Developing a Best Practice Framework for Implementing Public ... - Core

Developing a Best Practice Framework for Implementing Public Private Partnerships (PPP) in Hong Kong

Esther Cheung BEng (Hons), MPhil

A thesis submitted for the degree of Doctor of Philosophy

School of Urban Development Faculty of Built Environment and Engineering Queensland University of Technology

March 2009

Keywords

KEYWORDS

Public Private Partnership (PPP) Build Operate Transfer (BOT) Infrastructure Procurement Public Works Public Sector Private Sector Researcher Hong Kong Australia

i

Abstract

ABSTRACT

Public Private Partnership (PPP) is a well established methodology for procuring public works projects. By incorporating the private sector’s expertise, efficiency, innovation, business sense, risk sharing, financing etc. into public works projects, the quality of public services and facilities can be uplifted. Like many jurisdictions, Hong Kong is also keen to take aboard this methodology which is so familiar but yet so distant. Although they have been one of the first jurisdictions to utilise the private sector in public works projects, their comfortable financial reserves has meant that there has been no urge to push the movement until recently.

PPP has become increasingly popular amongst

governments. The Hong Kong Special Administrative Region (HKSAR) government is no exception. Some of the more active works departments have commissioned studies to investigate the best ways to deliver these projects, others have even trialed the method themselves. The efficiency Unit of the HKSAR government has also become an active arm in conducting research in this area. Although so, the information that is currently available is still very broad. Building from their works there is a need to develop a best practice framework for implementing PPP projects in Hong Kong by incorporating international experiences.

To develop a best practice framework will require thorough investigation into the benefits,

ii

Abstract

difficulties and critical success factor of PPP. PPP should also be compared with other procurement methods. In order to do so it is important to clearly understand the local situation by an analysis of projects conducted to date. Lessons learnt can further be derived from other countries and incorporated to those derived locally. Finally the best conditions in terms of project nature, complexity, types, and scales for adopting PPP should be derived.

The aim and objectives of this study were achieved via a comprehensive literature review, in-depth case analyses, interview survey with experts from both Hong Kong and overseas, and finally a large scale data collection was conducted via a questionnaire survey with PPP practitioners. These findings were further triangulated before they were used as the basis to form the best practice framework presented in this thesis. The framework was then further validated by PPP experts to ensure it is comprehensive, objective, reliable and practical.

This study has presented a methodology that can be adopted for future studies. It has also updated our knowledge on the development trends of PPP as well as opened up the experiences of other jurisdictions. The findings have shown that the local industry is familiar with “what” should be done in PPP projects but they are unsure of “how” these goals can be achieved.

This framework has allowed this further knowledge to be

delivered to PPP practitioners. As a result, the development of this framework can help to resolve the current economic crisis by encouraging more developments and business opportunities for the private sector. In addition, the correct projects can be delivered by

iii

Abstract

PPP, the advantages of PPP can be maximised, and the general public can benefit from the private sector’s participation.

iv

List of Publications

LIST OF PUBLICATIONS

Journal Papers (published and accepted)

1. Esther Cheung and Albert P.C. Chan, Financing Model for Future Infrastructure Projects in Hong Kong – A Case Study of the Hong Kong – Zhuhai – Macau Bridge, Journal of Property Investment and Finance, Journal of Property Investment and Finance, Paper accepted for publication. 2. Esther Cheung, Albert P.C. Chan and Stephen Kajewski (2008). Reasons for Implementing Public Private Partnership Projects – Perspectives from Hong Kong, Australian and British Practitioners. Journal of Property Investment and Finance, Vol. 27, No. 1, 81 – 95. 3. Albert P.C. Chan, Patrick T.I. Lam, Daniel W.M. Chan and Esther Cheung (2008). A Mechanism for Risk Sharing in PPP Projects – The Sydney Cross City Tunnel Case Study, Surveying and Built Environment (Journal of the Hong Kong Institute of Surveyors), 19, 1, December 2008.

v


4. 陈炳泉，林俊业，陈炜明，张泳沁，柯永建 (2008). 香港基础设施融资模式比较研究. 建築經濟, October 2008, 89-92. (English translation: Albert PC Chan, Patrick TI Lam, Daniel WM Chan, Esther Cheung and Yongjian Ke (2008). Comparative Study of Different Financial Modalities in Infrastructure Development of Hong Kong. Construction Economy, October 2008, 89-92.)

Journal Papers (under review)

1. Esther Cheung, Albert P.C. Chan and Stephen Kajewski (2008). The Hong Kong and Australian Private Sector’s Perspective on Procuring Public Works Projects, Journal of Property Investment and Finance, Journal of Property Investment and Finance, Paper under review. 2. Esther Cheung, Albert P.C. Chan and Stephen Kajewski (2008). The Public Sector’s Perspective on Procuring Public Works Projects – Comparing the Views of Practitioners in Hong Kong and Australia, Journal of Civil Engineering and Management, Paper under review. 3. Esther Cheung, Albert P.C. Chan and Stephen Kajewski (2008). The Researcher’s Perspective on Procuring Public Works Projects – Findings from Hong Kong and Australian Interviewees, Australian Journal for Construction Economics and Building, Paper under review.

vi


4. Esther Cheung, Albert P.C. Chan and Stephen Kajewski (2008). Suitability of Procuring Large Public Works by Public Private Partnership - Comparing Hong Kong Practitioners' Views against those in the United Kingdom and Australia. Engineering, Construction and Architectural Management, Paper under review. 5. Esther Cheung, Albert P.C. Chan and Stephen Kajewski (2008). Factors Contributing to Successful Public Private Partnership Projects – Comparing Hong Kong with Australia and the United Kingdom. Canadian Journal of Civil Engineering, Paper under review. 6. Esther Cheung, Albert P.C. Chan and Stephen Kajewski (2008). Enhancing Value for Money in Public Private Partnership Projects - Findings from a Survey Conducted in Hong Kong, Australia and the United Kingdom. Journal of Financial Management of Property and Construction, Paper under review. 7. Albert PC Chan, Patrick TI Lam, Daniel WM Chan, Esther Cheung and Yongjian Ke (2008). Critical Success Factors for Public Private Partnerships (PPP) in Infrastructure Developments: A Chinese Perspective. Journal of Construction Engineering and Management, ASCE, Paper under review. 8. Albert PC Chan, Patrick TI Lam, Daniel WM Chan, Esther Cheung and Yongjian Ke (2008). A Comparative Study of Critical Success Factors for Public Private Partnerships (PPP) between China and the Hong Kong Special Administrative Region. Journal of Management in Engineering, ASCE, Paper under review.

vii


9. Albert PC Chan, Patrick TI Lam, Daniel WM Chan, Esther Cheung and Yongjian Ke (2008). Driving Forces to Adopt Public Private Partnership (PPP) in China and the Hong Kong Special Administrative Region. Engineering, Construction and Architectural Management, Paper under review. 10. Albert PC Chan, Patrick TI Lam, Daniel WM Chan, Esther Cheung and Yongjian Ke (2008). Potential Obstacles to Successful Implementation of Public Private Partnerships (PPP) in China and the Hong Kong Special Administrative Region. Journal of Management in Engineering, ASCE, Paper under review. 11. Albert PC Chan, Patrick TI Lam, Daniel WM Chan, Esther Cheung and Yongjian Ke (2008). Drivers for Adopting PPP - A Comparison between China and Hong Kong Special Administrative Region. Journal of Construction Engineering and Management, ASCE, Paper under review. 12. Yongjian Ke, Shouqing Wang, Albert P.C. Chan and Esther Cheung (2008). Research Trend of Public-Private Partnership (PPP) in Construction Journals, Journal of Construction Engineering and Management, ASCE, Paper under review.

Journal papers (pending submission)

1. Albert P.C. Chan, Patrick T.I. Lam, Daniel W.M. Chan, Esther Cheung, Yongjian Ke, Yang Wen and Yelin Xu (2008) Understanding the Major Risks in Mainland China's PPP Projects, Pending submission.

viii


2. Albert P.C. Chan, Patrick T.I. Lam, Daniel W.M. Chan, Esther Cheung, Yongjian Ke, Yang Wen and Yelin Xu (2008) Critical risk groupings of public-private partnerships in China, Pending submission.

Conference Papers (published and accepted)

1. Esther Cheung and Albert P.C. Chan. Suitability of Procuring Large Public Works by Public Private Partnership (PPP) - A Case Study of the Kai Tak Cruise Terminal Project in Hong Kong. The 34th Australasian Universities Building Education Association (AUBEA) Annual Conference, 7 – 10 July 2009, Abstract accepted. 2. Albert PC Chan, Patrick TI Lam, Daniel WM Lam, Esther Cheung and Yongjian Ke (2009). Privileges and Attractions for Private Sector Involvement in PPP Projects - A Comparison between China and the Hong Kong Special Administrative Region. The Fifth International Structural Engineering and Construction Conference, Las Vegas, Nevada, USA, 21 – 27 September 2009, Abstract accepted. 3. Esther Cheung (2009). Common Problems Holding Back the Development of PPP in Hong Kong, Public Private Partnerships (PPPs) Seminar Series, Hong Kong Institute of Surveyors, 14 February 2009.

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4. Albert P.C. Chan, Patrick T.I. Lam, Daniel W.M. Chan and Esther Cheung (2008). Application of Public Private Partnership (PPP) Model in Procuring Infrastructure Projects in Hong Kong, CIB W055 – W065 Joint International Symposium: Transformation Through Construction, 190 – 191, 17 – 19 November 2008, Dubai. 5. Albert P.C. Chan, Patrick T.I. Lam, Daniel W.M. Chan and Esther Cheung (2008). Application of Public Private Partnership (PPP) in Hong Kong Special Administrative Region – The Private Sector’s Perspective, The Chinese Research Institute of Construction Management (CRIOCM) 2008 International Symposium on “Advancement of Construction Management and Real Estate” , 31 October – 3 November 2008, Beijing, China. 6. Albert P.C. Chan, Patrick T.I. Lam, Daniel W.M. Lam, Esther Cheung and Yongjian Ke (2008). Measures that Enhance the Achievement of Value-for-Money in PPP Projects, Building Abroad - Procurement of construction and reconstruction projects in the international context, IF Research Group, i-Rec and CIB, University de Montreal, Canada, 23 – 25 October 2008. 7. Albert P.C. Chan, Patrick T.I. Lam, Daniel W.M. Chan and Esther Cheung (2008). Application of Public Private Partnership (PPP) in Hong Kong Special Administrative Region – the Critics’ Perspectives, International Conference on Construction in Developing Countries - Advancing and Integrating Construction, Education, Research & Practices (ICCIDC-I), Pakistan, 4 – 5 August 2008, 302311.

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8. Albert P.C. Chan, Tony Sidwell, Stephen Kajewski, Patrick T.I. Lam, Daniel W.M. Chan and Esther Cheung (2007). From BOT to PPP - A Hong Kong Example, 2007 International Conference on Concession Public / Infrastructural Projects (ICCPIP), Dalian University of Technology, China, 24 – 26 August 2007. 9. Albert P.C. Chan, Patrick T.I. Lam, Daniel W.M. Chan, Tony Sidwell, Stephen Kajewski and Esther Cheung (2007). A Research Framework for Investigating Public Private Partnerships (PPP) in Hong Kong, 4th International Conference on Construction in the Twenty First Century (CITC-IV), Gold Coast, Australia, 11 – 13 July 2007.

Book Chapter (published) 1. Janardhan Rao N. and Singh Sisodiya A. (2009). Public-Private Partnership Model in India: Concepts, Issues and Outlook. Albert P.C. Chan, Stephen Kajewski and Esther Cheung. Obstacles in Adopting PPP – Lessons from Australia. Icfai University Press, 181-187.

Magazine Article (published) 1. Albert P.C. Chan, Stephen Kajewski and Esther Cheung (2008). Obstacles in Adopting PPP – Lessons from Australia. Projects and Profits, Special Issue – Managing Construction Projects, The Icfai University Press, 60, 28 – 31, May 2008.

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Table of Contents

TABLE OF CONTENTS

KEYWORDS

i

ABSTRACT

ii

LIST OF PUBLICATIONS

v

TABLE OF CONTENTS

xii

LIST OF TABLES

xxi

LIST OF FIGURES

xxv

LIST OF ABBREVIATIONS

xxvii

STATEMENT OF ORIGINAL AUTHORSHIP

xxx

ACKNOWLEDGEMENTS

xxxi

CHAPTER 1 INTRODUCTION

1

1.1

Background

2

1.2

Research Aim and Objectives

4

1.2.1

Aim

4

1.2.2

Objectives

4

1.3

Research Methodology

5

1.4

Structure of the Thesis

7

xii

Table of Contents

1.5

Research Significance and Value

1.6

Chapter 1 Summary

9 10

CHAPTER 2 RESEARCH METHODLOGY

11

2.1

Chapter 2 Introduction

12

2.2

Research Design

12

2.3

Research Process

13

2.3.1

Background study

13

2.3.2

Project experience

13

2.3.3

Extraction of expert knowledge

14

2.3.3.1

Interviews with the public sector

16

2.3.3.2

Interviews with the private sector

18

2.3.3.3

Interviews with researchers

21

2.3.4 2.4

2.5

Large scale data collection

23

Data Analysis Techniques

24

2.4.1

Qualitative data analysis

24

2.4.2

Quantitative data analysis

25

2.4.2.1

Mean score ranking technique

25

2.4.2.2

Kendall’s concordance analysis

26

Chapter 2 Summary

27

CHAPTER 3 LITERATURE REVIEW

28

3.1

29


xiii

Table of Contents

3.2

3.3

What is the Traditional Practice of Procuring Public Works Project?

31

3.2.1

Progression from traditional to PPP

31

3.2.2

Traditional vs PPP

36

Background of PPP

39

3.3.1

Background

39

3.3.2

Types of PPP

42

3.3.3

The PPP process

44

3.3.4

The parties involved in a PPP project

46

3.3.5

Research conducted in PPP

47

3.4

Attractive Factors of adopting PPP

49

3.5

Negative Factors of adopting PPP

55

3.6

Value for Money in PPP projects

59

3.7

Achieving Successful PPP projects

61

3.8

Chapter 3 Summary

63

CHAPTER 4 PROCURING INFRASTRUCTURE PROJECTS IN HONG KONG

64

4.1


65

4.2

BOT/PPP Experience in Hong Kong

65

4.3

BOT/PPP Case Studies

67

4.3.1

Cross Harbour Tunnel (CHT)

67

4.3.2

Western Harbour Crossing (WHC)

69

4.3.3

Asia World Expo (AWE)

71

4.3.4

West Kowloon Cultural District (WKCD)

74

xiv

Table of Contents

4.4

4.3.5

Findings from the case studies

76

4.3.6

Section 4.3 summary

79

Is BOT the Best Financing Model to Procure Infrastructure Projects?

81

4.4.1

Background of the Hong Kong – Zhuhai – Macau Bridge

82

4.4.1.1

Background

82

4.4.1.2

The proposed design

84

4.4.1.3

The original BOT decision

86

4.4.1.4

Underlying problems of the project

87

4.4.2

4.4.3 4.5

Change from private financing to public financing

88

4.4.2.1

The Process of change

88

4.4.2.2

Government motives for not opting for the BOT model

91

4.4.2.3

Other underlying reasons for using public finance

92

Section 3.4 summary

97

Chapter 4 Summary

98

CHAPTER 5 THE AUSTRALIAN PPP EXPERIENCE

100

5.1


101

5.2

PPP in Australia

101

5.2.1

The Victoria practice

102

5.2.2

The Queensland practice

103

5.3

A New Era of PPP in Australia

106

– The Southbank Education and Training Precinct Case Study 5.3.1

Background

106

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Table of Contents

5.4

5.3.2

The obstacles

109

5.3.3

Other projects in Queensland

110

5.3.4

Section 5.3 summary

111

Risk Sharing Mechanism for PPP Projects

112

– The Sydney Cross City Tunnel Case Study

5.5

5.4.1

Background

112

5.4.2

Underlying causes leading to failure

116

5.4.3

Appropriate risk allocation

121

5.4.4

Risk sharing mechanism

127

5.4.5

Section 5.4 summary

130

Chapter 5 Summary

131

CHAPTER 6 DIFFERENT PERSPECTIVES ON PROCURING PUBLIC

132

WORKS PROJECTS IN HONG KONG AND AUSTRALIA 6.1


133

6.2

The Public Sector’s Perspective

133

6.2.1

Selecting respondents

133

6.2.2

Interview findings

137

6.2.2.1

Research on local case studies

141

6.2.2.2

Comparing PPP with traditional procurement methods

142

6.2.2.3

Projects best suited to use PPP

144

6.2.2.4

Key performance indicators in PPP projects

146

xvi

Table of Contents

6.2.3 6.3

6.2.2.5

Critical success factors leading to successful PPP projects

148

6.2.2.6

In-house guidance/practice notes

150

Section 6.2 summary

151

The Private Sector’s Perspective

154

6.3.1


154

6.3.2

Interview findings

157

6.3.2.1

161

Local and international experience in conducting PPP projects

6.3.3 6.4

6.3.2.2

Implementation process of PPP projects

162

6.3.2.3

Major reasons for adopting PPP projects

163

6.3.2.4


164

6.3.2.5

Projects of interest to the private sector

166

6.3.2.6

Key performance indicators of PPP projects

167

6.3.2.7


168

6.3.2.8

In-house guidance/practice notes

169

Section 6.3 summary

170

The Researcher’s Perspective

174

6.4.1


174

6.4.2

Interview findings

176

6.4.2.1

Research on local case studies

179

6.4.2.2


179

6.4.2.3

Projects best suited to use PPP

181

6.4.2.4

Key performance indicators in PPP projects

182

xvii

Table of Contents

6.4.2.5 6.4.3 6.5


Section 6.4 summary

182 184

Chapter 6 Summary

185

CHAPTER 7 SUITABILITY OF PROCURING LARGE PUBLIC WORKS BY

188

PPP 7.1


189

7.2

Collection of Research Data

189

7.3

Survey Results

194

7.3.1

Ranking of attractive factors for adopting PPP

194

7.3.2

Ranking of negative factors for adopting PPP

201

7.3.3

Agreement of the survey respondents

206

7.3.4

The suitability of adopting PPP

208

7.4

Chapter 7 Summary

213

CHAPTER 8 IMPLEMENTING PUBLIC PRIVATE PARTNERSHIP PROJECTS

215

8.1


216

8.2

Reasons for Implementing PPP Projects

216

8.2.1


218

8.2.2

Ranking of the reasons for implementing PPP projects

219

8.2.3

Section 8.2 summary

225

8.3

Factors Contributing to Successful PPP Projects

227

8.3.1

229


xviii

Table of Contents

8.4

8.5

8.3.2

Ranking of factors that contribute to the success of PPP projects

230

8.3.3

Section 8.3 summary

237

Enhancing Value for Money in PPP Projects

238

8.4.1


240

8.4.2

Ranking of value for money measures in PPP

241

8.4.3

Section 8.4 summary

247

Chapter 8 Summary

248

CHAPTER 9 A BEST PRACTICE FRAMEWORK FOR IMPLEMENTING PPP

251

IN HONG KONG 9.1


252

9.2

The PPP Process

252

9.3

Incorporating the Research Findings into the PPP Process

257

9.4

Validation of the Framework

267

9.4.1

Design of the validation questionnaire survey

267

9.4.2

Respondents of the survey

268

9.4.3

Results of the validation

270

9.5

Chapter 9 Summary

272

CHAPTER 10 CONCLUSIONS AND RECOMMENDATIONS

273

10.1


274

10.2

Review of the Project Objectives

274

xix

Table of Contents

10.3

Major Findings

277

10.3.1

Benefits, difficulties and critical success factors of PPP

277

10.3.1.1

Benefits/attractive factors of PPP

277

10.3.1.2

Difficulties/negative factors of PPP

280

10.3.1.3

Critical success factors of PPP

284

10.3.2

PPP compared to other procurement methods

287

10.3.3

Representative case studies from Australia

289

10.3.4

PPP experiences in Hong Kong

290

10.3.5

Best conditions for using PPP

292

10.3.6

Recommendations for Developing a Best Practice Framework for

294

Public Private Partnerships in Hong Kong 10.4

Value and Significance of the Research

295

10.5

Limitations of the Research

297

10.6

Recommendations for Future Research

298

10.7

Chapter 10 Summary

299

REFERENCES

300

APPENDICES

327

Appendix 1 Questionnaire Survey Template for Research Study

328

Appendix 2 Questionnaire Survey Template for Validation Process

331

xx

List of Tables

LIST OF TABLES

Table 2.1

Project objectives linking up with interview questions for public sector

17

interviewees Table 2.2

Project objectives linking up with interview questions for private sector

19


Project objectives linking up with interview questions for researcher

22


Summary of the analysed case studies (Asia World Expo, 2007; Bouygues-

78

Asia, 2007; Hong Kong Engineers, 2006; Li, 2001; Nishimatsu, 2006) Table 4.2

Summary of the HZMB details (Mak, 2008; Hong Kong Special

86

Administrative Region Government, 2008; Chen and Lee 2008; Hung, 2008; Transport and Housing Bureau, 2008a) Table 4.3

Comparison of estimated toll fees to be charged under different financial

95

models (Ming Pao, 2008b) Table 5.1

Risk allocation structure for CCT (Clifton and Duffield, 2006)

Table 5.2

Risk allocation framework for the annuity-based BOT model (Singh and 125 Kalidindi, 2006)

xxi

123

List of Tables

Table 6.1

List of interviewees from the public sector in Hong Kong

135

Table 6.2

List of interviewees from the public sector in Australia

136

Table 6.3

Summary of responses from public sector interviewees

138

Table 6.4

Question 1 - Have you conducted any research looking at local case

142

studies? Table 6.5

Question 2 - How would you compare PPP with traditional procurement

144

methods? Table 6.6

Question 3 - Which type of project do you feel is best suited to use PPP?

Table 6.7

Question 4 - What do you feel are the key performance indicators in a PPP 148

146

project? Table 6.8

Question 5 - In general, what do you think are the critical success factors 150 leading to successful PPP projects?

Table 6.9

Question 6 - Does your organisation have any in-house guidance/practice

151

notes? Table 6.10

List of Interviewees from the private sector in Hong Kong

155

Table 6.11

List of Interviewees from the private sector in Australia

156

Table 6.12

Summary of responses from private sector interviewees

158

Table 6.13

Question 1 - Which PPP projects has your company been involved in?

162

Table 6.14

Question 2 - Please describe the implementation process in these projects

162

Table 6.15

Question 3 - What were the major reasons for adopting PPP in these 164 projects?

Table 6.16

Question 4 - How do you think PPP compares with traditional procurement 165 methods?

xxii

List of Tables

Table 6.17

Question 5 - Which type of project would your company be most interested 167 in applying PPP?

Table 6.18

Question 6 - What do you feel are the key performance indicators in a PPP 168 project?

Table 6.19

Question 7 - In general, what do you think are the critical success factors 169 leading to successful PPP projects?

Table 6.20

Question 8 - Does your company have any in-house guidance/practice notes 170 on PPP implementation?

Table 6.21

List of interviewees

175

Table 6.22

Summary of interview findings with researchers from Hong Kong and

177

Australia Table 7.1

Mean scores and rankings for the attractive factors of PPP

200

Table 7.2

Mean scores and rankings for the negative factors of PPP

205

Table 7.3

Results of Kendall’s concordance analysis for the attractive factors of PPP

206

Table 7.4

Results of Kendall’s concordance analysis for the negative factors of PPP

207

Table 7.5

Checklist of attractive and negative factors for the Kai Tak cruise terminal 212 project

Table 8.1

Mean scores and rankings of the reasons for implementing PPP projects

Table 8.2

Results of Kendall’s concordance analysis of the reasons for implementing 218

217

PPP projects Table 8.3

Mean scores and rankings for the factors that contribute to the success of 228 PPP projects

xxiii

List of Tables

Table 8.4

Results of Kendall’s concordance analysis for the factors that contribute to

229

the success of PPP projects Table 8.5

Mean scores and rankings for the VFM measures in PPP projects

Table 8.6

Results of Kendall’s concordance analysis for the VFM measures in PPP 240

239

projects Table 9.1

Guideline for conducting step 1 “Mobilisation and development of a

258

business case” Table 9.2

Guideline for conducting step 2 “Funding”

260

Table 9.3

Guideline for conducting step 3 “Technical assessments, consultation and

261

land requirements” Table 9.4

Guideline for conducting step 4 “Expression of interest exercise”

262

Table 9.5

Guideline for conducting step 5 “Policy and funding approvals”

263

Table 9.6

Guideline for conducting step 6 “Procurement and selection”

264

Table 9.7

Guideline for conducting step 7 “Service commencement”

265

Table 9.8

Guideline for conducting step 8 “Payment and contract management”

266

Table 9.9

Details of the survey respondents for the validation process

269

Table 9.10

Results of the validation questionnaire survey

271

Table 10.1

Tools used to achieve the research objectives

276

xxiv

List of Figures

LIST OF FIGURES

Figure 1.1

Flow diagram of research process

Figure 3.1

Procurement selection process for typical public works project in Hong

6 32

Kong (adapted from Environment, Transport and Works Bureau, 2004) Figure 3.2

The generic procurement categories with their respective sub-categories for

34

public works projects in Hong Kong (adapted from Environment, Transport and Works Bureau, 2004) Figure 3.3

Differences in procurement between the traditional and PPP approaches of

38

conducting public works projects in Hong Kong (adapted from Efficiency Unit, 2008b) Figure 3.4

Annual investment of infrastructure projects with private participation in

41

developing countries between 1990-2006 (World Bank, 2008) Figure 3.5

Typical processes for delivering PPP projects in New South Wales, Australia

45

(adapted from Infrastructure Implementation Group, 2005) Figure 4.1

Photograph of the Cross Harbour Tunnel entrance and exit on Kowloon

68

Peninsula (Kowloon Motor Bus 30X/230X, 2008) Figure 4.2

Photograph of the Western Harbour Crossing entrance and exit on Kowloon Peninsula (Forum Sara, 2008)

xxv

70

List of Figures

Figure 4.3

Photograph of the Asia World Expo (Asia World Expo, 2008a)

72

Figure 4.4

Artist’s impression of the proposed West Kowloon Cultural District project

75

(Home Affairs Bureau, 2008) Figure 4.5

Alignment of the HKZMB (Transport and Housing Bureau 2008a)

Figure 5.1

Ariel photograph of the Southbank Education and Training Precinct project 108

85

in October 2007 (Department of Education, Training and the Arts; 2008) Figure 5.2

Photograph of the Cross City Tunnel (Traffman, 2008)

113

Figure 5.3

Examples of newspaper headlines relating to the CCT when it opened

117

(Infrastructure Implementation Group, 2005) Figure 7.1

Histogram showing the number of years of working experience in 192 construction industry for the Hong Kong survey respondents

Figure 7.2

Histogram showing the number of years of working experience in 192 construction industry for the Australian survey respondents

Figure 7.3

Histogram showing the number of PPP projects the Hong Kong survey

193

respondents have been involved with Figure 7.4

Histogram showing the number of PPP projects the Australian survey

193

respondents have been involved with Figure 8.1

Rank relationship between Hong Kong, Australia and the United Kingdom

236

for success factors of PPP Figure 8.2

Rank relationship between Hong Kong, Australia and the United Kingdom

246

for VFM measures of PPP Figure 9.1

The process for implementing PPP projects in Hong Kong (adapted from 255 Efficiency Unit, 2008b)

xxvi

List of Abbreviations

LIST OF ABBREVIATIONS

AUD:

Australian Dollar

AWCG:

Advance Work Co-ordination Group

AWE:

Asia World Expo

BOO:

Build Own Operate

BOOR:

Build Own Operate Remove

BOOT:

Build Own Operate Transfer

BOT:

Build Operate and Transfer

BTO:

Build Transfer Operate

CCT:

Cross City Tunnel

CHT:

Cross Harbour Tunnel

DBFO:

Design Build Finance Operate

DBFOM:

Design Build Finance Operate Manage

Dr.:

Doctor

e.g.:

exempli gratia

et al.:

et alii

etc.:

et cetera

f:

Frequency of each rating for each factor

HKSAR:

Hong Kong Special Administrative Region

xxvii


HM:

Her Majesty

HPDI:

China Highway Planning and Design Institute

HZMB:

Hong Kong – Zhuhai – Macau Bridge

JV:

Joint Ventures

km:

Kilometre

KPI:

Key Performance Indicator

LROT:

Lease Renovate Operate Transfer

Mr.:

Mister

MS:

Mean Score

n:

Number

N:

Number

No:

Number

NDRC:

National Development and Reform Commission

NGO:

Non Governmental Organisation

No.:

Number

NSW:

New South Wales

O&M:

Operation and Maintenance

OM&M:

Operate Maintain and Manage

PFI:

Private Finance Initiative

PPP:

Public Private Partnerships

R:

Average of the ranks assigned across all factors

Ri :

Average of the ranks assigned to the ith factor

RMB:

Renminbi

xxviii


s:

Score given to each factor by the respondents

SETP:

Southbank Education and Training Precinct

SPSS:

Statistical Package for Social Science

TAFE:

Technical and Further Education

U.K.:

United Kingdom

VFM:

Value for Money

W:

Kendall’s Coefficient of Concordance

WHC:

Western Harbour Crossing

WKCD:

West Kowloon Cultural District

xxix

Statement of Original Authorship

STATEMENT OF ORIGINAL AUTHORSHIP

The work contained in this thesis has not been previously submitted to meet requirements for an award at this or any other higher education institution.

To the best of my

knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made.

Signature:

Date:

23 March 2009

xxx

Acknowledgements

ACKNOWLEDGEMENTS

I would like to take this opportunity to thank those who have supported me throughout the course of my studies and contributed towards this thesis. Without them this thesis would definitely not have been possible.

I would sincerely like to thank my PhD associate supervisor Professor Albert P.C. Chan. Being an overseas student the majority of my time has been spent working under his patient, professional and knowledgeable guidance. Not only has he taught me the skills of becoming a researcher, he has also enlightened the world of research and consolidated my decision to pursue a future career in this field.

I would also like to thank my PhD principal supervisor Professor Stephen Kajewski. Stephen has always communicated with me regularly and responded to my needs promptly. His advice and guidance has been vital towards completing this thesis.

I would also like to take this opportunity to thank my family for their continuous support in whatever decisions I make in life.

xxxi

Acknowledgements

Sincere thanks goes to Dr. Bing Li and Professor Akintola Akintoye for permitting to adapt their survey questionnaire template. Special gratitude is also extended to those industrial practitioners from both Hong Kong and Australia, who have kindly participated in the interviews and questionnaire survey of this study.

Finally, this study would not have been possible without the financial support from the Research Grants Council of the Hong Kong Special Administrative Region, China (RGC Project No. PolyU 5114/05E), and the QUT International Doctoral Scholarship offered by Queensland University of Technology.

Their financial support has allowed me to

concentrate solely on my research work.

xxxii

Chapter 1

Introduction

CHAPTER 1 INTRODUCTION 1.1 1.2

1.5

Research Aim and Objectives 1.3


1.4


Research Significance and Value 1.6

1

Background

Chapter 1 Summary

Chapter 1

1.1

Introduction

Background

The success of implementing Public Private Partnership (PPP) projects in places such as Western Europe, the United States and Australia has been an attractive alternative for procuring public works projects instead of the usual traditional methods. With benefits such as risk transfer, increased efficiency and innovation, and private financing governments around the world are keen to encourage PPP projects.

Hong Kong is not completely new to the PPP idea. Back in the late sixties several Build Operate Transfer (BOT) projects were conducted. These were mainly transportation type projects.

Unfortunately, not all of these were equally successful hence the

implementation of PPP projects have decelerated since. Another reason for the slow adoption of PPP is that the Hong Kong Special Administration Region (HKSAR) government has been able to enjoy a budget surplus for many years running. Hence, providing for their own public projects has not been a problem. In other jurisdictions that first adopted PPP, often their motives have been finance driven. But with the matured development seen across the world and the in-depth research conducted, the other advantages of PPP are even more obvious. The public sector is also aware that in many cases they cannot deliver projects as efficiently and effectively as the private sector. The private sector is able to introduce efficiency, skills, innovation, technology, motivation, finance and most importantly a share of the project risks. On the other hand, the public sector is best dealing with administrative matters. Similarly, the private sector is also interested in public works projects as they tend to be large. And as business persons they

2

Chapter 1

Introduction

are keen to become players within this circle.

Unfortunately, a string of recent projects in Hong Kong linked with PPP have received much opposition. Debates have been going on for many years for certain projects to whether they should be procured by the PPP model. In other cases, projects have been heavily criticised for over benefiting the private consortium. Some cases have even changed from originally being procured by PPP to opting for more traditional methods. These obstacles have heavily discouraged both the public and private sectors from considering the PPP model. Although so, the Efficiency Unit of the HKSAR has been continuously working on PPP related research.

Some of the local government

departments have also continued to use different forms of PPP such as Design Build Operate (DBO). Obviously this shows that there are still many in Hong Kong who has faith in the PPP model.

Although Hong Kong has not rejected PPP, undoubtedly the local practitioners lack knowledge on how to procure PPP projects hence they have become reluctant to do so. Therefore, a best practice framework should be put in place. Being aware of this need, this research has looked into developing such a framework for PPP projects in Hong Kong. The derived framework combines international and local experience in order to appropriately fit in with the local culture, practice and unique features, as well as incorporate the lessons learnt from overseas. This framework acts as a guideline for the user, enabling them to build on the existing PPP process adopted in Hong Kong. Both the public and private sectors can adopt this framework. The users are provided clear

3

Chapter 1

Introduction

instructions to what they should and should not be doing within the PPP process. Currently, no such framework exists and this development is believed to benefit the construction industry at large, as well as introduce new opportunities.

1.2

Research Aim and Objectives

1.2.1 Aim

This research study aims to develop a best practice framework for implementing PPP in Hong Kong by looking at international experience.

1.2.2 Objectives

In order to achieve the aim the following objectives were identified for this research:

(a)

Identify the benefits, difficulties and critical success factors of PPP.

(b)

Measure the effectiveness of PPP against other procurement methods.

(c)

Identify representative case studies from other countries for analysis to identify their approach to success/failure.

(d)

Identify previous projects in Hong Kong that utilised a similar approach to PPP and to analyse their implementation successfulness.

4

Chapter 1

(e)

Introduction

Investigate the best conditions in terms of project nature, project complexity, project types and project scales under which the use of PPP is the most appropriate.

(f)

Evaluate the findings collected to determine a best practice framework for implementing PPP in Hong Kong.

1.3


Figure 1.1 shows a flow diagram of the research process that was adopted for this study. The research consisted of mainly four stages. The first stage focused on the identification of research objectives, design of research methodology and gaining background knowledge on the topic. These activities were achieved by conducting a comprehensive literature review, holding informal discussions with experts and running brainstorming sessions with supervisors and colleagues.

The second stage focused on the data

acquisition. This stage was conducted by the collection of case study information, interviews with experts and an empirical questionnaire survey. The third stage was the data interpretation and analysis phase. This was achieved by a selection of methods such as comparative analysis, content analysis, statistical analysis and triangulation of the results. The final stage presented the conclusions and recommendations. These were achieved by drawing conclusions from the analysed data, deriving recommendations for the research scope and also suggesting recommendations for future research.

5

Chapter 1

Figure 1.1

Introduction

Flow diagram of research process Methodology Adopted

Research Stages

Stage 1 z Identification of research objectives z Design of research methodology z Background knowledge

z

Stage 2 z Data acquisition

z

z z

z z

Comprehensive literature review Informal discussions with experts Brainstorming sessions with supervisors and colleagues

Collection of case study information Interviews with experts Empirical questionnaire survey

Stage 3 z Data Interpretation and analysis

z z z z

Comparative analysis Content analysis Statistical analysis Triangulation of results

Stage 4 z Conclusions z Recommendations

z z

Draw conclusions Derive recommendations for research scope Validation Suggest recommendations for future research

z z

6

Chapter 1

1.4

Introduction


The structure of this research report is as follows:

z

Chapter 1 gives the introduction of the research study. It covers the background, research aim and objectives, scope and significance of the research. The research approach and the structure of the research report are also outlined.

z

Chapter 2 presents the methodology of this research study. The chapter explains the research design, process and data analysis techniques used.

z

Chapter 3 provides an insight into the existing literature of the research topic. The literature studies the traditional practice of procuring public works projects and also looks into the option of using PPP. Specific features of PPP have also been covered including the attractive factors, the negative factors, the value for money measures and the factors leading to success.

z

Chapter 4 studies the BOT and PPP experience in Hong Kong. BOT is a more common form of PPP adopted in Hong Kong. Several cases from different eras are analysed to observe the development of PPP in Hong Kong. Lastly this chapter considers whether BOT/PPP is the best financing model for conducting public infrastructure in Hong Kong.

7

Chapter 1

z

Introduction

Chapter 5 studies Australia’s experience in conducting PPP projects by looking at the problems encountered in two highly profiled cases. Lessons learnt from these cases were derived.

z

Chapter 6 presents the findings from interviews conducted in both Hong Kong and Australia with PPP experts. The chapter considers the views of these experts from three different perspectives: the public sector’s angle, the private sector’s angle and the researcher’s angle. Each perspective has been analysed for commonalities and unique features between the two jurisdictions.

z

Chapter 7 looks at the suitability of procuring large public works by PPP from the findings of a questionnaire survey conducted in both Hong Kong and Australia. The attractive and negative factors for adopting PPP have been analysed to help provide solutions on whether the PPP model is more ideal than traditional methods.

z

Chapter 8 continues to present the findings of the same questionnaire survey. This chapter specifically considers the reasons for implementing PPP projects, the factors contributing to successful PPP projects and the ways to enhance value for money in PPP projects. Again the findings present a comparative analysis for the two survey jurisdictions.

z

Chapter 9 presents a best practice framework for implementing PPP in Hong Kong. The framework is presented according to the project steps as defined by local

8

Chapter 1

Introduction

governmental guidelines. The results obtained in this study are drawn together to illustrate how each stage can be carried out more efficiently. As a result both the public and private sectors can better conduct future PPP projects by referring to this framework. Also, the findings from the validation process are presented.

z

Chapter 10 concludes this research study. A review of the research objectives, a presentation of the major findings, the limitations have been highlighted and finally potential future research areas have been suggested.

1.5

Research Significance and Value

The Hong Kong Special Administrative Region (HKSAR) government has realised the benefits of using PPP in Hong Kong as well as the success achieved overseas. But a more thorough research is needed to develop the most suitable practice of PPP in terms of project nature, project complexity, project type and project scale under which PPP is most appropriate for Hong Kong. The lessons learnt from other countries are also useful. Hence this study has opted to consider the experience of PPP in Australia: one of the leading countries in implementing this model. From their experiences and a study of the local situation in Hong Kong a best practice framework has been developed.

The

findings of this study are believed to be valuable to the government and construction industry at large. The opportunities for infrastructure development in Hong Kong will be broadened. In addition this project also forms a comparative study for the use of PPP in Australia and Hong Kong.

9

Chapter 1

1.6

Introduction

Chapter 1 Summary

This chapter outlines the framework of this research study by considering the background, research aim and objectives, research methodology, and research significance and value. The structure of the thesis has also been introduced.

10

Chapter 2


CHAPTER 2 RESEARCH METHODLOGY 2.1

Chapter 2 Introduction 2.2 2.3

2.4

Research Process

Data Analysis Techniques 2.5

11

Research Design

Chapter 2 Summary

Chapter 2

2.1



This chapter describes the research methodology used to achieve the study objectives. Data was collected utilising a combination of different methods. And both qualitative and quantitative techniques were used to analyse the data.

2.2

Research Design

Construction management research is commonly carried out using four standard methods, these include: (1) Literature review; (2) Case study; (3) Interview; and (4) Questionnaire survey (Chow, 2005). Therefore this research study combines these methods to collect information and data on Public Private Partnership (PPP) both locally and internationally. The techniques and design of the data collection process were arranged so that the research objectives would be achieved (as described in later sections of this chapter). The research data and analyses were triangulated from multiple sources to help improve the credibility of the findings. And finally the results contributed to the development of a best practice framework for PPP projects in Hong Kong.

12

Chapter 2

2.3


Research Process

2.3.1 Background study

Literature on the current practice of PPP both locally and internationally were extensively reviewed via books, journals, magazines, newsletters, conference proceedings, workshops, seminars and other sources.

Past and current practices of PPP were

documented. The review exercise also included the development of an instrument to conduct the interviews and questionnaires.

The information collected from these

interviews and questionnaires were fully documented individually but analysed collectively to firstly verify the literature study conducted and secondly achieve the proposed research objectives. In addition as a result of the literature review appropriate case studies were identified for analyses.

2.3.2 Project experience

From the literature review representative case studies were selected. The selected cases included ones with unique features such as having particular success or failure. These cases consist of ones both locally and internationally. The findings from the case studies enable us to verify and triangulate the findings from the other sources of data collection used in this study.

This part of the data collection mainly aimed to collect information for the objectives

13

Chapter 2


“Identify representative case studies from other countries for analysis to identify their approach to success/failure” and “Identify previous projects in Hong Kong that utilised a similar approach to PPP and to analyse their implementation successfulness”. Through this process some of the other objectives were also achieved including: “Identify the benefits, difficulties and critical success factors of PPP”; “Investigate the best conditions in terms of project nature, project complexity, project types and project scales under which the use of PPP is the most appropriate”; and “Evaluate the findings collected to determine a best practice framework for implementing PPP in Hong Kong”.

In addition, a comparison of the experiences was performed to identify whether the PPP approach is appropriate to be used in Hong Kong. Also, the best way to avoid risks and maximise the benefits of PPP was studied.

2.3.3 Extraction of expert knowledge

The interviews which were carried out in this research study adopted the “Grounded Theory” approach. This approach is an iterative process by which the analyst becomes more and more “grounded” in the data and develops increasingly richer concepts and models of how the phenomenon being studied really works (Denzin and Lincoln, 2005). This approach involves the interviewer to collect word for word transcripts from the interviewees. These transcripts can then be further analysed by identifying themes which are common and meaningful by an “open coding” technique. Therefore the findings will be solely based on the responses given by the interviewees.

14

Chapter 2


Dainty et al. (2000) also adopted the Grounded Theory approach for construction management research. In their methodology they collected unstructured data and coded meaning information. This method allows the researcher to relate categories in complex ways and ensuring density and precision to the developed theory. They also believed that too much structuring would mean that the interviewees’ responses would be defined by the researcher. Hence, they used a semi-structured interview format. Their aim was not to promote consistency in terms of response, but to uncover as many relevant responses as possible.

Consistencies would therefore emerge from the subsequent Grounded

Theory analysis.

Raiden et al. (2008) agreed that structured questions would not allow interviewees to fully expand on their knowledge. This does not mean that the theory from literature should not be tested but its generalization should be tested with a population first.

Based on these concepts, interviews were conducted with experts from the public sector, private sector and with researchers. The experts were selected based on two main criteria, these included: 1) The experts must possess adequate knowledge in the area of PPP; and 2) The experts have hands-on experience with PPP projects, experience in conducting PPP research or have followed very closely with the development of PPP.

15

Chapter 2


2.3.3.1 Interviews with the public sector

Based on the Grounded Theory approach, six interview questions linking up to the project objectives were derived for the interviews with the public sector interviewees (please refer to Chapter 1 for the project objectives).

Table 2.1 shows how these

objectives are linked to the interview questions. In the first question the interviewees were asked “Have you conducted any research looking at local case studies?” This question aimed to collect information for objectives 3 – 6. Question 2 “How would you compare PPP with traditional procurement methods?” targeted to achieve objectives 2, 4 – 6. Objectives 5 and 6 were covered again in Question 3 “Which type of project do you feel is best suited to use PPP?” and Question 4 “What do you feel are the key performance indicators in a PPP project?” In Question 5, interviewees were asked to answer “In general, what do you think are the critical success factors leading to successful PPP projects?” This question sought information for objectives 1, and 6. The final question was “Does your organisation have any in-house guidance/practice notes?” This question aimed to collect information for objectives 1, 5 – 6.

16

Chapter 2

Table 2.1


Project objectives linking up with interview questions for public sector interviewees Question 1 Identify the benefits, difficulties and critical success factors of PPP

1. Have you conducted any research looking at local case studies? 2. How would you compare PPP with traditional procurement methods? 3. 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? 5. In general, what do you think are the critical success factors leading to successful PPP projects? 6. Does your organisation have any in-house guidance/practice notes?

2 Measure the effectiveness of PPP against other procurement methods

Objective 3 4 Identify Identify previous representative projects in case studies Hong Kong from other that utilised a countries for similar analysis to approach to identify their PPP and to approach to analyse their success/failure implementation successfulness

3 3

6 Evaluate the findings collected to determine a best practice framework for implementing PPP in Hong Kong

3

5 Investigate the best conditions in terms of project nature, project complexity, project types and project scales under which the use of PPP is the most appropriate 3

3

3

3

3

3

3

3

3

3

3

3

3

17

3

Chapter 2


2.3.3.2 Interviews with the private sector

Eight interview questions linking up to the project objectives were derived. Table 2.2 shows how these objectives are linked to the interview questions. In the first question the interviewees were asked “Which PPP projects have your company been involved in?” This question aimed to collect information for objectives 3 – 6. Question 2 “Please describe the implementation process in these projects.” targeted to achieve objectives 3, 4 and 6. Objectives 1, 2, 5 and 6 were covered in Question 3 “What were the major reasons for adopting PPP in these projects?” Question 4 “How do you think PPP compares with traditional procurement methods?” and Question 5 “Which type of project would your company be most interested in applying PPP?” collected information for objectives 2, 5 and 6. Question 6 “What do you feel are the key performance indicators in a PPP project?” sought information for objectives 5 and 6 only. Question 7 “In general, what do you think are the factors leading to successful PPP projects?” collected information for objectives 1, 5 and 6. The final question was “Does your company have any in-house guidance/practice notes on PPP implementation?” information for objectives 5 and 6 only.

18

This question aimed to collect

Chapter 2

Table 2.2


Project objectives linking up with interview questions for private sector interviewees Question 1 Identify the benefits, difficulties and critical success factors of PPP


1. Which PPP projects has your company been involved in?

3

2. Please describe the implementation process in these projects. 3. What were the major reasons for adopting PPP in these projects? 4. How do you think PPP compares with traditional procurement methods?

Objective 3 4 5 6 Identify Identify Investigate Evaluate the representative previous the best findings case studies projects in conditions in collected to from other Hong Kong terms of determine a countries for that utilised a project best practice analysis to similar nature, framework identify their approach to project for approach to PPP and to complexity, implementing success/failure analyse their project types PPP in Hong implementation and project Kong successfulness scales under which the use of PPP is the most appropriate 3 3 3 3

3

3

3

3

3

3

3

3

3

19

Chapter 2


3

5. Which type of project would your company be most interested in applying PPP? 6. What do you feel are the key performance indicators in a PPP project? 7. In general, what do you think are the factors leading to successful PPP projects?

3

8. Does your company have any in-house guidance/practice notes on PPP implementation?

20

3

3

3

3

3

3

3

3

Chapter 2


2.3.3.3 Interviews with researchers

Five interview questions linking up to the project objectives were derived. Table 2.3 shows how these objectives are linked to the interview questions. In the first question the interviewees were asked “Have you conducted any research looking at local case studies?” This question aimed to collect information for objectives 3 – 6. Question 2 “How would you compare PPP with traditional procurement methods?” targeted to achieve objectives 2, 4 – 6. Objectives 5- 6 were covered again in Question 3 “Which type of project do you feel is best suited to use PPP?” and Question 4 “What do you feel are the key performance indicators in a PPP project?” In Question 5, interviewees were asked to answer “In general, what do you think are the critical success factors leading to successful PPP projects?” This question sought information for objectives 1, and 6.

21

Chapter 2

Table 2.3


Project objectives linking up with interview questions for researcher interviewees Question 1 Identify the benefits, difficulties and critical success factors of PPP

1. Have you conducted any research looking at local case studies? 2. How would you compare PPP with traditional procurement methods? 3. 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? 5. In general, what do you think are the critical success factors leading to successful PPP projects?


3

Objective 3 4 5 6 Identify Identify Investigate Evaluate the representative previous the best findings case studies projects in conditions in collected to from other Hong Kong terms of determine a countries for that utilised a project best practice analysis to similar nature, framework identify their approach to project for approach to PPP and to complexity, implementing success/failure analyse their project types PPP in Hong implementation and project Kong successfulness scales under which the use of PPP is the most appropriate 3 3 3 3 3

3

3

3

3

3

3

3 3

22

Chapter 2


2.3.4 Large scale data collection

Questionnaire survey is an effective method to seek a large sample size for quantitative data analysis. Representative practitioners with in-depth experience in PPP were targeted. The selection criteria for suitable respondents were similar to those for the interviewees mentioned in Section 2.3.3 “Extraction of expert knowledge”. The questionnaire aimed to achieve several key features of PPP projects including: the attractive and negative factors, reasons for implementation, value for money measures and also factors contributing to success (please refer to Appendix 1 for questionnaire template). Using the questionnaire survey the following objectives were achieved: “Identify the benefits, difficulties and critical success factors of PPP”; “Investigate the best conditions in terms of project nature, project complexity, project types and project scales under which the use of PPP is the most appropriate”; and “Evaluate the findings collected to determine a best practice framework for implementing PPP in Hong Kong”.

The questionnaire template designed by Li (2003) was adopted for this study. Although a new research questionnaire could be developed based on the literature and interview findings, there were several advantages foreseeable to adopt Li’s (2003) survey questionnaire rather than designing a new template. Firstly, the value of Li’s (2003) questionnaire has already been recognised by the industry at large. His publications as a result of the research findings derived from the questionnaire are evidence of its worthiness. Secondly, there would be no added advantage to reinvent the work that has previously been done by other researchers. And thirdly by administering Li’s (2003)

23

Chapter 2


questionnaire in different administrative systems, it would be of interest for comparison purposes in the future. In addition, Hong Kong is traditionally influenced by the British, so the construction practice is very close hence no problems in adopting this questionnaire could be observed. Therefore, Li’s (2003) questionnaire was adopted for the survey as presented in Chapters 7 and 8 with prior permission obtained from the author Dr. Bing Li and his doctoral research supervisor, Professor Akintola Akintoye who is currently the Head of the School of Built and Natural Environment, University of Central Lancashire, United Kingdom.

2.4

Data Analysis Techniques

2.4.1 Qualitative data analysis

The literature review and case studies were analysed by content analysis. Literature from different sources were summarised (as shown in Chapter 3). Content analysis is often used to determine the main facets of a set of data, by simply counting the number of times an activity occurs (Fellows and Liu, 1997). The initial step in content analysis is for the researcher to identify the material to be analysed. The next step is to determine the form of content analysis to be employed: qualitative, quantitative or structural. The choice is dependent on, if not determined by, the nature of the research project. The choice of categories will also depend upon the issues to be addressed in the research. Using this approach the case studies were analysed both individually and collectively. The process of each case was mapped out, and each stage was analysed and compared.

24

Chapter 2


The analysis of the case studies drew answers behind successful implementation of PPP projects and also highlighted the common obstacles and problems which could be encountered (as shown in Chapters 4 and 5).

2.4.2 Quantitative data analysis

The quantitative data collected was analysed using the Statistical Package for Social Science (SPSS). The techniques that were used in this research study, in respect of quantitative analysis include the mean score ranking technique and Kendall’s concordance analysis.

2.4.2.1 Mean score ranking technique

Chan and Kumaraswamy (1996) adopted the “mean score” method to establish the relative importance of causes of delay in building construction projects in Hong Kong as suggested by the clients, consultants and contractors. The data collected from the current questionnaire survey was also analysed using the same technique, within various groups being categorised according to the origins of the respondents (i.e. Hong Kong and Australia). The five-point Likert scale (1 = Least Important and 5 = Most Important) as described previously was used to calculate the mean score for each factor, which was then used to determine its relative ranking in descending order of importance. These rankings made it possible to triangulate the relative importance of the factors to the respondents from Hong Kong, Australia and the United Kingdom as presented in Li’s

25

Chapter 2


(2003) survey 2003. The mean score (MS) for each factor was computed by the following formula:

MS =

∑ (f × s) , (1 ≤ MS ≤ 5) N

Where s = Score given to each factor by the respondents, ranging from 1 to 5 (1 = Least Important and 5 = Most Important); f = Frequency of each rating (1-5) for each factor; and N = Total number of responses concerning that factor.

2.4.2.2 Kendall’s concordance analysis

The survey respondents in this study were based on two groups: Hong Kong and Australia. Kendall’s concordance analysis was conducted to measure the agreement of different respondents on their rankings of factors based on mean values within a particular group. If the Kendall’s coefficient of concordance (W) is significant at a predefined allowable significance level of, say 0.05, a reasonable degree of consensus amongst the respondents within the group on the rankings of factors was indicated. The W for the factors was calculated by the following formula (Siegel and Castellan, 1988):

26

Chapter 2


∑ (R n

W =

i

−R

i =1

)

2

n(n 2 − 1) / 12

Where n = Number of factors being ranked;

R i = Average of the ranks assigned to the ith factor; and R = Average of the ranks assigned across all factors.

According to Siegel and Castellan (1988), W is only suitable when the number of attributes is less than or equal to 7. If the number of attributes is greater than 7, chisquare is used as a near approximation instead. The critical value of chi-square is obtained by referring to the table of critical values of chi-square distribution, which can be found in Siegel and Castellan (1988).

2.5

Chapter 2 Summary

This chapter provides a detailed account of the research framework for this study. The methods used to achieve the research objectives are described. The overall research design and process were first introduced, followed by the explanation of qualitative and quantitative data analysis techniques.

27

Chapter 3

Literature Review

CHAPTER 3 LITERATURE REVIEW 3.1 3.2


What is the Traditional Practice of Procuring Public Works Project? 3.3

3.4

Background of PPP

Attractive Factors of Adopting PPP

3.5

Negative Factors of Adopting PPP

3.6 3.7

Value for Money in PPP Projects Achieving Successful PPP Projects 3.8

28

Chapter 3 Summary

Chapter 3

3.1

Literature Review


Public Private Partnership (PPP) is a procurement approach where the public and private sector join forces to deliver a public service or facility. In this arrangement normally both the public and private sector will contribute their expertise and resources to the project and share the risks involved. The definition of PPP may differ slightly between different jurisdictions, depending on which part of the arrangement the importance is focused on. For example, PPP is defined by the Efficiency Unit of the Hong Kong Special Administrative Region (HKSAR) government as any agreement where the public and private sectors work together to deliver a public project:

“Arrangements where the public and private sectors both bring their complementary skills to a project, with varying levels of involvement and responsibility, for the purpose of providing public services or projects.”

(Efficiency Unit 2008a)

Whereas, according to the New South Wales Government the term PPP is used to mean:

“An arrangement for the provision of assets or services, often in combination and usually for a substantial or complex ‘package’, in which both private sector supplier and public sector client share the significant risks in provision and/or operation.” (Infrastructure Implementation Group, 2005)

29

Chapter 3

Literature Review

In this definition there is an emphasis that both the public and private parties share a large proportion of the risks in a PPP project. In reality it is not always that an equal split of risks is experienced. Naturally, each party will want to pass on more risks to the other party. It is noticed that this occurrence is more common in developing countries or jurisdictions where the government has less experience in this alternative procurement method. The New South Wales (NSW) government further describes the importance in the financing of PPP projects and how passing on financial risks is appealing to governments:

“Privately financed projects involve provision by investors of equity capital and debt capital to fund what might otherwise be wholly publicly funded projects financed from NSW Government borrowings and/or budget revenue.” (Infrastructure Implementation Group, 2005)

30

Chapter 3

3.2

Literature Review

What is the Traditional Practice of Procuring Public Works Project?

3.2.1 Progression from traditional to PPP

According to a technical circular prepared by the Environment, Transport and Works Bureau (2004) of the HKSAR government, in a typical public works project the selection process will consist of three stages (Figure 3.1). procurement category will be selected.

In the first stage the generic

In the second stage a sub-category will be

selected. And in the third and final stage the major areas requiring improvement in performance will be identified. Also, the optimal project delivery techniques to address these identified improvement areas will be selected. In an ideal case a project manager from the government will be assigned to follow up the selection process as early as possible.

31

Chapter 3

Figure 3.1

Literature Review

Procurement selection process for typical public works project in Hong Kong (adapted from Environment, Transport and Works Bureau, 2004)

Stage 1 Select generic procurement category

Stage 2 Select sub-category

Stage 3 Select optimal project delivery technique

Four generic procurement categories are identified (Figure 3.2). These include: I Designer Led; II – Design and Construct; III – Design, Construct and Operate; and IV – Finance Design Construct and Operate. The four categories show different levels of private sector participation. The first category is where the private sector has the least involvement, whereas the fourth category shows the private sector having the most involvement. The most extreme form of these categories is category IV. In this category the private sector’s involvement is the maximum.

This model can be regarded as

equivalent to the PPP arrangement. Typically PPP projects have a strong emphasis on the private financing aspect. Also, the private consortium is required to maintain and operate the product/facility for an agreed concession period.

For the other procurement

categories identified these could be regarded as the traditional approaches for delivering public works projects in Hong Kong.

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Under each procurement category, there are also a number of sub-categories. Under the first category “Designer Led” the sub-categories include: z

Lump Sum Contract (with bills of quantities or with drawings and specifications);

z

Remeasurement Contract;

z

Term Contract; and

z

Prime Cost Contract.

The second category “Design and Construct” includes the sub-categories: z

Employer’s Designer Novated;

z

Independent Designers; and

z

Contract Designer.

The third category “Design, Construct and Operate” includes the sub-categories: z

Design Build Operate (DBO); and

z

Prime Contracting.

And the final category “Finance, Design, Construct and Operate” includes the subcategories: z

Private Finance Initiative (PFI);

z

PPP; and

z

Build Operate Transfer (BOT).

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Figure 3.2

The generic procurement categories with their respective sub-categories for public works projects in Hong Kong (adapted from Environment, Transport and Works Bureau, 2004)

Public sector Category I Designer Led z

Lump Sum Contract (with bills of quantities or

Level of participation

with drawings and specifications) z

Remeasurement Contract

z

Term Contract

z

Prime Cost Contract

Category II Design and Construct z

Employer’s Designer Novated

z

Independent Designers

z

Contract Designer

Category III Design, Construct and Operate z

Design Build Operate (DBO)

z

Prime Contracting

Category IV Finance, Design, Construct and Operate z

Private Finance Initiative (PFI)

z

PPP

z

Build Operate Transfer (BOT)

Private sector

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In the third and final stage of the project selection process the delivery technique is identified. These have been broadly categorised into six groups that include: z

Non-contractual Project Delivery Techniques – Partnering;

z

Contractual Project Delivery Techniques - Guaranteed Maximum Price, Target Cost, Construction Management, Incentivisation, Revenue Sharing and Contractor Designed Portions;

z

Project Design Improvement Techniques – Life Cycle Costing, Environmental Assessments and Buildability Rating System;

z

Supplier/Contractor Management - Supply Chain Management, Supplier Benchmarking and Performance Assessment Scheme;

z

Techniques for General Application - Value Management and Risk Management; and

z

Dispute Resolution Mechanisms - Dispute Resolution Advisor, Dispute Resolution Panel, Expert Determination, Mediation, Adjudication, Local Arbitration and International Arbitration.

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3.2.2 Traditional vs PPP

The Efficiency Unit (2008b) of the HKSAR government conducted a thorough comparison to look at the differences between procuring public works projects in Hong Kong traditionally and by PPP (Figure 3.3).

In both approaches the client department takes the lead.

Traditionally the client

department will request the relevant works department to design their desired facility. Via the PPP approach the client department would define their desired facility in terms of the service required. Next, for both approaches the client department together with external experts would form a group to monitor the project.

In the traditional approach, after planning and approvals are obtained, the works department would call for tenders from private contractors to construct or to design and build the facility. On the other hand, in a PPP approach the client group would prepare an output-based performance specification to request proposals for a private sector consortium to design, build, finance, operate and maintain the facility for a specified period.

For both approaches the client department would then conduct a consultation with the general public and Legislative Council Panels before obtaining financial endorsement. The successful bidder in a traditional approach would be the one that satisfies the minimum requirements specified by the client department with respect to quality of

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service or product, and also scores the highest mark in the tender evaluation which weighs both the technical and cost aspects. In a PPP approach, the successful consortium bidder would be the one that satisfies the mandatory requirements specified with respect to the ability of the facility to deliver the service required, the quality of design, construction and operation and on terms which provide best value for money.

Once the contract has been awarded the works department would monitor the construction process under a traditional approach.

In a PPP approach, the client

department advisors would deal solely with the consortium only. The consortium would also manage the specialist contractors involved.

After completion of a traditional project the works department would inspect the works, and upon satisfaction payment would be made to the contractor. On the other hand, in a PPP approach the client department or a third party would verify the facility to be fit for the purpose before payment is made to the consortium.

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Figure 3.3

Differences in procurement between the traditional and PPP approaches of

conducting public works projects in Hong Kong (adapted from Efficiency Unit, 2008b)

Traditional approach

PPP approach

Client department requests works department to design

Client department defines facility in terms of service required

Client department and external experts form group to monitor project

Client department and external experts form group to monitor project

After planning and approvals are obtained, works department would call for tenders from private contractors to construct or to design and build

The group would prepare output-based performance specification to request proposals for a private sector consortium to design, build, finance, operate and maintain the facility for a specified period

Client department would conduct consultation with general public and Legislative Council Panels before obtaining financial endorsement

Client department would conduct consultation with general public and Legislative Council Panels before obtaining financial endorsement

Successful bidder would be the one that satisfies the minimum requirements specified by the client department with respect to quality of service or product and scores the highest mark in the tender evaluation which weighs both the technical and cost aspects

Successful consortium bidder would be the one that satisfies the mandatory requirements specified with respect to the ability of the facility to deliver the service required, the quality of design, construction and operation and on terms which provide best value for money

Works department monitors construction process

Client department advisors deal solely with consortium. Consortium will manage the specialist contractors

After completion works department would inspect the works, upon satisfaction payment will be made to the contractor

Client department or third party would verify the facility to be fit for the purpose before payment to the consortium

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3.3

Literature Review

Background of PPP

3.3.1 Background

PPP projects can be dated as far back as the 1600s during the railway construction boom in the United Kingdom (Grimsey and Lewis, 2004). PPP is a relatively modern term for this arrangement used only more commonly in the last decade. Previously different variations of the arrangement included Private Finance Initiative (PFI), which is a more familiar term to many people due to its popular development in the United Kingdom during the early nineties (Tieman, 2003).

It would not be incorrect to say that the PFI practice developed in the United Kingdom raised the world’s attention to this alternative option for delivering public infrastructure and services. PPP projects now account for about 15 and 8 percent of infrastructure spent in the United Kingdom and Australia respectively (Ernst and Young, 2005). Up to 2006, 794 PPP/PFI deals had already been signed.

The combined capital value was

approximately £55 billion (National Audit Office, 2008). Amongst these projects almost 70% were in the health sector, and over 40% costing below £10 million (Akintoye, 2007). However, Maltby (2003) asserted that PPP/PFI should be abolished for smaller projects and for information technology schemes.

Partnership UK was set up in 2000 to succeed the Treasury Taskforce. The Taskforce was set up in 1997 to oversee the implementation of PPP/PFI projects. One observation

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is that Partnerships UK was initiated by the local Treasury. The team is generally responsible for providing project advice and support, developing government policies, providing co-sponsorship and participating in investment of PPP/PFI projects.

Due to the long history of PPP/PFI projects in the United Kingdom, Partnerships UK has a very comprehensive collection of guidelines and policies on implementing PPP projects for all sectors in many aspects. Case study reports can also be found on the public domain. Amongst the projects conducted by Partnerships UK it was noticed that the majority included projects for schools, hospitals and transportation. Other projects which have also been conducted include environment ones, leisure facilities, prisons and detention centers, housing etc. (Partnerships UK, 2008). The extent to which PFI could be used and the advantages created were the main drivers attracting other countries to start adopting or improve their practice in PPP.

A more specific term used more commonly decades ago in Hong Kong is Build Operate and Transfer (BOT).

This arrangement was commonly adopted for transportation

projects. This is because transportation projects tend to be larger in size and also because their long physical lives fit well into the procurement model. Early types of public infrastructure projects that involved the private sector include the turnpikes built in the United Kingdom and The United States, and also the water facilities that the French delivered through the concession approach (Grimsey and Lewis, 2004). Although water projects tend not to be particularly large in project sum, it was noticed early on the advantages of introducing private expertise to deal with tasks that the public sector was

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probably not as efficient or experienced in carrying out the works. On the other hand, PPP also plays a significant role in the infrastructure development of developing countries. Figure 3.4 presents the annual private investment between 1990 and 2006 in the public services of developing countries (World Bank, 2008).

Figure 3.4

Annual investment of infrastructure projects with private participation in developing countries between 1990-2006 (World Bank, 2008)

This figure is not available online. Please consult the hardcopy thesis available from the QUT Library

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3.3.2 Types of PPP

There are many types of PPP used around the world. Most of them operate in similar ways and the name is differed depending on the country it is used in, whereas in some cases there are major differences to the approach. Some of the commonly mentioned different types of PPP have been listed as follows.

z

Design Build Finance Operate (DBFO) – similar to BTO, the government will retain title of the land and lease it to the private consortium over the life of the concessionary agreement (Levy 1996).

z

Operation and Maintenance (O&M) – the private company operates and maintains a publicly owned asset. This is especially common in Mainland China as traditionally the majority of assets are state owned. The large number of state owned facilities and services have meant that the Chinese government has held a heavy burden, and by adopting PPP this financial commitment can be released. This type of PPP is sometimes not as favourable compared to ones that start from scratch.

For new projects the benefits of employment are

obvious, but on the other hand for existing facilities and services a consortium taking over can cause change to the existing employees. z

Private Finance Initiative (PFI) – commonly used in the United Kingdom, there is a large emphasis on private financing.

z

Build Operate Transfer (BOT) – one of the most traditional types of PPP used in the early days mainly for transport economic infrastructure projects. This

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has also been the traditional option used in Hong Kong. BOT involves the construction of the facility as well as the operation of it. At the end of the contract period it will be transferred back into the hands of the government. z

Build Own Operate (BOO) – commonly used in Australia at the beginning.

z

Build Own Operate Transfer (BOOT) - commonly used in Australia at the beginning. Similar to BOT but a larger emphasis on the ownership.

z

Build Transfer Operate (BTO) – a method of relieving the consortium of furnishing high cost insurance required by the project during operation of the facility (Levy, 1996).

z

Joint Ventures (JV) – public and private sector jointly finance, own and operate the facility (Grimsey and Lewis, 2004).

z

Leasing – where all or a substantial part of all risks associated with funding, developing and operating the facility are assumed by the private sector, with the public sector entity taking the facility on lease (Sapte, 1997).

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3.3.3 The PPP process

Section 3.2.2 in this chapter has already mentioned the process of conducting PPP projects in Hong Kong, but this section takes a further look at the process adopted in general. In a typical PPP project the government will invite private consortia to bid by submitting a project proposal. The successful bidder will need to design, construct and manage the facility/service for the agreed concessionary period which is typically 10 to 30 years. Over the concessionary period the private consortium will need to maintain and operate the facility/service according to the contract terms defined by the government. Normally certain quality standards or performance targets must be achieved. Part of the profit made from the project will be used to repay the loan that the consortium took out to cover the design and construction costs. The remaining proportion becomes their profit, so obviously it is to their benefit to manage the project well.

At the end of the

concessionary period the private consortium will normally hand back the facility/service into the hands of the government.

In general, the typical processes for delivering PPP projects in New South Wales (NSW) include five major steps (Figure 3.2): (1) Project identification; (2) Project approval; (3) Planning assessment; (4) Project delivery; and (5) Project implementation (Infrastructure Implementation Group, 2005). Before a project is even considered going through the PPP path it will go through a series of governmental in-house procedures to decide whether it is a public facility or service that is needed. If decided to be necessary the project will have to be approved via the Gateway review process and to see which

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procurement option it should adopt. Planning assessment via a number of different line agencies would be necessary. Finally the project will be offered to the market, consortia will bid for it and the government will select the most suitable candidate after a long series of negotiations. The project will be designed and constructed over typically 3-5 years. It will then be operated and maintained for a further 25-30 years as the concession period. Thereafter, the project will normally be returned to the government, completely ending its life as a PPP project.

Figure 3.5

Typical processes for delivering PPP projects in New South Wales, Australia (adapted from Infrastructure Implementation Group, 2005)

Project identification and early consideration

Project approval

Planning assessment

Project delivery

Project implementation

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3.3.4 The parties involved in a PPP project∗

In a PPP project there are usually four key parties involved: the local government department / public sector, the consortium / the private sector, the employees of the project and also the public and end-users of the facility or service.

In traditional PPP projects the government is usually more concerned with transferring their risks associated with design, construction, management, operation etc. on to the private sector and satisfying the needs of the general public. On the other hand, the consortium is usually willing to accept some risk but in return expect a more satisfactory financial profit. In the traditional practice the government and the consortium are more self-centered focusing on their own benefits rather than trying to achieve a win-win scenario. Recent years has shown a change to this practice, the parties are more willing to share responsibility, communication is increased and the partnership apart from being based on finance is also concerned with maximising the benefits that can be adopted from the private sector and bringing in skills and innovations that the public sector do not possess.

The employees of a PPP project benefit through employment. For this group of people a successful PPP project often indicates job security. The general public end-users have been known to have a large effect towards the success of a PPP project. Often it is not whether a PPP project is finished ahead of time or is making a huge profit that determines ∗

Information contained in this section is according to the author’s own interpretation, analysis and observation of existing theory and cases studies

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it to be successful. In many cases it is often its image perceived by the general public from the media that is its key to success. Public opinion is important hence a successful PPP project must consider its overall image. For example, a project that needs to cut down forestry for construction maybe perceived to fail at the beginning due to its lack of environmental awareness. Therefore a strategic plan must be considered at the start even before possibly the drawing board.

3.3.5 Research conducted in PPP

With the increasing popularity of adopting PPP projects around the world, research in this field has also become more important to both researchers and practitioners (Al-Sharif and Kaka, 2004).

A comprehensive literature review of PPP research was previously

conducted by Ke et al. (2008). A total of 148 recent publications from renowned journals were studied. The findings showed that the researchers from the United Kingdom were found to be the originators of most PPP papers, followed by the United States, Singapore, Hong Kong, China, Australia and Germany. It was assumed that construction education, national economics and mother language were all factors affecting which countries published more PPP papers.

In academic institutions, Nanyang Technological University in Singapore, The University of Hong Kong, National University of Singapore, and Glasgow Caledonian University were all identified as active in pursuing PPP research. It was also found that various

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modes of PPP have been applied in different parts of the world, and the diverse concept of PPP has been publicly accepted instead of the more traditional BOT scheme alone.

PPP topics that were found to be of particular interest to the researchers included “Risk”, “Procurement” and “Finance”. In which seven more specific categories were derived from these topics including (a) Investment environment; (b) Procurement; (c) Economics viability; (d) Financial package; (e) Risk management; (f) Governance issue; and (g) Integration research.

For these research studies, the techniques adopted vary from

qualitative to quantitative analyses, some of which have included more vigorous techniques / theories in researching.

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3.4

Literature Review

Attractive Factors of Adopting PPP

The attractive factors of PPP have been discussed by many previous researchers. This section looks briefly at some of these.

So why are governments across the world

favouring the approach of PPP to provide for their public services and facilities? The very first PPP projects that opted for this approach were simply to bring in private investment for public services and facilities. These services and facilities were often essential for the public but to provide for them using the government’s capital would put pressure on the government’s financial status. Therefore, it was an ideal situation that the public had what they want provided for without the government having to pay, and also business opportunities were widened for the private sector.

As PPP has developed over the years the advantages associated have become more obvious. Walker and Smith (1995) suggested three main reasons for using the PPP approach: z

In general, the private sector possesses better mobility than the public sector. For example, the private sector is not only able to save the costs of project in planning, design, construction and operation, but also avoid the bureaucracy and to relieve the administrative burden.

z

The private sector can provide better service to the public sector and establish a good partnership so that a balanced risk-return structure can be maintained.

z

The government lacks the ability of raising massive funds for the large-scale infrastructure projects, but private participation can mitigate the government’s

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financial burden.

In addition, Walker et al. (1995) supported that PPP is a win-win solution and a number of benefits to the general public and government are recognised: z

Relief of financial burden;

z

Relief of administrative burden;

z

Reduction in size of (inefficient) bureaucracy;

z

Better services to the public;

z

Encouragement of growth; and

z

Government can better focus and fund social issues such as health, education, pensions and arts.

It is anticipated that there will be more PPP projects due to two main reasons according to Ghobadian et al. (2004). Firstly, the private sector will get to know the needs of the public sector client over time. Secondly, the private sector has more to give than the public sector in terms of skills, technology and knowledge therefore providing better quality facilities.

Askar and Gab-Allah (2002) summarised eight advantages of PPP in their paper: z

The use of private sector financing to provide new sources of capital, thus reducing public borrowing and improving the host government’s credit rating;

z

The ability to accelerate the development of projects that would otherwise have to wait for scarce sovereign resources;

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z

Literature Review

The use of private-sector capital, initiative, and know-how to reduce project construction costs and schedules and to improve operating efficiency;

z

The allocation of project risk and burden to the private sector that would otherwise have to be undertaken by the public sector;

z

The involvement of private sponsors and experienced commercial lenders, providing an in-depth review and additional assurance of project feasibility;

z

Technology transfer, training of local personal, and development of national capital markets;

z

In contrast to full privatisation, the government’s retention of strategic control over the project, which is transferred back at the end of the contractual period; and

z

The opportunity to establish a private benchmark to measure the efficiency of similar public sector projects and thereby offer opportunities for the enhancement of public management of infrastructure facilities.

Risk transfer is one of the main reasons for adopting the PPP approach. The private sector is in general more efficient in asset procurement and service delivery and as a result it is to the government’s advantage to share the associated risks with the private sector. In line with widely accepted principles, Hong Kong government’s Efficiency Unit (2003a) advocated that the most ideal situation is to allocate the risk to the party most able to manage/control that risk.

For example, the contractor would take up the

construction risk, the designer would take up the design risk, the government would take up environmental approval risks, land acquisition risks etc. (Corbett and Smith, 2006;

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Chan et al., 2006; Grimsey and Lewis, 2004; Boussabaine, 2007; Akintoye et al., 2003; Li et al., 2005a; So et al., 2007; Li, 2003; Efficiency Unit, 2003a; Ingall, 1997; New South Wales Government, 2006; European Commission Directorate, 2003; Efficiency Unit, 2002; United Nations Economic Commission for Europe, 2004; British Columbia, 1999).

Cost certainty is more easily achieved in PPP projects as financial terms are identified and included within the contract.

Since the private consortium will normally be

responsible for financing, designing, constructing and operating the facility over an extended period, any cost saving can naturally result in a better chance of securing profit. Hence they are keen to control their spending tightly (Corbett and Smith, 2006; Chan et al., 2006; Environment, Transport and Works Bureau, 2004; Boussabaine, 2007).

Innovation is another important advantage that the private sector can bring to public services. Generally speaking, the public sector may not be as innovative as the private sector. The private sector on the other hand is continuously searching for new products and services to increase their competitive edge and to save costs (Chan et al., 2006; Environment, Transport and Works Bureau, 2004; Akintoye et al., 2003; Li et al., 2005b; Li, 2003; Efficiency Unit, 2003a; New South Wales Government, 2006; Efficiency Unit, 2002; British Columbia, 1999).

The private sector is made responsible for ensuring that the asset and service delivered meet pre-agreed quality benchmarks/standards throughout the life of the contract.

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Sometimes, the private consortium would only receive payment upon meeting certain requirements of the project; or it is motivated by the incentive payments to reward the high quality of service to be provided.

In a PPP project the consortium is also responsible for the long-term maintenance of the facility/service.

The concession period may range from a few years to decades.

Therefore the consortium is keen to design and construct the service/facility to ensure better maintainability (Chan et al., 2006; Environment, Transport and Works Bureau, 2004; Grimsey and Lewis, 2004; Boussabaine, 2007; So et al., 2007; Li, 2003; Efficiency Unit, 2003a), at least within the concession period if not beyond.

Public sector projects delivered by the PPP model can often be completed on time and even with time savings because the consortium would start receiving revenue once the facilities/services are up and running. Therefore, the project team is keen to complete design and construct as quickly as possible. Once it starts to accrue revenue it can begin to pay off the initial costs and build up profits, whereas in a traditionally procured project there are no extra financial incentives for public servants to deliver projects faster. As a result, projects can best be proceeded along as scheduled (Environment, Transport and Works Bureau, 2004; Grimsey and Lewis, 2004; Akintoye et al., 2003; Li, 2003; Efficiency Unit, 2003a).

Time certainty is found to be more easily achieved in PPP projects. The consortium is often paid according to milestones of the project schedule and any delay might be subject

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Literature Review

Therefore the consortium is often motivated to reach these

milestones on time, if not earlier. This is a common behavior observed in the private sector but it may not be the case in the public sector (Chan et al., 2006).

To the government, PPP frees up fiscal funds for other areas of public service, and improves cash flow management as high upfront capital expenditure is replaced by periodic service payments and provides cost certainty in place of uncertain calls for asset maintenance and replacement. Public sector projects delivered via the private sector normally involve private sector funding. Consequently, the public funding required for public services can be reduced and redirected to support sectors of higher priority, e.g. education, healthcare, community services, etc. (Li et al., 2005b; Efficiency Unit, 2002).

To the private sector participants, PPP provides access to public sector markets. If priced accurately and costs managed effectively, the projects can provide reasonable profits and investment returns on a long-term basis. Also, these projects tend to be large and therefore expertise from many areas is required. Hence co-operation among different collaborating parties is encouraged (Environment, Transport and Works Bureau, 2004; Grimsey and Lewis, 2004; Boussabaine, 2007; European Commission Directorate, 2003; United Nations Economic Commission for Europe, 2004).

Business opportunities are also created, due to the large scope of works that can benefit different sectors (So et al., 2007; Li, 2003; Efficiency Unit, 2003a; United Nations Economic Commission for Europe, 2004; British Columbia, 1999).

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3.5

Literature Review

Negative Factors of Adopting PPP

Similarly the negative factors for PPP were also reviewed and a summary has been given in this section. Berg et al. (2002) also summarised some disadvantages of PPP projects: z

Lengthy bidding process – from initial phase of public sector assessment to signing of contract takes up to two years. The process of inviting, preparing, assessing and refining bids and negotiating contracts is complex and procedural.

z

High bidding costs – the detailed and lengthy nature of the bidding process implies increased transaction costs.

z

Small number of bidders

z

Cost overruns – considerable scope for cost inflation through the bidding process.

z

Excessive risks – not clear to what extent the government can shift risk.

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; Environment Transport and Works Bureau, 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).

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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 consortium).

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).

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 client’s 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; Environment Transport and Works Bureau, 2004; Li, 2003; Li et al., 2005b; 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

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a complicated agreement framework for successful PPP implementation can slow down the bidding process (Chan et al., 2006; Environment Transport and Works Bureau, 2004; Grimsey and Lewis, 2004; Li, 2003; Li et al., 2005b; Merna and Owen, 1998; Mustafa, 1999; Zhang, 2001).

One other reason for failure is the stakeholders’ opposition and general 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 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., 2005b; Zhang and AbouRisk, 2006).

The introduction of PPP exerts unprecedented pressure on the legal framework as it plays

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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 versus legitimate rights of private sector).

Without a well-established legal framework, disputes are inevitable

(Grimsey and Lewis, 2004; Li et al., 2005b; Satpathy and Das, 2007).

Private sector investors bear financial risks in funding of the investment. financially strong partners in a PPP project is regarded as difficult.

Seeking

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 a negative factor to PPP success. Therefore, a conducive financial market is important for the private parties to drive PPP projects.

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3.6

Literature Review

Value for Money in PPP Projects

One of the main reasons that projects are procured by PPP is to enhance Value for Money (VFM) by inviting the private sector to handle public works projects. As a result there has been much literature on how VFM in PPP projects can be achieved. This section reports only a few examples of how VFM can be achieved in PPP projects.

VFM, defined by Grimsey and Lewis (2004) as the optimum combination of whole life cycle costs, risks, completion time and quality in order to meet public requirements, is another important consideration when deciding whether to proceed with the PPP option, especially for the public sector (Chan et al. 2006; Boussabaine 2007; Li et al. 2005b; Li 2003; Efficiency Unit 2003a; Ingall 1997; New South Wales Government 2006; European Commission Directorate 2003; Efficiency Unit 2002).

"Public Sector

Comparator" is the most common tool used by the public sector to show how much it would cost the Government to build the asset through public funding, which is then used to compare with how much it would cost to build it as a PPP (Farrah 2007). In the case of the University College London Hospital Redevelopment in the United Kingdom, the PPP option cost 6.7% less than the Public Sector Comparator, while maintaining the same output and user requirements as demanded (Efficiency Unit 2003b).

Cost savings refer to the reduction in price as a result of delivering a project by PPP instead of traditional methods. The saving could be a result of the private sector’s innovation and efficiency which the public sector may not be able to achieve (Corbett and

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Literature Review

Smith 2006; Environment, Transport and Works Bureau 2004; Grimsey and Lewis 2004; Akintoye et al. 2003; Li et al. 2005b; So et al. 2007, Li 2003; Efficiency Unit 2003a; European Commission Directorate 2003; United Nations Economic Commission for Europe 2004; British Columbia 1999).

Private sector generally achieves higher

operational efficiency in asset procurement and service delivery by applying their expertise, experience, innovative ideas/technology (e.g. using durable materials to reduce future maintenance cost) and continuous improvements. Overall cost savings to the project can be achieved by striving for the lowest possible total life cycle costs while maximising profits.

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 materialise 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; Environment, Transport and Works Bureau 2004; Grimsey and Lewis 2004; Li 2003; Li et al. 2005b; Merna and Owen 1998; Zhang 2001; Zhang and AbouRisk 2006). Complex PPP projects require inputs from many parties of different expertise. Therefore, the

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Literature Review

projects should be economically viable to cover such costs.

3.7

Achieving Successful PPP Projects

In order to achieve successful PPP projects, some suggestions have previously been reported in literature. This section reports only a few examples of how successful PPP projects can be achieved.

Under PPP contracts the government should be concerned that the assets are procured and services are delivered on-time with good quality and meet the pre-agreed service benchmarks or requirements throughout the life of the contract.

However, the

government should be less concerned with “how” these are achieved and should not impose undue restrictions and constraints on the private sector participants.

The

government should be relegated to the primary role of industry and service regulation; should be flexible in adopting innovations and new technology; should provide strong support and make incentive payments to the private sector where appropriate. On the other hand, the government should retain controls in case of default and be prepared to step in and re-provide the service if necessary (Abdul-Rashid et al. 2006; Corbett and Smith 2006; El-Gohary et al. 2006; Jamali 2004; Kanter 1999; Li et al. 2005c; Tam et al. 1994; Tiong 1999; Zhang 2005).

A transparent and efficient procurement process is essential in lowering the transaction costs and shortening the time in negotiation and completing the deal. Clear project brief

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Literature Review

and client requirements should help to achieve these in the bidding process. In most cases, competitive bidding solely on price may not help to secure a strong private consortium and obtain value for money for the public. The government should take a long-term view in seeking the right partner (Corbett and Smith 2006; Gentry and Fernandez 1997; Jefferies et al. 2002; Jefferies 2006; Li et al. 2005c; Qiao et al. 2001; Zhang 2005a).

Successful PPP implementation requires a stable political and social environment, which in turn relies on the stability and capability of the host government (Wong 2007). Political and social issues that go beyond private sector’s domain should be handled by the government. If unduly victimised, it is legitimate that the private sector participants should be adequately compensated. Unstable political and social environments have resulted in some failed rail projects (e.g. frequent change in government premiers in Bangkok leading to the cancellation of many new public infrastructure projects originally procured under the PPP approach (Khang 1998; Cobb 2005)).

Many researchers (Akintoye et al. 2001; Corbett and Smith 2006; Jefferies et al. 2002; Li et al. 2005c, Zhang 2005a) have found that project financing is a key success factor for private sector investment in public infrastructure projects. The availability of an efficient and mature financial market with the benefits of low financing costs and diversified range of financial products would be an incentive for private sector taking up PPP projects.

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3.8

Literature Review

Chapter 3 Summary

This chapter has provided the results of a comprehensive literature review conducted to provide background knowledge on the research topic.

The traditional practice of

procuring public works projects was reviewed to highlight the difference compared to the PPP method. It was found that there are some clear procedures prepared by the local government explaining the process of implementing PPP projects.

Although the

procedures were explained clearly and illustrated by a step by step process, there are no exact instructions on how to carry out these activities. Furthermore a comprehensive review was conducted to study the attractive factors, negative factors, value for money measures and success factors of PPP. These findings should be further verified with a population before generalization can be reached.

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Procuring Infrastructure Projects in Hong Kong

CHAPTER 4 PROCURING INFRASTRUCTURE PROJECTS IN HONG KONG 4.1 4.2

BOT/PPP Experience in Hong Kong 4.3

4.4



Is BOT the Best Financing Model to Procure Infrastructure Projects? 4.5

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Chapter 4

4.1



Hong Kong has seen a long history of adopting the Build Operate Transfer (BOT) arrangement for its public works projects. The famous channel tunnel projects have been amongst some of the earliest projects in the world to adopt this arrangement. Unfortunately, the development of this procurement arrangement was not continued until more recently. Overseas experience demonstrating the benefits of PPP has re-initiated the interest of some local governmental departments, to develop the traditional BOT arrangement into a more appropriate, refined and internationally recognised successful approach. This paper examines the development of PPP projects in Hong Kong by looking at a number of cases which have contributed to this change.

4.2

BOT/PPP Experience in Hong Kong

Hong Kong is not completely new to the idea of PPP. In actual fact the city was probably one of the first to utilise resources from the private sector. The term PPP may sound revolutionary to Hong Kong, whereas a more familiar term is BOT. The concept of BOT has been used since the late sixties. Although Hong Kong has had experience in adopting quite a number of BOT projects, the approach of PPP has never really been studied extensively in the local context. The traditional practice of these projects was for the government to directly award a concession to the potential bidder. This practice of awarding concessions is common in Hong Kong, but the gestation period spent in formulating the enabling legislation is lengthy (Zhang 2001).

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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 (HKSAR) government has been heavily involved in PPP research.

The local

government’s interest in utilising 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 bureaus and departments to familiarise with private sector engagement (Efficiency Unit, 2001). These guidelines were published in 2001 and showed the government’s interest in adopting the idea of PPP. Only two years later they also produced a comprehensive introductory guide to PPP (Efficiency Unit, 2003a). This guide was aimed for the use of the civil servants but is also made available for the public’s interest to understand the government’s approach. After the publication of this report much interest was drawn from the construction industry due to the possibility of the increased business opportunities available.

More recently, the Efficiency Unit published two more guidelines on PPP (Efficiency Unit, 2007; 2008b). The first of these publications shows how more knowledge on the

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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.

4.3


4.3.1 Cross Harbour Tunnel (CHT)

In September 1969 the construction for the first BOT project in Hong Kong commenced (Mak and Mo, 2005). The Cross Harbour Tunnel (CHT) is a two lane tunnel in each direction (Figure 4.1 shows a photograph of the CHT (Kowloon Motor Bus 30X/230X, 2008)). It took only 36 months to complete and was eleven months ahead of schedule. The CHT was an instant success when it came in operation in August 1972. It was the first tunnel linking Hong Kong Island to Kowloon Peninsula. Before the tunnel was constructed traveling between the two places was by ferry for passengers and vehicles. There were more reasons for its success, it was well situated in the centre and provided the shortest route across the harbour of only 1,852 m. constructed at the right time.

More importantly it was

During the late sixties and seventies, Hong Kong’s

economy was developing at a high speed, and with good economy the number of vehicles on the street had also increased dramatically. Within three and a half years of operation

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the tunnel had already collected enough tolls to pay back for the construction cost. The franchise period for the project was thirty years the tunnel was therefore handed back to the local Government on 31 August 1999. The tunnel is probably the most successful BOT project in Hong Kong. The tunnel is still one of the most important and profitable pieces of infrastructure locally.

Figure 4.1

Photograph of the Cross Harbour Tunnel entrance and exit on Kowloon Peninsula (Kowloon Motor Bus 30X/230X, 2008)


Tam (1999) documented some lessons learnt in Asian projects through a selection of case studies. From his analysis on the CHT project he concluded that BOT would be a good solution to overcome the shortage in public money and the lack of technology. The BOT model allows the government to transfer technical and financial risks to the project

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concessionaire.


He further suggested that to ensure the commitments from the

government and the concessionaire, the government should hold a stake in the project as in the CHT case. The result meant that the parties cooperated to limit competing projects and the construction process was faster.

4.3.2 Western Harbour Crossing (WHC)

The success of the CHT introduced around a dozen more BOT projects in Hong Kong. Other examples of local BOT projects include the Chemical Waste Treatment Plant on Tsing Yi Island, the Tate’s Cairn Tunnel, and the Route 3 Country Park Section. But not all these projects were equally as successful. A typical example is the Western Harbour Crossing (WHC) opened in 1993 (Figure 4.2 shows a photograph of the WHC (Forum Sara, 2008)).

This project was the third underwater roadway tunnel to connect Hong Kong Island with the Kowloon Peninsula. This project was constructed as part of a giant infrastructure improvement project reaching HK$160 billion in scale, centered on Hong Kong’s new airport (Nishimatsu, 2006). Under the contract agreement of a 30 year period, the consortium can adjust the toll depending on the performance of the revenue. If the revenue is underestimated the toll can be increased to meet targets, on the other hand the toll can also be lowered if the toll exceeds the expected revenue. When the tunnel came into operation in April 1997 (Mak and Mo, 2005), Hong Kong was experiencing an economic downturn which in turn reduced the traffic volume. Another problem was that

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the WHC was very expensive to build. It cost approximately HK$7,500 million, which was over 23 times more than that for the CHT (Li, 2003). Therefore, in order to reach target revenue the WHC increased the toll causing drivers to use the other two cross harbour tunnels linking Hong Kong Island to Kowloon (Kwan, 2005).

WHC can therefore be discussed as a less successful project. The project investors have not made their target revenue, the general public has a negative perception of the project due to some adverse media reporting and the local government has had to take up critique from the general public.

Figure 4.2

Photograph of the Western Harbour Crossing entrance and exit on Kowloon Peninsula (Forum Sara, 2008)


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Analysis conducted by Tam (1999) showed that although the WHC was also completed earlier and effectively managed, the project performance was destroyed by the delay in toll rise applications. The applications were held up by the elected members of the Legislative Council of the HKSAR when the government introduced more democracies into the political system from 1990 onwards. The importance of a well defined toll rise mechanism was crucial in this case. Political influence was also a major factor towards the end performance.

As a result an arbitration clause and a legal system were

established to resolve the dispute. Another possible factor affecting the difference in performance between the CHT and the WHC could be due to the lower government stake in the WHC. As mentioned previously government stake in projects could further ensure the commitment from all parties.

4.3.3 Asia World Expo (AWE)

A recently completed project is the Asia World Expo (AWE) opened in December 2005 (Figure 4.3 shows an aerial photograph of the exhibition centre (Asia World Expo, 2008a)). The project has been touted as a model PPP scheme by the HKSAR government (Tam, 2006). Some may consider AWE to even be the first proper PPP project in Hong Kong. The project was initiated to increase competition in the exhibition sector, and as a result to make Hong Kong more attractive to the outside world. Therefore, PPP seemed to be the innovative way to tackle the project. The exhibition centre is located right next to the Hong Kong International Airport and provides 70,000 square meters of rentable

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space, including 10 exhibition halls and meeting rooms. The exhibition hall also claims to be capable of holding a 13,500 seat entertainment arena (Asia World Expo, 2008b).

Figure 4.3

Photograph of the Asia World Expo (Asia World Expo, 2008a)


An obvious difference between this project and other previous projects delivered by this approach was that AWE was highly driven by the Financial Secretary’s Office. One of the problems that Hong Kong has experienced in the development of PPP is the lack of driving force or champion at senior level of the government. In other countries it has often been seen that in jurisdictions where PPP have developed well and rapidly are those where someone in government with authority has been behind the driving force. AWE has therefore been fortunate enough to have this driving force.

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During the collection of case study information an interview was conducted with a member of the AWE project, who described that:

“An existing convention and exhibition centre in Hong Kong has 62,000 square metres of usable space and 900 permanent staff recruited. In comparison, the AWE is a lot larger providing 70,000 square metres of usable space but only recruits 50 permanent staff. Temporary services are called upon when needed. This shows that AWE is a cost effective model. In addition, AWE cost HK$2.5 billion to deliver the asset which included a railway station and the infrastructure. On the other hand, the quasi-public operator of the existing convention facilities is reacting to the new competition and expanding its premises, creating 15,000 square metres of additional space at a cost of over HK$1 billion. If the job was left to the concessionaire it would be much cheaper. If AWE was delivered the traditional way it would have cost a lot more and would have taken a lot longer. The speed of the project was down to the drive of the people behind it and their desire to make it happen. By making the operator and contractor stakeholders they ensure that the cost is kept in track as they do not want to create cost overruns. This project was delivered without any significant overruns since the private sector has to bear the excess over the government’s injection. It was the desire of the operator to have the facility designed to be readily manageable and easily maintained.”

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4.3.4 West Kowloon Cultural District (WKCD)

The proposed West Kowloon Cultural District (WKCD) project is located West of Yau Ma Tei on the Kowloon Peninsula of Hong Kong (Figure 4.4 shows an artist’s impression of the project (Home Affairs Bureau, 2008)). The project had been long awaited due to repeated delays and controversies (South Morning China Post, 2008). Back in April 2001, the HKSAR government invited the private sector to submit conceptual plans for the 40 hectare waterfront site at the southern tip of the Western Kowloon reclamation into an integrated arts, cultural and entertainment district under the mode of PPP (Mok, 2005). Since, there has been continuous debate over the best suitable financing modality which should be adopted. A number of uncertainties in this project doomed it to be highly criticised. These problems included: z

Initially the government was unclear of what they wanted and their objectives were unknown;

z

Government did not notify or seek advice from relevant parties at the beginning e.g. art and culture groups;

z

There is no timeframe or schedule to be met and no milestones to be achieved;

z

The private sector has been kept in the process for too long causing loss in terms of time and resources; and

z

The project may not be able to proceed if private financing is not involved.

Media reports have also highly publicised the dissatisfaction heard from local Legislative Councilors towards the government’s indecisiveness and delay in delivering this project

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(Leong, 2008). Due to the large number of uncertainties involved, the local government has needed to handle the project more cautiously. As a result a decision to the project design, timeframe and the delivery method took a long time to be decided. A number of public consultations were conducted. And a special task force was established to monitor the progress of this project.

The debate over the financing modalities finally came to a halt when the Legislative Council of the HKSAR government approved HK$21.6 billion to fund this project (Wu, 2008). The agreement was reached after thirty-two Legislative Councilors agreed to this arrangement against ten that opposed.

Figure 4.4

Artist’s impression of the proposed West Kowloon Cultural District project (Home Affairs Bureau, 2008)


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4.3.5 Findings from the case studies

This section has looked into four case studies in Hong Kong. Two of these appear to be a failure or less successful and the other two are seen to be highly successful or at least most of the project stakeholders are happy with their performance.

The CHT and the WHC were delivered by the more traditional BOT approach which Hong Kong has gained abundant experience in. Although experience has been developed for these types of projects, WHC has still been regarded as relatively unsuccessful, especially when compared to the CHT which is one of the most profitable public services that the local Government now owns.

AWE and WKCD are two more recent projects. AWE is classified by some as the first proper PPP project to be delivered in Hong Kong. The satisfied stakeholders involved in this project have reflected its success. On the other hand, the WKCD took a long while to decide on the delivery approach of whether or not using the PPP route; and finally the government decided that they should fund the project out of their own money. The lengthy decision process and the uncertainty of the local government, has doomed it to become an unsuccessful PPP venture. Its consideration to go down the PPP path has given PPP a highly bad profile in Hong Kong.

The cases discussed in this section have shown both successful and unsuccessful experiences of the more traditional BOT projects and the more recent PPP projects in

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Hong Kong. Table 4.1 shows a summary of some of the project information for the cases presented.

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Table 4.1


Summary of the analysed case studies (Asia World Expo, 2008; Bouygues-Asia, 2008; Hong Kong Engineers, 2006; Li, 2003; Nishimatsu, 2006)

Project Name

Abbreviation

Delivery

Concession

Construction

Opening

Approximate

Planned

Actual

Approach

Period

Start Date

Date

Project Cost

Construction

Construction

(HK$ million

Period

Period

)

(months)

(months)

(years)

Cross Harbour Tunnel

CHT

BOT

30

Sep 1969

Aug 1972

320

47

36

Western Harbour Crossing

WHC

BOT

30

2 Aug 1993

1 Apr 1997

7,500

48

44

Asia World Expo

AWE

PPP

25

Sep 2003

21 Dec 2005

2,350

28

27

WKCD

Traditional

West Kowloon Cultural District

On-going: to be confirmed

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4.3.6 Section 4.3 summary

Although Hong Kong has had experience in adopting quite a number of BOT projects, the approach of PPP has yet to be studied extensively on a local scale. Often the traditional practice of these projects was to directly form a contract agreement with the potential bidder. By doing so it was possible that essential items for success were neglected and risks were not avoided. Some of the BOT projects conducted in Hong Kong have often jumped straight into the project agreement neglecting important foundation work. This practice of securing contracts quickly is common in Hong Kong, but the risks which maybe associated are unpredictable. Therefore, it is important to adopt the experiences of others and to develop a suitable model to fit Hong Kong bearing in mind the differences in location, culture, experiences and practices.

Some of the lessons learnt which can be derived from the Hong Kong case studies include: z

Timing of the project is important, this will effect whether there is a demand;

z

The PPP method can help to resolve technical and financial problems by bringing in more able parties to work with/for the government;

z

Ensure that value for money is achievable by adopting PPP;

z

Ensure a reasonable toll adjustment mechanism;

z

Keep the general public satisfied by sufficient consultations and transparency in the process;

z

Projects that attract a lot of political debates are less likely to be successful;

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z

A project champion is necessary;

z

PPP projects can also be delivered via public funding;

z

Set clear objectives and timeline; and

z

Streamline the procurement process.

Presently, PPP projects are conducted without thorough investigation into the feasibility of using the model in Hong Kong. The only information available is the experiences that Hong Kong has derived. Some recent projects have been adopted appropriately by integrating international best practice. It is anticipated that future PPP projects in Hong Kong will be adopted well if the local Government can integrate the lessons learnt from other jurisdictions and integrate these with Hong Kong’s own experiences to overcome the differences in practice and location.

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4.4


Is BOT the Best Financing Model to Procure Infrastructure Projects?

This section aims to study the feasibility of implementing BOT projects in Hong Kong by looking at the recent highly profiled Hong Kong – Macau – Zhuhai Bridge (HMZB) project. The three governments that are going to deliver the HMZB, have decided to finance the project themselves rather than to seek private financing as previously planned. Additionally, the objectives of this analysis will include: z

Study the background of the HMZB to discover the reasons why it will not be delivered by the BOT model;

z

Analyse the process in which the HMZB changed from being delivered by BOT to being funded solely by the host governments;

z

Study the underlying problems of the HMZB and why the BOT model could not be applied; and

z

Analyse the government’s motives for not opting for the BOT model in the case of the HMZB.

The aim and objectives of this study were achieved by conducting an in-depth analysis of the HZMB case via published materials such as newspapers, magazine articles, websites, journal papers, government releases etc. A large range of materials were firstly collected. Then materials that were believed to show a true reflection of the HZMB situation were retrieved and analysed thoroughly. This process was conducted using the “WiseNews” search engine. WiseNews is a database of news and magazine articles that are published

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in more than 500 sources including all major newspapers in Hong Kong, press release from the Information Services Department of the HKSAR government, ATV Internet news, Xinhua News Agency and many magazines from Hong Kong, Macau, China and Taiwan (The Hong Kong Polytechnic University, 2009).

4.4.1 Background of the Hong Kong – Zhuhai – Macau Bridge

4.4.1.1 Background

The idea for the HZMB was first proposed by Mr. Gordon Wu of the Hong Kong listed Hopewell Holdings Limited in the eighties (Kwok, 2009). Mr. Wu had observed the added advantages towards industry with improved infrastructure network in the Pearl River Delta Region. But no further actions were taken by the HKSAR government hence the project was put on hold for over two decades (Oriental Newspaper, 2008).

It was not until September 2002 that the project was rethought. At the “Third Meeting of the Mainland / Hong Kong Conference on the Co-ordination of Major Infrastructure Projects” it was agreed that a study would be conducted on the transportation between Hong Kong and Pearl River West. This was the first proper study conducted to analyse the feasibility of the HZMB. Furthermore, in January 2003, the National Development and Reform Commission (NDRC) and the HKSAR government commissioned the Institute of Comprehensive Transportation to conduct this study.

The study was

completed in July 2003. The report entitled “Transport Linkage between Hong Kong and

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Pearl River West” highlights that transportation between Hong Kong and the Pearl River West is insufficient. A point which was mentioned over twenty years ago but only verified till now. The current transport between theses jurisdictions via the Humen Bridge is costly and time consuming. Therefore, the report concluded that the HZMB would be advantageous to overcome the problems (Transport and Housing Bureau 2008a).

With the project back on track the Advance Work Co-ordination Group (AWCG) was setup in August 2003 for the bridge. The AWCG is comprised of representatives from each of the governments.

In February 2004, the AWCG commissioned the China

Highway Planning and Design Institute (HPDI) to conduct a feasibility study for the HZMB. In doing so the HPDI also set up an office in Guangzhou to specifically monitor the works conducted by HPDI. The study looked at all aspects of the project including hydrology, environment, landscape, marine, ship impact protection, traffic, wind speed assessment and financial viability (Transport and Housing Bureau, 2008a). The report proposed several alignment options which were presented at a meeting organised by the NDRC in April 2005. It was approved by the AWCG that the Northern bridge-cumtunnel alignment would be adopted (Transport and Housing Bureau, 2008a). The HPDI were further commissioned to conduct studies on the locations of boundary crossing facilities of the bridge after the “Ninth Plenary of the Hong Kong-Guangdong Cooperation Joint Conference” held in August 2006 (Transport and Housing Bureau, 2008a).

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With the technical side of the project underway, the financial arrangement and responsibilities needed to be confirmed. These details are discussed in later sections of this chapter.

4.4.1.2 The proposed design

The three governments have claimed that the HZMB will further enhance the economy development of Hong Kong, Macau and the Western Pearl River Delta region (Hong Kong Special Administrative Region Government, 2008). The new bridge is expected to significantly reduce the cost and time for both people and goods transportation between the regions. At the same time it is hoped that the project will increase the region’s competitiveness. The construction of the bridge is expected to commence no later than 2010 (Hong Kong Special Administrative Region Government, 2008). And the estimated completion date is set for year 2015 to 2016 (Chen and Lee, 2008).

The initial estimated time of travel is believed to be within 15 to 20 minutes and the total cost of the bridge will be approximately RMB37.4 billion (Mak, 2008). The main bridge will be a 29.6 kilometres dual 3-lane carriageway in the form of bridge tunnel structure comprising an immersed tunnel of about 6.7 kilometres. Vehicle speeds are anticipated to be 100 kilometres per hour. A traffic flow of approximately 12000 – 16000 vehicles are expected per day (Hung, 2008). The bridge will land on an artificial island off Gongbei on the west side, and another artificial island on the east which would be west of the HKSAR boundary.

According to the current proposed construction option, the

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connecting roads are about 12.6 kilometres on the Hong Kong side and 13.9 kilometres on the Mainland side. As shown in Figure 4.5 the bridge will run across the Lingding Channel, the Tonggu Channel, the Qingzhou Channel, the Jiuzhou Port Channel, and the Jianghai Channel etc. (Transport and Housing Bureau, 2008a). A summary of the project details is also shown in Table 4.2.

Figure 4.5.

Alignment of the HKZMB (Transport and Housing Bureau, 2008a)


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Table 4.2


Summary of the HZMB Details (Mak, 2008; Hong Kong Special Administrative Region Government, 2008; Chen and Lee 2008; Hung, 2008; Transport and Housing Bureau, 2008a)

Route

Joining Lantau Island in Hong Kong to Perola in Macau and Gongbei in Xhuhai

Length

29.6 kilometres (main body)

Vehicle speed limit

100 kilometres per hour

Journey duration

15 to 20 minutes

Toll fee

$HK150 per vehicle

Construction cost

RMB37.4 billion

Traffic Flow (Hung, 2008)

12000 – 16000 vehicles per day

Estimated Date of Construction 2010 Commencement Estimated Date of Completion

2015/ 2016

4.4.1.3 The original BOT decision

The HZMB project was originally suggested by the private sector hence BOT was the assumed delivery method from the very beginning. A BOT plan was originally drawn up in early 2008 for the bridge. This plan was officially initiated by the three governments from Guangdong, Hong Kong and Macau in 2002. Under the BOT scheme, the three governments would be only responsible for construction of ports and connective parts of the bridge within the three sides and its main part will be constructed by bids (Qiu, 2008).

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Under the BOT arrangement the bridge was to have a 50 year concession period (Legislative Council, 2008).

Another reason for the HZMB to be delivered by the BOT model was the high project costs. By involving the private sector the governments would not need to take up the financial risks involved (Apple Daily, 2008). Although this was appealing the extended duration of the tendering and negotiation process due to the project being a BOT was foreseeable. Also the differences in legislation between the three jurisdictions, made it even more difficult to come up with a unique agreement on aspects such as vehicle flow and sharing of risks between the public and private sectors. As a result to continue with the BOT plan would mean that the timeframe for the project would be more unpredictable and a lot further away (Apple Daily, 2008).

4.4.1.4 Underlying problems of the project

Originally calculations showed that if the bridge was procured by the BOT model the toll fares would be approximately $150 for each vehicle crossing the bridge (Mak, 2008), but whether this price will be lowered due to public financing is still unknown (Hong Kong Special Administrative Region Government, 2008).

Chairman of the Container

Transportation Employees General Union, Mr. Chiu spoke publicly that the toll fees should be lowered between the range HK$80 to HK$100 to be reasonable for the general public (Mak, 2008). Another local Hong Kong car rental enterpriser believed that for such a short journey the fare should not be beyond HK$100 to HK$120. The responses

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show that the proposed toll prices would be far too high for the general public to benefit from the project.

Also as mentioned previously a major reason why the WHC was so unsuccessful compared to the CHT was because it was built 30 years later and at a cost of twenty-three times more. Similarly it has been 25 years since the idea for the HZMB was first mentioned, the cost of construction and the necessity for the bridge has definitely changed. The lack of interest from the private sector maybe an indication that the bridge is not as important as it once was. The original intention was that the bridge could serve the industrial development of the area rather than the general public. But since the idea was first proposed undoubtedly there has been a large change and movement to the industries in the region.

4.4.2 Change from private financing to public financing

4.4.2.1 The process of change

Mr. Wu’s original initiation of the project led minds to think that Hopewell Holdings would definitely be interested to participate in this mega infrastructure project but it has been reported that over twenty years after the idea was first proposed, the company no longer saw a business opportunity in the plan (Lam and Chan, 2008). Similarly, other private sector companies felt the same. The private sector was no longer interested in this project as the business potential for them was not attractive.

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Therefore, the decision for the financing model of the bridge was changed dramatically. In the “8th AWCG Meeting” held in February 2008 it was still assumed that the project would be procured by BOT. The three governments agreed to take up the responsibility for construction and operation of the boundary crossing facilities and the link roads to the bridge within their own territory. It was discussed that private investment would be invited for the main body of the bridge with the funding gap shared by the three governments according to construction needed in their own territories.

In this

arrangement Hong Kong would have covered 50% of the difference, Guangdong 35% and Macau 15%. The decision showed that the governments were in favour of the PPP arrangement at the time (Transport and Housing Bureau, 2008b).

But in an interview conducted with the Secretary for Transport and Housing Bureau also in February 2008, she was asked by reporters whether the BOT method would be adopted for the HZMB. The Secretary responded that the project would be considered as a whole amongst the governments. Her response did not directly answer whether the project would be financed by the private sector or not (Transport and Housing Bureau, 2008c).

Under some discussion and reviews of the studies that have been carried out such as on the traffic flow and bid price, it was realised that the governments would not be able to come up with an attractive economic package for the private sector to be interested (Ming Pao Newspaper, 2008a). Finally a decision was made at the “11th Plenary of Hong Kong-Guangdong Co-operation Joint Conference” in August 2008. It was announced that the HZMB would be funded jointly by the governments (Hong Kong Special

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Administrative Region Government, 2008). It was confirmed that the bridge would be conducted using public money rather than private sector resources.

The preliminary proposed contribution from each government will be RMB6.75 billion from the HKSAR government, RMB7 billion from the Guangdong-Central government, and RMB1.98 billion from the Macau Special Administrative Region government. The total contribution from the three governments will be RMB15.73 billion, which will be equal to 43% of the bridge's construction cost. The remainder will be financed by bank loans (Information Services Department, 2008a).

The new arrangement has meant that the Guangdong government has become the largest stakeholder of the project (Hong Kong, Guangdong and central government and Macau government will take up approximately 43%, 45% and 13% respectively of the upfront payments (Lam and Lai, 2008)). In the original proposal the HKSAR government would have taken this role. The move for this change can be an indication that the Chinese government has high desire to push the project ahead.

But there has been no

comprehensive answer from the governments why the BOT arrangement was not opted for the bridge. (Chen and Lee 2008)

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4.4.2.2 Government motives for not opting for the BOT model

Faster project delivery

Undoubtedly there are benefits to paying for the HZMB with public money otherwise the governments would not have come to this conclusion. The Chief Executive of Hong Kong, Donald Tsang spoke publicly at the “11th Plenary of Hong Kong-Guangdong Cooperation Joint Conference” in Guangzhou during August 2008 on the advantages for the HZMB to be funded jointly by the governments. He explained that for the governments to take up the financing responsibility would speed up the construction works of the bridge. This argument was also agreed by Chen (2008) who claimed that the project would be delivered two years earlier than the BOT approach which normally would require a lengthy consultation period and complicated legislative requirements.

Government control in tolls

Furthermore, Mr. Tsang added that the governments would be left with more allowance to adjust the toll fee of the bridge without economic pressure (Information Services Department, 2008a). Ng (2008) also agreed that paying for the bridge with public money would mean that the governments would have more authority to adjust the tolls. Also, the governments being willing to undertake the project’s financial risk gives certainty that they are committed to the project (Hong Kong Special Administrative Region Government, 2008).

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4.4.2.3 Other underlying reasons for using public finance

Time and cost certainty

The governments’ decision in this project has also been supported by some of the media. If the project continued as a BOT, the private sector would need to prepare a bid based on their financial benefits in which they will take in to account their expenditure for the project, the traffic forecast and the toll price. Bid preparation is a lengthy and costly process in BOT type projects (Zhang, 2001). If the governments are to find that their proposals are unsuitable, the process for the project would be further extended. Similar situations as the Kai Tak Cruise Terminal could arise.

In this case the package offered by the HKSAR government was not attractive enough to seek private investors hence the government has had to repackage the project and reinvite the private sector for bids. The HKSAR government believed that the private sector would be interested in this project but reality has shown that this was not the situation (Oriental Newspaper, 2008) (More information on the Kai Tak cruise terminal project is given in Section 7.3.4 of Chapter 7).

Cheaper tolls

Another problem foreseeable if the project was to be delivered by the BOT model would be the high toll fees that may be imposed.

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organisations, hence they would adjust the toll fees so that they can cover their expenditure acquired during the delivery and maintenance of the project. In addition, they will hope to seek reasonable financial rewards. In doing so there is a risk that the project would follow in the footsteps of the East and West Harbour Crossings in Hong Kong (Apple Daily, 2008).

These projects were procured under the BOT model,

controversy to the CHT (Hong Kong’s first and probably most successful BOT project) they suffered much bad publicity due to the high and continuously increasing toll prices. As a result, the general public has tended to use the cheaper CHT more frequently than the other two tunnels for the crossing between Hong Kong Island and Kowloon Peninsula.

In the case of the HZMB, the general public could also choose to travel on cheaper routes if the prices were to be too high.

Studies showed that the HZMB would not be

commercially viable hence that would mean that the governments would have to cover the financial costs if the bridge was to be delivered by BOT (Brown, 2008).

If the

private sector was to be involved they would be left with no choice but to raise the toll process incredibly to compensate for their expenses acquired as in the case of the East and West Harbour Crossings (Apple Daily, 2008).

So (cited in Ming Pao, 2008b) conducted an analysis on the probable toll fees under different financing models.

As shown in Table 4.3, three different scenarios are

considered. The first and second scenarios estimates the toll fee for crossing the HZMB, with the project financed by the host governments according to a 120 year and 60 year investment return period respectively. Other factors considered in the estimation include

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the savings from the private investor’s profits if the project was to be financed by the BOT model, and also the estimated annual usage of the bridge. The toll fees estimated per trip were RMB$193 and RMB$387 for the first and second scenarios respectively. The third scenario considers the project under the BOT model. The investment return period was set at 30 years which is also a typical concession period for BOT type projects (Howes and Robinson, 2005). Other factors considered in the estimation also included the estimated annual usage of the bridge. Under this scenario the toll fee was calculated to peak RMB$830 per trip. Analyses of these scenarios have illustrated that the use of the BOT financial model (Scenario 3) may be 2 (Scenario 2) to 4 times (Scenario 1) more expensive than if it is funded primarily by the government.

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Table 4.3


Comparison of estimated toll fees to be charged under different financial models (Ming Pao, 2008b)

Scenario 1: Funded by the host governments with an investment return period equal to the bridge life of 120 years Total Investment Savings from private investor’s profits

RMB72.7 billion RMB4.95 billion (under the BOT model, with a private investment of RMB30 billion calculated at a 16.5% return rate) Usage per year 292 0000 (8000 per day) Investment return period 120 years Estimated cost per trip (daily maintenance cost not included) (RMB72.7 billion – RMB4.95 billion) / RMB2.92 billion / 120 years = RMB$193 Scenario 2: Funded by the host governments with an investment return period of 60 years Total Investment Savings from private investor’s profits

RMB72.7 billion RMB4.95 billion (under the BOT model, with a private investment of RMB30 billion calculated at a 16.5% return rate) Usage per year 292 0000 (8000 per day) Investment return period 60 years Estimated cost per trip (daily maintenance cost not included) (RMB72.7 billion – RMB4.95 billion) / RMB2.92 billion / 60 years = RMB$387 Scenario 3: Adopting the BOT model (financed, constructed and operated by private investors) with a return period of 30 years (typical BOT concession period in transportation projects) Total Investment RMB72.7 billion Usage per year 292 0000 (8000 per day) Investment return period 30 years Estimated cost per trip (daily maintenance cost not included) RMB72.7 billion / RMB2.92 billion / 30 years = RMB$830 Note: 1 RMB = 0.1464 US$ (Yahoo, 2008)

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User satisfaction

A similar problem was also observed in the Cross City Tunnel project of Sydney which was delivered by the PPP model. Due to the inaccurate traffic forecasts and the high toll prices which were applied to overcome the low traffic volume, both the consortium and the New South Wales Government were highly criticised for this project (Jean, 2006) (Refer to Chapter 4 Section 4.4 for more details). Similarly if high tolls and low usage are experienced by the HZMB, the situation would in turn limit the cooperation between the three jurisdictions and also demean the objective of the bridge. As a result the governments may be reluctant to deliver large infrastructures jointly again.

Lack of private sector interest

The governments were also aware that the private sector lacked motivation for this project. As the bridge was found to be highly costly and uneconomic, the appeal to the private sector even with compensation would be difficult to attract (Van der Kamp, 2008). With the comfortable reserve from all three governments there has been less drive to force the project as a BOT. Although the project may not be economically feasible when all costs are considered, experts believe that the collected tolls would sufficiently cover the expenses of maintenance and operation hence the financial risks involved for the government would be minimal.

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Reduce allegation of collusion between the public and private sectors

There are also other advantages that have been perceived of the new arrangement. Chen and Lee (2008) quoted from a Hong Kong academic that the new arrangement will minimise the chance of negotiation between developers and the governments; hence will reduce allegation of collusion between business and the government. Hong Kong has previously been criticised for favouring certain developers and giving developers high financial returns through delivering public projects. An example is the Cyberport project a technological centre and the West Kowloon Cultural District a proposed cultural hub (Wong, 2005).


This section has studied the much speculated case of the HZMB from Hong Kong’s angle. The findings showed that there were several reasons that led to the case being financed by the governments rather than involving the private sector as originally planned. Firstly, Hong Kong had previously experienced a lack of interest from the private sector in the bid of the Kai Tak Cruise Terminal hence causing the project to be delayed for repackaging. Therefore, the governments did not want the HZMB to experience a similar situation causing it to be further delayed. Also, the project was first proposed twenty-five years ago, hence to proceed with the BOT model would mean that the project would be further delayed due to the long tendering and negotiation processes that would be involved if it was to go along with the BOT model.

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Secondly, the legal differences between the three jurisdictions would mean that an agreement unifying and compromising all legal systems would be difficult. Thirdly, with private sector involvement there would be a lack of government control over the toll prices. Again the HKSAR government has had some bad experiences in the West and East Harbour Tunnels where the private consortia have charged tolls much higher than the government owned tunnels. Fourthly, the private sector was no longer as interested in the project as they were when the idea was first proposed due to changes and movements in industries over time. Also, studies carried out by the governments showed that the business model would not be economically attractive enough for the private sector to be interested. The fifth reason for financing the project with public money is to avoid the public perception of collusion between business and the government. And finally the most important reason of all is that the three governments have comfortable financial reserves, meaning they could deliver the project themselves with ease.

4.5

Chapter 4 Summary

This chapter has studied Hong Kong’s experience in BOT/PPP projects by looking at different cases. Projects conducted by the BOT and the PPP approach have been studied to compare the differences. Both dated and recent projects have been considered to analyse the development trend. As a result some lessons learnt were derived from this analysis. It was found that timing can be a very important aspect affecting the success of projects as the demand will differ over time. Also, the PPP method can help to resolve technical and financial problems by bringing in more able parties to work with/for the

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government. Value for money should be achievable by adopting PPP. For transportation projects a reasonable toll adjustment mechanism should be in place. Often the success of a project can affect the satisfaction level of the general public hence there should be sufficient consultations and transparency in the process. Projects that have complicated political issues should be avoided. Successful projects are those that have had a project champion. PPP projects do not necessarily have to be funded by the private sector. PPP projects should have clear objectives and a timeline. Lastly the procurement process should be streamlined to avoid unnecessary delays and expenses.

This chapter has also considered whether BOT is the best option for public works projects in Hong Kong by analyzing the HZMB. There were six main reasons leading to the governments’ decision to fund the project themselves. These include: 1) To avoid delay due to the foreseeable long procurement process; 2) Complicated legal differences between the three jurisdictions; 3) Private sector involvement would mean less control over the toll prices for the governments; 4) Lack of interest from the private sector; 5) Avoid perception of collusion between public and private sectors; and 6) The governments all have a comfortable financial reserve.

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The Australian PPP Experience

CHAPTER 5 THE AUSTRALIAN PPP EXPERIENCE 5.1

Chapter 5 Introduction 5.2

5.3

PPP in Australia

A New Era of PPP in Australia – The Southbank Education and Training Precinct Case Study 5.4.

Risk Sharing Mechanism for PPP Projects – The Sydney Cross City Tunnel Case Study 5.5

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5.1



Public Private Partnership (PPP) has been an increasingly popular choice for delivering public works projects in Australia. Although for decades there have been known to be public works projects delivered in Australia by similar partnership arrangements, it has only been since the early nineties that PPP was first properly introduced. PPP has been a growing alternative to procuring public projects across the world. Especially with the success seen from the Victoria state, the other Australian states are eager to get a taste. This chapter looks at two highly profiled case studies: The Southbank Education and Training Precinct in Brisbane and the Cross City Tunnel in Sydney.

From these

experiences it is hoped that some lessons learnt can be drawn for future PPP projects.

5.2

PPP in Australia

The practice for delivering public works projects across Australia is quite different depending on the state. Each state government will have its own set of guidelines, rules, preference and practice to go by. Political decisions are crucial in deciding procurement processes.

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5.2.1 The Victoria practice

The Victoria government released the Partnerships Victoria policy in June 2000 providing a framework for developing contractual partnerships between the public and the private sector for public infrastructure and services (Partnerships Victoria, 2000). This bought about the change to the traditional practice of using Build Own Operate (BOO) and Build Own Operate Transfer (BOOT). The traditional practice focused more on bringing in the private sector’s financial input and also having the risk transferred from the public sector to the private sector. But since the Partnerships Victoria policy the focus moved more towards delivering better projects as a result of bringing in the private sector expertise and also the government would regain direct control over the service or facility after the concession period.

The Partnerships Victoria team is part of the Commercial Division in the Department of Treasury and Finance of the Victoria state.

The team is mainly responsible for

overseeing projects implemented via the PPP practice and also developing guidelines and policies for PPP projects.

Up to present, seventeen projects have already been

implemented under Partnerships Victoria totaling AUD$5.5 billion (Partnerships Victoria 2008a). The team has also produced four policies, four guidelines, three technical notes and four advisory notes for the implementation of PPP projects in Victoria. These publications are targeted for the use of both the private and public sectors, and cover areas including the public sector comparator, risk allocation, standard commercial principles, tender process, interest rates etc. (Partnerships Victoria, 2008b).

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5.2.2 The Queensland practice

In the past, Queensland has always been historically a conservative state (Townsend, 2004). The conservativeness of the Queensland government has meant that alternative procurement methods have not been considered until recently. Queensland is a very unique state, for example it is the only state that has elected a communist member into its parliament. Another example more relevant to procuring projects is that unlike other states such as New South Wales and Victoria, Queensland has its own public works department to deal with their projects. In other states those services tend to be outsourced to the private sector. The Queensland government still runs their own toll roads and some of the electricity. This may also be one of the reasons that other states have been more comfortable and quicker in adopting PPP.

Another major factor is that Queensland has never had a huge budgetary crisis. The traditional practice of how the state has operated has meant that it is a state which has the ability to control almost every function within itself, such as marketing functions, agricultural functions etc. The approach in general is therefore a very socialist one. Queensland has therefore adopted PPP much slower than other states in Australia. Taking Victoria for example, PPP projects were introduced over a decade beforehand.

PPP although not called by this term 20 years ago was first utilised in Queensland even before other states. The project was a toll way built in Sunshine Coast. The short lived procurement alternative came to a hold after the Queensland government changed from

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being conservative to labour. As a result public infrastructure was basically nationalised. This was a typical intervention. The new Queensland government was not keen with adopting PPP. In other jurisdictions PPP projects have been driven by either the Premier or the Treasurer. And the previous Queensland Treasurer did not take any actions to encourage PPP projects.

Another major reason that the Queensland government has not been keen to jump into using PPP at first, is because it does not see the delivery method as value for money when compared to conventional options. The Queensland government’s state budget is in a much more robust situation compared to Victoria when they first adopted PPP. Therefore there has never been any economic pressure for them to try out alternatives. Similar to other governments around the world, PPP was often first adopted due to budgetary crisis for delivering public infrastructure and services.

Queensland government’s recent interest in PPP has also been due to changes in their economic situation. The state is required to pay approximately AUD50 billion over the next four years to uplift their infrastructure. Therefore, there has been a lot more pressure in the state to turn up the cash with ease. PPP has therefore become an attractive option to draw in cash from the private sector. Obviously, with the amount of experience and research done on PPP in other parts of Australia the Queensland government are clearly aware that PPP should be driven by value for money.

The reason there have not been

many PPP projects in Queensland is because some people in the state government believe that they may not be value for money. They see no reason for the private sector to

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finance and build public projects when they can borrow the money themselves at a lower financial cost.

The Queensland government has also been careful to ensure that they do not follow in the same footsteps as the Sydney government.

Although the Sydney government has

delivered many successful PPP projects in the past, a very high profile project has caused negative views on PPP. The Cross City Tunnel faced problems associated to traffic forecasts and toll fare (Chan et al, 2008). The result was that the private consortium made a total loss. The risks associated with PPP projects were therefore highly profiled at the time causing the government unwanted attention from the media. Governments in general are concerned about similar criticism. Therefore the Queensland government has been careful with every step they take on the PPP path in order to avoid the trap holes (The Cross City Tunnel case is discussed further in later sections of this chapter).

Many of the Queensland government’s PPP guidelines have been based on those of neighboring states, especially Victoria. Victoria’s PPP process published by Partnerships Victoria (Partnership Victoria, 2000) has been undoubtedly the most advance in Australia. The Victoria government has handled the most PPP projects in Australia in terms of number and variation.

The publications produced are renowned worldwide and

compared to those of Partnerships UK. Many players in the private sector have also tended to follow the rules in these publications, as often what is written by the Victorian government on PPP is believed to be the “Bible of PPP” across Australia. Undoubtedly, the private sector may not even challenge the appropriateness of the guidelines, but often

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the governments will expect the private sector to go by these “rules”, as it has become the expected. The Queensland government has moved one step forward by producing their own guidelines for PPP projects. Although based on the Victorian model, they have added some further steps in the process to suit Queensland’s situation and needs.

5.3

A New Era of PPP - The Southbank Education and Training Precinct Case Study

5.3.1 Background

Queensland is no exception and together with the demand for public infrastructure, the private sector’s economic support is much more welcome. This section looks at the obstacles faced by the Queensland government, from the case of the South Bank Education and Training Precinct (SETP) in Brisbane, Australia. From the obstacles highlighted by this case study it is hoped that jurisdictions elsewhere in the world can learn from these and avoid them, in order to deliver successful PPP projects.

The first proper PPP project conducted by the Queensland government was the SETP. In September 2002 the development of the SETP was announced. The goal was to develop a multi-sectoral campus that built on developing greater links between schools, Technical and Further Education (TAFE), universities, community groups and industry.

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The private sector was invited for expression of interest from February 2003 to 11 April 2003. Three consortia were shortlisted by August 2003. In the end only two bids were received and Axiom Education Queensland Proprietary Limited was selected as the more favourable consortium in December 2004. The parties within the consortium consisted of ABN Amro, John Holland Proprietary Limited and Spotless Services Australia Limited. After further rounds of reviews especially on the value for money aspect the consortium was announced successful on 19 April 2005, to plan, design, construct, finance and maintain the AUD550 million facility. The construction of this four hectare site is currently still undergoing and aims to be completed by the end of year 2008 (Figure 5.1 shows an aerial photograph of the project under construction). The concession period will be for 34 years (Queensland Government, 2008).

The SETP was initiated by the then Department of Employment and Training in consultation and collaboration with the Department of Education and central agencies, including the Premiers and Treasury.

As the SETP represented the Queensland

government’s first project to be commenced under PPP guidelines, there were no statebased or local examples to go by. Therefore in order to aid the concessionaire, they were given access to policy material form the Department of State Development and Innovation and also the opportunity to interview interstate government agencies which had direct experience on the development and procurement of PPP projects. It was by this way the concessionaire of SETP learnt to conduct PPP projects. On top the selected consortium already had experience in PPP projects elsewhere beforehand.

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Figure 5.1


Ariel photograph of the Southbank Education and Training Precinct project in October 2007 (Department of Education, Training and the Arts; 2008)


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5.3.2 The obstacles

Being the first PPP project in Queensland, SETP faced a number of problems early on. Firstly the government’s design of the project was very conceptual. Therefore the actual validity of the public sector comparator was highly questionable and hence so was the debate of value for money. Although so the public sector comparator was still conducted just as a governmental process to justify the project for being a PPP. Another worry for the private consortium was the Queensland government’s commitment to proceeding with the project. It is known that some organisations and companies in the private sector were reluctant to participate in this project as the state government has had a previous track record of pulling out a proposed PPP project. With the large project sum and the complexity of PPP projects, the risks that they bear are immensely high. Therefore, the private sector needs to be sure that they have the government’s full support throughout the project to overcome potential obstacles.

In addition, many experts in the field believed that the Queensland government should not have chosen such a complex project for its first PPP project. Social projects are often considered more difficult to handle compared to economic ones where income is obvious. In addition, partnership projects between the public and private sectors have always traditionally been economic ones hence the experience and knowledge in this field is much more advanced. This was another reason that drew away potential bidders due to their lack of confidence that the project would succeed. In the end there were only two bidders for this project. The lack of potential bidders is another issue thought to limit the

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competition in a PPP project. The lack of competition can be linked to the lack of quality, innovation and price delivered. In order to boost up the number of potential bidders in future, not only does the first project need to be a success, the Queensland government has also proposed a small amount of compensation to the losing bidder. In the SETP case the losing bidder was compensated AUD3 - 4 million. Although this is not the full amount that they would have spent during the tendering stage it was more comforting to get a partial return of the investment.

For the SETP project many of the protocols were already set out in the project deed issued by the Queensland government. In terms of management practice there was little difference to conventional methods. But a more rigorous risk management practice and a better management practice overall was incorporated. Being a PPP project the other issues that the consortium needed to deal with was the management of publicity and media issues. In addition, the initial phase of this project took a long time. Much longer than it should have, the government also noticed this and has stated that for future projects they would definitely need to streamline the timeframe.

5.3.3 Other projects in Queensland

Following SETP, the Queensland government has already announced a further eight more public projects which will be conducted by PPP also. These projects include: Airport Link/Northern Busway; Gold Coast Rapid Transit; Gold Coast University Hospital; New Queensland Driver Licence; Project Vista; South East Queensland Schools Project;

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Sunshine Coast Hospital and Toowoomba Bypass. The projects selected are all relatively large projects of both social and economic nature.


Similar to other large projects, PPP projects also have specific obstacles to overcome. It is hoped that the obstacles highlighted for the SETP case have informed practitioners of the things that should be avoided and how PPP projects can be conducted better. Apart from financing the private sector obviously has other added advantages to offer such as efficiency, skills, innovation, expertise, risk sharing etc. But at the end of the day governments opt to utilise PPP because it provides value for money in the long run for them.

Therefore before adopting PPP, governments should consider their drive for

utilising this approach. Public projects should be conducted by the method that is best suited for their needs.

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5.4


Risk Sharing Mechanism for PPP Projects – The Sydney Cross City Tunnel Case Study

5.4.1 Background

The Cross City Tunnel (CCT) in Sydney, Australia is a good example of how improper allocation of risks could affect the success of a PPP project (Figure 5.2 shows a photograph of the CCT). It is not incorrect for risks to be passed on to the private sector, especially when they are capable to. But maybe there should be a “partnership” in place when the private sector is unable to manage all the risks themselves. Some critiques considered this project as an unsuccessful PPP as the local state government has had to cope with handling many public opinions and criticisms for their inaccurate traffic forecasts, leading to the investor making a financial loss.

The primary objectives of the CCT project were to reduce “through” traffic in central Sydney, and as a result easing traffic congestion and improving environmental amenity in the central business district and on streets approaching the central business district, and to improve the east to west traffic flows (Roads Traffic Authority, 2003).

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Figure 5.2


Photograph of the Cross City Tunnel (Traffman, 2008)


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The CCT is a 2.1 kilometre twin two-lane motorway that runs east and west underneath the busy central business district of Sydney. It opted for a Design Build Operate (DBO) arrangement under a 30-year concession agreement. The project was part of a network of new transportation infrastructure plan of the Roads and Traffic Authority of the New South Wales Government. Its large project sum of AUD680 million meant that PPP was an attractive option to the New South Wales Government.

The initial concept of the tunnel was mooted in 1998 (Cross City Tunnel Proprietary Limited, 2007). After a series of complex consultations, exhibitions, modification and approvals the private sector was finally asked for an expression of interest on 15 September 2000 (Roads Traffic Tunnel, 2003). In response, a total of eight consortia expressed interest by 23 October 2000. Three consortia were shortlisted and asked to submit detailed proposals for the project on 8 June 2001. All three consortia submitted their proposals by the closing date of 24 October 2001. It was announced on 27 February 2002 that Cross City Motorway Proprietary Limited was selected as the winning consortium.

The project commenced construction on 28 January 2003. It was delivered ahead of schedule and took only 31 months to construct (typical for PPP projects). The tunnel was officially opened for service on 28 August 2005 to the public. Unsurprisingly the project attracted private sector from within Australia and abroad.

The selected consortium

included strong financiers, Cheung Kong Infrastructure of China, Bilfinger Berger of Germany and RREEF Infrastructure of Australia.

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recover the cost of design, construction, operation and maintenance via the tolls collected. Therefore the project company Cross City Motorway Proprietary Limited was allocated all the demand risk for the project. Innovation was introduced by the contractor. The tunnel was the first motorway in Sydney to have full electronic tolling. There were high levels of expectations for all the parties, the traffic forecast for the project was predicted to be 90,000 vehicles per day.

A number of benefits were sourced from materials published and released from the project company Cross City Motorway Proprietary Limited (Cross City Tunnel, 2007) and the government agency client the Roads and Traffic Authority of New South Wales (Government Roads Traffic Authority, 2007). These parties claimed that as a result of the Cross City Tunnel project the following benefits would be experienced: z

34 traffic signals avoided (16 sets westbound and 18 sets eastbound);

z

Major reduction of traffic across the central business district;

z

Improved quality of life for pedestrians and cyclists in the central business district;

z

Higher reliability of bus services in the central business district;

z

Cut trips across the city to approximately 2 minutes, from up to 20 minutes by avoiding traffic lights;

z

Improved access and movement within the city for taxis, delivery vehicles, cyclists and pedestrians;

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z


Make city streets safer and more pleasant for pedestrians, residents and business people by removing intrusive through traffic and providing more footpath space in some streets;

z

Reduced traffic noise levels; and

z

Better air quality by taking cars off surface streets.

Despite the benefits of PPP which have been highly publicised, some may consider that there are also many “failures” from the project. The next sub-section takes a closer look into these “failures”.

5.4.2 Underlying causes leading to failure

CCT has been perceived as an unsuccessful case by the general public and as a result the government’s image has suffered (Jean, 2006).

To illustrate some of the negative

portrayals of the project, some headlines related to the project were sought and shown in Figure 5.3. Amongst these seven headlines, three are related to the toll. This can show that the toll is probably one of the key factors affecting the satisfaction level of the general public towards CCT, and also one of the issues that is highly sensitive amongst them.

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Figure 5.3


Examples of newspaper headlines relating to the CCT when it opened (Infrastructure Implementation Group, 2005)

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PPP has been given a bad name and investors have been driven away from New South Wales, at least temporarily (AAP General News Wire, 2006a). CCT encountered severe difficulties in reaching the predicted traffic volume. Motorists have expressed their unhappiness towards the high toll levels (AAP General News Wire, 2006b) and the government closing off the surface roads to direct the traffic into CCT (AAP General News Wire, 2006c). These sufferings have been the result of inaccurate traffic forecast and flawed concession agreement. Currently, CCT has entered into receivership and the concessionaire has written off their equity (Project Finance, 2007).

In this project it has been unfortunate that the public client and the private consortium have openly argued in public. Newspapers have reported them criticising each other for their faults (Field, 2006a). The Premier publicly spoke out expressing his frustration that motorists were able to use the toll road without paying. He criticised the operators for not enforcing the charge and how it was unfair for the motorists who did pay (AAP General News Wire, 2006d; Field, 2006b).

On the other hand the consortium also

criticised the Premier for failing to demonstrate leadership (AAP General News Wire, 2006e). It can be seen how the media has portrayed a tense battle between the public and private sectors. This is an image that nobody wants to create for any project whether it is delivered by PPP or not. But being a PPP project creates an even higher sensitivity, as tax payers will query whether they are actually getting value for money from the government’s decision.

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Following the unfortunate events experienced, the private consortium requested the local state government to pay them a toll subsidy and compensation for the road changes. Unfortunately the two parties were unable to come to a satisfactory agreement (AAP General News Wire, 2006f). But in order for the CCT case not to be repeated the local state government considered to pay the consortium compensation for the Lane Cove Tunnel, which is also in Sydney, if unfortunately traffic forecasts are also predicted inaccurately (Cratchley and Jean, 2006a; 2006b). This action from the government was positive as it showed that they were aware that there were problems in the CCT project, and that they should share the responsibilities by undertaking more of the risks rather than passing the pressure solely to the private consortium.

In 2005 the New South Wales government produced a report titled “Review of Future Provision of Motorways in NSW” (Infrastructure Implementation Group, 2005). The report reviews recent road projects including the CCT in order to improve future similar projects. It is unfortunate to see that more barricades are set up to protect the government, as a result of which risks are further passed on to the private sector. For example, in the document they expressed their preference to bidders with the “lowest” toll. This line of thinking is similar to selecting the lowest cost bidder, which should not be the only way to select the consortium. Instead, value for money for the project overall should be their main concern. By focusing on the toll only, other important features adding to value may be neglected such as innovative techniques and skills used in the project to make it more efficient and as a result creating value for money. Quality of the works may also suffer.

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In the report it was also mentioned that in Victoria all the main variables which would affect the commercial outcome of the project for all parties would be negotiated at the bidding stage. But in New South Wales the toll level or the possibility of government contribution would not be open to negotiation. Therefore whether value for money for the taxpayers is achieved is questionable. The report has indicated that the New South Wales government is clearly aware of their faults, but whether they actually rectify the situation is to be observed.

To consolidate the findings reported by the press discussed previously, the underlying causes leading to the “failure” of the CCT project include: z

Inaccurate traffic forecast;

z

High toll levels;

z

Government closing off the surface roads to direct the traffic into CCT;

z

Flawed concession agreement;

z

The public client and the private consortium arguing openly in public;

z

No toll subsidy and / or compensation from the government;

z

The toll level or the possibility of government contribution was not open to negotiation.

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5.4.3 Appropriate risk allocation

Grimsey and Lewis (2002) identified nine main risks affecting all types of infrastructure projects. These included technical risk, construction risk, operating risk, revenue risk, financial risk, force majeure risk, regulatory/political risk, environmental risk, and project default. On the other hand (Lam et al., 2007) identified seven key risk allocation criteria: z

Whether the party is able to foresee the risk;

z

Whether the party is able to assess the possible magnitude of consequences for the risk;

z

Whether the party is able to control the chance of the risk occurring;

z

Whether the party is able to manage the risk in case of occurring;

z

Whether the party is able to sustain the consequences if the risk occurs;

z

Whether the party will benefit from bearing the risk; and

z

Whether the premium charged by the risk receiving party is considered reasonable and acceptable for the owner.

According to the terms and conditions set out in the Project Deed of CCT, the private consortium accepted more or less all the risks associated with the project. The private sector is often willing to take up large proportions of risk to gamble for their desired returns. The government is also concerned about the consortium's readiness to accept risk (Ahadzi and Bowles, 2004). But it is a surprise that the government is willing to allow the private sector to take up such a large proportion of the risks. However in the arrangement the social responsibility will always be the public sector’s. Therefore the

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government should consider whether the consortium is able to handle the risk effectively. In an ideal situation the risks should be shared equitably so that the party best able to manage that risk will take up the role. The risks that the consortium agreed to take on board in the Project Deed included (Roads Traffic Authority, 2003): z

All risks associated with the financing, design, construction, operation, maintenance and repair costs of the project;

z

The risks that traffic volumes or project revenues may be less than expected;

z

Income tax risks; and

z

The risks that their works or operational and maintenance activities might be disrupted by the lawful actions of other government and local government authorities or a court or tribunal.

Clifton and Duffield (2006) undertook a study where they looked into the risk allocation structure for several recent PPP projects in Australia. One of these cases included the CCT and realised that the risks for each party were quite evenly spread. But further study showed that the intensity of the risks allocated to the private sector were actually much more intense compared to those allocated to the local state government, as shown in Table 5.1.

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Table 5.1 Risk allocation structure for CCT (Clifton and Duffield, 2006) Risk Allocated to Government Native title risks

Risk Allocated to Consortium Design, construction and commissioning risks

Force majeure

Delay and completion risks

Uninsurable risks

Ground/geotechnical conditions risks

Legislative and Government Policy

Operation

and

maintenance/facility

management risks

Shen et al. (2006) studied the risk allocation for public sector projects in Hong Kong. From literature they identified a number of major risks affecting public sector projects. In their analysis they selected the Hong Kong Disneyland as a case study. This case study demonstrated which risks would be most suitably allocated to each party. The study concluded that the public sector should be allocated the site acquisition risks, inexperienced private partner risk and legal and policy risks. On the other hand, the private party should be allocated the design and construction risks, operation risks and industrial action risks. Lastly, Shen et al. (2006) advocated the importance that there are some risks which both parties should share, these include development risks, market risks, financial risks and force majeure. Although Shen et al.’s (2006) study was conducted for a project in another country and of a different nature; it is believed that these shared risks as mentioned could also apply to other PPP projects such as the CCT. CCT suffered immensely due to the market and financial risks. If these were shared risks as suggested

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by Shen et al. (2006), the intensity of the damage to the consortium could have been minimised.

Traffic revenue risk has been identified as one of the most critical risks impacting the commercial success of road projects delivered by PPP (Singh and Kalidindi, 2006). In order to overcome traffic revenue risk, the annuity-based Build Operate Transfer (BOT) model1 has been presented as a good solution. Unlike the traditional BOT type road economic projects, the concessionaire will be paid by the governmental client a fixed semi-annual annuity. This approach is similar to that used for the social infrastructure PPP projects such as hospitals and schools which are paid by a regular fixed payment. Similarly the annuity-based BOT model will require the concessionaire to achieve certain milestones and standards. The payment will be used to cover the design, construction, maintenance and operation of the road and its facilities. As a result the concessionaire does not undertake any of the traffic revenue risk. This approach ensures that the governmental client must also undertake their fair share of risks.

The risk allocation framework shown in Table 5.2 shows the appropriate risk allocation for each party under the annuity-based BOT model.

Amongst the sixteen risks listed,

over half or nine are undertaken by governmental clients. In general the concessionaire is responsible for the risks related to the construction and operational performance of the facility.

Other risks which are less predictable and controllable are taken by

governmental clients.

By adopting this approach the business case may not be as

1

Annuity-based BOT model – a fixed amount of payment is made by the public sector to the private sector for running the project.

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attractive to the private sector. The private sector is often willing to take up more risks in return for the possibility of financial benefits. The private sector should not be solely responsible for taking these decisions. Instead the government should also consider whether they should allow the private sector to take up large risk.

Table 5.2

Risk allocation framework for the annuity-based BOT model (Singh and Kalidindi, 2006)

Risk Allocated to Government

Risk Allocated to Consortium

Pre-investment

Delay in financial closure

Resettlement and rehabilitation

Time and cost overrun during construction

Permit/approval

Time and cost overrun during operation and maintenance

Delay in land acquisition

Non-political force majeure

Delay in payment of annuity

Performance standards

Change of scope

Lane availability

Traffic revenue risk

Interest rate risk

Change in law Political risk

Another payment mechanism similar to the annuity-based BOT model was proposed, in that the patronage risk stays with the government (Aziz, 2007). The shadow-toll Design

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Build Finance Operate (DBFO) system2 is similar to the BOT system except shadow tolls are used instead of real tolls. The government will pay a toll per vehicle per road kilometre instead of the end users paying the toll. Another option is the performancebased DBFO system3 . For this payment mechanism the services and the operational performance of the contractor are emphasised rather than the usage of the facility.

From the experience of several road projects including the CCT, the New South Wales government identified some lessons learnt (Infrastructure Implementation Group, 2005): z

Need for consultation and communication over the life of project procurement;

z

Need for improved community consultations and messages;

z

Responsibility of government client over procurement life of project; and

z

Greater onus on the consortium to accept full responsibility over the whole life of the concession period.

The fourth lesson learnt indicates that the Government feels they have accepted too much of the project risks. Therefore they appear to be keen to ensure that the consortium will take a larger responsibility for risks in future.

2

Shadow-toll DBFO system - payment is made by the public sector to the private sector based on the number of vehicles using the road. 3 Performance-based DBFO system - payment is based on the service and operational performance rather than the usage.

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5.4.4 Risk sharing mechanism

PPP should be adopted primarily based on value for money. Obviously the package is accompanied by various other advantages which are attractive to the government such as private financing and transfer of risks. But the decision to adopt PPP should not be solely based on these additional advantages.

As discussed previously risks should always be allocated to the party best able to handle them. The party allocated the risk should be the one most able to prevent it from occurring. And if the risk does occur the allocated party should be the one most able to minimise the consequences.

The inaccurate traffic forecast was the main reason that led to the collapse of the project company. As a result of this fault other actions were taken by the concessionaire to overcome the reduced traffic flow. These actions led to further complications which in turn ruined the partnership agreement between the public and private sectors.

In the case of CCT the inappropriate allocation of risks was believed to be the root cause. In some cases the government may subsidise or compensate the concessionaire if the project revenue is less than expectation or if the contract is terminated. But often there is much argument as to the amount which this subsidy or compensation should be. For example, railways in Hong Kong have been implemented very successfully by MTR Corporation using the “Railway plus Property Model” (Asian Development Bank, 2009).

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The cost of constructing and operating railways is often very high. The R+P model uses the surrounding development rights to compensate for the losses encountered for delivering the railway. Public transport is particularly important to the development of a city but as they are often expensive to deliver, private parties will not be interested unless there are other means they can profit or there is subsidy available, like in the case of the R+P model.

To prevent similar cases from occurring, an optimal risk sharing mechanism is presented. The risk sharing mechanism can be adopted in projects of high risk nature. CCT was a project of high risk due to its scale and significance. In this risk sharing mechanism, projects which are traditionally economic infrastructure projects such as transportation projects can adopt a regular fee payment from the government instead of bearing the revenue risk. This approach is similar to social infrastructure projects. As mentioned previously in this paper other researchers have also reported the possibility and feasibility of this arrangement for economic infrastructure projects.

Under this mechanism, the consortium of high risk economic infrastructure projects will be paid via a regular fee payment. In this way the payment will be based on project performance rather than usage. As in social infrastructure projects certain risks are still taken by the concessionaire, such as those associated with the design, construction, operation and maintenance. But the other risks should be dealt with by the government including revenue risk.

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Although the economic package for projects paid by a regular fee may not be as attractive to the private sector, this type of mechanism for high risk projects can help to protect the private sector. By protecting the private sector the government will also benefit, since as always the ultimate responsibility lies with them. The government may be able to pass on most of the financial risks but for social responsibility they cannot avoid. Hence this proposed mechanism is believed to benefit all parties involved.

The details of the proposed risk allocation mechanism will vary depending on the project itself. But it is likely that the payment will be a regular fee paid to the concessionaire based on performance and activity milestones.

Under the agreed payment the

concessionaire will deliver a service to the public according to standards as agreed to in the contract. If the concessionaire under performs then they will be penalised by a deduction of their fees. In this way the concessionaire is monitored by the project’s performance rather than usage of the facility. In the CCT project the concessionaire had to bear the revenue risk, hence their main priority was to generate revenue. They used toll prices and redirecting traffic to bring in revenue which just caused public frustration. Although the local state government could have prevented these actions, they did not step in. If the consortium had not needed to worry about the revenue, the public would have been more satisfied. As a result the public perception of the facility, the project company and the local state government would have been very different!

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CCT was designed as part of a large infrastructure network plan for New South Wales, Australia. Due to its complexity and size, PPP appeared to be an attractive delivery method. Under PPP procurement the financing would be provided by the private sector. Also expertise and innovation which would otherwise be unavailable within the local state government could be sought. As a result the local state government managed to pass on many of the project risks to the private sector. Obviously for a project of this size there would be abundant financial opportunities for the private sector, hence they were readily willing to take up the associated risks for the chance to be involved. The situation could have been a win-win case but unfortunately this was not actually what happened.

Media reports have reflected CCT as an unsuccessful PPP project. For the consortium this may have been the case. For the local state government, although they have received some negative critiques, at the end of the day they have still constructed a world class infrastructure facility. For the general public, the scandal may have been more amusing to them rather than affecting! It is not easy and probably impossible to distinguish whether any case is either solely successful or a failure. Instead it is believed that lessons learnt from each case can be sought.

This section has looked into a highly profiled case and tried to recommend solutions to overcome the potential obstacles. As a result a more suitable risk sharing mechanism for projects similar to the CCT has been presented to achieve win-win service outcomes.

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5.5


Chapter 5 Summary

This chapter has studied the development of PPP in Australia by analysing two highly profiled cases: The Southbank Education and Training Precinct in Brisbane and the Cross City Tunnel in Sydney. The obstacles encountered in these cases have been highlighted, and measures have been suggested for future projects that may encounter similar problems.

It was found that projects should be delivered by the most suitable

procurement method.

And value for money should be a key reason for delivering

projects by PPP. It was also found that risk is sometimes unfairly allocated amongst parties. Instead equitable risk allocation should be achieved. In theory, the risk should go to the party best able to handle it. It is believed that through valuable previous experiences, PPP projects can be better implemented in future.

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Different Perspectives on Procuring Public Works Projects in Hong Kong and Australia

CHAPTER 6 DIFFERENT PERSPECTIVES ON PROCURING PUBLIC WORKS PROJECTS IN HONG KONG AND AUSTRALIA 6.1 6.2 6.3


The Public Sector’s Perspective The Private Sector’s Perspective

6.4

The Researcher’s Perspective 6.5

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Chapter 6

6.1



This chapter presents the findings from thirty-five interviews conducted in Hong Kong and Australia with experts involved with Public Private Partnership (PPP) projects. The findings from these interviews were analysed according to the perspectives of the public sector, private sector and researchers. Within each of these categories, the findings from Hong Kong and Australian interviewees were further compared.

6.2

The Public Sector’s Perspective

6.2.1 Selecting respondents

The target public sector respondents of the interviews were practitioners with experience in PPP of senior level and authority who have had experience. A total of fourteen interviews were conducted with experts from the public sector. Seven interviews were conducted in each jurisdiction. Amongst the seven interviews conducted in Hong Kong, two were from Administration Departments (one of the interviewees previously represented a Works Department), three were from Works Departments (one of which previously represented an Administration Department and the other also holds a position at a local institute), two of the interviewees were from Non Governmental Organisations (NGO) (both had previously acted for different Works Departments).

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The Australian interviewees consisted of three government officials and four specialist advisers from the private sector. The government officials interviewed are from local state education and treasury departments. When arranging the interviews in Australia, it was found that the state governments tended to employ advisers from the private sector to act on their behalf in providing advice and expertise for selecting and monitoring the PPP project consortia. Therefore four advisers from the private sector were also selected for interview. Their roles were solely on behalf of the public sector hence their responses can also be regarded as the public sector’s view. Background details of these experts are shown in Tables 6.1 and 6.2 for Hong Kong and Australian interviewees respectively.

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Table 6.1

List of interviewees from the public sector in Hong Kong

No.

Position of Interviewee

Organisation of Interviewee

Experience of Interviewee

PU1

Assistant Director

Administration Department

Produced many PPP guidelines and conducted research.

PU2

Permanent Secretary

Administration Bureau

Involved with initiating PPP projects in a works

(previously Works Department)

department he previously worked for.

Works Department

Involved with on-going PPP projects.

PU3

Director

(previously Administration Bureau) PU4

Assistant Director

Works Department

Involved with on-going PPP projects.

PU5

Senior Quantity Surveyor

Works Department / Local

Founder of a PPP research working group for his

Professional Institute

institute.

NGO (previously Works


Department)


NGO (previously Works


Department)


PU6

PU7

Executive Board Member

Executive Director

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Table 6.2

List of interviewees from the public sector in Australia

No.




PU8

Executive Director

Education Department

His department initiated a social PPP project of which he was responsible for the overall delivery.

PU9

Director

Treasury Department

Involved with delivering many PPP projects, producing guidelines, training, courses and research.

PU10

Executive Manager

Treasury Department

Involved with delivering many PPP projects, producing guidelines, training, courses and research.

PU11

Executive Director

Transaction Adviser

Acted as governments’ adviser for many PPP projects, managing the tender, evaluation, negotiation and award.

PU12

Partner

Legal Adviser

Acted as the governments’ legal adviser for many PPP projects.

PU13

Head

Finance Adviser

Acted as the governments’ financial adviser for many PPP projects.

PU14

Director

Finance Adviser

Acted as the governments’ financial adviser for many PPP projects.

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6.2.2 Interview findings

Table 6.3 shows a summary of the responses to each question given by the fourteen interviewees. The number of times that each response was given was tallied. Where the response was only given once it was believed to be insignificant for further analysis. For the responses given more than once, these were tabulated and further analysed as shown in Tables 6.4 to 6.9. The numbers in brackets represent the number of times the response was mentioned by interviewees.

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Table 6.3

Summary of responses from public sector interviewees

PU1 1.

Hong Kong Interviewees PU3 PU4 PU5 PU6

PU7

Total

PU8

PU9

Australian Interviewees PU10 PU11 PU12 PU13

PU14

Total

3 3 3

4 2 5 2

Have you conducted any research looking at local case studies? And if so, could you share your insights?

Local case studies International case studies Other research conducted Not mentioned 2.

PU2

3 3 3

3 3

3 3

3

3 3

3

1 3 5 2

3

3

3

3

3

3 3 3 3

3

How would you compare PPP with traditional procurement methods?

Using a Public Sector Comparator Longer tendering/negotiation for PPP Government act as supervisor in PPP Traditional method accepted as norm Each project is unique Difference in payment mechanism PPP projects gain private sector’s added efficiency/expertise/management skills PPP projects delivered faster PPP utilises private sector finance/difference in finance structure PPP tend to be large project sums Difference in risk profile Operational differences Management differences PPP projects have a more transparent process PPP considers whole life cycle cost

3 3

3

3

2 1 1 1 2 1 2

3

1 1

3

1 0 0 0 0

3 3 3

3 3 3

3 3 3 3 3

0

138

3

3 3

3

3 3

0 1 0 0 0 0 2 0 4 0 1 1 1 1

3 3

1

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More parties involved in PPP

3.

3

0

1

Which type of project do you feel is best suited to use PPP?

Link between performance and payment Each project unique Economically viable Value for Money Large operating element/cost Performance easily measured Mutual benefits for all parties Economic infrastructure Scope for innovation High project costs Any nature Sufficient risk transfer

3 3 3 3

3 3 3

3 3 3

1 1 3 1 2 1 1 0 0 0 0 0

3

3

3

3

3

3 3 3

3

3

3

3

3 3

3

0 0 3 0 0 2 0 1 3 2 2 2

4. What do you feel are the key performance indicators in a PPP project? Project performance Resources saved Contractor’s performance Traditional KPIs: Cost, time, quality Risk Management Public acceptance Value for money achieved Service outcomes Contract terms Client satisfaction Payment mechanism performed

3 3

3 3

3 3

3 3

3 3

139

1 2 2 3 1 1 0 0 0 0 0

3 3 3 3

3 3 3

3 3 3

3 3

3 3

3

2 0 2 1 2 0 1 1 4 1 1

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5.


In general, what do you think are the critical success factors leading to successful PPP projects?

Champion Large project capital value Well prepared contract/document Partnership spirit/commitment/trust Transparent process Project objectives well defined Public consultation Appropriate risk allocation Large operating element Development potential Economically viable Effective negotiations between parties Competitive procurement process Government support Skilled and experienced parties Clear milestones Initiate project Value for money

6.

3 3 3 3 3 3 3

3

3 3 3

3

3 3 3 3 3

3

3 3 3

1 1 2 2 2 3 3 4 1 1 1 0 0 0 0 0 0 0

3

3 3 3

3

3 3 3

3

3 3 3

3 3 3 3

3

3

3 3

3 3

3

3 3 3 3

3 3 3

3

3

3 0 1 2 1 3 1 1 0 0 2 1 5 2 4 3 1 2

Does your organisation have any in-house guidance/practice notes?

Yes No Refer to others

3

3 3

3 3

3

3 3

3

140

3 4 2

3 3

3

3

3

3

3

6 0 1

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6.2.2.1 Research on local case studies

Table 6.4 shows the responses of Question 1 “Have you conducted any research looking at local case studies?” that were given more than once. The findings show that three different responses were given by Hong Kong interviewees and four were given by the Australians. Amongst the four responses given by the Australian interviewees, three were the same as those given by the Hong Kong interviewees. The response which was given most by both groups of interviewees was “Other research conducted”, mentioned five times for each. This finding showed that irrespective of geographical locations the interviewees tended to conduct other research besides case studies on PPP.

The response “Local case studies” was mentioned four times by the Australians. It is possible that because Australia has had much experience in conducting PPP projects, they do not need to look else where to learn from the experience of others, instead they can refer to their own projects as reference material. As mentioned previously the Victoria state in Australia for example has a large range of guidance materials on the public domain which other states can refer to when conducting PPP projects (Partnerships Victoria, 2008b).

On the other hand the Hong Kong interviewees mentioned “International case studies” three times showing there need to learn from the experience of others. The Efficiency Unit of the Hong Kong Special Administrative Region (HKSAR) government has also been known to be interested in international case studies. They have also published a

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number of case study reports for PPP projects in the United Kingdom and Australia (Efficiency Unit, 2008c). The Australians also mentioned this response two times. From the interviews it was found that the involvement in research was “Not mentioned” twice by each group of interviewees.

Table 6.4

Question 1 - Have you conducted any research looking at local case studies?

Hong Kong Interviewees

Australian Interviewees

Other research conducted (5)

Other research conducted (5)

International case studies (3)

Local case studies (4)

Not mentioned (2)

Not mentioned (2) International case studies (2)

6.2.2.2 Comparing PPP with traditional procurement methods

Table 6.5 shows the responses mentioned more than once by both groups of interviewees for Question 2 “How would you compare PPP with traditional procurement methods?” Three and two different responses were mentioned more than once by the Hong Kong and Australian interviewees respectively. For all three responses mentioned by the Hong Kong interviewees each was mentioned twice.

Mentioned the most by Australian interviewees was “PPP utilises private sector finance/difference in finance structure” which was mentioned four times. This finding

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shows the importance of the different financing structure provided by PPP projects. Although finance should not be the main reason for adopting PPP projects, undoubtedly, financial drive is still an attractive factor to governments, hence this response was unsurprising.

Mentioned by both groups of interviewees was the response “PPP projects gain private sector’s added efficiency/expertise/management skills”.

This response was also

mentioned twice by the Australian interviewees. From previous literature it has also been recorded that one of the main advantages of involving the private sector is to add value to public projects in terms of their efficiency, expertise and management skills when compared to those of the public sector (Yescombe, 2008; Carrillo et al., 2007; Leiringer, 2006).

Other response mentioned by the Hong Kong interviewees included “Using a Public Sector Comparator”, which was also mentioned by the Efficiency Unit (2003a) of the HKSAR government as necessary whenever public money is involved. Also “Each project is unique” was mentioned by the Hong Kong interviewees too.

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Table 6.5

Question 2 - How would you compare PPP with traditional procurement methods?



Using a Public Sector Comparator (2)

PPP

utilises

private

sector

finance/difference in finance structure (4) PPP projects gain private sector’s

PPP projects gain private sector’s

added efficiency/expertise/

added efficiency/expertise/

management skills (2)

management skills (2)

Each project is unique (2)

6.2.2.3 Projects best suited to use PPP

The Interviewees were asked to answer “Which type of project do you feel is best suited to use PPP?” in Question 3. Table 6.6 shows their responses that were mentioned more than once. The results showed that only one similar response was mentioned by both groups of interviewees. This was “Economically vaible” which was mentioned three times by both groups of interviewees and also mentioned the most. The private sector parties are businessmen, so for them to participate in PPP projects there must be reasonable financial benefits foreseeable for them. Partnerships Victoria (2001) explains how developing a business case is a key step in the decision-making process. This is where the project is fully scoped and the risks and costs are identified to develop a costbenefit analysis, as well as to test the net benefit of the proposal.

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The Hong Kong interviewees suggested only one more criteria for PPP projects, which was “Large operating element/cost” mentioned twice. One typical feature of PPP projects is that the consortium is normally responsible for the operation and maintenance of the project.

Without this element PPP projects would be similar to projects procured

traditionally. Therefore the operation part must constitute a reasonable proportion of the project. Grimsey and Lewis (2004) listed a number of public private business models prior to the more general term PPP, many of these emphasised the operation element of the structure within its name, showing the highly important role in these arrangements including: Operate and Maintain (O&M); Operate Maintain and Manage (OM&M); Build Transfer Operate (BTO); Build Operate Transfer (BOT); Build Own Operate Remove (BOOR); Build Own Operate Transfer (BOOT); Lease Renovate Operate Transfer (LROT); Design Build Finance Operate (DBFO); Design Build Finance Operate Manage (DBFOM); Build Own Operate (BOO) etc.

Other response given by the Australian interviewees included “Scope for innovation” (Eaton et al. 2006) which was mentioned three times. Also, mentioned twice each by the Australians included “Performance easily measured” (Partnerships Victoria 2001), “High project value” (HM Treasury 2003), “Any nature” and “Sufficient risk transfer” (Jin and Doloi 2008). These features forming suitable PPP projects have been previously recorded by other researchers as well.

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Table 6.6

Question 3 - Which type of project do you feel is best to use PPP?



Economically viable (3)


Large operating element/cost (2)

Scope for innovation (3) Performance easily measured (2) High project value (2) Any nature (2) Sufficient risk transfer (2)

6.2.2.4 Key performance indicators in PPP projects

The interviewees were also asked to answer Question 4 “What do you feel are the key performance indicators in a PPP project?” (Table 6.7). Amongst the responses received, three were mentioned more than once by the Hong Kong interviewees and four by the Australian interviewees.

The response “Contract terms” was mentioned the most at four times by the Australian interviewees. In Australia high priority is given to the contract component of projects procured by PPP. Guidelines have also been published on this aspect (Partnerships Victoria 2008c). The response mentioned the most by Hong Kong interviewees was “Traditional KPIs: Cost, time, quality”. Probably due to the lack of experience in PPP projects (not including BOT type projects), the Hong Kong interviewees did not commonly come up with any responses that were specifically related to PPP projects

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solely.


Only one response was raised by both groups of interviewees, this was

“Contractor’s performance” which was mentioned twice by each group of the interviewees.

Also mentioned twice by the Australian interviewees were the responses “Project performance” and “Risk Management”. The performance of the contractor and project are items which would definitely be mentioned in the contract documents, these again confirm the importance of the contract to the Australian interviewees. Many studies have been conducted on the importance of risks in PPP projects (Akbiyikli and Eaton, 2004; Li et al., 2004; Li et al., 2005a; Shen and Wu, 2005).

One of the main reasons for

implementing public projects by PPP is also for risk transfer, therefore to classify the risk management as a performance indicator is also reasonable.

Another response mentioned by Hong Kong interviewees was “Resources saved”. PPP projects are normally only conducted after they have been proved to be a cheaper alternative to traditionally procured projects. This is normally conducted via the Public Sector Comparator (Efficiency Unit, 2003a; Partnerships Victoria, 2008b).

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Table 6.7

Question 4 - What do you feel are the key performance indicators in a PPP project?



Traditional KPIs: Cost, time, quality

Contract terms (4)

(3) Contractor’s performance (2)

Contractor’s performance (2)

Resources saved (2)

Project performance (2) Risk Management (2)

6.2.2.5 Critical success factors leading to successful PPP projects

Question 5 “In general, what do you think are the critical success factors leading to successful PPP projects?” received the most variation of responses from the interviewees (Table 6.8). This probably indicated that there are many ways for PPP projects to achieve success.

For responses that were mentioned more than once, there were six from the Hong Kong interviewees and nine for the Australian interviewees. Amongst these only two were similar for both groups of interviewees, these included “Project objectives well defined” which was mentioned three times by each group of respondents and “Partnership spirit/commitment/trust” mentioned twice by each group of interviewees. As mentioned by the Efficiency Unit (2008d) and the Queensland Government (2008b) the objectives/output specification of a PPP project must be well defined. The importance of

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partnership spirit was also identified by Gunnigan and Eaton (2006).

Mentioned the most frequently by Australian interviewees was “Competitive procurement process” (Jefferies et al., 2002) at five times, followed by “Skilled and experienced parties” (Drew, 2005) at four times, “Champion” (Efficiency Unit, 2008b) and “Clear milestones” (Civic Exchange et al., 2005) both three times and “Economically viable” (Chege, 2001), “Government support” (Qiao et al., 2001) and “Value for money” (Heald, 2003) all twice.

Mentioned the most by Hong Kong interviewees was “Appropriate risk allocation” (Li et al., 2005a) at four times, “Public consultation” (Kanakoudis et al., 2007) at three times and “Well prepared contract/document” (Partnerships Victoria, 2008c) and “Transparent process” (United Nations Economic Commission for Europe, 2004) both at two times.

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Table 6.8

Question 5 - In general, what do you think are the critical success factors leading to successful PPP projects?



Appropriate risk allocation (4)

Competitive procurement process (5)

Public consultation (3)

Skilled and experienced parties (4)

Project objectives well defined (3)

Project objectives well defined (3)

Well prepared contract/document (2)

Champion (3)

Transparent process (2)

Clear milestones (3)

Partnership

Partnership

spirit/commitment/trust

(2)

spirit/commitment/trust

(2) Economically viable (2) Government support (2) Value for money (2)

6.2.2.6 In-house guidance/practice notes

For Question 6 “Does your organisation have any in-house guidance/practice notes?” it was found that the majority of the interviewees (six out of seven) in Australia responded “Yes”, whereas only three interviewees in Hong Kong agreed (Table 6.9).

Four Hong Kong interviewees responded “No” and two responded “Refer to others”. This finding has shown that the Australians were much more likely to have their own guidance materials, whereas for the Hong Kong interviewees the responses varied.

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Australia has implemented many more PPP projects compared to Hong Kong; hence they can also be regarded as much more experienced. The Victoria state in Australia alone has implemented

seventeen

projects under the

Partnerships

(Partnerships Victoria, 2008a) as mentioned previously.

Victoria

arrangement

On the other hand, not

considering the previous projects conducted by BOT, Hong Kong has only completed a couple of PPP projects.

Table 6.9

Question 6 - Does your organisation have any in-house guidance/practice notes?



No (4)

Yes (6)

Yes (3) Refer to others (2)


This section has studied the public sector’s perspective on procuring public works projects via findings from fourteen interviews conducted in Hong Kong and Australia. Government officials and advisers with experience in PPP projects and research were invited to answer six questions related to the implementation.

The results found that interviewees from both jurisdictions had conducted some kind of research in the area and had looked at international cases. This finding has shown that

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governments in both jurisdictions have shown an interest in other sources of information besides real cases and also both are keen to learn from international experiences. Therefore other governments can also consider using a similar approach if they have not already done so.

Both groups of interviewees also found that the main difference between PPP and traditional projects is that in a PPP project there is the added advantage of the private sector’s efficiency/expertise/management skills involved. Therefore other governments could consider whether this added advantage is required from the private sector when they consider whether or not to opt for the PPP model in their public work projects. The interviewees from Hong Kong also suggested using the Public Sector Comparator as an indicator to determine the preference between the methods. Other criteria recommended by the Australian interviewees were the private sector financing and finance structure of the project. Again these could be used as indications to which method to opt for.

The interviewees were asked which projects would be suitable to use PPP; both groups suggested that an economically viable project would be crucial. Another important feature according to the Australian interviewees is scope for innovation.

It was suggested by both groups of interviewees that the contractor’s performance would be the key performance indicator in a PPP project. The Hong Kong interviewees also suggested that the traditional key performance indicators such as cost, time and quality are also important. The Australian interviewees suggested that the contract terms should

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be considered. These findings are valuable for measuring the performance of a PPP project for both the public and private sectors.

Common critical success factors mentioned by both groups of interviewees included the project objectives being well defined and a partnering spirit/commitment/trust. These factors should be considered by all parties before the project begins to ensure that they are achieved. The Hong Kong interviewees also felt strongly that an appropriate risk allocation would achieve success in the project.

For the Australian interviewees a

competitive procurement process was the most important success factor.

Lastly it was found that all the interviewees from Australia and some of the ones from Hong Kong had a practice of having their own organisation guidance/practice notes. This practice is highly recommended and especially useful for individuals and companies that are inexperienced with the PPP practice.

A large number of differences were observed between the findings from the two jurisdictions. This result is logical as each jurisdiction will differ in practice, culture, geographical location, experience, tradition, politically, economically, socially etc. Hence it is of interest to compare these differences.

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6.3


The Private Sector’s Perspective


The target private sector respondents of the interviews were practitioners with experience in PPP of senior level and authority within the private sector.

A total of fourteen

interviews were conducted, with seven interviews conducted in each jurisdiction. Interviewees of different backgrounds were purposely selected to compare the similarities and differences within the private sector. This would make the findings even more representable if common findings are derived even though their backgrounds are so diverse.

Amongst the seven interviews conducted in Hong Kong, four of the interviewees work for local companies whereas the other interviewees each work for a Japanese, French and Australian company respectively. These companies comprise of a property developer, three construction companies, an exhibition company, a law firm and a service provider.

Most of the Australian interviewees work for companies of their own country. Again the majority (four out of seven) of these are construction companies.

The other three

companies include a project management company, a bank and a credit rating company. Details of these experts are shown in Tables 6.10 and 6.11 for Hong Kong and Australian interviewees respectively.

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Table 6.10

List of Interviewees from the private sector in Hong Kong

No.




PR1

Project Advisor

Local Property Developer

Strong interest in PPP, previously bid for several PPP projects but unsuccessful.

PR2

Deputy General Manager

Japanese Construction Company

Involved with the design and construction of several PPP

working in Hong Kong

projects.

PR3

General Manager

Local Exhibition Company

Previously a general manager for a social PPP project.

PR4

Engineering Director

French Construction Company

Involved with the design and construction of several PPP

working in Hong Kong

projects.

PR5

Executive Director

Local Construction Company

Conducted PPP projects in other countries.

PR6

Managing Partner

Australian Law Firm working in

Acted as legal adviser for PPP projects in other countries.

Hong Kong PR7

Commercial Manager

Local Service Provider

155

Involved with an on-going PPP project.

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Table 6.11

List of Interviewees from the private sector in Australia

No.




PR8

Executive Manager


Involved with the design and construction of many PPP projects.

PR9

Manager



PR10

Manager



PR11

Manager



PR12

Director

Local Project Management

Acted as the project director for many PPP projects.

Company PR13

Head

Local Bank

One of the main financiers of PPP projects globally.

PR14

Managing Director

American Credit Rating Company

Advised bidders on PPP projects.

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Table 6.12 shows a summary of the responses to each question given by the fourteen interviewees. The number of times that each response was given was tallied. Where the response was only given once it was believed to be insignificant for further analysis. For the responses given more than once, these were tabulated and further analysed as shown in Tables 6.13 to 6.14. The numbers in brackets represent the number of times the response was mentioned by interviewees.

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Table 6.12

Summary of responses from private sector interviewees Hong Kong Interviewees PR1

PR2

PR3

PR4

PR5

PR6

1. Which PPP projects has your company been involved in? 3 3 Local projects 3 Local and international projects

3

3

3

Australian Interviewees PR7 3

2. Please describe the implementation process in these projects. 3 Increase competition Reduce competition Refer to Efficiency Unit Guidelines Government and authority co-promoted Consultations before project start Not initiated by Treasury Department Pre-qualification exercise Government focus on administration Based on Victoria Partnerships projects Costly bidding process Banks take lead in project transaction Same as traditional Consist of specialists

Total 3 4 1 0

3 3 3

3. What were the major reasons for adopting PPP in these projects? 3 3 3 Private sector expertise 3 Developing countries 3 Private sector’s cost and time certainty 3 Win-win situation 3 Value for money Private sector efficiency Transfer of risks Large projects 3 3 Government need

3 3 3

3

3

3 3 3

158

3 3

PR8

PR9

3

3

3

PR11

PR12

3

3

3

PR13

PR14

Total

3

3

5 2 0 2

3

1 1 1 1 1 1 0 0 0 0 0 5 1 1 1 3 2 1 0 2

PR10

3 3 3 3 3 3 3

3 3

3

3 3

3

3

3

0 0 0 0 0 0 1 1 1 1 1 1 0 1 0 0 1 2 1 4

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4. How do you think PPP compares with traditional procurement methods? 3 3 Better integration 3 Private sector involvement 3 Benefits for early completion 3 Better value for money 3 3 Performance based 3 Consider project life Differentiated product Larger projects 3 Increased efficiency and speed More rigorous tendering process

3

3 3

3

2 1 1 2 2 1 1 0 2 1

0 0 0 1 0 0 1 3 2

3

3 3

3 3

3 3

3

3

2

Paid according to schedule

0

3

Different risk profiles

0

3

Large emphasis on relationships

0

3

No difference in terms of rating

0

More complex

0

3

1

More politically challenging

0

3

1

5. Which type of project would your company be most interested in applying PPP? 3 3 3 3 All 3 Any except transportation 3 Projects with subsidy 3 Projects with appropriate risk allocation Projects with prospect of success Where land is not issue No staffing issues Recurrent expenditure already budgeted Projects with business case

3

3 3 3 3

3

3

159

5 1 1 1 2 1 1 1 1

1 3

3

3 1 3

3

3 3

3

1

1 0 0 1 1 0 0 0 1

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0 0 0

3

4 1 1 1 2 1 1 1 0

3 3

7. In general, what do you think are the critical success factors leading to successful PPP projects? 3 3 Economically viable 3 No Legislative Council interference 3 3 Good relationships / partnering spirit 3 3 3 Clear project objectives / timeline 3 Private party possess expertise 3 3 Appropriate allocation of risks 3 3 Government support (champion) 3 Transparent process

2 1 2 3 1 2 2 1

3

Flexibility for innovation

0

Robust contract

0

3

Positive media

0

3

Economic infrastructure Projects with clear objectives Social infrastructure

6. What do you feel are the key performance indicators in a PPP project? 3 3 Economics 3 Risk 3 Control 3 Refer to Efficiency Unit guide 3 Contract terms (operating parameters) 3 Traditional KPIs (time, cost and quality) Public sector comparator Service Time

8.

3

3

3 3 3

Does your company have any in-house guidance/practice notes on PPP implementation?

160

3 3

3

3 3

3

3

3 3

3

3

3 1 3

3

5 3 0 0 1 0 0 0 2

3

2 0 2 2 1 1 1 0

3

3

3 3

3

3 3 3

3 3 3

1 1 3

2

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Yes Other materials available No

3 3

3

3

3

3

3

161

0 4 3

3 3

3

3

3 3

3

1 4 2

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6.3.2.1 Local and international experience in conducting PPP projects

Table 6.13 presents the findings that were mentioned more than once by the interviewees for Question 1 “Which PPP projects has your company been involved in?” The results showed that interviewees from both jurisdictions mentioned two responses more than once.

Four interviewees from Hong Kong and two interviewees from Australia mentioned that they had participated in both “Local and international projects”. On the other hand five and two interviewees in Australia and Hong Kong respectively mentioned that they had been involved with “Local projects” only.

The findings showed that the majority of Hong Kong interviewees had participated in projects both locally and abroad, whereas most of the Australian interviewees had participated in local projects only. Another observation is that none of the interviewees had participated in international projects only. Although Hong Kong has had a long history in BOT projects it has still conducted far fewer of these types of projects compared to Australia. Therefore most of the PPP expertise utilised in Hong Kong today has been sourced from overseas rather than trained locally. On the other hand in Australia, their extensive use of PPP has meant that they have built up resources of their own to cater for these projects (Infranews, 2006).

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Table 6.13

Question 1 - Which PPP projects has your company been involved in?



Local and international projects (4)

Local projects (5)

Local projects (3)

Local and international projects (2)

6.3.2.2 Implementation process of PPP projects

Thirteen aspects related to the implementation of PPP projects were mentioned by the interviewees. Only one of these was mentioned twice by the Australian interviewees: “Reduce competition” (Table 6.14). The two Australian interviewees described that there has been too much competition in the procurement process of PPP projects. They further suggested that the number of competitors involved in the process should be reduced. The transaction process for PPP projects can be a costly and lengthy process. Hence the competitors need certainty that they have a high chance of winning the bid before they enter the process. Fewer competitors will assure them of their chances of success. Publications have also reported the problems related to the transaction process of PPP projects causing the private sector to become reluctant to continue participating in them (Ahadzi and Bowles, 2004).

Table 6.14

Question 2 - Please describe the implementation process in these projects.


Australian Interviewees Reduce competition (2)

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6.3.2.3 Major reasons for adopting PPP projects

As shown in Table 6.15 four and two reasons were mentioned more than once by the Hong Kong and Australian interviewees respectively. Amongst these reasons one was mentioned by both groups of interviewees: “Government need”.

This reason was

mentioned the most at four times by the Australian interviewees, whereas only twice by the Hong Kong interviewees. PPP in Australia were originally initiated due to financial shortages for the state governments to deliver public infrastructure and services (English and Guthrie, 2003). The findings from the interviews have shown that many of the experts still regard this as an important reason to adopt PPP.

Mentioned the most by Hong Kong interviewees was “Private sector expertise” at five times. The Hong Kong government has been able to enjoy a comfortable financial reserve. Hence other advantages such as the added benefits of the private sector’s expertise and efficiency have been motivators to adopt PPP projects (Borzel and Risse, 2005). Therefore “Private sector efficiency” was also mentioned by the Hong Kong interviewees twice. Other reasons mentioned by the Hong Kong interviewees include “Value for money”, which has also been studied by previous researchers (Grimsey and Lewis, 2005; Heald, 2003).

In Australia “Transfer of risks” was also mentioned twice by the interviewees. Risk is probably the most extensively studied aspect of the PPP method. Numerous studies have already been conducted on risk identification, allocation, treatment etc. (Akbiyikli and

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Eaton, 2004; Chan et al., 2008; Hodge, 2004; Jin and Doloi, 2008; Li et al., 2004; Li et al., 2005b; Ng and Loosemore, 2007; Shen et al., 2006; Shen and Wu, 2005; Sun et al., 2008; Thomas et al., 2003; Thomas et al., 2006; Wibowo and Kochendörfer, 2005)

Table 6.15

Question 3 - What were the major reasons for adopting PPP in these projects?



Private sector expertise (5)

Government need (4)

Value for money (3)

Transfer of risks (2)

Private sector efficiency (2) Government need (2)


Four differences mentioned more than once between PPP and traditional procurement methods were suggested by each group of interviewees (Table 6.16). Only one of these was similar for both groups of interviewees: “Increased efficiency and speed”. Efficiency and speed have been known as reasons for implementing public works projects by PPP (Borzel and Risse, 2005; Bovaird, 2004). The public sector tends to be more laid back compared to the private sector that tends to be more motivated due to commercial reasons (Sharma, 2007).

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Other differences mentioned more than once by the Hong Kong interviewees include “Better integration”, “Better value for money” and “Performance based”. Again these features have been highlighted by previous researchers. Nisar (2007) also agreed that a key aspect of PPP is the integration between partners. Many studies have also been conducted in the topic of value for money, as technically public projects are procured by the PPP model only when value for money can be achieved (Grimsey and Lewis, 2005; Heald, 2003; Nisar, 2007). A key feature of PPP projects is that there is a heavy emphasis on project and private sector performance (Dhaene, 2008).

The Australian interviewees also mentioned three other differences. Mentioned three times include “Larger projects” and “Different risk profiles”.

Shen et al. (2006)

mentioned that the best PPP projects should be ones that are mega-scale. As mentioned previously in this paper, risks are an important part of PPP projects throughout the lifecycle. The last difference mentioned twice was a “More rigorous tendering process”, which is another key feature of PPP projects (Ahadzi and Bowles, 2004).

Table 6.16

Question 4 - How do you think PPP compares with traditional procurement methods?



Better integration (2)

Larger projects (3)

Better value for money (2)

Different risk profiles (3)

Performance based (2)

More rigorous tendering process (2)

Increased efficiency and speed (2)

Increased efficiency and speed (2)

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6.3.2.5 Projects of interest to the private sector

Table 6.17 shows the types of PPP projects that the interviewees would be most interested in. Five of the Hong Kong interviewees mentioned “All”. And two suggested “Projects with prospect of success”. The private sector participates in PPP projects not because they have to but for commercial benefits hence it is logical that they expect the project to be successful.

Three Australian interviewees mentioned that they would be interested in “Transportation projects” and “Social infrastructure”. Public works projects normally comprise of either economic or social infrastructure. Economic projects are normally those where the income is collected directly from the end-user, for example toll roads, railways etc. On the other hand social infrastructure projects are normally supported by a regular fee paid by the government, for example schools, hospitals etc. Both of these were mentioned by the Australian interviewees indicating that most types of public works projects are supported by the private sector.

Similarly the findings found that the Hong Kong interviewees were interested in all PPP projects. The main difference is probably that Hong Kong’s experience in PPP projects has mainly been in economic infrastructure (Mak and Mo, 2005), hence they did not further break public works projects up into categories. Whereas, Australia has conducted a larger range of different natured PPP projects hence they tend to split them to into categories.

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Table 6.17

Question 5 - Which type of project would your company be most interested in applying PPP?



All (5)

Economic infrastructure (3)

Projects with prospect of success (2)

Social infrastructure (3)

6.3.2.6 Key performance indicators of PPP projects

Table 6.18 shows the key performance indicators mentioned by the interviewees. The top key performance indicator identified by both groups of interviewees was “Economics”. This key performance indicator was mentioned four times by the Hong Kong interviewees and five times by the Australian interviewees. Money has often been used as a measure to quantify performance. Especially for the private sector their motives for participating in PPP projects are related often to commercial aspects (Sharma, 2007).

Other key performance indicators mentioned by the Hong Kong interviewees include “Contract terms (operating parameters)” which was mentioned twice. Contracts can be used to measure the outputs of a project (Entwistle and Martin, 2005).

The Australian interviewees mentioned “Risk” three times and “Time” twice. Again as mentioned before risk is an important aspect of the PPP arrangement. On the other hand time is also a key performance indicator for traditional projects and highly related to the commercial aspects of the project.

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Table 6.18

Question 6 - What do you feel are the key performance indicators in a PPP project?



Economics (4)

Economics (5)

Contract terms (operating parameters) (2)

Risk (3) Time (2)


Table 6.19 shows that the Hong Kong interviewees mentioned five critical success factors more than once whereas the Australian interviewees mentioned four. Three of these critical success factors were similar, including “Clear project objectives / timeline” mentioned three times by the Hong Kong interviewees and twice by the Australian interviewees, “Economically viable” and “Good relationships / partnering spirit” mentioned twice by both groups of interviewees.

The importance of clear project

objectives and timeline has also been incorporated in to governmental guidance notes (Efficiency Unit, 2003a). In Zhang’s (2005a) study he looked at several groups of potential critical success factors, one of these was identified as economic viability. Partnering spirit between the parties is a vital aspect of PPP projects (Gunnigan and Eaton, 2006).

Other critical success factors also mentioned twice by the Hong Kong interviewees include “Appropriate allocation of risks” and “Government support (champion)”. Again

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risks are mentioned as being highly important in the PPP arrangement. In addition, Zhang (2005a) derived from his study that government support is the second most significant critical success factor under the group of “Favourable investment environment”.

The Australian interviewees also mentioned “Positive media” twice.

The effect of

positive media is incredibly important for the success of a PPP project. In the case of the Cross City Tunnel in Sydney, Australia the negative portrayal of the media caused the effects of its faults to intensify (Chan et al., 2008).

Table 6.19

Question 7 - In general, what do you think are the critical success factors leading to successful PPP projects?



Clear project objectives / timeline (3)

Clear project objectives / timeline (2)



Good relationships / partnering spirit (2)

Good relationships / partnering spirit (2)

Appropriate allocation of risks (2)

Positive media (2)

Government support (champion) (2)

6.3.2.8 In-house guidance/practice notes

Table 6.20 shows that both groups of interviewees had mentioned “Other materials available” instead of in-house guidelines/practice notes for PPP implementation. This

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finding is probably because the private sector tends to follow the guidelines of their client the public sector hence there is no need for them to derive their own guidance materials. Governmental guidance notes are readily available for the general public’s use (Efficiency Unit, 2008e; Partnerships Victoria, 2008d). Although so it was found that the organisations of most of the interviewees had conducted some kind of research in the topic of PPP to broaden their knowledge on the process. Some of the interviewees mentioned “No” to this final question (three in Hong Kong and two in Australia) showing the lack of need for in-house guidance/practice notes.

Table 6.20

Question 8 - Does your company have any in-house guidance/practice notes on PPP implementation?



Other materials available (4)

Other materials available (4)

No (3)

No (2)


This section has studied the private sector’s perspective on procuring public works projects via findings from fourteen interviews conducted in Hong Kong and Australia. Experts with experience in PPP projects and research were invited to answer eight questions related to the implementation. The results found that interviewees from Hong Kong had participated in projects both locally and internationally, whereas the Australian interviewees had participated in local projects mainly. Australia has conducted many

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more PPP projects compared to Hong Kong hence they have built up and trained their own resources and expertise of time. Hong Kong, on the other hand, may not have the necessary talents hence it is important for them to either gain overseas experience or import their expertise. With the increasing number of PPP projects conducted in Hong Kong there is a need to start training their own people.

The implementation process of PPP projects can vary depending on the project itself, hence a large range of descriptions were given by the interviewees.

Only reduce

competition was repeatedly mentioned. Reducing competition in the tendering process would mean that the chance of winning would be greater for the bidding party. Hence in future projects the government should consider a suitable number of competitors in the tendering process to avoid the private sector’s loss in terms of time, money and especially lack of confidence in conducting future PPP projects.

Only one reason for adopting PPP projects was mentioned by both groups of interviewees which was government need. Other reasons mentioned by the Hong Kong respondents included private sector expertise, value for money and private sector efficiency. All these reasons have been mentioned in many literature pieces for being typical features and attractions of the PPP model hence the findings have further verified previous studies.

Another major reason for adopting PPP is for risk transfer as mentioned by the Australian interviewees; this topic is probably the most discussed. It is likely that Hong Kong is familiar with delivering public works projects themselves hence are comfortable with the

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practice. Therefore they did not highlight risk transfer as a reason for adopting PPP projects as they are less aware of the risks. But according to previous cases around the word, the HKSAR government should consider an appropriate risk allocation in order for public projects to be delivered more effectively.

The common difference between PPP and traditional methods highlighted by both groups of interviewees was the increased efficiency and speed in PPP projects. Added value has become the foremost reason to apply PPP projects these days.

Governments have

realised that the private sector tends to be more motivated and driven due to commercial reasons. Other differences highlighted by the Hong Kong interviewees include: better integration; better value for money; and performance based. Mentioned by the Australian interviewees include: larger projects; different risk profiles; and more rigorous tendering process.

The findings also showed that the interviewees were interested in all sorts of projects. In Hong Kong the interviewees did not further categorise PPP projects, probably because there have been few PPP projects in Hong Kong and they have tended to be transportation related hence the variation has not been large. In Australia, on the other hand there have been various types of PPP projects conducted; hence the interviewees categorised them into social or economic types of projects. conducting these two groups of projects was similar.

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The preference for

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Both groups of interviewees agreed that economic performance indicators were the most appropriate. The Hong Kong interviewees also recommended that the contract terms could be used to measure performance. The Australian interviewees also mentioned risk and time as key performance indicators. Therefore the key performance indicators for PPP projects should focus heavily on the economics.

Five critical success factors were mentioned more than once by Hong Kong interviewees and four by the Australian interviewees. Amongst these three were mentioned by both groups of interviewees: clear project objectives/timeline; economically viable; and good relationship / partnering spirit. Clear objectives and timeline allows the private sector to keep on track over such a long project period. In PPP projects typically the consortium’s responsibility is over 30 years instead of a normal design and construct contract which will span over maybe just 5 years. Hence clear objectives and timeline are particularly important.

These should be well defined before the project commences.

An

economically viable project is also vital as the private sector is driven by commercial motives. In order to sustain such a long term relationship over the project period good relations / partnering spirit is also vital. The parties involved could consider utilising tools such as partnering workshops to increase their communication and understanding.

Other critical success factors mentioned by Hong Kong interviewees include appropriate allocation of risks and government support (champion). The Australian interviewees also mentioned positive media as a critical success factor. Finally, it was realised that the interviewees all had access to some kind of PPP guidance materials.

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6.4


The Researcher’s Perspective


The target respondents of the interviews were researchers with experience in PPP who neither belonged to nor acted for the public or private sectors. A total of seven interviews were conducted, with three in Hong Kong and four in Australia.

Amongst the three interviewees from Hong Kong, 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. Similarly the Australian interviewees were all active researchers of the PPP topic from local universities. Due to the limited number of PPP projects conducted in Hong Kong (not including BOT type), fewer academics are involved with PPP related research, hence two legislative councilors were selected, both have been known to publicly mention their interests in PPP. As their role tends to represent the general public rather than the public or private sector, it was believed that their position would be similar to the academics interviewed. Background details of these experts are shown in Tables 6.21.

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Table 6.21

List of researcher interviewees

No.

Jurisdiction




R1

Hong Kong

Member of Legislative Council

Legislative Council of the

Commissioned a working group to

(Legal background)

HKSAR Government

analyse the feasibility of PPP.

Member of Legislative Council

Legislative Council of the

Supporter of PPP and included in his

HKSAR Government

campaign to push the development.

Local University

Conducted his own PhD in the area of

R2

Hong Kong

(Engineering background) R3

Hong Kong

Professor

PPP and active researcher. R4

Australia

Professor

Local University

Active researcher.

R5

Australia

Professor

Local University

Involved with producing governmental guidelines, training, courses and research for PPP.

R6

Australia

Professor

Local University

Active researcher.

R7

Australia

Professor

Local University

Involved with producing governmental guidelines, training, courses and research for PPP.

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Table 6.22 shows a summary of the responses to each question given by the seven interviewees. The number of times that each response was given was tallied. Where the response was only given once it was believed to be insignificant for further analysis. For the responses given more than once, these were tabulated and further analysed.

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Table 6.22

Summary of interview findings with researchers from Hong Kong and Australia

1. Have you conducted any research looking at local case studies? Yes 2. How would you compare PPP with traditional procurement methods? Clear project objectives PPP utilises public resources PPP is a partnership arrangement PPP projects have high tendering / transaction costs PPP projects tend to be completed on-time Income of PPP projects can be dependent on market Construction costs of PPP projects are more expensive PPP considers maintenance Different risk profiles More expensive for private sector to borrow money Private sector more innovative / efficient PPP focuses on service delivery PPP improves public procurement 3. Which type of project do you feel is best suited to use PPP? Government lacks funding Project dependent Projects with few competitors Large projects Expensive projects Quantifiable income stream Scope for innovation

Hong Kong Interviewees R1 R2 R3

R4

3

3

3

3

Australian Interviewees R5 R6 3

Total

3

7

3

1 1 2 2 1 1 1 1 2 1 2 1 1

3 3 3 3

3 3 3 3 3 3 3 3 3

3 3 3

3 3

3 3 3 3 3 3

3

3

178

3

R7

2 2 1 2 1 1 1

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Toll ways

3

1

3 3

1 2 1 1 1 1 1

4. What do you feel are the key performance indicators in a PPP project? 3

Profits Project dependant Traditional KPIs: Quality, time and cost Should be defined by private sector Service outcomes Contract compliance Proactive managers

3 3

3 3 3

5. In general, what do you think are the critical success factors leading to successful PPP projects? 3 3

Clear project objectives Timeline and milestones foreseeable Transparent process Public consultation Project dependent Clear legal structure and regulation mechanism Market need Technical and financial capability of concessionaire Champion with authority Roles clearly defined and related to each other Need to budget money for project amount Right timing Strong and robust contract Commitment of partners

3 3 3 3

3 3 3 3 3

3 3 3 3 3 3 3

179

2 1 2 1 2 1 2 1 1 1 1 1 1 1

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6.4.2.1 Research on local case studies

The first question that the interviewees were asked to answer was “Have you conducted any research looking at local case studies?” All interviewees responded that they had conducted PPP case studies and research both locally and overseas. In general, it can be summarised that the interviewees are active experienced researchers in the field of PPP.


The interviewees were further asked “How would you compare PPP with traditional procurement methods?” Thirteen different responses were given, but only four of these were mentioned more than once. These responses which were each mentioned twice included: “PPP is a partnership arrangement”; “PPP projects have high tendering / transaction costs”; “Different risk profiles”; and “Private sector more innovative / efficient”.

Mentioned by the Hong Kong interviewees only was “PPP is a partnership arrangement” and “PPP projects have high tendering / transaction costs”. The Efficiency Unit of the HKSAR government has been actively involved in pushing the movement of PPP in Hong Kong.

In one of their latest guidelines they mention the importance of the

partnership arrangement “A PPP is a contractual arrangement involving the private sector in the delivery of public services. As the name suggests, this is based on a partnership approach, where the responsibility for the delivery of services is shared between the

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public and private sectors, both of which bring their complementary skills to the enterprise” (Efficiency Unit, 2008a).

A common feature which is found in PPP projects is the high costs of tendering and transaction (Zhang, 2005). Hughes et al. (2001) reported that the costs associated with tendering are seen by the construction industry in the United Kingdom to be significant, typically quoted as ½ – 1% of turnover; and 2 – 3% of bid price for PPP bids. Furthermore results from their study showed that building services contractors had calculated that up to 15% of their turnover could be accounted for by “unnecessary” tendering processes.

For the other two responses which were mentioned more than once (“Different risk profiles” and “Private sector more innovative / efficient”), these were mentioned by interviewees from both jurisdictions. As mentioned previously in this section one of the main reasons for implementing public projects by PPP is also for risk transfer. The National Stadium for the Beijing 2008 Olympic Games in China is an example of how key risk factors were appropriately passed to the private sector via the PPP model (Liu et al., 2007). Without doubt this project has been highly profiled hence the pressure to perform well increased the risks associated. The four most critical risks of this project included 1) The irrational construction schedule for a project of this size and complexity; 2) Possible cost overruns due to inexperience in delivering similar previous projects in China; 3) Small and limited market for large scale sporting events in China; and 4) Lack of operational experience in similar previous projects in China. These factors were all

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related to the management, design, construction and operation of the project, which are also aspects that are considered to be best handled by the private sector; whereas the public sector’s expertise lies in the area of public administration.

Another major difference observed between traditionally procured projects and PPP projects is the added innovation and efficiency from the private sector in PPP projects. The private sector in general tends to be more motivated due to financial drive, whereas the public sector parties are experts in policy making rather than innovation and efficiency. Studies have shown that by adopting PPP in public works projects, innovation and efficiency is achieved due to the private sector’s contribution (Leiringer, 2006)

6.4.2.3 Projects best suited to use PPP

The interviewees were asked “Which type of project do you feel is best suited to use PPP?” in Question 3. Three out of the eight responses were mentioned twice by the interviewees, these included “Government lacks funding” and “Project dependent” which were mentioned by the Hong Kong interviewees and “Large projects” mentioned by the Australian interviewees. In many jurisdictions which first started to adopt PPP, private financing was a major incentive for governments to adopt PPP, such as the United Kingdom and the Victoria state of Australia.

Therefore there has been a common

association that PPP projects are about financing.

An example, showing that Hong Kong does not need private sector financing can be

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shown by the recent Hong Kong Zhuhai Macau bridge project where the governments of these three jurisdictions have agreed to undertake the project costs without private sector input. The HKSAR government alone has agreed to cover approximately 50% of the costs, approximately HK$15.3 billion (South China Morning Post, 2008).

The Hong Kong interviewees also mentioned that the suitability criteria of projects to be procured by PPP would be unique depending on the project. The Australian interviewees mentioned that large projects would be suitable for the PPP model. Similarly, Price (2002) suggested that for some types of projects, especially those that are large or complex, a joint venture between the public and private sectors may prove advantageous.

6.4.2.4 Key performance indicators in PPP projects

Only one response was mentioned more than once at twice by the interviewees for Question 4 “What do you feel are the key performance indicators in a PPP project?” This was “Project dependant” which was mentioned by interviewees from both jurisdictions. Six other responses were given by the interviewees for this question.


For the final question, interviewees were asked “In general, what do you think are the critical success factors leading to successful PPP projects?” This question received the most number of responses probably indicating that there are many critical success factors

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that could lead to successful PPP projects. But amongst these responses only four were mentioned more than once by the interviewees, these included “Clear project objectives” which was mentioned by the Hong Kong interviewees only and “Transparent process”, “Project dependent” and “Market need” which were all mentioned by interviewees from both jurisdictions.

Zhang (2006) mentioned in his study that the public client often does not have clear objectives and priorities in infrastructure development through PPP. This often impairs the project development process. The client should clearly define its objectives and establish their relative importance and make sure the private sector shares these objectives. The probability of successful project delivery increases dramatically when both sectors have a common vision of the project to be developed. In the Partnerships Victoria Policy (2000), it mentions that where there is private sector involvement in major public infrastructure projects, the choice of contractors should be through a rigorous and transparent system of public tendering.

Similar to the responses for Questions 3 and 4, the interviewees also mentioned that the critical success factors for PPP projects would be dependent on the project due to their uniqueness. Lastly, Partnerships Victoria (2001) also mentioned that a key characteristic of Partnership Victoria projects (i.e. PPP projects conducted under the Partnership Victoria’s supervision) includes market appetite. This implies that the project creates a genuine business opportunity which is likely to attract a sufficient number of private parties and create an effective and competitive bidding process.

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This section has presented the findings of seven interviews conducted by experienced researchers in the field of PPP from Hong Kong and Australia. The interviewees were asked to answer five questions related to the implementation of PPP. It was found that both groups of interviewees had conducted case studies and research in the field of PPP locally and internationally.

When considering the differences between traditionally procured projects and PPP projects, both groups of interviewees agreed that “Different risk profiles” and “Private sector more innovative / efficient” were the main differences. Other major differences between the two approaches mentioned by the Hong Kong interviewees included “PPP is a partnership arrangement” and “PPP projects have high tendering / transaction costs”. The types of project best suited to use PPP were not the same according to the two groups of researchers.

The Hong Kong interviewees recommended that “Government lacks funding” and “Project dependent” are suitable criteria for PPP projects, whereas, the Australian researchers believed that “Large projects” would be more ideal.

Amongst the key performance indicators highlighted by the interviewees “Project dependant” was the only response given by both groups of interviewees.

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From the large number of critical success factors suggested “Transparent process”, “Project dependent” and “Market need” were the common ones highlighted by both groups of interviewees. Hong Kong interviewees also believed that “Clear project objectives” would be an important critical success factor.

6.5

Chapter 6 Summary

The findings presented in this chapter have summarised the views of experienced practitioners from the public sector, private sector and renowned researchers from Hong Kong and Australia.

It was found that the public sector and researcher interviewees from both jurisdictions had conducted research in PPP and looked at international cases. From their experiences other governments should also adopt a similar practice. Although both jurisdictions had conducted research in PPP, the Australian private sector had conducted many more PPP projects than those in Hong Kong.

Many of the private sector interviewees believed that competition in the tendering process should be reduced.

Hence governments should consider what the suitable

number of bidders for a project should be.

The public sector and researcher interviewees agreed that the main difference between PPP and traditional projects is that in a PPP project there is the added advantage of the

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private sector’s efficiency/expertise/management skills involved.

The researcher

interviewees also added that PPP projects and traditional projects differ in risk profiles. On the other hand, the private sector highlighted that the main difference is that PPP can increase the efficiency and speed of projects.

The public sector interviewees agreed that projects which are economically viable are those suitable to be procured by PPP. Whereas the private sector believed that projects are normally procured by PPP due to government need, but all types of projects should be suitable.

The public sector interviewees believed that the contractor’s performance would be the key performance indicator for PPP projects. Whereas, the private sector interviewees believed that economic performance indicators are the most important. On the other hand, the researcher interviewees believed that each project is dependent so the key performance indicators would be as well.

The project objectives being well defined and a partnering spirit/commitment/trust were the critical success factors mentioned by both the public and private sector interviewees. The private sector interviewees also added that the project must be economically viable. The researcher interviewees highlighted some further critical success factors including projects having a transparent process and there being a market need (this factor is very closely linked with the project being economically viable as mentioned by the private sector interviewees).

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Most of the public and private sector interviewees had their own organisation guidance/practice notes. This practice is highly recommended.

The views presented in this chapter are believed to be of interest to all practitioners involved with PPP projects. The findings also form a comparative study between the views of PPP practitioners in Hong Kong and Australia, and draw similarities irrespective of the differences in jurisdictions.

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Suitability of Procuring Large Public Works by PPP

CHAPTER 7 SUITABILITY OF PROCURING LARGE PUBLIC WORKS BY PPP 7.1 7.2


Collection of Research Data 7.3 7.4

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Survey Results

Chapter 7 Summary

Chapter 7

7.1



This chapter will specifically consider whether Public Private Partnership (PPP) should be used to procure public works projects in Hong Kong by studying the attractive and negative factors for adopting PPP. A questionnaire survey was conducted with industrial practitioners in Hong Kong and Australia, and compared to findings obtained by Li (2003) in the United Kingdom. The respondents were requested to rank the importance of fifteen attractive factors and thirteen negative factors for adopting PPP.

7.2

Collection of Research Data

An empirical questionnaire survey was undertaken in Hong Kong and Australia from October 2007 to December 2007 to analyse the attractive and negative factors of adopting PPP.

The target survey respondents of the questionnaire included all industrial

practitioners from the public, private and other sectors.

These respondents were

requested to rate their degree of agreement against each of the identified attractive and negative factors according to a five-point Likert scale (1 = Least Important and 5 = Most Important). The information collected regarding the attractive and negative factors will help to achieve objective 1 “Identify the benefits, difficulties and critical success factors of PPP” and objective 6 “Evaluate the findings collected to determine a best practice framework for implementing PPP in Hong Kong” of this research study.

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Target respondents were selected based on two criteria: 1) They must possess adequate knowledge in the area of PPP; and 2) They must have hands-on experience with PPP projects, experience in conducting PPP research or have followed very closely with the development of PPP. Survey questionnaires were sent to 95 target respondents in Hong Kong and 80 target respondents in Australia. It was anticipated that some of these target respondents would have colleagues and personal connections knowledgeable in the area of PPP to participate in this research study as well; hence some of the respondents were dispatched five blank copies of the survey form. A total of 34 completed questionnaires from Hong Kong and 11 from Australia were returned representing response rates of 36% and 9%, respectively.

The lower response rate in Australia was expected as the

questionnaire was administered from Hong Kong, hence geographical complications were perceived. But as this study mainly focuses on Hong Kong, the responses received from Australia were used for reference only, similarly so were the results from Li’s survey (2003).

It must be noted that the number of responses in the Kendall’s concordance analysis may not always be 34 and 11 for Hong Kong and Australia respectively, as these respondents may not have ranked all the factors. Therefore in some cases not all responses may have been suitable for subsequent statistical analyses.

The questionnaire respondents comprised experienced practitioners from the industry. As shown in Figures 7.1 and 7.2 approximately half of the respondents in Hong Kong and Australia possessed twenty-one years or above of industrial experience. Figures 7.3 and

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7.4 provide a breakdown of questionnaire respondents who have been involved with PPP projects.

Given the few Build Operate Transfer (BOT)/PPP projects conducted in Hong Kong, it was a surprise to find that 33% of the respondents gained previous experience. Without doubt some of these may have had experience with local BOT projects or PPP projects overseas, but still the experience of these respondents confirmed the quality of the responses from the survey conducted. In addition, amongst those respondents who have acquired experience with PPP projects, 10% had previously been involved with at least five projects.

In Australia, many more PPP projects have been conducted so it was unsurprising to find that approximately 90% of the respondents have participated in PPP projects before, with two thirds of these respondents having participated with at least five PPP projects. Once again this reassures the value and reliability of the findings.

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100 90 80

Percentage

70 60 50 40 30 20 10 0 ≦ 5

6 - 10

11 - 15

16 - 20

21 ≧

Years

Figure 7.1

Histogram showing the number of years of working experience in construction industry for the Hong Kong survey respondents

100 90 80

Percentage

70 60 50 40 30 20 10 0 ≦ 5

6 - 10

11 - 15

16 - 20

21 ≧

Years

Figure 7.2

Histogram showing the number of years of working experience in construction industry for the Australian survey respondents

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100 90 80

Percentage

70 60 50 40 30 20 10 0 0

1

2

3

4

>4

Number of PPP projects

Figure 7.3

Histogram showing the number of PPP projects the Hong Kong survey respondents have been involved with

100 90 80

Percentage

70 60 50 40 30 20 10 0 0

1

2

3

4

>4

Number of PPP projects

Figure 7.4

Histogram showing the number of PPP projects the Australian survey respondents have been involved with

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7.3


Survey Results

The attractive and negative factors for adopting PPP were assessed from different perspectives of the Hong Kong, Australia and the United Kingdom (results obtained by Li (2003) from his survey) respondent groups. The means for each administrative system were calculated and ranked in descending order of importance as shown in Tables 7.1 and 7.2. Although a large number of differences were observed between the findings of the three jurisdictions. This result is logical as each jurisdiction will differ in practice, culture, geographical location, experience, tradition, politically, economically, socially etc. Hence it is of interest to compare these differences.

7.3.1 Ranking of attractive factors for adopting PPP

Fifteen attractive factors for adopting PPP were rated by the respondents (Table 7.1). The findings showed that the top three attractive factors ranked in Hong Kong were: (1) Provide an integrated solution (for public infrastructure / services); (2) Facilitate creative and innovative approaches; and (3) Solve the problem of public sector budget restraint.

The first and second attractive factors ranked by Hong Kong respondents were also ranked identically by respondents in Australia. Ranked third in Australia was “Save time

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in delivering the project”. The results show that both Hong Kong and Australia ranked efficiency-related attractive factors more importantly. Although financial drive in general is a major reason for adopting PPP, these respondents did not rank it as the top attractive factor.

Since Hong Kong has enjoyed abundant financial reserve in hand and budget surplus over the past few years, these have allowed Hong Kong to pay for their public works projects upfront. The government officials generally did not see the need to borrow money when they could provide the cash cheaper. Hence efficiency was a more important attractive factor that could really induce Hong Kong to adopt PPP.

Similarly in Australia, although financial reasons may have previously been the reason for adopting PPP this is no longer the case. The Victoria State in Australia first utilised PPP in order to deliver PPP projects using the private sectors’ money, but as the financial situation has improved and more experience has been gained, the Australians have realised other benefits of adopting PPP rather than for financial reasons alone.

On the contrary, in the United Kingdom economic related factors were ranked much higher in year 2003.

The top attractive factor ranked in the United Kingdom was

“Transfer risk to the private partner”. Ranked second was the same attractive factor that came third in Hong Kong. And ranked third was “Non recourse or limited recourse to public funding”.

Similar to Australia’s Victoria State, the United Kingdom also

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introduced PPP initially due to financial reasons. But the situation today may also no longer be the same. The results from Li’s (2003) study were obtained five years before those presented in this study, hence certain changes in the adoption of PPP and the attitude of practitioners are anticipated. Therefore as mentioned before the results in Li’s (2003) study can only be used as a reference.

The first attractive factor ranked in Hong Kong “Provide an integrated solution (for public infrastructure/services)” was also positioned first in the ranking for Australia. The rankings have demonstrated that this attractive factor was regarded as equally important to them irrespective of location.

PPP is an integrated solution in that a private consortium is responsible for all the functions of design, building, financing, operation and maintenance. This bundling can allow the partners to take advantage of a number of efficiencies and increase economies of scale and scope (European Commission Directorate, 2003).

For instance, the

contractor’s detailed knowledge of the project design and the materials utilised allows it to develop a tailored maintenance plan over the project life that anticipates and addresses needs as they occur, thereby reducing the risk that issues will go unnoticed or unattended and then deteriorate into much more costly problems. In the United Kingdom, this factor was ranked eighth showing a medium level of importance only.

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The second attractive factor ranked by respondents from Hong Kong and Australia was “Facilitate creative and innovative approaches”. In the United Kingdom, Li (2003) found that this attractive factor was rated seventh place amongst fifteen attractive factors for PPP. This observation manifests that Hong Kong and Australia has a much larger urge for having creativity and innovation in PPP projects compared to the United Kingdom. In the United Kingdom there has been a tendency for the local government to deliver packages of projects which are very similar, such as for schools.

The creativity

difference between these projects is often minimal. Nevertheless, practitioners in Hong Kong have expressed in public the need and importance for creativity and innovation in PPP projects (Kwan, 2005; Ho, 2005).

The third attractive factor rated by respondents from Hong Kong “Solve the problem of public sector budget restraint”, was also positioned highly at second place in the ranking of respondents from the United Kingdom.

Therefore, both administrative systems

perceived this attractive factor as highly important for launching PPP projects.

The financing of public sector projects has been recognised as one of the key initial driving forces for implementing PPP schemes internationally.

Many experienced

practitioners in PPP believe that PPP brings about many other attractions besides financing, and that financial motivations should not be taken as the sole reason for adopting PPP. However, financial reasons are frequently the initial attractive factors for administrative systems adopting PPP. This financial attractive factor is undoubtedly very appealing for governments across the world especially when public money is to be spent 197

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amongst competing needs. Therefore, it is not surprising that both groups of respondents have rated this attractive factor highly, but with a subtle difference in emphasis.

Contrastingly, the Australian respondents ranked this factor thirteenth amongst the fifteen attractive factors. This factor could imply that Australia currently does not face any major restraints in public sector budget.

But the views of more respondents from

Australia should be sought before confirming this conclusion as there were only eleven respondents from the survey conducted in Australia.

The mean values for the attractive factors as rated by Hong Kong respondents ranged from 2.94 to 3.79. This observation has reflected that the variation in their responses are relatively small, only 0.85 for Hong Kong. In Australia and the United Kingdom the means ranged from 2.36 to 4.45 and 1.82 to 3.98 respectively. The corresponding differences in means were 2.09 and 2.16 respectively. The differences in means were shown to be much higher for the survey conducted in Australia and the United Kingdom compared to Hong Kong. This finding shows that the Hong Kong respondents rated the fifteen attractive factors much more consistently, whereas in Australia and the United Kingdom the respondents showed a much larger variation.

As the respondents were asked to rate the 15 attractive factors according to a Likert scale from 1 to 5 (1 = Least Important and 5 = Most Important), a value above “3” would represent that the attractive factor is of importance. Amongst the attractive factors only

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one was ranked below “3” in the Hong Kong rank.

This attractive factor was

“Technology transfer to local enterprise” which scored “2.94” and was also ranked bottom in Hong Kong. This is probably because the immediate results of this attractive factor could not be seen and therefore the other fourteen attractive factors were relatively more favourable. In Australia and the United Kingdom (Li, 2003) this attractive factor was rated “3.18” and “1.82” respectively, showing that the first set of respondents disagreed but the latter set of respondent agreed with those respondents from Hong Kong. The other fourteen attractive factors in the Hong Kong rank were rated a score between “3” and “4”.

In addition, on top of those factors the respondents were asked to rate, they were also given the opportunity to add others which would be of importance, but they did not do so.

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Table 7.1 Mean scores and rankings for the attractive factors of PPP Attractive Factors

Hong Kong

Australia

United Kingdom (Li, 2003)

N

Mean

Rank

N

Mean

Rank

N

Mean

Rank

a. Solve the problem of public sector budget restraint

34

3.65

3

11

2.73

13

61

3.86

2

b. Provide an integrated solution (for public infrastructure / services)

33

3.79

1

11

4.45

1

61

3.05

8

c. Reduce public money tied up in capital investment

33

3.48

6

11

2.36

15

61

3.58

4

d. Cap the final service costs

34

3.26

10

11

3.55

6

61

3.56

5

e. Facilitate creative and innovative approaches

34

3.74

2

11

4.36

2

61

3.36

7

f. Reduce the total project cost

33

3.09

14

11

3.45

7

61

2.97

10

g. Save time in delivering the project

34

3.21

13

11

4.18

3

61

2.75

12

h. Transfer risk to the private partner

34

3.65

4

11

3.36

9

61

3.98

1

i. Reduce public sector administration costs

33

3.39

8

11

2.82

12

61

2.53

14

j. Benefit to local economic development

34

3.56

5

11

3.18

11

61

2.62

13

k. Improve buildability

33

3.24

11

11

3.73

5

61

3.03

9

l. Improve maintainability

34

3.32

9

11

4.18

4

61

3.36

6

m. Technology transfer to local enterprise

34

2.94

15

11

3.18

10

61

1.82

15

n. Non recourse or limited recourse to public funding

34

3.21

12

11

2.64

14

61

3.61

3

o. Accelerate project development

34

3.47

7

11

3.36

8

61

2.95

11

N = Number of survey respondents

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7.3.2 Ranking of negative factors for adopting PPP

Thirteen negative factors for adopting PPP were rated by the survey respondents (Table 7.2). The top three negative factors ranked by Hong Kong respondents included: (1) Lengthy delays because of political debate; (2) Lengthy delays in negotiation; and (3) Very few schemes have actually reached the contract stage (aborted before contract).

In Hong Kong, public works projects are often delayed and complicated by the need for public consultation; hence it is not surprising that “Lengthy delays because of political debate” was the highest negative factor ranked by the Hong Kong respondents. This problem is well known for causing projects to be held back.

For example, the West Kowloon Cultural District project has been cited as a typical example in Hong Kong where political interference has caused the project to be on hold for many years (Chan et al., 2007a). Initially there was much political debate within the Legislative Council as to whether this project should proceed as a PPP, especially whether the whole project with an estimated cost of US$25 billion (So, 2007) should be handled by one single consortium instead of half a dozen number of consortia each sharing the pie. The local government was also alleged to be unclear of the long-term policy and objectives for this cultural development project, causing much criticism from the general public. In Australia and the United Kingdom (Li, 2003) this factor was

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ranked of mediocre importance only at seventh and sixth position respectively, showing that they do not face the similar problem that Hong Kong does.

Ranked second by respondents in Hong Kong and the United Kingdom (Li, 2003) was “Lengthy delays in negotiation”. Australia also ranked this factor relatively high at fourth place. This finding has shown that “Lengthy delays in negotiation” are typical for PPP projects irrespective of geographical locations. Due to the size and complexity of PPP projects the procurement process has been know to be lengthy. This can be said to be a typical feature of PPP projects, therefore only projects that are of appropriate value and worthiness should consider PPP.

The third negative factor as ranked by Hong Kong respondents was “Very few schemes have actually reached the contract stage (aborted before contract)”. The high ranking of this factor coincides with the previous argument about political debate in Hong Kong. As a result some projects had to be aborted due to political disagreement. This negative factor was ranked last in Australia and Li’s (2003) survey.

The experience of the

Australians and the British in conducting PPP projects is much more plentiful, in that the respondents did not believe that few schemes would reach the contract stage. Without doubt they are much more experienced and hence more confident in launching PPP projects.

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Another observation manifested that “Less employment positions” and “Reduce the project accountability” were both ranked within the bottom three of the rankings for all three jurisdictions. The respondents shared the same views on the negative factors they believed to be of less threat. The low ranking of “Less employment positions” has shown that employment has not been affected irrespective of how projects are procured. The main purpose of introducing PPP projects is not to “Reduce the project accountability”; hence it was logical that all respondents perceived that this negative factor was less significant. Therefore these two negative factors were thus common for PPP projects irrespective of the geographical differences.

For the negative factors rated by respondents in Hong Kong the mean values ranged from 2.79 to 3.82. The variation in responses was 1.03. On the other hand, in Australia and the United Kingdom it was found that the mean values obtained ranged from 1.36 to 3.45 and 1.71 to 3.86 respectively. The variations in responses were 2.09 for Australia and 2.15 for the United Kingdom. Both variations were higher than that for Hong Kong. It was also found that in general these negative factors were rated higher by Hong Kong respondents. It can thus be interpreted that the Australian and British respondents found that these negative factors were less of a challenge. This finding is logical as discussed previously Australia and the United Kingdom are much more experienced in delivering PPP projects compared to Hong Kong.

Similarly to the rating of the attractive factors, the respondents were also asked to rate the thirteen negative factors according to a Likert scale from 1 - 5 (1 = Least Important and 5 203

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= Most Important), therefore a value above “3” would represent that the negative factor is of importance. The results show that in Hong Kong there were two negative factors below a score of “3”. On the other hand in Australia and the United Kingdom there were ten and eleven respectively below “3”.

Again this consolidates the fact that the

Australians and British are much more confident at conducting PPP projects, hence they are less conservative. The two negative factors ranked below “3” for Hong Kong were the ones discussed previously that were ranked low by all three sets of respondents. These negative factors were “Less employment positions” and “Reduce the project accountability”, which both scored only 2.79.


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Table 7.2


Mean scores and rankings for the negative factors of PPP Hong Kong

Negative Factors

Australia

The United Kingdom (Li, 2003)

N

Mean

Rank

N

Mean

Rank

N

Mean

Rank

a. Reduce the project accountability

34

2.79

12

11

2.00

11

61

1.90

11

b. High risk relying on private sector

34

3.09

10

11

2.27

8

61

2.22

10

c. Very few schemes have actually reached the contract stage (aborted before contract)

34

3.41

3

11

1.36

13

61

1.71

13

d. Lengthy delays because of political debate

34

3.82

1

11

2.55

7

61

2.48

6

e. Higher charge to the direct users

34

3.26

9

11

2.18

10

61

2.33

8

f. Less employment positions

34

2.79

13

11

1.64

12

61

1.81

12

g. High participation costs

34

3.35

5

11

3.27

2

61

3.53

3

h. High project costs

34

3.03

11

11

2.18

9

61

2.43

7

i. A great deal of management time spent in contract transaction

34

3.29

6

11

2.55

5

61

3.86

1

j. Lack of experience and appropriate skills

33

3.27

8

11

3.45

1

61

2.78

5

k. Confusion over government objectives and evaluation criteria

34

3.41

4

11

3.00

3

61

2.81

4

l. Excessive restrictions on participation

34

3.29

7

11

2.55

6

61

2.32

9

m. Lengthy delays in negotiation

33

3.45

2

11

2.91

4

61

3.68

2

*N = Number of survey respondents

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7.3.3 Agreement of the survey respondents

As shown in Table 7.3, the Kendall’s coefficient of concordance (W) for the rankings of attractive factors was 0.071 and 0.325 for Hong Kong and Australia respectively. The computed W’s were significant with p = 0.008 and 0.000 respectively. As the number of attributes considered were above seven, as mentioned previously the Chi-square value would be referred to rather than the W value. According to the degree of freedom, the critical value of Chi-square was 23.680 for both groups (Hong Kong and Australia) the computed Chi-square values were all above the critical value of Chi-square (29.907 and 50.076 respectively). Therefore the assessment by the respondents within each group on their rankings of attractive factors is proved to be consistent. This finding ensures that the completed questionnaires were valid for further analysis.

Table 7.3 Results of Kendall’s concordance analysis for the attractive factors of PPP Hong Kong

Australia

30

11

Kendall's coefficient of concordance (W)

0.071

0.325

Chi-square value

29.907

50.076

Critical value of Chi-square

23.680

23.680

Degree of freedom (df)

14

14

Asymptotic significance

0.008

0.000

Number of survey respondents

Note: Only 30 out of 34 responses from Hong Kong were suitable for subsequent

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statistical analyses.

Table 7.4 shows the Kendall’s concordance analysis for the negative factors of PPP. The respective W for Hong Kong and Australia was 0.094 and 0.323.

The number of

attributes were also above seven hence the Chi-square value was referred to. The critical value of Chi-square was 21.030 for both groups. The computed Chi-square values were both higher at 35.968 and 42.591 for Hong Kong and Australia respectively. Hence the assessment by the respondents within each group on their rankings of negative factors is proved to be consistent. And this finding also ensures that the completed questionnaires were valid for further analysis.

Table 7.4 Results of Kendall’s concordance analysis for the negative factors of PPP Hong Kong

Australia

32

11


0.094

0.323

Chi-square value

35.968

42.591


21.030

21.030


12

12


0.000

0.000


Note: Only 32 out of 34 responses from Hong Kong were suitable for subsequent statistical analyses.

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7.3.4 The suitability of adopting PPP

With the identification of attractive and negative factors of PPP, these could be identified as checklists for assessing the suitability/feasibility of using PPP. If the attractive factors are prevailing in a given project scenario, the use of PPP will be more positive. Conversely, if the negative factors are dominant PPP might be considered as unsuitable.

Taking the recent Kai Tak cruise terminal project as an example, the fifteen attractive factors and thirteen negative factors were used as checklists to assess the suitability of adopting PPP. The Kai Tak site in Hong Kong is the exact location that the old airport had been for 73 years (Encyclopedia.com, 2009). With the construction of the new, larger and more advanced airport at Chep Lap Kok on Lantau Island of Hong Kong, the Kai Tak airport was replaced in 1998. Since the Kai Tak site has been vacant, there has been on-going debate on how this valuable city centered piece of land could be utilised.

Obviously, in a populated city like Hong Kong, residential development is the foremost attraction to the private sector developers. But due to previous criticisms from the general public in projects such as the Cyberport, the local government has been keen to avoid the interpretation that the public and private sectors show collusion. The Cyberport project is a technological park on Hong Kong Island developed by a single developer on condition that they were given the adjacent property rights. The developer concerned

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made unbelievably high profits from the selling of these properties. Unfortunately, less attention has been given to the Cyberport project (Tsang, 2008).

The local government will be spending HK$7.2 billion to design and build the Kai Tak cruise terminal.

The facilities will be leased to a private operator whilst the local

government retains ownership of the site and terminal. The first berth is anticipated to be in 2013 (Cheung et al., 2008). Although it has been confirmed that this project will be delivered by more traditional methods, it’s suitability to adopt PPP is still analysed according to the checklist of attractive and negative factors presented in this chapter. Table 7.5 shows a checklist of the attractive and negative factors which can be recognised from this project. The results show that nine out of the fifteen attractive factors were observed for the Kai Tak cruise terminal project. This represents 60% of the attractive factors which include: b. Provide an integrated solution (for public infrastructure / services); d. Cap the final service costs; e. Facilitate creative and innovative approaches; h. Transfer risk to the private partner; i. Reduce public sector administration costs; j. Benefit to local economic development; k. Improve buildability; l. Improve maintainability;

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m. Technology transfer to local enterprise; and

On the other hand, nine amongst the thirteen negative factors were observed for this project representing 69%, these include: b. High risk relying on private sector; d. Lengthy delays because of political debate; e. Higher charge to the direct users; g. High participation costs; h. High project costs; i. A great deal of management time spent in contract transaction; k. Confusion over government objectives and evaluation criteria; l. Excessive restrictions on participation; and m. Lengthy delays in negotiation.

In this case, percentage wise the results show that the negative factors of PPP are more dominant than the attractive factors of PPP. Hence, the use of traditional procurement methods could be regarded as more suitable than PPP for the Kai Tak cruise terminal project. This analysis was conducted according to the author’s own perception of the project only to demonstrate how the checklist could be used. The accuracy of this current assessment needs further refinement before it can be relied on. For examples, further study should be carried out to establish the relative weighting of each factor. The 210

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intensity of each factor may be different, this will in turn effect whether the attractive or negative factors are more dominant. Hence it is important that these are identified before the checklist is used in real life.

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Table 7.5


Checklist of attractive and negative factors for the Kai Tak cruise terminal project

Attractive Factors a. Solve the problem of public sector budget restraint b. Provide an integrated solution (for public infrastructure / services) c. Reduce public money tied up in capital investment

3

3 3

d. Cap the final service costs e. Facilitate creative and innovative approaches f. Reduce the total project cost g. Save time in delivering the project h. Transfer risk to the private partner i. Reduce public sector administration costs j. Benefit to local economic development k. Improve buildability l. Improve maintainability m. Technology transfer to local enterprise n. Non recourse or limited recourse to public funding o. Accelerate project development

3 3 3 3 3 3

Total count Total %

Negative Factors a. Reduce the project accountability b. High risk relying on private sector

3

c. Very few schemes have actually reached the contract stage (aborted before contract) d. Lengthy delays because of political debate e. Higher charge to the direct users f. Less employment positions g. High participation costs h. High project costs i. A great deal of management time spent in contract transaction j. Lack of experience and appropriate skills k. Confusion over government objectives and evaluation criteria l. Excessive restrictions on participation m. Lengthy delays in negotiation

9 60

Total count Total %

212

3 3 3 3 3 3 3 3

9 69

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7.4


Chapter 7 Summary

This chapter presents the findings of an empirical questionnaire survey undertaken in Hong Kong, Australia and the United Kingdom to study the attractive and negative factors of conducting PPP projects. The survey respondents were asked to rate fifteen attractive factors and thirteen negative factors. The results gained from these three administrative regions were analysed and compared.

The results found that the top three attractive factors in Hong Kong were (1) Provide an integrated solution (for public infrastructure / services); (2) Facilitate creative and innovative approaches; and (3) Solve the problem of public sector budget restraint. These could be interpreted as situations where the use of PPP would be suitable. Similar results were found in the survey conducted in Australia.

Efficiency related factors

appeared to be more attractive to the respondents from Hong Kong and Australia, whereas in the United Kingdom economic related factors were rated higher. The finding for Hong Kong coincides with the fact that the local government has been enjoying a budget surplus in recent years, and has therefore not been pressured for delivering public projects with their own financial reserves.

The top three negative factors ranked by the respondents from Hong Kong were: (1) Lengthy delays because of political debate; (2) Lengthy delays in negotiation; and (3) Very few schemes have actually reached the contract stage (aborted before contract).

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These could be interpreted as situations where the use of PPP would be less desirable. The top negative factor was ranked of mediocre importance by the Australians and British, showing that they do not face the same concerns as Hong Kong. In Hong Kong this negative factor has been shown to be a problem as demonstrated by the West Kowloon Cultural District project which was delayed mainly due to political debate. The second negative factor ranked in Hong Kong was also ranked high by the Australians and British. This negative factor was therefore seen to be important irrespective of the geographical differences and could be considered a negative factor specifically for PPP projects. The third negative factor was ranked bottom by the Australians and British showing a high level of controversy to the ranking in Hong Kong. This factor appears to be more of a concern to the Hong Kong respondents. Some delayed projects as discussed previously are causes towards the low confidence experienced. Whereas in Australia and the United Kingdom, they are much more experienced at conducting PPP projects and hence more confident with this type of procurement.

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Implementing Public Private Partnership Projects

CHAPTER 8 IMPLEMENTING PUBLIC PRIVATE PARTNERSHIP PROJECTS 8.1 8.2 8.3



Factors Contributing to Successful PPP Projects 8.4

Enhancing Value for Money in PPP Projects 8.5

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Chapter 8 Summary

Chapter 8

8.1



This chapter studies the reasons, success factors and value for money measures behind Public Private Partnership (PPP) projects. The findings discussed were obtained from the same questionnaire survey as described in Chapter 7.

8.2


This section presents the findings of a study to investigate the reasons for implementing PPP projects. The same questionnaire survey described in Chapter 7 was used to obtain data. The survey respondents were asked to rate the importance of nine identified reasons for implementing PPP projects.

The reasons for implementing PPP projects were assessed from different perspectives of the Hong Kong, Australia and the United Kingdom (results obtained by Li (2003) from his survey) respondent groups.

The means for each administrative system were

calculated and ranked in descending order of importance as shown in Table 8.1.

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Table 8.1


Mean scores and rankings of the reasons for implementing PPP projects

Reasons

Hong Kong

Australia

United Kingdom (Li, 2003)

N

Mean

Rank

N

Mean

Rank

N

Mean

Rank

a. Economic development pressure demanding more facilities

33

3.48

2

11

3.64

2

61

3.34

2

b. Political pressure

33

2.79

9

11

2.45

8

61

3.24

4

c. Social pressure of poor public facilities

33

2.88

8

11

3.09

5

61

3.12

5

d. Private incentive

32

3.56

1

11

3.09

4

61

2.57

9

e. Shortage of government funding

33

3.24

6

11

2.64

7

61

3.9

1

f. Inefficiency because of public monopoly and lack of competition

33

3.33

4

11

3.09

3

61

2.98

6

g. High quality of service required

33

3.42

3

11

3.91

1

61

2.7

7

h. Avoid public investment restriction

33

2.97

7

11

2.18

9

61

3.31

3

i. Lack of business and profit generating skill in the public sector

32

3.31

5

11

2.82

6

61

2.62

8

* N = Number of survey respondents

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As shown in Table 8.2, the Kendall’s coefficient of concordance (W) for the rankings of reasons for implementing PPP projects was 0.076 and 0.239 for Hong Kong and Australia respectively. The computed W’s for both were significant with p = 0.000. As the number of attributes considered were above seven, as mentioned previously the Chi-square value would be referred to rather than the W value. According to the degree of freedom, the critical value of Chi-square was 15.510 for both groups (Hong Kong and Australia) the computed Chi-square values were all above the critical value of Chi-square (18.943 and 21.042 respectively). Therefore the assessment by the respondents within each group on their rankings of reasons for implementing PPP projects is proved to be consistent. This finding ensures that the completed questionnaires were valid for further analysis.

Table 8.2

Results of Kendall’s concordance analysis of the reasons for implementing PPP projects Hong Kong

Australia

31

11


0.076

0.239

Chi-square value

18.943

21.042


15.510

15.510


8

8


0.015

0.007


Note: Only 31 out of 34 responses from Hong Kong were suitable for subsequent statistical analyses.

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8.2.2 Ranking of the reasons for implementing PPP projects

As in Li’s questionnaire, a total of nine reasons for implementing PPP projects were rated by the respondents. The top three reasons ranked in Hong Kong included: (1) Private incentive; (2) Economic development pressure demanding more facilities; and (3) High quality of service required.

The top reason for implementing PPP projects ranked by respondents from Hong Kong was “Private incentive”.

Obviously practitioners round the world can foresee the

advantages of involving the private sector into conducting public works projects. The private sector can add value to these projects in many ways such as financially, via expertise, innovation, risk sharing and above all motivation. This finding has indicated that the Hong Kong respondents felt that the main reason for implementing public works projects by PPP is to acquire the added value from the private sector. In Australia and the United Kingdom this reason for implementing PPP projects was ranked lower at fourth and ninth place respectively, indicating that those respondents did not feel so strongly to involve the private sector for their added value.

Ranked second by respondents in Hong Kong, Australia and the United Kingdom was “Economic development pressure demanding more facilities”.

The similar ranking

pattern across the three survey groups represents that the importance of this reason for implementing PPP projects is applicable irrespective of geographical differences. Hence

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all survey respondents felt that PPP projects are implemented due to economic pressure to provide more public facilities. The similar ranking pattern could also be a reflection of the real life situation that the survey respondents have observed.

In Hong Kong

particularly there has been a growing phase of rapid infrastructure development, which the government has opted to use the PPP scheme. These projects include the Shatin to Central rail link and the Kwun Tong rail extension. The new metro line will consist of nine stations. Construction will start in 2010 and the two phases of the line will be completed by 2015 and 2019 (Information Services Department, 2008b).

The third reason for implementing PPP projects ranked by respondents from Hong Kong was “High quality of service required”. Being an international city, maintaining high quality in services is important. This feeling was also reflected by the survey respondents, as they felt that this is also a reason for implementing PPP projects. In Australia and the United Kingdom this reason for implementing PPP projects was ranked first and seventh respectively. The findings show that the Australians felt similarly but the British ranked this reason for implementing PPP projects much lower. Although so, the survey with the British respondents was conducted a few years ago, hence it is anticipated that with the increasing projects due to be carried out before the Olympics in 2012, the respondents might have a different view if this survey was conducted today.

In Australia, the respondents ranked “Inefficiency because of public monopoly and lack of competition” third. Due to the size, complexity, challenges and long concession period of PPP projects, they tend to be limited to be conducted by only those very large private

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sector companies. These companies will normally possess sufficient finance, expertise and skills to implement PPP projects. Therefore for those who are not involved with the PPP process they may feel that public monopoly and lack of competition exists. This occurrence is often partially true but then only those capable parties will possess the power to participate with PPP projects.

Ranked first by British respondents was “Shortage of government funding”. One of the main reasons for the rise of PPP/Private Finance Initiative (PFI) projects in the United Kingdom was due to financial resources from the private sector. The PPP/PFI method was first adopted at a time when the British government was struggling to provide for public facilities and services (Zhang, 2001).

By involving the private sector the

government was able to continue delivering public infrastructure. As a result a heavy emphasis on finance has always been associated to PPP/PFI projects especially in the early days of implementation. Along with other benefits as a result of involving the private sector, finance is often not the only element considered when delivering public projects these days though.

Third in the United Kingdom rank was “Avoid public investment restriction”. Similar to the reason discussed previously, this reason holds a strong emphasis on the financial element of the project. Again it must be considered that the survey conducted with British respondents was carried out a few years ago. It is likely that when the British government were still in a tight budgetary condition they would also be more likely to enforce more budgetary restrictions before approving projects. Hence it is unsurprising

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for this reason to be ranked highly by the British respondents.

The mean values of the reasons for implementing PPP projects as rated by Hong Kong respondents ranged from 2.79 to 3.56. This observation has reflected that the variation in their responses are relatively small, only 0.77 for Hong Kong. In Australia and the United Kingdom the means ranged from 2.18 to 3.91 and 2.57 to 3.90 respectively. The corresponding differences in means were 1.73 and 1.33 respectively. The differences in means were much higher for the survey conducted in Australia and the United Kingdom compared to Hong Kong.

As the respondents were asked to rate the nine reasons for implementing PPP projects according to a Likert scale from 1 to 5 (1 = Least Important and 5 = Most Important), a value above “3” would represent that the reason for implementing PPP projects is of importance. Amongst the reasons for implementing PPP projects only three were ranked below “3” in the Hong Kong rank. These reasons for implementing PPP projects were “Political pressure”, “Social pressure of poor public facilities” and “Avoid public investment restriction” which scored 2.79, 2.88 and 2.97 respectively.

For Australia and the United Kingdom, each had four reasons for implementing PPP projects rated below “3”. In Australia, two of these were the same as those for Hong Kong (“Political pressure” and “Avoid public investment restriction” with scores of 2.45 and 2.18 respectively).

The other two in Australia were “Shortage of government

funding” and “Lack of business and profit generating skill in the public sector” which

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scored 2.64 and 2.82 respectively. On the other hand in the United Kingdom none were the same as those in Hong Kong but one was the same as Australia (“Lack of business and profit generating skill in the public sector” which scored 2.62). The other three reasons in the United Kingdom were “Private incentive”, “Inefficiency because of public monopoly and lack of competition” and “High quality of service required” which scored 2.57, 2.98 and 2.7 respectively.

The reason for implementing PPP projects “Political pressure” was rated low by respondents in both Hong Kong and Australia. Hood and McGravey (2002) claimed that the PPP development would remain a major political issue. Relatively speaking, Hong Kong and Australia have less history of PPP implementation compared to the United Kingdom. Also, they faced less political pressure when the concept was first introduced, as the practice has been well documented in other developed countries (such as the United Kingdom) and the political influence of trade unions is minimal. Hence this reason for implementing PPP projects was not rated highly.

Also rated lowly by respondents from Hong Kong and Australia was “Avoid public investment restriction”. Again this reason for implementing PPP projects was not rated highly as both groups of survey respondents did not believe that the public were under heavy investment restrictions.

Rated low by only the Hong Kong respondents was “Social pressure of poor public facilities”. The Hong Kong respondents did not feel that the government has been under

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pressure from the society. Hence they rated this reason for implementing PPP projects lowly. This finding could imply that the respondents felt happy towards the current standard of public facilities in Hong Kong.

Rated lowly by the Australian respondents only was “Shortage of government funding”. Although financial drive may have once been the main reason for involving private sector participation, this is not the case anymore. In Australia, the state governments have noticed the benefits associated with implementing PPP projects and have developed a more revolutionary process.

The state governments are capable of delivering these

services themselves but instead they choose to involve the private sector to achieve added value from the private sector for particular public projects.

Rated lowly by the Australian and British respondents was “Lack of business and profit generating skill in the public sector”, again the Australians and the British have a much longer history in implementing PPP projects hence their skills in this area are much more advanced.

As a result the public sector has acquired sufficient experience and

competency to deliver these projects well.

Therefore the respondents felt that

incapability of the public sector to deliver public projects was not the case.

The British respondents rated “Private incentive” lowly. This contradicts with the finding achieved from the Hong Kong respondents. The public sector of the United Kingdom is already well experienced at conducting PPP projects, but they realise their job is to deal with the administrative procedures rather than act as the developer.

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Also, rated lowly in the United Kingdom survey was “Inefficiency because of public monopoly and lack of competition” and “High quality of service required”. Again the experience of the public sector implies that these can be achieved without involving the private sector.


8.2.3 Section 8.2 Summary

The findings have shown that in general those reasons ranked high by respondents from Hong Kong and Australia focused on improving the overall performance of public projects whereas those that were rated high by the British respondents focused on the financial aspect of the projects. Ranked in the top three by Hong Kong respondents was “Private incentive”; “Economic development pressure demanding more facilities”; and “High quality of service required”. In Australia and the United Kingdom both groups of respondents also ranked their second reason the same as Hong Kong. In addition, the Australians also ranked the third reason in Hong Kong first; and “Inefficiency because of public monopoly and lack of competition” third. In the United Kingdom the first and third reasons ranked by the respondents was “Shortage of government funding” and “Avoid public investment restriction” respectively.

The reason “Private incentive” was attractive due to the added value which could be

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applied to public works projects by the private sector. One of the main reasons to adopt PPP is that the public works project can benefit from the private sector’s expertise, innovation, motivation and experience. Similar for many governments around the world “Economic development pressure demanding more facilities” is common. Even though governments such as Hong Kong are capable to finance their own projects, there are also other areas in society where they need to support. So by using money from the private sector, governments can utilise their resources much more effectively. In international cities particularly, “High quality of service required” to maintain their status and competition is common. The size and complexity of PPP projects often limit only certain large private sector parties therefore “Inefficiency because of public monopoly and lack of competition” is often seen. Many governments first started to implement PPP projects due to “Shortage of government funding”. Similarly, when the government is under tight budget controls implementing PPP projects could also “Avoid public investment restriction”.

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8.3


Factors Contributing to Successful PPP Projects

This section presents the findings of a study to investigate the factors contributing to successful PPP projects. The same questionnaire survey was used to obtain data. The survey respondents were asked to rate eighteen factors which contribute to delivering successful PPP projects.

The factors that contribute to the success of PPP projects were assessed from different perspectives of the Hong Kong, Australia and the United Kingdom (results obtained by Li (2003) from his survey) respondent groups. The means for each administrative system were calculated and ranked in descending order of importance as shown in Table 8.3.

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Table 8.3


Mean scores and rankings for the factors that contribute to the success of PPP projects

Success Factors

Hong Kong

a. Stable macro-economic condition b. Favourable legal framework c. Sound economic policy d. Available financial market e. Multi-benefit objectives f. Appropriate risk allocation and risk sharing g. Commitment and responsibility of public and private sectors h. Strong and good private consortium i. Good governance j. Project technical feasibility k. Shared authority between public and private sectors l. Political support m. Social support n. Well organised and committed public agency o. Competitive procurement process (enough potential bidders in the process) p. Transparency procurement process (process is made open and public)

q. Government involvement by providing guarantee r. Thorough and realistic assessment of the cost and benefits * N = Number of survey respondents

228

N 34 34 34 34 34 34 34 34 34 34 34 34 34 34 34 33 34 34

Mean 3.85 4.06 3.74 3.71 3.50 3.85 3.97 3.91 3.68 3.56 3.41 3.76 3.44 3.65 3.68 3.67 3.62 3.65

Rank 4 1 7 8 16 5 2 3 10 15 18 6 17 12 9 11 14 13

Australia N 11 11 11 11 10 11 11 11 11 11 10 11 11 11 11 11 10 11

Mean 4.18 4.27 4.09 4.18 4.20 4.64 4.91 4.64 4.45 4.36 3.70 4.27 3.36 4.27 4.27 4.09 2.40 4.00

Rank 12 7 13 11 10 2 1 3 4 5 16 6 17 8 9 14 18 15

United Kingdom (Li, 2003) N Mean Rank 61 3.19 15 61 3.63 9 61 3.19 13 61 4.04 3 61 3.19 14 61 4.05 2 61 3.98 4 61 4.11 1 61 3.72 8 61 3.79 6 61 2.98 17 61 3.56 11 61 2.81 18 61 3.74 7 61 3.37 12 61 3.6 10 61 3.16 16 61 3.95 5

Chapter 8



As shown in Table 8.4, W for the rankings of factors that contribute to the success of PPP projects was 0.061 and 0.270 for Hong Kong and Australia respectively. The computed W’s were significant with p = 0.008 and 0.004 respectively. Again as the number of attributes considered were above seven, as mentioned previously the Chi-square value would be referred to rather than the W value. According to the degree of freedom, the critical value of Chi-square was 27.590 for both groups (Hong Kong and Australia), the computed Chi-square values were all above the critical value of Chi-square (34.045 and 36.757 respectively). Therefore the assessment by the respondents within each group on their rankings of success factors is proved to be consistent. This finding ensures that the completed questionnaires were valid for further analysis.

Table 8.4

Results of Kendall’s concordance analysis for the factors that contribute to the success of PPP projects Hong Kong

Australia

33

8


0.061

0.270

Chi-square value

34.045

36.757


27.590

27.590


17

17


0.008

0.004


Note: Only 33 out of 34 responses from Hong Kong and 8 out of 11 responses from Australia were suitable for subsequent statistical analyses.

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8.3.2 Ranking of factors that contribute to the success of PPP projects

Eighteen success factors for adopting PPP were rated by the respondents. Figure 8.1 illustrates the relationship of the top five success factors ranked in Hong Kong with their ranking positions in Australia and the United Kingdom. These success factors included: (1) Favourable legal framework; (2) Commitment and responsibility of public and private sectors; (3) Strong and good private consortium; (4) Stable macro-economic condition; and (5) Appropriate risk allocation and risk sharing.

The top success factor ranked by respondents from Hong Kong was “Favourable legal framework”.

On the contrary respondents from Australia and the United Kingdom

ranked this success factor of medium importance only, at seventh and ninth position respectively. This finding has implied that the Australian and British respondents were not particularly concerned about their existing legal framework, which is already well established to handle PPP projects.

On the contrary, respondents in Hong Kong felt that the legal framework is the most important success factor. As mentioned by the National Treasury PPP Unit of South Africa (2007), an independent, fair and efficient legal framework is a key factor for successful PPP project implementation. Sufficient legal resources at reasonable costs should be available to deal with the amount of legal structuring and documentation

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required. A transparent and stable legal framework would help to make the contracts and agreements bankable.

An adequate dispute resolution system would help to ensure

stability in the PPP arrangements. Appropriate governing rules, regulations and reference manuals related to PPP have been well established in some developed countries (e.g. United Kingdom, Australia, Canada, South Africa, etc.) to facilitate the effective application of PPP procurement approach.

The second success factor ranked by Hong Kong respondents was “Commitment and responsibility of public and private sectors”.

This success factor was also ranked

importantly by the Australians and British at first and fourth place respectively. This success factor was ranked high by all respondent groups irrespective of geographical locations. To secure the success of PPP projects, both the public and private sectors should bring their complementary skills and commit their best resources to achieve a good relationship (National Audit Office, 2001).

Ranked third by respondents in Hong Kong and Australia was “Strong and good private consortium”.

Respondents from the United Kingdom felt even stronger on the

importance of this success factor and ranked it top. This finding again has shown that this success factor is seen to be highly important to the success of PPP projects irrespective of geographical locations.

The government in contracting out the PPP

projects should ensure that the parties in the private sector consortium are sufficiently competent and financially capable of taking up the projects. This suggests that private companies should explore other participants' strengths and weaknesses and, where

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appropriate, join together to form consortia capable of synergising and exploiting their individual strengths. Good relationship among partners is also critical because they all bear relevant risks and benefits from the co-operation (Abdul-Rashid et al., 2006; Birnie, 1999; Corbett and Smith, 2006; Jefferies et al., 2002; Kanter, 1999; Tam, et al. 1994; Tiong, 1996; Zhang, 2005a).

The fourth success factor ranked by respondents from Hong Kong was “Stable macroeconomic condition”.

On the contrary respondents from Australia and the United

Kingdom ranked this success factor relatively low amongst the eighteen success factors rated.

In these countries this success factor was ranked only twelve and fifteenth

respectively. This success factor was therefore seen as quite important in Hong Kong but rather unimportant in Australia and the United Kingdom.

In a stable macro-economic environment the market is more predictable, hence lowering risks such as interest rate, exchange rate, employment rate, inflation rate, etc. It is very important to reduce risks and enable a reasonable investment return for private investors, especially in the emerging PPP market like Hong Kong. For projects where the major source of revenue to the private sector is generated from direct tariffs levied on users, there are revenue risks that can go beyond the control of the private sector like, for example, future usage level and permitted tariff charges.

There may also be unforeseen risks during the course of the project life. To ensure project economic viability, the government may consider some forms of government

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guarantees; joint investment funding or supplemental periodic service payments to allow the private sector to cover the project costs and earn reasonable profits and investment returns. At the same time, the government should take due consideration of the private sector’s profitability requirements in order to have stable arrangements in PPP projects. Alternative sources of income and financing like property development opportunities along the railway can be sought to bridge the funding gap for private investors (AbdulRashid et al., 2006; Corbett and Smith, 2006; Li et al., 2005c; Nijkamp et al., 2002; Qiao et al., 2001; Tam et al., 1994; Tiong, 1996; Zhang, 2005a).

The fifth success factor ranked by Hong Kong respondents was “Appropriate risk allocation and risk sharing”. Respondents from Australia and the United Kingdom both ranked this success factor second, showing again that irrespective of geographical differences all groups of respondents ranked this success factor importantly. Although so the findings showed that the respondents from Hong Kong ranked this success factor slightly below the others.

This could be due to the fact the Hong Kong has had

experience with different procurement systems that entail different risk allocation models, thereby making this success factor relatively less critical in terms of its contribution to project success.

A core principle in PPP arrangement is the allocation of risk to the party best able to manage and control it (Efficiency Unit, 2003a). Logically, the government would prefer to transfer risks associated with asset procurement and service delivery to the private sector participants, who are generally more efficient and experienced in managing them.

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But the government should be reasonable to take up risks that are beyond the control of private sector participants. In all cases, the government should ensure there are measures in place to manage the risk exposure rather than leaving it open to the private sector. Likewise before committing to the projects, the private sector participants should fully understand the risks involved and should be prudent in pricing and managing the risks appropriately (Grant, 1996; Qiao et al., 2001; Zhang, 2005a).

The results also found that the success factors “Shared authority between public and private sectors” and “Social support” were ranked in the bottom three by all groups of respondents. These success factors were therefore seen to be least important compared to the others. Although no explanation can be provided for why these success factors were ranked particularly lower, it can be assumed that the other success factors were seen to be more important. This perception was shown to be true for all survey locations.

The mean values for the success factors as rated by Hong Kong respondents ranged from 3.41 to 4.06. This observation has reflected that the variation in their responses are relatively small, only 0.65 for Hong Kong. In Australia and the United Kingdom the means ranged from 2.40 to 4.91 and 2.81 to 4.11 respectively.

The corresponding

differences in means were 2.51 and 1.30 respectively. The differences in means were shown to be much higher for the survey conducted in Australia and the United Kingdom compared to Hong Kong. This finding shows that the Hong Kong respondents rated the eighteen success factors much more similarly, whereas in Australia and the United Kingdom the respondents showed a much larger variation.

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As the respondents were asked to rate the eighteen success factors according to a Likert scale from 1 to 5 (1 = Least Important and 5 = Most Important), a value above “3” would represent that the success factor is of importance. Amongst the success factors none were ranked below “3” in the Hong Kong rank. In Australia and the United Kingdom only one and two success factors respectively were ranked below a score of “3”. Therefore, all three groups of respondents concurred that the identified factors were important.


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Figure 8.1


Australia

Top 5 rank for success factors of PPP in Hong Kong

The United Kingdom

(7)

(1) Favourable legal framework

(9)

(1)

(2) Commitment and responsibility of public and private sectors

(4)

(3)

(3) Strong and good private consortium

(1)

(12)

(4) Stable macro-economic condition

(15)

(2)

(5) Appropriate risk allocation and risk sharing

(2)

Rank relationship between Hong Kong, Australia and the United Kingdom for success factors of PPP

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This section has analysed the perceptions of respondents from Hong Kong, Australia and the United Kingdom on the importance of eighteen factors contributing to successful delivery of PPP projects. The ranking in Hong Kong showed that the top five success factors included: (1) Favourable legal framework; (2) Commitment and responsibility of public and private sectors; (3) Strong and good private consortium; (4) Stable macroeconomic condition; and (5) Appropriate risk allocation and risk sharing.

The top success factor ranked by Hong Kong respondents was ranked with medium importance by respondents from the other two groups; implying that their legal frameworks are already well developed to cater for PPP projects hence they are less concerned on the existing system.

The second, third and fifth success factors were ranked highly by all three groups of respondents, indicating that these success factors were applicable to delivering successful PPP projects irrespective of their geographical locations.

The fourth success factor ranked by Hong Kong respondents was ranked lowly by the other groups of respondents. In Australia and the United Kingdom there is a well established stable macro-economic environment hence the market is much more predictable. Hong Kong on the other hand has experienced dramatic changes since the British to Chinese handover in 1997, hence they are still adjusting to the changes and the

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market is therefore not as stable. As a result a stable macro-economic condition was rated much higher by the Hong Kong respondents. In general, all three groups of respondents concurred that the identified factors were important.

8.4

Enhancing Value for Money in Public Private Partnership Projects

This section presents the findings of a study to investigate the measures that enhance Value for Money (VFM) in PPP projects. The same questionnaire survey was used to obtain data. The survey respondents were asked to rate the importance of eighteen VFM measures in PPP projects.

The VFM measures in PPP were assessed from different perspectives of the Hong Kong, Australia and the United Kingdom (results obtained by Li (2003) from his survey) respondent groups.

The means for each administrative system were calculated and

ranked in descending order of importance as shown in Table 8.5.

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Table 8.5


Mean scores and rankings for the VFM measures in PPP projects

VFM Measures

a. Competitive tender b. Efficient risk allocation (allocating the risk to the party best able to manage it) c. Risk transfer (transferring a substantial amount of risk from the public to the private)

d. Output based specification e. Long-term nature of contracts f. Improved and additional facilities to the public sector g. Private management skill h. Private sector technical innovation i. Optimal use of asset/facility and project efficiency j. Early project service delivery k. Low project life cycle cost l. Low shadow tariffs/tolls m. Level of tangible and intangible benefits to the Users n. Environmental consideration o. Profitability to the private sector p. "Off the public sector balance sheet" treatment q. Reduction in disputes, claims and litigation r. Nature of financial innovation * N = Number of survey respondents

Hong Kong N 34 33 34 34 34 34 34 33 34 34 34 34 34 34 34 34 34 34

239

Mean 3.91 4.18 3.59 3.91 3.65 3.35 3.82 3.82 3.68 3.35 3.47 2.82 3.00 2.97 3.18 3.15 3.09 3.56

Rank 3 1 8 2 7 12 4 5 6 11 10 18 16 17 13 14 15 9

Australia N 11 11 11 11 11 11 11 10 10 11 11 10 11 11 10 11 11 11

Mean 4.27 4.55 2.73 4.27 4.18 4.00 4.27 4.50 4.70 4.00 4.00 3.30 4.00 2.73 3.00 2.36 3.18 3.73

Rank 6 2 17 5 7 11 4 3 1 10 9 13 8 16 15 18 14 12

United Kingdom (Li, 2003) N Mean Rank 61 3.5 6 61 4.02 1 61 3.57 5 61 3.91 2 61 3.78 3 61 3.16 13 61 3.41 7 61 3.28 9 61 3.31 8 61 3.72 4 61 3.24 11 61 2.49 17 61 2.83 15 61 2.38 18 61 2.84 14 61 3.23 12 61 2.81 16 61 3.25 10

Chapter 8



As shown in Table 8.6, W for the rankings of VFM measures was 0.199 and 0.459 for Hong Kong and Australia respectively. The computed W’s for both were significant with p = 0.000. Again as the number of attributes considered were above seven, as mentioned previously the Chi-square value would be referred to rather than the W value. According to the degree of freedom, the critical value of Chi-square was 27.590 for both groups (Hong Kong and Australia) the computed Chi-square values were all above the critical value of Chi-square (108.189 and 54.567 respectively). Therefore the assessment by the respondents within each group on their rankings of VFM measures is proved to be consistent. This finding ensures that the completed questionnaires were valid for further analysis.

Table 8.6

Results of Kendall’s concordance analysis for the VFM measures in PPP projects Hong Kong

Australia

32

7

0.199

0.459

Chi-square value

108.189

54.567


27.590

27.590


17

17


0.000

0.000

Number of survey respondents Kendall's coefficient of concordance (W)

Note: Only 32 out of 34 responses from Hong Kong and 7 out of 11 responses from

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Australia were suitable for subsequent statistical analyses.

8.4.2 Ranking of Value for Money measures in PPP

Eighteen VFM measures in PPP were rated by the respondents. Figure 8.2 illustrates the relationship of the top five VFM measures ranked in Hong Kong with their ranking positions in Australia and the United Kingdom. These VFM measures included: (1) Efficient risk allocation (allocating the risk to the party best able to manage it); (2) Output based specification; (3) Competitive tender; (4) Private management skill; and (5) Private sector technical innovation.

The top VFM measure ranked by the Hong Kong respondents was “Efficient risk allocation (allocating the risk to the party best able to manage it)”. This VFM measure was also ranked top by the Australians and highly at second place by the British, showing that its importance in PPP projects is applicable irrespective of geographical locations.

It is essential for the public client and the private bidders to evaluate all of the potential risks throughout the whole project life. Public and private sector bodies must place particular attention on the procurement process while negotiating contracts for PPP to ensure a fair risk allocation between them. Systematic risk management allows early detection of risks and encourages the PPP stakeholders to identify, analyse, quantify, and

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respond to the risks, as well as take measures to introduce risk mitigation policies (Akbiyikli and Eaton, 2004). A fundamental principle is that risks associated with the implementation and delivery of services should be allocated to the party best able to manage the risk in a cost effective manner.

Second in the Hong Kong and Australia rank was “Output based specification”. This VFM measure was also ranked high by the British at fifth. Besides the top VFM measure ranked by Hong Kong discussed previously, this was the only one also ranked highly by all three administrative regions, indicating again that this VFM measure is applicable to PPP projects irrespective of geographical differences.

Clear specifications can be used to quantify the resources required for a project. When project specifications are more difficult to define the costs that it may incur are also hard to quantify and control. Therefore clearly defined output based specifications can help the government to monitor the private sector’s performance. The private party can also feel more confident to achieve targets and keep control of the project flow in order to enhance their profit margins. Output based specifications can also help the government to use the public sector comparator more effectively in quantifying whether VFM is reached by procuring projects via PPP. Some may feel that output based specifications define too much of the project to allow for private sector innovation, but for example a two lane tunnel can still leave plenty of room for added value from the private sector.

The Hong Kong respondents ranked “Competitive tender” third. In Australia and the

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United Kingdom this VFM measure was ranked with medium importance only, both at sixth position.

This VFM measure was ranked high in Hong Kong reflecting the

respondents’ views of the actual situation of procuring projects.

Hong Kong has only a limited number of contractors who are able to handle large public works projects. Therefore it is often the same groups of contractors who are successful at winning these bids. For those slightly smaller local companies they are often unable to compete with the larger local companies. For international companies based in Hong Kong they may not always wish to spend their resources in Hong Kong. Hence a revolving situation has been formed that there are often few bids received from the private sector. As a result these projects tend to be awarded to the same groups of people. Therefore an evolving situation is that the fewer competitors in the tendering process the more difficult it is to achieve VFM in PPP projects.

In a more competitive bidding environment the private sectors will try all measures to improve their designs in every aspect. In particular in terms of VFM as one of the main reasons that the public sector opt for PPP is to achieve VFM in public works projects. This would therefore be a key reason to choose a particular private party for the government. In a bidding environment that has few competitors the private sector does not need to try so hard to win the contracts, hence VFM may not always be achieved.

Ranked fourth in Hong Kong and Australia was “Private management skill”. This VFM measure was ranked slightly lower by the British at seventh position. The British are

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more experienced in conducting PPP projects hence many of the private sector companies are already equipped with the necessary skills to handle PPP projects. On the other hand in Hong Kong particularly many private companies are not experienced with handling PPP projects and are therefore not equipped with the necessary management skills. The capability of the private sector can determine the successfulness of the PPP project. The success of a PPP project is often associated with its degree of VFM that can be achieved.

The fifth VFM measure in Hong Kong was “Private sector technical innovation”. This was ranked slightly higher by the Australians but lower by the British at third and ninth position respectively. This VFM measure is similar to “Private management skill”, in that it relies on the capability of the private party. Obviously the ability of the private party will determine how successful the PPP project can become in terms of VFM. Then again VFM is the main incentive for governments around the world to involve the private sector in to procuring public works projects.

The mean values for the VFM measures as rated by Hong Kong respondents ranged from 2.82 to 4.18. This observation has reflected that the variation in their responses are relatively small, only 1.36 for Hong Kong. In Australia and the United Kingdom the means ranged from 2.36 to 4.70 and 2.38 to 4.02 respectively. The corresponding differences in means were 2.34 and 1.64 respectively. The differences in means were slightly higher for the survey conducted in Australia and the United Kingdom compared to Hong Kong. This finding shows that the Hong Kong respondents rated the eighteen VFM measures much more similarly, whereas in Australia and the United Kingdom the

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respondents showed a slightly larger variation.

As the respondents were asked to rate the eighteen VFM measures according to a Likert scale from 1 to 5 (1 = Least Important and 5 = Most Important), a value above “3” would represent that the VFM measure is of importance. Amongst the VFM measures only two were ranked below “3” in the Hong Kong rank. These VFM measures were “Low shadow tariffs/tolls” and “Environmental consideration” which scored 2.82 and 2.97 respectively. In Australia and the United Kingdom three and five VFM measures were rated below “3” respectively. Similar to Hong Kong, the other respondent groups also rated “Environmental consideration” below a score of “3” with scores of 2.73 and 2.38 respectively. This finding showed that environment related issues showed the least effect towards enhancing VFM according to all groups of survey respondents.


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Australia

(2)

Figure 8.2

Top 5 rank for VFM measures of PPP in Hong Kong

The United Kingdom

(1) Efficient risk allocation (Allocating the risk to the party best able to manage it)

(1)

(5)

(2) Output based specification

(2)

(6)

(3) Competitive tender

(6)

(4)

(4) Private management skill

(7)

(3)

(5) Private sector technical innovation

(9)

Rank relationship between Hong Kong, Australia and the United Kingdom for VFM measures of PPP

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This section has discussed the VFM measures rated by survey respondents from Hong Kong, Australia and the United Kingdom. The results showed that there were two VFM measures that were ranked highly by all groups of survey respondents.

The first of these which was ranked top in Hong Kong was “Efficient risk allocation (allocating the risk to the party best able to manage it)”. Appropriate risk allocation so that risks are assigned to the party best able to manage it, is believed to reduce the problems encountered in a project. As a result VFM is enhanced due to fewer risks occurring in the project life.

The second VFM measure ranked highly by all was “Output based specification”. A clearly defined output based specification enables the milestones and activities in a project to be much more predictable compared to one without hence the effect towards VFM is larger.

Ranked thirdly in Hong Kong was “Competitive tender”. This measure can create VFM when it exists. The more competition in the tendering process, the more the private sector will try to offer a better package overall for the public sector. In Hong Kong unfortunately there is limited competition between those companies that can handle PPP projects; hence the respondents felt that this VFM measure is relatively more important.

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Ranked fourth and fifth in Hong Kong was “Private management skill” and “Private sector technical innovation”. Both of these VFM measures relate to the ability of the private sector. Obviously the better the private sector’s ability the more chance there is for them to enhance VFM. In Hong Kong the skill of the private sector in conducting PPP projects may not be as experienced as the Australia and the United Kingdom, hence the respondents felt strongly towards these measures.

8.5

Chapter 8 Summary

This chapter has presented the findings from a questionnaire survey looking at the reasons for implementing PPP projects, the success factors of PPP projects and the VFM measures of PPP projects.

The findings showed that the top reason ranked by the survey respondents in Hong Kong was “Private incentive”. Ranked second by all three groups of survey respondents was “Economic development pressure demanding more facilities”. Third in Hong Kong and first in Australia was “High quality of service required”.

The reason “Inefficiency

because of public monopoly and lack of competition” was ranked third by the Australian respondents. And finally ranked first and third by the British respondents was “Shortage of government funding” and “Avoid public investment restriction”. The rankings showed that in general those reasons rated highly in the United Kingdom focused on financial elements whereas those rated highly in Hong Kong and Australia were more related to the

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overall performance of improving public projects.

Amongst the top five success factors ranked by Hong Kong respondents, three were also ranked highly by the Australians and British.

These success factors included:

“Commitment and responsibility of public and private sectors”; “Strong and good private consortium”; and “Appropriate risk allocation and risk sharing”. These success factors were therefore found to be important for contributing to successful PPP projects irrespective of geographical locations. Ranked top in Hong Kong but only with medium importance in the other surveyed jurisdictions was “Favourable legal framework”. Also, ranked within the top five by Hong Kong respondents was “Stable macro-economic condition”, but this success factor was ranked lowly by the Australians and British.

The top five VFM measures ranked by the respondents from Hong Kong included (1) Efficient risk allocation (allocating the risk to the party best able to manage it); (2) Output based specification; (3) Competitive tender; (4) Private management skill; and (5) Private sector technical innovation. The first and second of these VFM measures were also found to be ranked high by the respondents from Australia and the United Kingdom, indicating that these were true irrespective of geographical differences. When the risks are handled well less pitfalls are experienced and as a result VFM is more achievable. Hence an efficient risk allocation is vital in determining whether VFM can be achieved in PPP projects. A clear output based specification can enable a more obvious project design and concept hence minimising the possibility of delivering the wrong product for the user. Therefore this measure is also important in determining whether VFM has been

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achieved for a PPP venture.

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Chapter 9

A Best Practice Framework for Implementing PPP Projects in Hong Kong

CHAPTER 9 A BEST PRACTICE FRAMEWORK FOR IMPLEMENTING PPP PROJECTS IN HONG KONG 9.1

Chapter 9 Introduction 9.2

9.3

The PPP Process

Incorporating the Research Findings into the PPP Process 9.4

Validation of the Framework 9.5

251

Chapter 9 Summary

Chapter 9

9.1



This chapter presents a best practice framework for implementing Public Private Partnership (PPP) projects in Hong Kong. Based on the process for conducting PPP projects presented by the Efficiency Unit of the Hong Kong Special Administrative Region (HKSAR) government, the findings achieved from this research study suggest measures to improve the process at each step. The findings drawn from the literature review, case study analysis, interviews and questionnaire survey are triangulated to enhance the exiting practice of implementing PPP projects in Hong Kong. By using this framework both the public and private sectors can deliver better PPP projects.

9.2

The PPP Process

As this research study aims to develop a best practice framework for implementing PPP projects in Hong Kong, it would be logical to work on the existing governmental framework. Although the Efficiency Unit of the HKSAR government is not involved with conducting PPP projects, as mentioned in previous chapters their involvement in PPP research for Hong Kong within the local government has been inevitable. Hence this study chose to adopt their process as the baseline for conducting PPP projects in Hong Kong.

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Figure 9.1 looks at the steps involved in the PPP process as proposed by the Efficiency Unit (Efficiency Unit, 2008b). A total of 8 steps are defined for this process. The first step is “Mobilisation and development of a business case”. Within this step there are a further eight activities that should occur, these include: 1) Conduct needs analysis, market testing and PPP feasibility study; 2) Establish a project steering committee and designate a contract manager; 3) Establish whether a site is available; 4) Establish what facilities/services are required; 5) Prepare a draft Statement of Requirements; 6) Consider whether

to

accept

proposals

for

enhanced

or

other

additional

commercial

facilities/services on the site; 7) Assess risk; and 8) Prepare public sector comparator and seek policy endorsement.

The second step is “Funding” which involves submitting a bid via the policy bureau for funds through the resource allocation exercise process.

The third step is “Technical assessments, consultation and land requirements”.

It

involves three activities including: 1) Conduct appropriate technical assessments and socio-economic studies; 2) Seek necessary authorities’ agreement on land use; and 3) Conduct consultations with stakeholders, policy committee and legislative council panel.

Step 4 is the “Expression of interest exercise” where an expression of interest exercise is initiated.

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Step 5 looks at the “Policy and funding approvals”. Two activities are involved including: 1) Consult and seek approvals of public works subcommittee of the legislative council; and 2) finance committee of the legislative council. Step 6 is the “Procurement and selection” involving seven activities including: 1) Instruct department of justice on drafting of procurement documents/contract; 2) Finalise procurement documents and seek approval from central tender board; 3) Establish bid evaluation committee; 4) Issue request for proposal and conduct briefings/site inspections; 5) Evaluate proposals; 6) Negotiate with bidders and select from best and final offer; and 7) Award contract.

Step 7 is the “Service commencement”. There are four activities for this step including: 1) Commence construction; 2) Commissioning of facility; 3) Commence service delivery; and 4) Establish and maintain close relationship with the consortium.

And finally step 8 “Payment and contract management” wraps up the PPP process. Six activities are involved including: 1) Monitor performance regularly / Make payment for the facilities/services provided; 2) Defer or reduce payment; 3) Institute investigations and issue warning / Initiate dispute resolution procedures; 4) Step-in; 5) Conduct joint inspection towards the end of the contract; and 6) Hand over facilities at the end of the contract.

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Figure 9.1


The process for implementing PPP projects in Hong Kong (adapted from Efficiency Unit, 2008b)

Step 1 Mobilisation and development of a business case 1.1 Conduct needs analysis, market testing and PPP feasibility study 1.2 Establish a project steering committee and designate a contract manager 1.3 Establish whether a site is available 1.4 Establish what facilities/services are required 1.5 Prepare a draft Statement of Requirements 1.6 Consider whether to accept proposals for enhanced or other additional commercial facilities/services on the site 1.7 Assess risk 1.8 Prepare public sector comparator and seek policy endorsement

Step 2 Funding 2.1 Submit a bid via the policy bureau for funds through the resource allocation exercise process

Step 3 Technical assessments, consultation and land requirements 3.1 Conduct appropriate technical assessments and socio-economic studies 3.2 Seek necessary authorities’ agreement on land use 3.3 Conduct consultations with stakeholders, policy committee and legislative council panel

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Step 4 Expression of interest exercise 4.1 Initiate an expression of interest exercise

Step 5 Policy and funding approvals 5.1 Consult and seek approvals of public works subcommittee of the legislative council and finance committee of the legislative council 5.2 Determine detailed commercial arrangements 5.3 Seek draft land grant conditions

Step 6 Procurement and selection 6.1 Instruct department of justice on drafting of procurement documents/contract 6.2 Finalise procurement documents and seek approval from central tender board 6.3 Establish bid evaluation committee 6.4 Issue request for proposal and conduct briefings/site inspections 6.5 Evaluate proposals 6.6 Negotiate with bidders and select from best and final offer 6.7 Award contract

Step 7 Service commencement 7.1 Commence construction 7.2 Commissioning of facility 7.3 Commence service delivery 7.4 Establish and maintain close relationship with the consortium

Step 8 Payment and contract management 8.1 Monitor performance regularly / Make payment for the facilities/services provided 8.2 Defer or reduce payment 8.3 Institute investigations and issue warning / Initiate dispute resolution procedures 8.4 Step-in 8.5 Conduct joint inspection towards the end of the contract 8.6 Hand over facilities at the end of the contract

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9.3


Incorporating the Research Findings into the PPP Process

The existing PPP process described in Section 9.2 of this chapter demonstrates “What” needs to be done in order to implement a PPP project in Hong Kong. But it does not explain “How” these activities can be achieved. By incorporating the “What” and “How”, a best practice framework for implementing PPP projects in Hong Kong can be derived. The “How” part of the framework can be formed from the research findings obtained from both the international and local literature review, case studies, interviews and questionnaire survey. These results were further triangulated for validation purposes. For each step of the process, users are shown “How” to implement PPP projects by a list of the “Dos” and “Don’ts”. Tables 9.1 to 9.8 show the “Dos” and “Don’ts” for each step of the PPP process.

For example, Table 1 demonstrates that there are thirty “Dos” and “Don’ts” for step 1 of the process “Mobilisation and development of a business case”. The first “Dos” item for step 1 is to “Prepare a public sector comparator” and the first “Don’ts” item is to “Choose PPP without thorough investigation” (Section 6.2.2.2). These items are listed within the table under no specific order. Similarly the same applies for the other tables.

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Table 9.1


Guideline for conducting step 1 “Mobilisation and development of a business case”

No. Dos 1 Prepare a public sector comparator 2 Ensure an economically viable project 3 Streamline the process 4

5

6 7 8

9 10 11 12 13

14 15

16 17 18 19

Consider to use PPP when improved services / products can be achieved Ensure appropriate risk sharing / allocation Keep to a timeline Provide an integrated solution Facilitate creative and innovative approaches Solve the problem of public sector budget restraint Minimise political debate Continuous training Public sector to show commitment Government to have clear objectives and evaluation criteria Gain interest of general public Consider complex projects so that private sector can maximise their ability Avoid legislation obstacles Ensure an attractive financial market Avoid lengthy delays Ensure transparent and process

Don’ts Choose PPP without thorough investigation Choose projects that are uneconomical Spend long durations during mobilization Use PPP when improved services / products cannot be achieved Intend to transfer large proportions of risk to a single party Ignore timeframe Have unclear objectives

Reference Section 6.2.2.2 Section 6.2.2.5 Section 4.4.1.4 Section 3.4

Limit the opportunity for the private party to show innovation and creativity Consider PPP for financial reasons only Involve in political debate Employ inexperienced or unskilful employees Government to be indecisive on procurement method Government to have unclear objectives and evaluation criteria Lack of communication with general public Define project scope and design fully

Section 7.3.1

Challenge legislation system Force projects that have no market Tolerate delays Lack of transparency in the process

258

Section 8.3.2

Section 4.3.4 Section 7.3.1

Section 7.3.1 Section 7.3.2 Section 6.3.3 Section 4.3.4 Section 4.3.4

Section 5.4.2 Section 6.4.2.3 Section 4.2 Section 3.7 Section 7.3.2 Section 6.2.2.5

Chapter 9


20

Government champion from high level or treasury departments

Lack of government support

Section 6.2.2.5

21

Positive media

Bad relationship with media

22

Ensure a stable macroeconomic condition Ensure project technically feasible

Proceed under unstable economic conditions Expect projects to work without thorough investigation on the technical feasibility Leave assessment of the cost and benefits to later stages

Section 6.3.2.7 Section 8.3.2

23

24

25 26 27 28 29 30

Thorough and realistic assessment of the cost and benefits Ensure partnering spirit / Reluctance to work with commitment / trust partners Ensure there is a market need Consider projects with no market Consider projects with large Consider projects that do not operation element involve operation Ensure there is government Consider projects that the need government do not need Consider projects of large Consider small scale projects scale Ensure better value for Consider projects that are not money can be demonstrated value for money

259

Section 8.3

Section 8.3

Section 6.2.2.5 Section 6.4.2.5 Section 6.2.2.3 Section 6.3.2.3 Section 6.4.2.3 Section 6.2.2.5

Chapter 9

Table 9.2



Dos No. 1 Solve the problem of public sector budget restraint 2 Allocate the risks appropriately

Reference Section 7.3.1

3 4

Section 7.3.2 Section 3.4

5 6

7

8 9 10 11 12 13 14

Don’ts Focus on private financing only Allocate all financial risks to the private sector Avoid political debate Intensify political debates Rely on private parties that are Rely on private financing financially incapable solely Avoid delays in negotiation Spend long durations over negotiation Ensure an efficient and mature Assume an efficient and mature financial market exists financial market is readily available Conduct a thorough and Avoid continuous assessment realistic assessment of the costs analysis and benefits Ensure commitment and Lack commitment and responsibility of all parties responsibility Ensure an economically viable Choose projects that are project uneconomical Avoid public investment Conduct PPP projects for restriction financial reasons only Opt for PPP to provide funding Let funding be the sole reason for PPP Demonstrate appropriate risk Inappropriate risk allocation allocation and sharing and sharing Demonstrate value for money Ignore value for money

Ensure partnership arrangement

Think of self privileges only

260

Section 8.3.2

Section 7.3.2 Section 3.7

Section 8.3

Section 8.3.2 Section 6.2.2.5 Section 8.2.2 Section 3.4 Section 8.3.2 Section 6.2.2.5 Section 6.4.2.2

Chapter 9

Table 9.3


Guideline for conducting step 3 “Technical assessments, consultation and land requirements”

No. Dos 1 Ensure that improved services and products can be delivered 2 Appropriate risk sharing 3 Ensure that the party best able to manage the risk is assigned 4 Provide integrated solution 5 Facilitate creative and innovative approaches 6

10

Ensure experience and appropriate skills Gain support and interest from general public Conduct complex projects so that private sector’s expertise could be utilised Avoid lengthy delays and negotiation Good governance

11

Ensure transparent process

12

Ensure that project is technically feasible Conduct thorough and realistic assessment of the cost and benefits

7 8

9

13

Don’ts Lack of interest to show improvement Inefficient risk allocation Transfer all risks to the private sector Consider short term goals only Minimise opportunities for private efficiency and innovation Inexperienced employees

Section 5.4.2

Block out the general public

Section 5.4.2

Conduct over challenging projects

Section 6.4.2.3

Spend long durations during negotiation Lack of government governance Lack public consultation

Section 7.3.2

Aim to achieve technically infeasible aspects Leave assessment of cost and benefits to later stage

261

Reference Section 3.4 Section 8.3.2 Section 8.4.2 Section 7.3.1 Section 7.3.1

Section 8.3 Section 6.2.2.5 Section 8.3 Section 8.3

Chapter 9

Table 9.4



No. Dos 1 Demonstrate appropriate risk sharing 2 Keep to a timetable 3 Facilitate creative and innovative approaches 4 5

6 7 8 9

Government show support towards project Have clear government objectives and evaluation criteria Good private sector capability Government to commit to projects Gain support and interest from general public Speed up negotiation process

10

Minimise private sector expenditure

11 12

Partnering spirit/commitment/trust Ensure transparent process

13

Ensure there is a market need

14

Ensure an economically viable project Have well defined project objectives Propose projects that are technically feasible Ensure stable macro-economic condition Ensure efficient and mature financial market exists

Don’ts Hide details of risk allocation arrangement Delay the process Limit private sector’s chance to show creativity and innovation Government appear to be indecisive Government lack objectives and evaluation criteria

Reference Section 8.3.2

Poor private sector capability Government indecisive on procurement method Lack of support and interest from general public Spend long durations during negotiation Expect private sector to have clear conceptual plans at this stage Consider self privileges only


Block out the general public

19

Close connection with media

Propose projects with no market Choose projects that are uneconomical Have unclear project objectives Propose projects that cannot be achieved technically Pursue projects under unstable macro-economic condition Pursue projects under inefficient and immature financial market Negative media

20

Ensure a favourable legal framework

Pursue projects under unfavourable legal framework

15 16 17 18

262



Section 5.4.2 Section 4.4.1.4 Section 5.3.2

Section 6.2.2.5 Section 6.2.2.5 Section 6.4.2.5 Section 6.2.2.5 Section 6.2.2.5 Section 3.4 Section 8.3.2 Section 3.7


Chapter 9


21

Ensure a stable political and social environment exists

22

Ensure government need

23

Propose large projects

Table 9.5

3

Ensure a stable social and political environment Ensure a clear legal framework

4 5

Ensure good governance Ensure transparent process

6

Gain government support and have champion from high level or treasury department Ensure stable macro-economic condition

7

Section 3.7

Section 6.3.2.3 Section 6.4.2.3


No. Dos 1 Keep to a timetable 2

Pursue projects under unstable political and social environment Propose projects that the government does not need Propose small projects

Don’ts Delays during negotiation / political debate Pursue projects under unstable and political environment Pursue projects under an unclear legal framework Poor governance Block out the general public Lack of government support

Pursue projects under unstable macro-economic condition

263

Reference Section 7.3.2 Section 3.7 Section 8.3.2 Section 8.3 Section 6.2.2.5 Section 6.2.2.5 Section 8.3.2

Chapter 9

Table 9.6



No. Dos 1 Ensure a fair risk allocation mechanism 2 Allocate risks to the party best able to manage them 3 Streamline the process 4 5

Provide an integrated solution Keep to a timetable

6 7

Ensure a stable social and political environment Ensure a clear legal framework

8 9

Ensure good governance Ensure transparent process

10

Gain government support and have champion from high level or treasury department Ensure stable macro-economic condition Minimise political debate Government commitment Compensation to losing bidder Select strong and good private consortium Gain general public support and interest Clear government objectives and evaluation criteria Ensure positive media

11 12 13 14 15 16 17 18 19 20 21

Ensure partnering spirit / commitment / trust Ensure rigorous tendering process Low tendering / transaction costs

Don’ts Allocate large proportion of risk to a single party Allocate all the risks to the private sector Waste time during administrative procedures Have unclear objectives Delays during negotiation / political debate Pursue projects under unstable and political environment Pursue projects under an unclear legal framework Poor governance Block out the general public Lack of government support

Pursue projects under unstable macro-economic condition Encourage political debate Scheme aborted before contract High participation costs Select incapable private consortium Lack consultation with general public Unclear government objectives and evaluation criteria Negative media Lack partnering spirit / commitment / trust Fixing contracts too quickly High tendering / transaction costs

264

Reference Section 5.4.4 Section 8.4.2 Section 4.4.1.4 Section 7.3.1 Section 7.3.2 Section 3.7 Section 8.3.2 Section 8.3 Section 6.2.2.5 Section 6.2.2.5 Section 8.3.2 Section 7.3.2 Section 4.3.4 Section 5.3.2 Section 8.3.2 Section 5.4.2 Section 4.3.4 Section 6.3.2.7 Section 6.2.2.5 Section 6.4.2.5 Section 6.4.2.2

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Table 9.7



No. Dos 1 Keep to the contract milestones 2 Continuously introduce appropriate talents or resources 3 Continuous training 4 5 6 7 8 9 10

Communicate with general public Ensure transparent process Charge reasonable fees for facilities/services Ensure financial market Ensure a stable and macro economic condition Show good governance

11

Government to step in if necessary Create close links with media

12 13

Commitment of all parties Partnership arrangement

14

Government to give private sector free hand to maximise their ability

Don’ts Neglect the target milestones Conduct minimal requirements Be reluctant to develop personnel Stop communicating with general public Hide project details Overpriced fees for facilities/services Stop searching for markets Ignore surrounding macro economic condition Government avoid responsibility Government to intrude on activities Allow the media to gain a bad perception Lack commitment Consider self privileges only Prevent private sector to maximise their potential

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Reference Section 3.7 Section 6.3.2.1 Section 6.3.3 Section 5.4.2 Section 6.2.2.5 Section 4.3.2 Section 3.7 Section 8.3.2 Section 8.3 Section 5.44 Section 6.3.2.7 Section 8.3.2 Section 6.4.2.2 Section 3.7

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Table 9.8



No. Dos 1 Check that appropriate services and products are delivered 2 3 4 5 6 7

8 9 10 11 12

Show a partnership arrangement Encourage interest of the general public Government to step in if necessary Ensure a stable macroeconomic condition Ensure stable political and social environment Conduct thorough and realistic assessment of the cost and benefits Ensure efficient and mature financial market Ensure an economically viable project Ensure continuous market need Ensure compliance with contract terms Assessed by performance

Don’ts Deliver services and products of lower quality then specified in contract Blame partners for unsatisfactory performance Prevent transparency

Reference Section 3.4


Government to interfere without appropriate reason Ignore the surrounding macro economic condition Ignore changes to political and social environment Avoid continuous assessment analysis to minimise work load

Section 5.44

Stop creating economic opportunities Choose projects that are uneconomical Search for new markets

Section 3.7

Breach contract terms Assessed solely be economic return

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Section 8.3.2 Section 3.7 Section 8.3

Section 6.2.2.5 Section 6.4.2.5 Section 3.7 Section 3.2.2

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9.4


Validation of the Framework

Validation is an important process to ensure the quality of the research outcomes. This is normally undertaken as the final stage of the research works. This section presents the findings of the validation for the best practice framework developed.

9.4.1 Design of the validation questionnaire survey

In order to validate the best practice framework developed from this research study, a questionnaire survey was conducted. This survey was based on a similar validation process conducted by Yeung (2007). In his study, a questionnaire survey was adopted to validate the quality of the “Partnering Performance Index” model which was developed. Six aspects regarding the model were assessed. These included the areas: appropriateness, objectivity, replicability, practicability, reliability and suitability. In the questionnaire survey conducted to validate the best practice framework, the respondents were also asked to rate these six aspects.

The survey respondents were first presented with the purpose of the questionnaire, some background information, instructions for the exercise, the process for implementing PPP projects in Hong Kong according to the Efficiency Unit’s (of the HKSAR government) model, and also the best practice framework developed from this research study. At the end of the exercise, the respondents were asked to rate their extent of satisfaction for each 267

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of the six validation aspects according to a scoring scale from 1 to 5, where 1 represented “poor” and 5 represented “excellent”. The template for this questionnaire survey has been included in Appendix 2.

9.4.2 Respondents of the survey

There were three main criteria for selecting the survey respondents for this validation process. Firstly, the respondents needed to be working closely with PPP, either with hands-on experience or in research. Secondly, the respondents needed to have a good amount of knowledge in the situation of conducting PPP projects in Hong Kong. Lastly, the survey respondents must not have contributed to the development of the best practice framework in this research study. According to these criteria, participants that attended the recent CIB TG72 symposium titled “Revamping PPPs’ Symposium” which was held in Hong Kong on 28 February 2009 were targeted as survey respondents. A total of nine responses were collected and their details have been shown in Table 9.9.

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Table 9.9

Details of the survey respondents for the validation process

No.

Position

Type of Organisation

Sector

Experience

1

Professor

University

Research

Active researcher

2

President

Project advisers

Public and Private

Hands-on experience with conducting PPP projects.

3

Professional Consultant

University (Law)

Research

Active researcher and adviser for the Efficiency Unit of the HKSAR government.

4

General Manager

Project advisers

Private

Hands-on experience with conducting PPP projects in Mainland China.

5

Manager

Transportation provider

Private

Hands-on experience with conducting PPP projects in Hong Kong and Mainland China.

6

Researcher

University

Research

Active researcher

7

Lecturer

University

Research

Active researcher

8

Legal Adviser

Transportation provider

Private

Hands-on experience with conducting PPP projects in Hong Kong and Mainland China.

9

General Manager

Transport authority

Public

Hands-on experience with conducting PPP projects in Hong Kong.

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9.4.3 Results of the validation

Table 9.10 shows the results obtained from the validation questionnaire survey, which was conducted with the respondents mentioned in the previous section. The respondents were asked to rate six aspects of the framework according to a Likert scale of 1 to 5. A score above “3” would represent satisfactory performance for that aspect. The results showed that all aspects were rated above “3”. The aspect rated highest was “Degree of appropriateness” at 3.78.

Rated the lowest by respondents was the “Degree of

replicability” at 3.33. Therefore it can be construed that the newly developed best practice framework was validated to be appropriate, objective, replicable, reliable, and suitable for delivering PPP projects in Hong Kong.

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Table 9.10


Results of the validation questionnaire survey

Validation Aspect

Respondent

Mean

1

2

3

4

5

6

7

8

9

1. Degree of appropriateness

4

4

5

4

4

4

2

4

3

3.78

2. Degree of objectivity

4

4

5

3

3

3

3

4

4

3.67

3. Degree of replicability

4

4

4

3

3

2

2

4

4

3.33

4. Degree of practicality

4

4

4

4

4

3

2

4

3

3.56

5. Overall reliability

4

4

4

2

4

3

3

4

3

3.44

6. Overall suitability for PPP projects in Hong Kong

3

4

4

4

4

3

3

4

4

3.67

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9.5


Chapter 9 Summary

Using the findings collected throughout this research study, this chapter has demonstrated “How” each step of the PPP process proposed by the Efficiency Unit (2008b) could be conducted based on the findings of this research. As a result a best practice framework for implementing PPP projects in Hong Kong has been delivered.

The presented

framework will enable practitioners in Hong Kong from both the public and private sectors to effectively utilise the PPP model. Also, given the clearer understanding it is anticipated to encourage more PPP projects in Hong Kong.

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Conclusions and Recommendations

CHAPTER 10 CONCLUSIONS AND RECOMMENDATIONS 10.1 Chapter 10 Introduction 10.2 Review of the Project Objectives 10.3 Major Findings 10.4 Value and Significance of the Research 10.5 Limitations of the Research 10.6 Recommendations for Future Research 10.7 Chapter 10 Summary

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10.1 Chapter 10 Introduction

This chapter concludes the research study. Firstly, the project objectives and the methods used to achieve them are reviewed. The major findings from this study are analysed and triangulated according to the data collection methods adopted. differences between these findings are further discussed.

Similarities and

Following, the value and

significance of this research are once again revisited. Limitations of this study are also highlighted and finally recommendations are made for future research.

10.2 Review of the Project Objectives

This research study aimed to develop a best practice framework for implementing Public Private Partnerships (PPP) in Hong Kong by looking at international experiences. In order to achieve the aim, six objectives were identified for this research:

(a)

Identify the benefits, difficulties and critical success factors of PPP.

(b)

Measure the effectiveness of PPP against other procurement methods.

(c)

Identify representative case studies from other countries for analysis to identify their approach to success/failure.

(d)

Identify previous projects in Hong Kong that utilised a similar approach to PPP and to analyse their implementation successfulness.

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(e)


Investigate the best conditions in terms of project nature, project complexity, project types and project scales under which the use of PPP is the most appropriate.

(f)

Evaluate the findings collected to determine a best practice framework for implementing PPP in Hong Kong.

The objectives were achieved by information collected from a comprehensive literature review, case studies, interviews and a questionnaire survey (as described in Chapter 2). Table 10.1 illustrates the tools used to achieve these objectives.

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Table 10.1


Tools used to achieve the research objectives

Data collection tools

Literature review Case study Interview Questionnaire survey

Objective 1

2

3

4

5

6

Identify the benefits, difficulties and critical success factors of PPP

Measure the effectiveness of PPP against other procurement methods

Identify representative case studies from other countries for analysis to identify their approach to success/failure

Identify previous projects in Hong Kong that utilised a similar approach to PPP and to analyse their implementation successfulness

Investigate the best conditions in terms of project nature, project complexity, project types and project scales under which the use of PPP is the most appropriate

Evaluate the findings collected to determine a best practice framework for implementing PPP in Hong Kong

3 3 3 3

3

3 3 3

3 3 3

3

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3 3 3

3 3 3 3

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10.3 Major Findings

10.3.1 Benefits, difficulties and critical success factors of PPP

10.3.1.1

Benefits/attractive factors of PPP

A summary of the attractive factors were summarised from international literature and presented in Section 3.4 of Chapter 3. Financial benefits of PPP projects are often regarded by governments as an attractive factor. In many jurisdictions that first started to adopt PPP projects this was often seen to be the main driver. For example, the United Kingdom and the Victoria state of Australia were also amongst those to introduce PPP projects due to financial difficulties to provide for public works projects.

Obviously, private financing is attractive to the public sector for a number of other reasons. Firstly the government’s pressure to provide for public services can be reduced by introducing private sector financing. For governments that have no financial worries, they still often welcome private financing so that they can utilize their own resources for other means such as for medical and education services. Although some may argue that the government can borrow more cheaply than the private sector, by reducing the government’s borrowing will in turn increase their credit ratings. Often PPP projects tend to be large scaled projects which are complex and costly to deliver, without introducing private financing these projects may not be possible. For some jurisdictions they may also be interested to deliver these projects to increase their image, tourism and

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international status.

Cost certainty is also something that has been demonstrated by the private sector to be more achievable. The public sector on the other hand are not trained businessmen hence tend to be less capable than the private sector at the economics of projects. In addition, for public works projects to be delivered by PPP, more business opportunities can be introduced for the private sector. In PPP projects the extent of private sector participation tends to be much more compared to traditional projects.

Improved services and products were also found to be attractive factors of PPP from the literature search.

Private sector can introduce more efficiency, skills, technology,

expertise, innovation, long term maintenance and knowledge to the project so that better public services are provided. The public sector is not trained for these types of jobs whereas the private sector is hence they tend to perform better. The public sector on the other hand is trained to deal with administration and by delivering public works by PPP the public sector can focus on their job duties.

Appropriate risk sharing in PPP projects is a very popular topic amongst literature. A large emphasis of the arrangement is based on the risk allocation element. Some previous projects have also had bad experiences with dealing with inappropriate risk allocation for example the Cross City Tunnel in Sydney. Under a PPP arrangement the public sector can pass a large proportion of the risks to the private sector. Whereas, in a traditional approach often the risks handled by the consortium are limited only to the design and

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construction of the project.


In PPP projects the risks can extend to operation,

maintenance, revenue, market risks etc. Although this may be advantageous to the public sector to some extent, the party best able to manage the risk should be assigned. PPP projects tend to show time certainty. The private sector is involved for financial returns. The faster a project is delivered the faster they start to collect their revenue. Hence, often PPP projects tend to be delivered on-time or even earlier than expected.

Chapter 7 presented the findings from an empirical questionnaire survey. The results found that the top three attractive factors in Hong Kong were efficiency related. The first attractive factor identified was “Provide an integrated solution (for public infrastructure / services)”. This may also be considered an attractive factor for traditional projects but in PPP projects there is a larger emphasis on the overall package as the private sector are involved in a larger extent.

The second attractive factor rated was “Facilitate creative and innovative approaches”. As mentioned previously the public sector is not trained in this way, instead their job is to perform administrative duties. Hence, the private sector tends to be better in this area. Another factor identified was “Solve the problem of public sector budget restraint”. Although, Hong Kong is financially capable to provide for its own public services and facilities there were still some respondents that rated this factor highly, probably due to the Hong Kong’s large infrastructure plan in the coming years. The first and second attractive factors were rated the same in Australia.

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The third attractive factor was rated second in the United Kingdom. Rated third in Australia was “Save time in delivering the project”. And rated first and third in the United Kingdom was “Transfer risk to the private partner” and “Non recourse or limited recourse to public funding” respectively.

From the case studies conducted in Hong Kong, it was found that PPP was no longer solely about drawing finance from the private sector. Advantages such as the private sector’s added efficiency, skills, innovation, expertise, and risk sharing can also be achieved.

In addition, the cases also showed that recent projects incorporating the

experiences from overseas delivered successful projects, hence future projects should also learn from good practices of others.

10.3.1.2

Difficulties/negative factors of PPP

A summary of the negative factors of PPP were also found from international literature. These findings have been presented in Section 3.5 of Chapter 3. Problems in the bidding process are often discussed for PPP projects. These include the high participation costs, the lengthy process, and the lack of competition.

Some jurisdictions such as Queensland state in Australia have started to introduce compensation for losing bidders to encourage more competition.

Although the

compensated amount may not be comparable to the actual costs spent by the bidders, still it helps to reduce their financial losses. Hence the idea has been welcome. The process

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for procuring PPP projects also tend to be lengthy as the process is much more rigorous than traditional methods. A main stage that public works projects need to get through is the public sector comparator to validate whether the project should be delivered by PPP or more traditional methods. Public sectors tend to be very careful to ensure that PPP projects are only chosen when value for money can be introduced. The process used by the Victoria state of Australia is particularly rigorous. Also, PPP projects tend to be large, expensive and complex hence the procurement process tends to take longer.

Appropriate risk allocation is an advantage of PPP, but inappropriate risk allocation is also a disadvantage. In situations where projects contain high risks or where contracts are secured too quickly, risks tend to be easily misallocated. Also, the public sector tends to be keen to pass as much risk as possible to the private sector, and often the private sector are keen to take up an unhealthy proportion of the risks in order to participate. The private sector can be risk takers and tend to be keen to take them for a chance of higher economic benefits.

Literature also identified that lack of private sector capability can be a problem. In most cases the private sector tends to be confident in their ability. From experience they have also shown to perform better than the public sector. But in some situations the chosen private sector may not be financially or technically capable to handle the project. This could just be because they are not the correct people for the job.

The success of a project often depends on the general public’s support and interest.

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Dissatisfaction from the general public can lead projects failing. This could be due to the high charges for a PPP facility or service. In PPP projects the private consortium often charges the facility or service a lot more compared to if it was ran by the public sector as they need to repay their investment costs as well as earn a profit. Whereas, this is not the government’s concern..

Other problems identified from literature include the existing legal framework. The current legal framework of some jurisdictions has not been designed to apply for PPP projects. In Hong Kong for example there has been specific project legislation which is time consuming and costly.

An unattractive financial market can also occur during the course of the concession period which can be long periods, in Hong Kong this tends to be thirty years. The political unstability and high interest rates are some common problems which are common.

From the same empirical questionnaire survey presented in Chapter 7, the top three negative factors identified in Hong Kong were also derived. The top factor identified was “Lengthy delays because of political debate”. Many projects in Hong Kong have been put on hold or changed from being delivered by PPP to traditional methods because of political debate particularly within the local Legislative Council.

The second factor identified was “Lengthy delays in negotiation”, again this factor is

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partially related to the first factor identified. Also, due to some unsuccessful experiences the local Hong Kong government has been careful to deliver projects by PPP, hence the negotiation process of projects has tend to be lengthened to ensure that the correct decisions are made.

The third factor identified was “Very few schemes have actually reached the contract stage (aborted before contract)”. Again, as mentioned the local government has proposed a number of PPP projects but due to the opposition received from the Legislative Council and general public they have continuously reverted to more traditional methods.

The second negative factor was also rated the same in the United Kingdom. Rated first and third in the United Kingdom included “A great deal of management time spent in contract transaction” and “High participation costs” respectively. And, rated in the top three in Australia include: 1) Lack of experience and appropriate skills; 2) High participation costs; and 3) Confusion over government objectives and evaluation criteria.

Chapter 5 presented the analysis of cases in Australia. The results showed that a number of obstacles and failings were encountered. First PPP projects took a long process, lack of knowledge was observed, and disruption of normality was also observed. It was also found that some complex projects were conducted. challenging than economic ones.

Social projects can be more

Projects with unique features can cause more

challenges. It was found that often the private sector can lack confidence due to the government’s poor track record in committing to projects.

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For transportation projects, inaccurate traffic forecasts can lead to a raise of tolls, general public dissatisfaction, government limiting the users’ options etc. Also, a partnership arrangement is essential for PPP projects. In the cases considered the public and private parties openly criticised each other; there was no toll subsidy / compensation from the local government, and also the toll level was not open for negotiation.

10.3.1.3

Critical success factors of PPP

Critical success factors of PPP were sourced from international literature and summarised in Section 3.7 of Chapter 3. The findings include contract benchmarks being achieved on-time and with good quality, although this critical success factor could also be considered for traditional projects. Part of the reason for conducting projects by PPP is to introduce the private sectors’ expertise to a larger extent hence it is important for the government to give a free hand for the private sector to maximise their ability. In situations where the project fails in anyway the government must be willing to step in if necessary as PPP projects emphasise on a partnership arrangement.

A transparent and efficient procurement process is essential in PPP projects. In Hong Kong for example the general public has often criticised public private collusion existing due to certain large private parties benefiting huge profits from residential development rights. A stable political and social environment is also important particularly in less developed countries. An efficient and mature financial market is essential to ensure that the project gains revenue as often concession periods span over a long period compared

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to traditionally procured projects.

Critical success factors were derived from the Australian case analysis presented in Chapter 5. Compensation to the losing bidder was one of these. Due to the high tendering costs competition is often limited as private parties will consider thoughtfully that their probability of winning is very high before competing for PPP projects. Therefore compensation for the losing bidder is attractive to increase compensation as their financial loss will be reduced. The government should also show strong support so that the project can be delivered successfully.

Chapter 6 presented the findings from interviews conducted with experienced PPP practitioners from the public and private sector, as well as researchers.

From the

interviews with the public sector the most common critical success factors were identified. Well defined project objectives were mentioned according to both Hong Kong and Australian interviewees. Obviously, this factor is also important in traditional projects but for the complexity of PPP projects it is even more important.

As mentioned

previously PPP projects emphasise a partnering arrangement hence partnering spirit/commitment/trust was mentioned by both groups of interviewees again. Also, the importance of an appropriate risk allocation was highlighted by Hong Kong interviewees. And a competitive procurement process was mentioned by Australian interviewees. Due to the size and complexity of PPP projects there are very few private parties who are capable hence often there are very few competitors involved. More competition in the process will increase the chance of selecting a capable consortium to handle the job.

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The private sector interviewees mentioned similar critical success factors for PPP to the public sector interviewees. In addition, they also added that an economically viable project (according to Hong Kong and Australian interviewees) is important.

As

mentioned previously the private sector are businessmen hence economics is an important factor for them.

In Hong Kong, government support (champion) was found to be

important. In other jurisdictions there is often a specific unit to deal with PPP projects. It is likely that this unit will fall under the treasury department. In Hong Kong on the other hand there is no such unit hence there is a lack of leadership to drive PPP projects from the government’s side. As shown from previous cases in Australia, positive media is crucial for successful PPP projects. The researcher interviewees agreed that well defined project objectives would be important. They also added that a transparent process and market need are important.

Chapter 8 continues to present the findings from the empirical questionnaire survey. The top five success factors for delivering PPP projects in Hong Kong were also mentioned previously by the other sources of information collected.

The findings from the

questionnaire therefore validated previous findings from other sources. These success factors include: (1) Favourable legal framework; (2) Commitment and responsibility of public and private sectors; (3) Strong and good private consortium; (4) Stable macro-economic condition; and (5) Appropriate risk allocation and risk sharing.

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The second success factor was ranked first in Australia and fourth in the United Kingdom. The third success factor was ranked third and first in Australia and the United Kingdom respectively. The fifth success factor was also ranked second in both Australia and the United Kingdom.

Also ranked in Australia was “Good governance” at fourth and

“Project technical feasibility” at fifth. In the United Kingdom ranked third and fifth was “Available financial market” and “Thorough and realistic assessment of the cost and benefits”.

10.3.2 PPP compared to other procurement methods

As mentioned in Section 3.2 of Chapter 3 from the international literature review, there are several differences between the PPP method and the traditional practice. The main differences highlighted include the financial arrangement for funding the project and the risk allocation arrangement for each party involved. It is likely that in a PPP project the finances will be supported fully or partially by the private sector. And also in PPP projects the public sector tends to prefer letting the private sector take a share of the risks involved.

Chapter 4 has analysed a large cross border project where the governments responsible were originally going to deliver it by Build Operate Transfer (BOT), but in the end decided to finance it themselves instead. Reasons for this change were analysed and several suggestions to encourage PPP projects have been presented (refer to section 10.3.4 of this chapter).

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Again, from the interview findings presented in Chapter 6 it was found that the public sector interviewees observed several differences between PPP projects and traditional projects, these include: z

PPP projects tap in private sector’s efficiency/expertise/management/skills (according to Hong Kong and Australian interviewees);

z

Public Sector Comparator can act as an indicator to determine the preference between the methods (according to Hong Kong interviewees only); and

z

Private sector financing and finance structure of the project (according to Australian interviewees only).

According to the private sector interviewees the implementation process of projects can be independent but reducing the competition can minimise the private sector’s loss in time and money. They also mentioned several differences between PPP and traditional methods including: z

Increased efficiency and speed in PPP projects (according to Hong Kong and Australian interviewees);

z

Better integration in PPP projects (according to Hong Kong interviewees only);

z

Better value for money in PPP projects (according to Hong Kong interviewees only);

z

PPP projects accessed by performance (according to Hong Kong interviewees only);

z

Larger projects (according to Australian interviewees only);

z

Different risk profiles (according to Australian interviewees only); and

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z


Rigorous tendering process (according to Australian interviewees only).

In addition, the researchers identified several differences between the two approaches as well including: z

Different risk profiles (according to Hong Kong and Australian interviewees);

z

Private sector more innovative / efficient in PPP projects (according to Hong Kong and Australian interviewees);

z

PPP is a partnership arrangement (according to Hong Kong interviewees only); and

z

PPP projects have high tendering / transaction costs (according to Hong Kong interviewees only).

10.3.3 Representative case studies from Australia

Chapter 4 has presented and analysed two highly profiled PPP projects in Australia. These are the Southbank Education and Training Precinct (SETP) in Brisbane and the Cross City Tunnel (CCT) in Sydney. SEPT is the Queensland state’s first PPP project hence it has been in the public eye from the very beginning. The CCT has been a project highly profiled in the media and criticised by the general public. From the analysis of the SETP and CCT projects the failures observed have been reported in Section 10.3.1.2 of this chapter. Besides these failures, a number of success factors were also observed in the SETP project and reported in Section 10.3.1.3 of this chapter. Similarly the advantages and best criteria for PPP have been given in Sections 10.3.1.1 and 10.3.5. These cases

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were identified from the literature review and during the discussion with interviewees.

Chapter 4 also describes the function of Partnerships Victoria in Victoria state of Australia.

The unit has produced some of the best guidelines and materials for

conducting PPP projects. Also, a database of projects conducted by their unit is available on the public domain.

From the interviews with the public sector in Chapter 6, it was found that the interviewees had all referred to international cases for lessons learnt. Also, they were keen to build up their knowledge on the PPP experience in other jurisdictions. The interviews with the private sector showed that all had previous PPP experience internationally. Similarly the researchers had also conducted cases studies and research on an international scale.

10.3.4 PPP experiences in Hong Kong

Four highly profiled projects in Hong Kong were analysed in Chapter 4. These included the Cross Harbour Tunnel (CHT) which is also the first BOT project in Hong Kong to be conducted, and also the only PPP style project to be returned into the local government’s hands in Hong Kong. The second case studied was the Western Harbour Crossing (WHC). This project has been one of the less fortunate BOT projects in Hong Kong, due to the frequent criticism from the general public, media and legislative councilors concerning its high tolls. The Asia World Expo (AWE) is a more recent PPP project

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which has been subsidised heavily by the local government to encourage more PPP projects. And finally the West Kowloon Cultural District (WKCD) project which was originally going to be procured by PPP, but a recent decision left the government paying for it themselves.

From the analyses of these studies it was found that the local

government could encourage more and proper PPP projects by integrating the lessons learnt internationally with their own experiences. These cases were identified from the literature review and during the discussion with interviewees.

A non-PPP project was also considered in Chapter 4. The Hong Kong – Zhuahai – Macau bridge was originally proposed to be delivered by the BOT model. But recently the three governments responsible have come to an agreement that they would finance the project themselves instead. Several reasons were highlighted for this sudden change. These reasons led to a list of conditions that would be necessary in future to encourage more PPP style projects including: z

Attract the private sector by an economically viable project;

z

Speed up the process of tendering and negotiation in PPP projects;

z

Adopt legal experts to advise on the contracts;

z

Ensure that toll prices are kept at acceptable levels to the general public throughout the concessionary period;

z

Transparent process to avoid public perception of collusion between business and the government; and

z

PPP should be adopted for reasons besides financial.

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Findings from Chapter 6 showed that the private sector interviewees tended to have experience in projects both locally and overseas. Practitioners in Hong Kong may not have the necessary talents to conduct PPP projects due to the minimal PPP project experience in Hong Kong. Therefore, gaining overseas experience or importing expertise has been a solution. Instead Hong Kong should consider training their own people both in the public and private sector to involve in PPP projects.

The public and private sector interviewees all felt keen towards PPP reference materials. Some of the public sector interviewees in Hong Kong even had their own resources available. On the other hand the private sector interviewees tended to refer to reference materials provided by others.

10.3.5 Best conditions for using PPP

The interview findings in Chapter 6 showed that projects best suited for PPP according to the public sector interviewees include ones that are economically viable (according to Hong Kong and Australian interviewees) and ones with scope for innovation (according to Australian interviewees only).

Often the success of a project is measured by the

economics, especially for the private sector. Therefore, with adequate profit margins from the PPP project all parties are normally kept happy. PPP projects tap in private sector’s expertise, so where projects have more room for innovation, the private sector’s ability can be maximised.

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According to the private sector all sorts of projects are suited for PPP, but their motives for conducting PPP projects include: z

Government need (according to Hong Kong and Australian interviewees);

z

Private sector expertise (according to Hong Kong interviewees only);

z

Value for money (according to Hong Kong interviewees only);

z

Private sector efficiency (according to Hong Kong interviewees only); and

z

Risk transfer (according to Australian interviewees only)

The researchers in Hong Kong added that each project should be considered independently but it is likely that PPP is adopted when the government lacks funding for providing public works projects. According to the Australian researchers large projects are more suitable for PPP.

Also presented in Chapter 8 are the findings for the reasons to adopt PPP projects. The results showed that in general Hong Kong focuses on improving the overall performance of public projects. Ranked highly in Hong Kong, Australia and the United Kingdom was “Economic development pressure demanding more facilities”, again this reason is related to the project’s economics Ranked highly in Hong Kong and Australia was “High quality of service required”. Ranked in Hong Kong only was “Private incentive” also related to economics.

And ranked in either Australia or the United Kingdom alone include

“Shortage of government funding”, “Inefficiency because of public monopoly and lack of competition” and “Avoid public investment restriction”. As mentioned previously Hong Kong is not short of financial reserve but both Australia and the United Kingdom started

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to use PPP because they were unable to provide for the necessary public facilities and services. The competition issue has once again been confirmed to be important. Often there are many governmental procedures for finances to be secured but with the introduction of private financing many of these can be avoided.

The criteria for PPP projects were discussed in Chapter 5 from the Australian case analysis results. It was found that PPP should be adopted when the project shows value for money. Project risks should always be allocated to the party best able to handle them. A risk sharing mechanism should be adopted in projects of high risk nature. A regular fee payment from the government instead of the private sector bearing the revenue risk could be considered

10.3.6 Recommendations for Developing a Best Practice Framework for Public Private Partnerships in Hong Kong

Drawing from the findings derived, a best practice framework for implementing PPP projects in Hong Kong has been presented in Chapter 9. Obviously, it is difficult to unify all types of projects hence this framework acts as a general guideline only.

This

framework incorporates the findings achieved from the literature review, case studies, interviews and questionnaire survey throughout the research study. The findings were then applied to an existing PPP process identified by the Efficiency Unit (2008b) of the Hong Kong Special Administrative Region (HKSAR) government. This process contains eight key steps for implementing PPP projects including:

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(1)

Mobilisation and development of a business case;

(2)

Funding;

(3)

Technical assessments, consultation and land requirements;

(4)

Expression of interest exercise;

(5)

Policy and funding approvals;

(6)

Procurement and selection;

(7)

Service commencement; and

(8)

Payment and contract management.

From the findings of this research study, users adopting the process for PPP projects in Hong Kong are shown the “Dos” and “Don’ts” at each step. Lastly, this framework was validated by a questionnaire survey conducted with PPP practitioners. The respondents were asked to rate six factors relating to the performance of the framework. These factors included: appropriateness; objectivity; replicability; practicability; reliability and suitability.

10.4 Value and Significance of the Research

This research study has introduced a best practice framework for PPP in Hong Kong which has never been introduced previously by others. The framework does not intend to introduce new alternatives but instead builds on existing practices so that users can more easily adapt to the improvement.

Development is made to the current process of

implementing PPP projects. Up to present, practitioners in Hong Kong are only told

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“what” they should be doing, but have not been shown “how” they can achieve these goals. This framework has been developed using both international and local experiences so that the lessons learnt from overseas can be incorporated to fit in with the distinct local situation.

The findings are believed to be useful for all practitioners who are either considering or currently involved with PPP projects. Practitioners involved with existing projects can better understand how to conduct them so that they can be carried out more efficiently. For those practitioners considering adopting or participating with PPP projects can be given more confidence to take action. As a result more development is encouraged.

Opportunities are also broadened for the private sector improving the overall financial climate.

With Hong Kong’s current proposed infrastructure plan more procurement

alternatives should be sought. Projects should be delivered by the method that it is most suitable for.

This framework therefore provides an alternative to traditional methods. The public sector is better informed hence in future can consider which types of projects are most appropriate to be delivered by PPP. Also, both the public and private sector will be more aware of each others’ motives which are important for projects to succeed.

Besides the obvious practical uses of this best practice framework, the findings from this study have also contributed to the body knowledge in PPP. The recent developments of

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PPP in Hong Kong have been reviewed, highlighting areas that require further works for researchers. Information has also been gathered from countries that are leading in the area of PPP, which has helped to broaden knowledge in this field. In addition, the development of this best practice framework has presented a methodology that could be used for research studies even in other fields and industries.

10.5 Limitations of the Research

Several limitations were noticed whilst conducting this research study, these include: z

A larger number of questionnaire responses would have increased the credibility of the results from the survey analysis. In Australia particularly, data collection was found to be more difficult due to geographic distances.

z

The questionnaire results obtained from Hong Kong and Australia were compared to those findings obtained by Li (2003) in England. The analysis would have been more valuable if the data collected in England was more up to date.

z

The interview findings from Hong Kong and Australia were more difficult to compare due to the different level of understanding in the topic of PPP. Although all interviewees were involved with PPP in some way, it was found that the Hong Kong interviewees were in general less knowledgeable on the topic compared to the Australian interviewees.

z

The results would have been more representative if more case studies could have been conducted, but due to time limitation this was not possible.

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z


The attractive and negative factors were used as a checklist for identifying suitable PPP projects, but the accuracy needs improvement as the relative weighting of the factors has not been identified.

z

Currently the best practice framework has been designed for general PPP projects only.

10.6 Recommendations for Future Research

Some recommendations for further research work are also proposed: z

From the findings achieved in this research study it would be interesting to apply the theory to potential real life PPP projects. These projects could be monitored throughout their project life and compared with projects that did not follow the best practice framework proposed in this study. The differences could be recorded and analysed for further improvement.

Also, with the

development of this framework it would be interesting to see it put to trial by encouraging the Hong Kong government to adopt the suggestions.

This

message could be delivered to them via local conferences and presentations. z

The questionnaire survey adopted for this research study could be repeated in other jurisdictions to enable an international comparison with the results obtained from the Hong Kong respondents.

z

The relative weighting of the attractive and negative factors should be identified, so that the checklist for identifying suitable PPP projects could provide a more accurate assessment.

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z


The best practice framework presented should be further refined for different projects according to their size, type, government’s political and budgetary strength, time etc. currently it is for general projects only.

10.7 Chapter 10 Summary

This research study has formed a solid basis for practitioners in Hong Kong to improve on the current PPP model adopted. By doing so, a win-win situation will be created between both the public and private sectors. As a result the construction industry and the general public at large will benefit.

299

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326

Appendices

APPENDICES Appendix 1 Questionnaire Survey Template for Research Study Appendix 2 Questionnaire Survey Template for Validation Process

327

Appendices

Appendix 1 Questionnaire Survey Template for Research Study Developing a Best Practice Framework for Implementing Public Private Partnerships (PPP)

A.

About the Respondent

1.

Your position in the organization:

2.

Name of your organization:

3.

Your Country of Origin:

4.

Please select your primary role below: Public sector

Central government Local government Public enterprise

5.

Private sector

11 – 15 years

16 – 20 years

21 years or above

How many PPP projects have you been involved in?

None (please move on to Part B) 1 7.

Please specify:

How many years of industrial experience do you have?

5 years or below 6 – 10 years 6.

Other

Financier D&B contractor Designer only Contractor only Consultant / advisor Operator (facility manager) Supplier Subcontractor

2

3

4

above 4

Which of the following PPP projects have you been involved with (you may tick more than one box)?

Hospital Transportation Housing & Office Defence & Naval Others (please specify)

Water & Sanitary Police & Prison

Power & Energy School & Education

IT & Communication

B. Features of PPP Projects Please rate the following statements based on a Likert scale from 1 – 5, where 1 represents the “Least Important”; 5 represents the “Most Important”; and select “N/A”’ if you are uncertain in rating a particular statement. 1.

Please rate the attractive factors for adopting PPP instead of traditional procurement

1

2

3

4

5

N/ A

a) b) c) d) e) f) g) h) i) j) k) l) m) n) o) p)

Solve the problem of public sector budget restraint Provide an integrated solution (for public infrastructure / services) Reduce public money tied up in capital investment Cap the final service costs Facilitate creative and innovative approaches Reduce the total project cost Save time in delivering the project Transfer risk to the private partner Reduce public sector administration costs Benefit to local economic development Improve buildability Improve maintainability Technology transfer to local enterprise Non recourse or limited recourse to public funding Accelerate project development Others (please specify)

328

Appendices Please rate the following statements based on a Likert scale from 1 – 5, where 1 represents the “Least Important”; 5 represents the “Most Important”; and select “N/A”’ if you are uncertain in rating a particular statement. 2.

Please rate the negative factors for adopting PPP arrangements

1

2

3

4

5

N/ A

a) b) c) d) e) f) g) h) i) j) k) l) m) n) 3.

Reduce the project accountability High risk relying on private sector Very few schemes have actually reached the contract stage (aborted before contract) Lengthy delays because of political debate Higher charge to the direct users Less employment positions High participation costs High project costs A great deal of management time spent in contract transaction Lack of experience and appropriate skills Confusion over government objectives and evaluation criteria Excessive restrictions on participation Lengthy delays in negotiation Others (please specify) Please rate the privileges / attractions for private sector involvement in PPP projects

1

2

3

4

5

N/ A

a) b) c) d) e) f) 4.

Government sponsorship Government assistance in financing Government guarantee Tax exemption or reduction Incentive of new market penetration Others (please specify) Please rate the driving forces leading to the adoption of PPP

1

2

3

4

5

N/ A

a) Economic development pressure of demanding more facilities b) Political pressure c) Social pressure of poor public facilities d) Private incentive e) Shortage of government funding f) Inefficiency because of public monopoly and lack of competition g) High quality of service required h) Avoid public investment restriction i) Lack of business and profit generating skill in the public sector j) Others (please specify) 5. Please rate the measures that enhance the achievement of Value for Money in PPP projects a) b) c) d) e) f) g) h) i) j) k) l) m) n) o) p) q) r) s)

Competitive tender Efficient risk allocation (allocating the risk to the party best able to manage it) Risk transfer (transferring a substantial amount of risk from the public to the private) Output based specification Long-term nature of contracts Improved and additional facilities to the public sector Private management skill Private sector technical innovation Optimal use of asset/facility and project efficiency Early project service delivery Low project life cycle cost Low shadow tariffs/tolls Level of tangible and intangible benefits to the Users Environmental consideration Profitability to the private sector “Off the public sector balance sheet” treatment Reduction in disputes, claims and litigation Nature of financial innovation Others (please specify)

329

1

2

3

4

5

N/ A

Appendices Please rate the following statements based on a Likert scale from 1 – 5, where 1 represents the “Least Important”; 5 represents the “Most Important”; and select “N/A”’ if you are uncertain in rating a particular statement. 6.

Please rate the factors that contribute to the success of PPP projects

1

2

3

4

5

N/ A

a) b) c) d) e) f) g) h) i) j) k) l) m) n) o) p) q) r) s)

Stable macro-economic condition Favourable legal framework Sound economic policy Available financial market Multi-benefit objectives Appropriate risk allocation and risk sharing Commitment and responsibility of public and private sectors Strong and good private consortium Good governance Project technical feasibility Shared authority between public and private sectors Political support Social support Well organised and committed public agency Competitive procurement process (enough potential bidders in the process) Transparency procurement process (process is made open and public) Government involvement by providing guarantee Thorough and realistic assessment of the cost and benefits Others (please specify)

C. Other Suggestions and Comments on Implementing PPP Projects

^ End of the questionnaire ] ^ Thank you for your valuable contribution ] Acknowledgement This questionnaire was adapted from Dr. Bing Li and Prof. Akintola Akintoye with their permission to compare PPP practices between different jurisdictions. Returning Questionnaire Kindly return the completed questionnaire by: (a) post to Miss Esther Cheung (Research Associate), Freepost No.58, Department of Building and Real Estate, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong; or (b) fax to (852) 2764-5131; or (c) e-mail at bsesther@polyu.edu.hk Further Information If you are interested in assisting our further research work / receiving a summary of our research work, please provide your e-mail address: _____

330

Appendices

Appendix 2 Questionnaire Survey Template for Validation Process Validation Scoring Sheet - A Best Practice Framework for Implementing PPP in Hong Kong

Purpose of the questionnaire To validate that the best practice framework for implementing PPP in Hong Kong is comprehensive, objective, reliable and practical. Background This framework was developed as part of the deliverables of a PhD research study conducted at the Queensland University of Technology in Australia by Ms. Esther Cheung. Instructions This document contains of 5 pages (1 page of background and instructions and 4 pages explaining the best practice framework). At the end of this document you are kindly requested to rate six validation aspects by simply selecting the appropriate boxes. Information of Respondent Your position in the organization: Name of your organization: Please state your primary role (i.e. public/private/other): Your kind assistance in completing this questionnaire is very much appreciated. Please kindly return the completed form to Ms. Esther Cheung either by email: bsesther@polyu.edu.hk or by fax: 852 2764 5131 on or before 31 March 2009. Thank you in advance for your kind contribution.

Ms. Esther Cheung 17 March 2009

The Best Practice Framework for Implementing PPP in Hong Kong According to the Efficiency Unit’s (of the Hong Kong Special Administrative Region (HKSAR) Government) process for implementing PPP projects in Hong Kong there are a total of eight steps (Figure 1). This process demonstrates “What” needs to be done in order to implement a PPP project in Hong Kong. But it does not explain “How” these activities can be achieved. By incorporating the “What” and “How”, a best practice framework for implementing PPP projects in Hong Kong has been derived. For each step of the process, users are shown “How” to implement PPP projects by a list of the “Dos” and “Don’ts”. Tables 1 to 8 show the “Dos” and “Don’ts” for each step of the PPP process.

331

Appendices

Figure 1

The process for implementing PPP projects in Hong Kong (adapted from the Efficiency Unit of the HKSARG)

Step 1 Mobilisation and development of a business case 1.1 Conduct needs analysis, market testing and PPP feasibility study 1.2 Establish a project steering committee and designate a contract manager 1.3 Establish whether a site is available 1.4 Establish what facilities/services are required 1.5 Prepare a draft Statement of Requirements 1.6 Consider whether to accept proposals for enhanced or other additional commercial facilities/services on the site 1.7 Assess risk 1.8 Prepare public sector comparator and seek policy endorsement

Step 2 Funding 2.1 Submit a bid via the policy bureau for funds through the resource allocation exercise process

Step 3 Technical assessments, consultation and land requirements 3.1 Conduct appropriate technical assessments and socio-economic studies 3.2 Seek necessary authorities’ agreement on land use 3.3 Conduct consultations with stakeholders, policy committee and legislative council panel

Step 4 Expression of interest exercise 4.1 Initiate an expression of interest exercise

Step 5 Policy and funding approvals 5.1 Consult and seek approvals of public works subcommittee of the legislative council and finance committee of the legislative council 5.2 Determine detailed commercial arrangements 5.3 Seek draft land grant conditions

Step 6 Procurement and selection 6.1 Instruct department of justice on drafting of procurement documents/contract 6.2 Finalise procurement documents and seek approval from central tender board 6.3 Establish bid evaluation committee 6.4 Issue request for proposal and conduct briefings/site inspections 6.5 Evaluate proposals 6.6 Negotiate with bidders and select from best and final offer 6.7 Award contract

Step 7 Service commencement 7.1 Commence construction 7.2 Commissioning of facility 7.3 Commence service delivery 7.4 Establish and maintain close relationship with the consortium

Step 8 Payment and contract management 8.1 Monitor performance regularly / Make payment for the facilities/services provided 8.2 Defer or reduce payment 8.3 Institute investigations and issue warning / Initiate dispute resolution procedures 8.4 Step-in 8.5 Conduct joint inspection towards the end of the contract 8.6 Hand over facilities at the end of the contract

332

Appendices

Table 1 No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Guideline for conducting step 1 “Mobilisation and development of a business case”

Dos Prepare a public sector comparator Ensure an economically viable project Streamline the process Consider to use PPP when improved services / products can be achieved Ensure appropriate risk sharing / allocation Keep to a timeline Provide an integrated solution Facilitate creative and innovative approaches

21 22 23

Solve the problem of public sector budget restraint Minimise political debate Continuous training Public sector to show commitment Government to have clear objectives and evaluation criteria Gain interest of general public Consider complex projects so that private sector can maximise their ability Avoid legislation obstacles Ensure an attractive financial market Avoid lengthy delays Ensure transparent and process Government champion from high level or treasury departments Positive media Ensure a stable macro-economic condition Ensure project technically feasible

24 25 26 27 28 29 30

Thorough and realistic assessment of the cost and benefits Ensure partnering spirit / commitment / trust Ensure there is a market need Consider projects with large operation element Ensure there is government need Consider projects of large scale Ensure better value for money can be demonstrated

16 17 18 19 20

Table 2

Challenge legislation system Force projects that have no market Tolerate delays Lack of transparency in the process Lack of government support Bad relationship with media Proceed under unstable economic conditions Expect projects to work without thorough investigation on the technical feasibility Leave assessment of the cost and benefits to later stages Reluctance to work with partners Consider projects with no market Consider projects that do not involve operation Consider projects that the government do not need Consider small scale projects Consider projects that are not value for money


No. 1 2 3 4 5 6

Dos Solve the problem of public sector budget restraint Allocate the risks appropriately Avoid political debate Rely on private parties that are financially incapable Avoid delays in negotiation Ensure an efficient and mature financial market exists

7

Conduct a thorough and realistic assessment of the costs and benefits Ensure commitment and responsibility of all parties Ensure an economically viable project Avoid public investment restriction Opt for PPP to provide funding Demonstrate appropriate risk allocation and sharing Demonstrate value for money Ensure partnership arrangement

8 9 10 11 12 13 14

Don’ts Choose PPP without thorough investigation Choose projects that are uneconomical Spend long durations during mobilization Use PPP when improved services / products cannot be achieved Intend to transfer large proportions of risk to a single party Ignore timeframe Have unclear objectives Limit the opportunity for the private party to show innovation and creativity Consider PPP for financial reasons only Involve in political debate Employ inexperienced or unskilful employees Government to be indecisive on procurement method Government to have unclear objectives and evaluation criteria Lack of communication with general public Define project scope and design fully

333

Don’ts Focus on private financing only Allocate all financial risks to the private sector Intensify political debates Rely on private financing solely Spend long durations over negotiation Assume an efficient and mature financial market is readily available Avoid continuous assessment analysis Lack commitment and responsibility Choose projects that are uneconomical Conduct PPP projects for financial reasons only Let funding be the sole reason for PPP Inappropriate risk allocation and sharing Ignore value for money Think of self privileges only

Appendices

Table 3 No. 1 2 3 4 5 6 7 8 9 10 11 12 13

Guideline for conducting step 3 “Technical assessments, consultation and land requirements”

Dos Ensure that improved services and products can be delivered Appropriate risk sharing Ensure that the party best able to manage the risk is assigned Provide integrated solution Facilitate creative and innovative approaches Ensure experience and appropriate skills Gain support and interest from general public Conduct complex projects so that private sector’s expertise could be utilised Avoid lengthy delays and negotiation Good governance Ensure transparent process Ensure that project is technically feasible Conduct thorough and realistic assessment of the cost and benefits

Table 4

Dos Demonstrate appropriate risk sharing Keep to a timetable Facilitate creative and innovative approaches

4 5 6 7 8 9 10

Government show support towards project Have clear government objectives and evaluation criteria Good private sector capability Government to commit to projects Gain support and interest from general public Speed up negotiation process Minimise private sector expenditure

11 12 13 14 15 16 17 18

Partnering spirit/commitment/trust Ensure transparent process Ensure there is a market need Ensure an economically viable project Have well defined project objectives Propose projects that are technically feasible Ensure stable macro-economic condition Ensure efficient and mature financial market exists

19 20 21

Close connection with media Ensure a favourable legal framework Ensure a stable political and social environment exists

22 23

Ensure government need Propose large projects

No. 1 2 3 4 5 6 7

Spend long durations during negotiation Lack of government governance Lack public consultation Aim to achieve technically infeasible aspects Leave assessment of cost and benefits to later stage


No. 1 2 3

Table 5

Don’ts Lack of interest to show improvement Inefficient risk allocation Transfer all risks to the private sector Consider short term goals only Minimise opportunities for private efficiency and innovation Inexperienced employees Block out the general public Conduct over challenging projects

Don’ts Hide details of risk allocation arrangement Delay the process Limit private sector’s chance to show creativity and innovation Government appear to be indecisive Government lack objectives and evaluation criteria Poor private sector capability Government indecisive on procurement method Lack of support and interest from general public Spend long durations during negotiation Expect private sector to have clear conceptual plans at this stage Consider self privileges only Block out the general public Propose projects with no market Choose projects that are uneconomical Have unclear project objectives Propose projects that cannot be achieved technically Pursue projects under unstable macro-economic condition Pursue projects under inefficient and immature financial market Negative media Pursue projects under unfavourable legal framework Pursue projects under unstable political and social environment Propose projects that the government does not need Propose small projects


Dos Keep to a timetable Ensure a stable social and political environment Ensure a clear legal framework Ensure good governance Ensure transparent process Gain government support and have champion from high level or treasury department Ensure stable macro-economic condition

334

Don’ts Delays during negotiation / political debate Pursue projects under unstable and political environment Pursue projects under an unclear legal framework Poor governance Block out the general public Lack of government support Pursue projects under unstable macro-economic condition

Appendices

Table 6 No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Dos Ensure a fair risk allocation mechanism Allocate risks to the party best able to manage them Streamline the process Provide an integrated solution Keep to a timetable Ensure a stable social and political environment Ensure a clear legal framework Ensure good governance Ensure transparent process Gain government support and have champion from high level or treasury department Ensure stable macro-economic condition Minimise political debate Government commitment Compensation to losing bidder Select strong and good private consortium Gain general public support and interest Clear government objectives and evaluation criteria Ensure positive media Ensure partnering spirit / commitment / trust Ensure rigorous tendering process Low tendering / transaction costs

Table 7 No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14


Don’ts Neglect the target milestones Conduct minimal requirements Be reluctant to develop personnel Stop communicating with general public Hide project details Overpriced fees for facilities/services Stop searching for markets Ignore surrounding macro economic condition Government avoid responsibility Government to intrude on activities Allow the media to gain a bad perception Lack commitment Consider self privileges only Prevent private sector to maximise their potential


No. 1

Dos Check that appropriate services and products are delivered

2 3 4 5 6 7

Show a partnership arrangement Encourage interest of the general public Government to step in if necessary Ensure a stable macroeconomic condition Ensure stable political and social environment Conduct thorough and realistic assessment of the cost and benefits Ensure efficient and mature financial market Ensure an economically viable project Ensure continuous market need Ensure compliance with contract terms Assessed by performance

8 9 10 11 12

Pursue projects under unstable macro-economic condition Encourage political debate Scheme aborted before contract High participation costs Select incapable private consortium Lack consultation with general public Unclear government objectives and evaluation criteria Negative media Lack partnering spirit / commitment / trust Fixing contracts too quickly High tendering / transaction costs


Dos Keep to the contract milestones Continuously introduce appropriate talents or resources Continuous training Communicate with general public Ensure transparent process Charge reasonable fees for facilities/services Ensure financial market Ensure a stable and macro economic condition Show good governance Government to step in if necessary Create close links with media Commitment of all parties Partnership arrangement Government to give private sector free hand to maximise their ability

Table 8

Don’ts Allocate large proportion of risk to a single party Allocate all the risks to the private sector Waste time during administrative procedures Have unclear objectives Delays during negotiation / political debate Pursue projects under unstable and political environment Pursue projects under an unclear legal framework Poor governance Block out the general public Lack of government support

335

Don’ts Deliver services and products of lower quality then specified in contract Blame partners for unsatisfactory performance Prevent transparency Government to interfere without appropriate reason Ignore the surrounding macro economic condition Ignore changes to political and social environment Avoid continuous assessment analysis to minimise work load Stop creating economic opportunities Choose projects that are uneconomical Search for new markets Breach contract terms Assessed solely be economic return

Appendices

Questionnaire Please select the relative score for each validation aspect below to represent the extent of satisfaction (1 represents “poor” and 5 represents “excellent”). Validation Aspects

Scoring Scale Poor 1

1. Degree of appropriateness 2. Degree of objectivity 3. Degree of replicability 4. Degree of practicality 5. Overall reliability 6. Overall suitability for PPP projects in Hong Kong

336

2

3

Excellent 4 5