingdom and other democratic and developed countries. However, a successful implementation of the PPPs in a politically undemocratic and an economically weak system like Hong Kong remains to be seen. Whether the PPPs can be universally practised with success in all political and economic systems requires further debates and research. This paper is therefore to explore the theoretical and practical dimensions of the PPPs using Hong Kong as a case study.

2. THE CONCEPTUAL MEANINGS OF PUBLIC PRIVATE PARTNERSHIPS

The United Nations (2003) perceived PPPs as effective means of establishing cooperation between public and private actors and to bundle financial resources, know-how and expertise to address needs. PPPs offer alternatives to full privatization, aiming at involving the private sector in the delivery of public services in various ways. PPPs are based on a partnership approach, where the responsibility for the delivery of services is shared between the public and private sectors, both of which bring their complementary skills to the enterprise (Efficiency Unit, 2003, p. 1).

Under a theoretical paradigm, PPPs mainly cover six initiatives:

1. Creating wider markets--launching new initiatives using private sector skills and finance to utilize the assets of the public sector, both physical and intellectual. The opportunity is to exploit the potential of assets, which cannot easily be sold, and to share in the returns. The challenge is to identify where such potential exists, and to ensure that the taxpayer receives a fair share of the returns.

2. Private finance initiatives--the public sector contracts to purchase quality services, with defined outputs, on a long-term basis. This includes the private sector maintaining or constructing the necessary infrastructure. The term also covers financially free-standing projects where the private sector supplier designs, builds, finances and then operates an asset and covers the costs through direct charges on the users of the asset. Public sector involvement is limited to assistance with planning, licensing and other statutory procedures. The opportunity is to benefit from private sector innovation, to generate innovations in the design and operation of assets, and to take advantage of private sector commercial disciplines to modernize services and obtain better value. The challenge is to define the requirements on the private sector partner from the start, and to ensure there is an appropriate allocation of risks between the public and private sectors.

3. Joint ventures--partnerships in which public and private sector partners pool their assets, finance and expertise under joint management, to deliver long term growth in value for both partners. The opportunity is to exploit the latent potential of government assets, and share the risk of delivering policy objectives and commercial objectives. The challenge is to judge when to use joint ventures and to create the right balance of risks and rewards for the public and private sectors. Structures need to work commercially, and be sufficiently robust to withstand public scrutiny.

4. Partnership companies--introducing private sector ownership into state-owned businesses, while preserving the public interest and public policy objectives, through legislation, regulation, partnership agreements, or retention of a special government share. The opportunity is to bring in the benefits of private sector ownership, including private sector investment and management skills. The challenge is to safeguard any continuing public sector interest in such assets, and to ensure the taxpayer receives value for money.

5. Partnership investments--partnership in which the public sector contributes to the funding of investment projects by private sector parties, to ensure that the public sector shares in the return generated by these investments. The opportunity is to overcome market failure by providing finance for projects with commercial potential. It allows the taxpayer to share in the future returns from the project.

6. Franchises--a concession awarded by the government to a private sector organization to provide a public service for an agreed period. The private sector organization pays a fee during this period for the revenue that the service generates. The opportunity is to maintain ownership, but use the private sector to deliver services efficiently. The challenge is to define the standards of service provision that ensure good coverage and quality of service (Efficiency Unit, 2001, pp. 11-12).

There are certain common elements found in all PPPs. First, the government defines the timeframe in which the services must be delivered and the quality and quantity of services needed. The private sector delivers the services and finances or part finances the project. Second, a long term relationship is established, typically between 10 and 30 years. A whole life approach to cost is taken. Third, the different functions of design, construction, maintenance and operation are integrated to release the synergies between them and discourage low-capital/high-operating expenditure solutions. Fourth, risks are allocated between the public and private sectors. There is an emphasis on output-based specifications. Fifth, the government retains political responsibility and accountability to secure services for the community (Efficiency Unit, 2003, p.4).

3. A RIGHT APPROACH?

Theoretically, the major advantages of PPPs are two-fold: (a) gains inefficiency would be properly priced into the partnership, and (b) there tends to be lots of transparency in the process. There is usually much earlier discussion between government and the private sector in the formation of PPP projects than when the government puts something out for tender once it has already decided the parameters of the project. As a result, it forces the two sides to think about the level of service desired and how much it would cost to provide, resulting in more realistic pricing practices.

Nevertheless, there are three types of costs that the Hong Kong PPPs formula does not incorporate. The first is social costs. Although there are vigorous measures to cut administrative costs and policy expenditures, social costs are not calculated. The social costs include citizens' affordability of market-based public services as well as social sentiments. If citizens are not able to afford more expensive public services, social problems will deteriorate and social inequality will be deepened. Social impacts of PPPs will be serious especially when the economy is weak. Streamlined public services must meet social expectations and social needs in order to maintain social harmony and stability. Public consultations and in-depth impact studies should be conducted as the basis of deliberation. Public sector managers must assess carefully the balance between economic and social costs, especially in the Asian context in which the majority of the population is not self-sufficient and so must depend on state assistance.

Another element that the PPPs model should incorporate is political costs. The emergence of a "contract state" produced a number of radical departures from established forms of political accountability (Elcock, 1998; Hood, 1995). First, PPPs reduce the degree of political accountability as elected representatives cannot directly control the decisions and actions of the private companies that finance and provide public services. Elected representatives can therefore no longer effectively protect the collective public interest. Second, the government is held less accountable to the legislature because it shifts the burden of responsibility to private companies in the provision of public services. In sum, public opportunities for participation in government decision-making are reduced because public services have been transferred to the private sector. The political costs are so great that public confidence and trust in the government will be undermined. PPPs will be counterproductive if it is not operated with a refined political accountable framework.

The third element that the PPPs model should incorporate is the personnel costs. PPPs will erode the commitment of civil servants in the public service in three dimensions. First, the adoption of business principles and practices in the public service tends to undermine the substance of the public sector ethos which emphasize on social benevolence, fairness, and faith. Second, civil servants under PPPs will be de-motivated by the reduction of extrinsic factors such as job security, salary, and benefits in the context of pro-market reforms and partnerships. Third, as close working relations between civil servants and private sector employees are inevitable under PPPs, civil servants may find themselves difficult to adapt to private business styles. All these may create bad feelings, dissatisfaction, conflicts, and alienation among civil servants, which ultimately affects loyalty and performance. The Hong Kong PPPs model did not suggest any measures to sustain or to promote the morale of civil servants under the new partnership relationship.

4. IMPLICATIONS

PPPs suggest a right approach to integrate the strengths of both the public and private sectors. Nevertheless, the application of PPPs in Hong Kong highlights its theoretical deficiencies of balancing social and economic values, maintaining political accountability, and sustaining civil service morale. Three important implications are worth mentioning. First, PPPs may not be suitable in weak economies whose populations are not able to afford market-based public services. Hong Kong was hit by the Asian financial crisis and economic mismanagement, resulting in a high percentage (8%) of unemployment and deflation (2.0%). Market-based public services will create further economic burden on citizens. Second, the practice of PPPs in undemocratic countries will encounter difficulties in ensuring a high degree of political accountability. Hong Kong is not a democracy and its Chief Executive enjoys tremendous political power. The Legislative Council finds it extremely difficult to monitor PPPs projects which by nature reduce the degree of political accountability. Third, those countries with conservative civil service ethos will have difficulties to promote PPPs projects as civil servants are demoralized and reluctant to implement PPPs. Hong Kong civil servants are trained and structured by the Weberian mould. They are alienated against turning into business managers. In short, PPPs is a right approach to enhance public productivity. Nevertheless, the framework has to be further refined especially when it is implemented in developing, undemocratic, and conservative states. This echoed Wettenhall (2003)'s observation that little attention has been paid to a systematic evaluation of PPPs for continuous improvement.

REFERENCES

Efficiency Unit, Serving the Community by Using the Private Sector, Government Printer, Hong Kong, 2001.

Efficiency Unit, An Introductory Guide to Public Private Partnerships, Government Printer, Hong Kong, 2003.

Elcock, H., "The Changing Problem of Accountability in Modern Government", Public Policy and Administration, Vol. 13, 1998, 23-37.

Hood, C., "Contemporary Public Management: A New Global Paradigm", Public Policy and Administration, Vol.10, 1995, 104-117.

United Nations, An Introduction to Public Private Partnerships, 2003. www.undp.org/ppp.2003

Wettenhall, R., "The Rhetoric and Reality of Public-Private Partnerships", Public Organization Review, Vol.3, No.1, 2003, 77-107.

Author Profile

Dr Jermain T.M. Lam received his Ph.D. at the University of Hong Kong in 1988. He is an Associate Professor, Public & Social Administration Department, City University of Hong Kong.