4.4. Reform without privatization?
Can we apply the above reform options to the water supply industry in Hong Kong? The experiences from
the sewerage and rail industries in Hong Kong have shown that the granting of a trading fund or public corporation
status is not likely to bring high efficiency gains to the water supply industry. When staff work under the
notion that the Government will bail out the department should the trading fund or the public corporation suffer
a loss, they will not have enough of an incentive to contain cost increases and to seek new revenue sources. The
imposition of financial targets may force a public corporation to achieve higher efficiency, but this is not a sufficient
inducement to maximize profits. In France, private water companies actively compete for contracts particularly in metropolitan areas. Such competition can help minimize costs and prevent potential operators from charging too high a price after winning a contract. Again, such forms of competition may not be applicable to Hong Kong, given its condensed
geographical area and the small scale of the water supply industry. There may not be a sufficient number of potential
bidders with an interest in running the water supply business. It is also difficult to delegate individual parts
of the integrated water supply system to different private operators and to compare their performances (Sawkins,
1995). Serious transactional problems are likely to arise at the initial award stage, at the execution stage, and
at the contract renewal stage. Furthermore, under these reform options, since water plants remain public property,
we cannot rely on the capital market to discipline the performance of the operators and to finance expansion.
One alternative available to overcoming the monitoring problem and the financial constraints is a full privatization
of the water supply industry. Hong Kong can gain from UK’s experience on full privatization.