18 September, 2016
The Hong Kong Housing Association (HKHA) has been urged by the competition watchdog to improve the way it grants contracts for the supply of liquid petroleum gas to housing estates.
The Hong Kong Competition Commission reviewed the HKHA after concerns were raised over a possible lack of competition in the current system, it said.
The HKHA arranges the supply of gas to around 156,000 residents in 15 public rental housing estates. Under current practice, incumbent suppliers' contracts are for an initial 15 years and are then renewed for a further 10 years without any competitive process.
Decisions on contracts have traditionally been based on the premium that will be payable to the HKHA, the Commission said. This premium is not shared with residents through lower costs, it said.
The Commission has therefore recommended that the HKHA should consider introducing a competitive process for the award of subsequent contracts.
The decision should then be based on the price to be charged to residents, not on the premium to be paid to the housing authority, the Commission said.
The HKHA should also consider 'bundling' estates for tender or negotiation with suppliers to encourage bids from new suppliers, it said.
Residents should also be given information on the pros and cons of staying with the existing supplier, and allowed a say in whether to open the contract to competition, the Commission said.
The HKHA has raised concerns about possible disruption and inconvenience to residents from a change of supplier. Residents would need to sign new agreements and replace gas meters at their own cost if the supplier changes, it said, according to the Commission.
Potential new suppliers are also likely to be at a disadvantage compared to the incumbent as they would be taking on infrastructure that was installed and maintained by their predecessor, the housing association said.
Incumbents may also simply pull out of supplying gas rather than submit to a competitive process, the HKHA told the Commission.
The Commission "does not make light of the HKHA’s concerns in introducing changes to the practice. However, the exclusion of competition in the process of awarding subsequent contracts effectively deprives residents of a genuine choice and the possibility of enjoying better terms and services that a competitive process may bring. This is something that needs to be addressed", it said.
Hong Kong-based competition law expert Mohammed Talib of Pinsent Masons, the law firm behind Out-Law.com said: "It is now becoming clear that the initial priority for the Competition Commission’s work is procurement in the residential property sector. Following on from the Competition Commission’s earlier work to investigate bid rigging in residential property on behalf of the Urban Renewal Authority and Hong Kong's Housing Society, it has now scrutinised the procurement practices of another major statutory body rather than focussing on activity in the private sector. This has been done using a consultative approach, as all three statutory bodies are exempt by law from the application of the Competition Ordinance. This indicates a willingness to champion the consumer where services are procured on their behalf."
A study by the Commission into the residential building renovation and maintenance market in Hong Kong found suggestions of bid-rigging, although no concrete examples of wrongdoing were identified.
The Competition Commission was established under Hong Kong's Competition Ordinance. The Ordinance came into full effect on 14 December 2015 and quickly began to affect on behaviour in a number of markets.
For further information, please contact:
Vincent Connor, Partner, Pinsent Masons
vincent.connor@pinsentmasons.com
