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

Journal of the Academy of Business and Economics, Jan, 2004 by Jermain T.M. Lam

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.