In the past centuries, the Hong Kong government has been committed in providing various welfare services to the citizens in order to meet the social needs of the citizens and so as to increase their quality of life and achieve a harmonious society. Since the society is becoming more and more developed, however, the role of government in providing social welfare services has changed too. The government seems intending to step away from directly providing those services and lowering the size of the public sector. The government has also tried to increase the private sector through the process of privatization. The LINK REIT (real estate investment trust) perhaps one of the best examples to demonstrate the privatization of social welfare services in Hong Kong. This paper aims to discuss the pros and cons of privatization of welfare services through the example of LINK REIT.
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Definition of privatization
There are indeed a wide range of definitions of privatization given by different scholars. According to Le Grand (1984), privatization of welfare services refers to any reduction of the roles of government in welfare provisions in any of these three disciplines, direct provision, subsidy and regulation. As for Walker (1984), his arguments on privatization can be divided into two parts. First, there is a responsibility shift on the service or a particular aspect of service delivery passes wholly or partially to the private sector. Second, the services or benefits are rationed or distributed according to the market criteria such as ability to pay or making profit. Despite the terminology employed, in general speaking, privatization of welfare services can be defined as the transfer of provision of welfare services which is altruistic from the public sector or the government to the private sector which runs under the egoistic market mechanism aiming for profit making and maximization.
Aim of privatization
In such, there is a rolling back of the role and responsibility of the government as well as shrinking its size whereby activating the private sector in the sense to increase efficiency, quality and choices of services under market competition. Also, as the privatized services are now running for profit-seeking motive, it would focus more on cost reduction and give greater attention to the satisfaction of the receivers of the services and cater to their needs. Proposed by Hanke (1985), privatization can lead to an enhancement of overall efficiency, effectiveness and versatility through competitive market mechanism with the shedding-off the governmental responsibility from both goods and services provision. For long that the expenditure on welfare services lays heavy burden on the government financial situation and thus through privatization, the pressure on the budgetary position of the government can be released. Moreover, it can improve the efficiency of resources utilization as market mechanism is employed, and it also allows the establishment of a balance between the public and private sectors in terms of both financial and welfare service provision aspects.
Privatization in Hong Kong
Privatization of welfare services was not a new idea in Hong Kong. Matter fact, the government had adopted privatization in various ways. For example the government and a private company, Serco Group (HK) Ltd. run the Hung Ham Tunnel together under the public and private partnership where the Hong Kong government as the owner and the company as the operator. Similarly, the government had adopted the Build-Operate Transfer model and gave the New Hong Kong tunnel the right to run the Eastern Harbour Tunnel in a 30-year franchise with lease expiring in August 2016. Moreover, the set up of trading fund for the post office in 1995 while it became a self-maintained independent body without extra subsidies from the government. Another example can also be found in the listing of MTR Corporation Limited in 2000. And the most recent controversial privatization of social welfare services in Hong Kong must also included the LINK REIT which was successfully listed in 2005.
The LINK REIT
The LINK REIT is one of the world largest real estate investment trusts ever. Its assets composed of 151 shopping arcades with total floor area of 1.87 million square ft. and 178 car parks with about 80,000parking spaces. A consideration of $32 billion HKD was given to the Housing Authority when it was first established, The LINK is also the largest single REIT IPO in the world. Due to the composition of its assets, the major source of revenue is from its rental income. While the Link Properties Limited is the business entity which is the legal and beneficial owner of the assets of the Link and carry out leasing activities for the Link, and the Link Management Limited is responsible for the management of the Link, the Link has contracted out certain services area such as security and cleaning services to other third parties.
Establishment of the LINK
Ever since the launch of the Home-ownership Scheme(HOS) to assist people to own their housing units in the 1978, the proceeds from the selling of the housing unit had become major source of income for the Housing Authority. And because the Housing Ordinance has been amended to turn the Housing Authority into a self-sufficient body which has to be self-sustained without much government support and subsidy, the decision of the government to withdraw from the property market and suspend the constructions of new HOS estate and selling of public housing units in 2002 had affected the HA revenue significantly. The revenue of HA by then had decreased by 60% and the HA was suffered from huge deficit budget so as to maintain its policy of providing rental housing to low-income groups in 3-year waiting time. Therefore the HA was in desperate need of extra source of financing and alternative ways to raise capital other than simply renting out residential units and shops. To resolve the problem, the HA was strongly willing to get rid of the shopping malls and car parks under its name for cash. And thus this led to the formation of the Link Real Estate Investment Trust. However, the establishment of the Link was not under proper public consultation. The HA only made a symbolic gesture to consult a few intermediate bodies for the commercial tenants before jumping to the hasty decision to sell its assets. The consequence was that 2 public housing estate residents applied to the High Court for a judicial review and the court order of injunction to halt the government’s privatization act. This happened shortly the announcement of details about the Link IPO and commencement of accepting public offering. Those 2 residents claimed that HA has violated the Housing Ordinance by not fulfilling its duty to provide housing and related shopping and commercial amenities to housing estate resident. HA had no choice but postponed the listing of Link. Nonetheless, the court thought that the selling of assets of HA was not necessarily affected HA ability to fulfil its duty and thus not violating the Housing Ordinance. One year later, the Link was eventually listed on the Hong Kong Stock Exchange.
Pros of Link
Reduce financial burden of the Housing Authority
First and foremost, the Link helped the HA to generate a considerable amount of capital of $32 billion HKD which was estimated to be able to hold account for the HA 10-year consumption. Other than the direct assistance, the set up of the Link can also help to reduce the financial burden of the HA and the government in terms of receipt from the public floatation and streamlining the size of the HA.
In the past, the HOS operation account of the HA had always been one of the accounts that have surplus while the HA was enduring great deficit in the management and maintenance of the rental housing units and shopping malls. Through selling the shopping malls and car parts to Link together with outsourcing those services, the HA budgetary position can be improved considerably. The HA can be benefited in terms of additional revenues from the sales of enterprises as well as reduction in running costs. Researches had shown that by contracting out services to the private sector, the cost saving can be up to an average of 20 -40%. And matter of fact, according to the Expenditure for Commercial Properties of HA, the total expenditure of HA has been decreased from $3118million before the establishment of the Link in 2004 to $811million in 2008.
Moreover, the transfer of assets to the Link has helped to streamline the size of the HA. One cannot deny the fact that one shortcoming of the public sector was its poor economic performance. The HA was unfortunately one of them. This may perhaps attributed to the heavy responsibility on both being accountable to carry out non-profit making projects and housing policy while at the same time in charge of the estate management and maintenance. Streamlining the HA means also reducing those costly tasks to be performed Thus, the privatization scheme has enabled the HA to lower its operating costs and concentrate its resources for services delivery. At such, the overall management of the enterprise will be improved. (Goldman & Mokuvos, 1984)
Improvement in the economic efficiency
As the services provided by the public sector was not aimed at profit-making but altruism which means transfer of resources or services unilaterally, the lack of free market competition and control mechanism would always resulted in poor economic performance, low economic efficiency and resources wastage. The transfer of ownership of those assets from the HA to the Link does not necessarily improve the efficiency but it was free market mechanism which allows the private sector to compete on the services provided as well as the price offered and the cost reduced so as to maintain its profit margin. The privatization act caused the Link to be responsible for its own business and create incentive to increase its profits and thus encourage better resources allocation in a wise and effectively manner. From the annual report of the Link we can see that the profit of the year ended Mar 2010 has increased by 15 times than the previous year, the dividend income of the shareholders has also increased by 17%. The results indicated that the Link can better manage cost and generate more income as compared with the Housing Authority.
Enhance the freedom of the choice
The Housing Authority had standardized the housing quality and allocation of public housing. Since the resident of the housing estate were supposing to be the low income groups, the HA also limited the access to credit and other inputs at below market rate favoring the small and medium sized enterprises to station at the shopping malls. The private businesses face dangers like unfair competition from the state enterprises. However, the privatization act opened the gate the private sector to gain access to these areas where were subjected to limited accessibility. The minimized government distribution channels allow more choices in the markets not only to the enterprises but also the residents living around those malls. The privatized state-owned enterprises provide a fair opportunity for the private sectors to compete and thrive.
Reduction of government’s political pressure
The privatization of the operation of the shopping malls and car parks can reduce the government’s political pressure with regard to the poor management, dissatisfaction of services delivered as well as economic performance. Though the HA is an independent statutory body nowadays, it was under the bureaucracy hierarchy of the government bound by the government regulations imposed on it as well as the Housing Ordinance. It is answerable to the department heads and each decision or action made had to be gone through lots of administrative works and procedures. The transfer of ownership to the private sector can effectively improve the situation according to the market mechanism. In other ways, both the government and HA can benefit from having less administrative work. Furthermore, as those services are not held responsible by the HA and the government, but the Link, a privately run company, any criticism about the services would now go directly to the corporation but not neither the government nor HA.
Flexibility in management
After the privatization, neither the management nor operation is subjected to the government hierarchy. The link has the autonomy in decision making which is detached from the government and has the flexibility in the deployment of staffs which is very different as it was running under the public sector. Fewer management strata and the employment of sub-contractors also enhance the flexibility to meet the tenants’ needs. Thus, the corporation can response to the market changes much quicker and hence provision of better services is possible. According to the customer rating for shopping and dinner choices in the shopping centers, the customer satisfaction about those shopping malls under the Link has increased from 5.8% in 2005 before it took over them to 6.8% in 2007 after its management. This has proven the flexibility in management has indeed enhanced the image of the shopping malls.
Improvement in quality of services
Privatization encourages healthy competition among the private and public enterprise, as well as private sector investment and development in local market, the standard and quality of products and services are improved for retaining contracts and keep customers satisfied. (Poole 1996) From the various information collected as shown above, we can see that the quality of services has increased because the Link operates according to the market principle, mechanisms of price and tests of profitability. As now the Link is accountable to the shareholders, it would try whatever means to cut costs and boost its revenue mainly from the rental income. The link has launched the asset enhancement projects to renovate the shopping malls and car parks to improve the image and attract customers.
Cons of the Link
Intensify social divisions and conflicts
Having looked at the pros of the Link has brought about, we should not omit the cons of the Link. One of the drawbacks of the establishment of the Link is that as now the shopping malls and car parks are running under market principle, the Link is held accountable to the shareholders instead of the general public. However, there is a clear division of interest between the two parties. The conflicts of interest has put the general public into a difficult situation as they have primarily low bargaining power as compared. When the Link is intended to increase the rent, there is simply no one to justify and regulate its action as the government has no obligation and right to do so. The small business has to succumb to the decision and have no ways but to transfer the cost to the consumers. The interest of the shareholders who are looking for higher dividend return and increase in stock tenants is gained at the expense of the interest of the public housing tenants and small business runner who have to suffer from higher rents and more expensive goods.
2 Financial burden of tenants and residence form privatization
For those businesses which cannot afford the increased rent, they had to end their business. In fact, this a method that the Link has used to end the landlord-tenant relationship with those small businesses and force them to leave the shopping malls. So that the Link can free the places and rent them to those enterprises who can afford the expensive rent through selling expensive goods. A recent news has reported that the rent of the wet market in Tsui Ping Estate has drastically increased by 30% despite the inflation was much lower than this rate. The tenants protested that the rent increased is not reasonable. Matter of fact, the rent increase of the Link is far higher than the market trend which on average only increased by 16%. Such increase in rent has occurred ever since the takeover of the Link as we can find from the Link financial report. The rent of the shopping malls is increase at least 7% annually and the rent car park spaces are also increasing at 2.5%annually. It seems that the Link is also lack of public accountability and monitoring bodies as the government is difficult to intervene with such a private corporation as it has its own decision making concerns under the market mechanism. However, the Link has been criticized on choosing its tenants through price discrimination and expelling the small business and neglect the public interest that the residents can only afford to buy those necessities at a low price with regard to their income. This is controversial because this may seriously affect the social harmony.
Lack of control over the Link
Because the services are now not under the public sector, the government can do little to regulate and control the management and operation of the shopping malls and car parks unless there is violation of law. Though there are dispute on the rent adjustment, salary range of the staffs and other business decision made by the Link, it has always excused of taking care of the interest of the shareholders. For example, we have found news revealing the salary of the cleansing workers of the Link was only $16 per hour with horrible 15 working hour per day. They are also not covered by the labor insurance nor the MPF scheme and they are even required to buy the cleaning tools on their own as they are considered as independent contractor instead of employee by the Link. These low-skilled workers are severely being exploited but the government cannot control it. In addition, there is also lack of control over the ownership of the Link. Possible risk of that is the dilution of ownership and the Link may eventually be taken over by some private foreign investors.
Comments on the Link
Having discussed both the pros and cons of the establishment of the Link, what can we tell about the privatization of such a social welfare services in Hong Kong? Surprisingly as it may seem, in spite of the theoretical benefits that could be brought about by allowing market mechanism, the Link has causes much troublesome. For example, it intensifies the problem of working poverty as well as unemployment as it tried to lower its cost as much as possible. It also in turn widens the gap between the rich and poor. Although it is claimed that is running under the market competition, it appears that the business is existed as monopoly as there is no rival in such newly formed model. Besides, the market mechanism on one hand indeed improve the efficiency, effectively and resources allocation, on the other hand, has less focusing on the social responsibility that such a corporation should bare in the sense of its special existence in the market. A balance between the market principle and the welfare principle should be strike for. Welfare is important in the sense that it serves as a mutual support system (H. Specht, 1993) to promote social integration through meeting people’s basic needs, resolving social problems, promoting social mobility and enhancing economic development. (R. Timuss, 1974) The rolling back of the role of government has decreased its responsibility in the provision of welfare services while is privatization a good way for the society and whether the function of welfare is preserved. Perhaps these are important questions we should ask and think of before the government makes another privatization decision and that is the lesson we have learnt from the case of the LINK REIT.