Introduction

Transfer of public services to the private sector where appropriate market conditions prevail is a major strand of work under the Helping Business Programme. Transfer of public services can be achieved in a variety of ways, including greater use of outsourcing, competitive tendering, partnership with the private sector and full scale privatisation.

2. Transfer of public services can bring the following benefits -

	improvements in the quality of services as suppliers compete to meet explicit performance targets for service standards;
	more efficient and responsive services as service providers do not need to conform with civil service rules and procedures;
	freeing up of public funds for essential services and immediate reduction in the overall cost of public services;
	greater management flexibility as the Government can now focus on the "core business", i.e. formulating policy, overseeing its implementation and protecting public interests; and
	stimulation of the private sector as the market responds to new demand for services previously provided by the public sector.

Hong Kong experience

3. Transfer of public services is nothing new to Hong Kong. Our experience includes -

	outsourcing of the operation and management of tunnels, public carparks and office buildings;
	contracting out of cleansing and guarding work and technical and professional services;
	setting up of public corporations - KCRC, MTRC;
	purchasing services from non-government organisations (bought place scheme in elderly homes, and for school places); and
	allowing developers to undertake works which were performed by the Government (e.g. utilities connections and construction of run-ins).

4. Transfer of public services has been a significant theme in public sector reform in many countries including Australia, New Zealand and UK. In Hong Kong, we see our reasons for transferring public services as follows -

	to keep the Government small;
	not to compete with our citizens;
	experience suggests that services provided by the private sector are more efficient and of a higher standard;
	to spare limited government resources for more specialised tasks; and
	to meet the fluctuation of workload in the civil service.

Important issues

5. The public services in Hong Kong are wide-ranging, diversified and manpower-intensive. Our experience in the past and overseas practices in transferring public services to the private sector have important learning points for our work plan, including -

	the objectives must be clear (better service, greater efficiency)
	staff concerns must be properly addressed (fear of losing jobs/lacking security)
	proper infrastructure in place (proper accounting system, streamlined procedures being pre-requisites to change)
	existence of an external market (we should not over-estimate the ability and the willingness of the private sector. Initial prompting from the Government should be provided, if necessary.)

Work in hand

6. We are working on the following projects which fall under this particular strand of the Helping Business Programme -

1. identification of initiatives to encourage greater private sector participation in the provision of residential care services for the elderly;
   
   
2. outsourcing of the meal delivery service under the Home Help Service;
   
   
3. contracting out of the driver and vehicle licensing functions;
   
   
4. outsourcing of the by-hand delivery of open and restricted documents;
   
   
5. outsourcing of the non-core activities in the Intellectual Property Department;
   
   
6. identification of options for private sector participation in the provision of water supply service; and
   
   
7. development of proper infrastructure for transfer of public services (e.g. corporatisation)

7. In the pursuit of these projects, we work closely with the respective departments and policy bureaux to study the feasibility of transferring the public services, to identify the most appropriate form of private sector participation and through to the implementation stage.

Corporatisation

8. There are certain government activities which are commercial or semi-commercial in nature. They have the potential to be provided in a more efficient and cost-effective way if the service providers are given more freedom to manoeuvre.

9. Furthermore, as we move into the 21st century, we must make sure we are providing public services that can meet modern day requirements and take full advantage of modern technology and techniques. In addition to setting up trading funds and contracting out more services, we also need to consider other types of changes to the government structure. Corporatisation is a tool which can in appropriate cases improve the efficiency with which public services are delivered.

10. By turning certain appropriate government services into public corporations and running them on commercial principles, this will produce a number of benefits -

1. subjecting the corporations to market discipline will instil a customer-oriented culture in the service providers;
   
   
2. the establishment of a proper accounting system will enable the operators to measure more accurately the costs and benefits of providing their services. This will in turn give them an incentive to run the activities more efficiently;
   
   
3. by freeing the corporations from government rules and procedures, the operators can have more flexibility to operate and the capability to be more responsive to customers' demands and changing market conditions; and
   
   
4. corporatisation can offer the opportunity for more private sector involvement in traditionally government run activities.

11. Corporatisation may serve as an interim step towards privatisation, though this may not necessarily follow in all cases. Whether a corporation would eventually be privatised may depend on many critical factors, one of which is whether suitable market conditions prevail. A detailed assessment would be made after the corporation had been established for some time depending on individual circumstances.

12. We are determined to move ahead quickly with corporatisation. Our current thinking is to establish a limited number of public corporations in the years to come. Each would be established under a separate ordinance. The ordinance would set out the principles and mechanisms for the corporation's operations. We are now at the stage of identifying potential candidates. We aim to come up with specific proposals by the end of the financial year.

13. We understand the concern of staff in any corporatisation proposal and recognise the importance of maintaining stability. In moving ahead with any corporatisation plan, we will work closely with the departmental management and consult staff as early as possible.

14. We also appreciate that the establishment of an effective monitoring mechanism for public corporations will be one of the major areas of public concern in considering corporatisation proposals affecting services to the public. We will give careful consideration to this when working out individual proposals.

Partial Privatisation of the Mass Transit Railway Corporation

15. The Financial Secretary announced in his Budget Speech on 3 March that the HKSAR Government proposes to privatise a substantial minority share of the MTRC through a public offering.

16. Following the announcement, the Government has selected and appointed a Financial Adviser and has embarked on the drafting of enabling legislation for the privatisation.

Financial Adviser

17. The Government has appointed Merrill Lynch as its Financial Adviser for the proposed partial privatisation of the MTRC. The Financial Adviser will assist the Government in evaluating the financial and related aspects and impact of such partial privatisation. The objective of the financial consultancy is to study how best to proceed from the perspective of the Government as the shareholder and regulator, taking into account the interests of the public, the users and employees of the MTRC.

18. The MTRC has appointed Goldman Sachs and ABN-AMRO Rothschild as its financial advisers.

Preparation of legislation and operating agreement

19. The Government is in the process of drawing up the necessary legislation, and has begun work with the MTRC on drafting the Operating Agreement, which will need to be in place prior to the privatisation. The Government aims to introduce the new bill into the Legislative Council as soon as possible.

20. The new legislation will replace the existing MTRC Ordinance and will provide for the granting of a franchise to construct and operate the mass transit railway, and any further extension as may be authorised, to a new company incorporated with limited liability under the Companies Ordinance. All assets and liabilities of the MTRC will be vested in the new company. There will also be provisions to ensure the safety and reliability of railway operations.

21. The Operating Agreement will set out the detailed terms of the franchise. As a basic principle, and to the maximum extent possible, the new arrangements will preserve the status quo of the MTRC's modus operandi, which has seen the establishment of a world-class mass transport system for Hong Kong over the past quarter-century.

Initial Public Offering

22. Following enactment of the legislation and signature of the operating agreement, we will move to the next phase of the privatisation process with the preparation of the Initial Public Offering of a minority of shares in the MTRC. Subject to market conditions, we expect this can take place in early 2000.

Next Steps

23. We will give a briefing on the proposed legislation at the next meeting of the Legislative Council Panel on Transport on 25 June. Members of this Panel will be invited to attend.


Business and Services Promotion Unit, Financial Secretary's Office
Finance Bureau
June 1999