Exclusive Interview with Michael Camerlengo

Public-Private is Right Road for Infrastructure: Kai Tak Sports Park Project

 

Public-private partnerships (PPPs) for delivery of public infrastructure come in various forms but have been around for a long time in some markets.

 

In Hong Kong they are a relative novelty but offer the prospect of appropriate management of risk – whether by the public or private sector – and the potential for innovation typically associated with private-sector market discipline and the profit motive, says Michael Camerlengo, director, infrastructure advisory at KPMG Transaction Advisory Services Ltd.The firm has been a consultant to the Hong Kong government on  on the Kai Tak Sports Park Project in East Kowloon.

 

 

The scheme’s website describes the initiative as the “most important investment of the government in sports infrastructure in recent decades”. The site occupies 28 hectares (69 acres) of land in the area once home to the city’s old airport. The Kai Tak Sports Park land parcel is about 9 hectares larger than Victoria Park in Causeway Bay on Hong Kong Island and will “contribute significantly” to development of sports in Hong Kong, according to the website.

 

The scheme is still at the qualified bidding stage, with responses from the bidders expected “towards the end of June”, says Mr Camerlengo. Once completed, it will have a main stadium with a capacity of up to 50,000, an indoor sports centre, and a public sports ground, and will be operated by the eventually-chosen consortium on a 25-year contract.

 

“This project has been talked about for over 15 years. With anything that’s had such a long history there is naturally going to be a degree of controversy,” Mr Camerlengo told Innovation Hong Kong.

 

“The project has a clear plan and a clear direction. The market is well aware of it, the funding has been procured from LegCo [Hong Kong’s Legislative Council], and the project is out to tender and looking for responses from groups that have been prequalified,” he added.

 

Bid incentive 

 

One of the most controversial aspects of the scheme has been the so-called “bid incentive” policy. Assuming that one of the three sets of qualified bidders is selected, the losing bidders have been guaranteed a payment from the government equal to a maximum of either HKD60 million (US$7.7 million), or 50 percent of their total bid costs.

 

“That is not typical, not standard, definitely,” said Mr Camerlengo. “As far as I am aware, that is unprecedented for the government in Hong Kong to take that approach. It has happened in other markets. We thought in this case it was a necessary element to increase the chances of success,” he added.

 

The KPMG executive explained that to deliver a project of this nature a bidder needs to bring together skills across many different disciplines, i.e., in design, in construction and even in project operations, as there are many different areas, from sports to events to managing retail facilities to managing community facilities.

 

“So when you look at all those variables, it’s hard for any one organisation to deliver on their own. You need to bring a diverse group of companies or individuals together to have a shot at this, and that’s not easy,” Mr Camerlengo told Innovation Hong Kong.

 

“When you have groups of very different disciplines that need to come together, they need a reason to come together… In this case, bidding for this project represented a high level of risk for all groups because no single group would be able to have full control over their chances of success,” he explained.

 

“By giving some incentive, we take some of that risk off the table, and encourage them to bid,” he added.

 

 

Best of both 

 

Leaving aside the specifics of the Kai Tak Sports Park Project, the KPMG executive suggested that the scheme – as well as the multi-phase SkyCity project at the current Hong Kong International Airport at Chek Lap Kok – could offer a way forward for other infrastructure in the city.

 

“Hong Kong has had fantastic strength in construction… the hardware side,” said Mr Camerlengo.Typically the private sector’s involvement has been on a “build and deliver” basis, with no management of the asset subsequently.

 

“I think there’s room for development on the ‘soft’ side of infrastructure… how projects are procured… such as more private sector involvement and innovation into the delivery and operation of these assets,” he stated.

 

One possible route is so-called public-private partnerships, where the public sector absorbs some or all of the commercial risk of a scheme, or may manage some of the operational risk. In the United Kingdom, a particular form of PPP – known as a private finance initiative, or “PFI”, has been used to build schools and hospitals and lease them back to the public sector. PFIs have had a bad press there recently, because of the reportedly high payments owed by the public sector to the private-sector developer once the assets are delivered.

 

“A large volume of PFI projects in the U.K. is structured using a service payment regime,” says Mr Camerlengo. “The private sector finances it, and then the government makes a service, or lease style payment in return for the delivery of the asset.”

 

He added: “A misconception about PPPs… is that they can be undertaken to shift the funding burden [from public to private]. Actually, funding is not a good reason in isolation to undertake PPPs…the main driver for adopting a PPP approach is…to capture private-sector innovation… Getting the ‘best of breed’ private skills to be able to develop and deliver a project; and [for] improved risk allocation.”

 

He further explained: “What a PPP does is allows the risks of a project to be identified and allocated to the parties best capable of managing those risks: in some cases it is the private sector, and in some cases it is the government or ‘public’ sector.”

 

The KPMG executive added that by allocating risk appropriately, the final cost of delivering a project might come down, “because groups that know how to manage those risks, won’t price those risks so highly”.

 

“By definition, to survive in the private sector, you have to innovate and be creative and find solutions to problems on an evolving basis. So when you bring that mindset to the delivery of infrastructure…it creates greater opportunities for the users of the asset, in this case the general public,” suggested Mr Camerlengo.

 

He added: “Innovation from the private sector can… deliver greater benefits. Take a stadium, for example. If you allow a private sector group to design, build and operate a facility, they then start thinking about the end user from the point of view of a commercial operator. And if you structure the project correctly from the outset – from the point of view of all possible users, including community users – it increases the scope for commercial income streams to be generated, whilst also addressing the needs of community user groups…creating win, win outcomes.”

 

 

Update

Since this interview was conducted Kai Tak Sports Park Project was awarded to the JV between New World Development Company Ltd and NWS Holdings Limited ( Kai Tak Sports Park Ltd) for the design, construction and operation. The construction works will commence in the first quarter of 2019 and  are scheduled for completion in 2023.

The contract for the Kai Tak Sports Park is for 25 years, including four to five years for design and construction and approximately 20 years of operation. The Government will fund the construction cost of $29.993 billion, while Kai Tak Sports Park Ltd is required to cover all operating costs and pay the Government 3 per cent of the gross income plus $1.724 billion during the operation period.

There are various energy conservation and sustainability design features such as a photovoltaic system, roof greening, vertical greening and parking spaces with electric vehicle charging facilities. There are also smart city initiatives including an intelligent building management system, wi-fi hot spots, an indoor positioning system, an intelligent car park management system and mobile applications to facilitate precinct information, booking of facilities and wayfinding.

 

 

 

 

 

 

 

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