Public-private partnerships may help deficit: consultant

PUBLISHED : Monday, 21 July, 2003, 12:00am
UPDATED : Monday, 21 July, 2003, 12:00am

The Hong Kong government should consider adopting British-style public-private partnerships (PPPs) rather than opting for wholesale privatisation of its assets, a consultant has said.

Michael O'Higgins, a member of PA Consulting's management committee and head of its IT consulting group, said some of the more pressing questions surrounding the privatisation debate could be solved by adopting the British model of public-private partnerships as a way of creating a smaller government.

'PPPs are not just contracts, Hong Kong has been doing that for a long time. The emphasis is long-term partnerships that put the onus on the service provider to establish the framework of the partnership,' he said.

'Simply put, the government sets the benchmarks for what it wants and then the private sector partner decides how best to provide this. They are then paid by the outcome,' Mr O'Higgins said, with public oversight over the quality of services.

He said the biggest difference from traditional methods of privatisation was that 'the private sector has to be willing to take on more risk than they would normally do with a government contract'.

'For example, whereas in the traditional model, providers are paid for providing the service, in PPP, they are paid by the transaction. In the UK, it's common to talk of this as 'gain-sharing',' he said.

Public-private partnerships can also often get rid of the issue of the fairness of allowed returns to the private sector partner, a problem which has plagued Hong Kong projects like power and gas provision and the operation of the cross-harbour tunnels, he said.

'In principle, it gets rid of the fairness questions because gains in efficiency would be properly priced into the partnership. In practice, there typically tends to be lots of transparency in the process anyway.'

There is usually much earlier discussion between government and the private sector in the formation of PPP projects than when the government puts something out for tender once it has already decided the parameters of the project.

As a result, it forces the two sides to think about the level of service desired and how much it would cost to provide it, resulting in more realistic pricing practices, said Mr O'Higgins.

While the debate over how to privatise public assets rages, the shortfall in government accounts will keep swelling, hitting as much as $68 billion in the coming fiscal year after having reached $61.7 billion last year, making the move towards smaller government inevitable.

Even more important to government coffers than the cash raised from the sales is the savings from not having to provide continued management and operation of services, such as the maintenance of public rental housing, or water and sewerage services.

Without these savings, analysts estimate that the local economy would need to grow 4 to 5 per cent a year over the next decade to seriously address the deficit issue.

'In the UK, savings to the government have been around 20 per cent. In fact, the vast majority of public capital projects in the UK are now done under some form of PPP, prisons, hospitals, major IT supply services, etc,' Mr O'Higgins said.