(Address in United Nations Asia Pacific Leadership Forum, Hong Kong SAR, 25-26 February 2004)
By Albert Lai , Chairman, Hong Kong People’s Council for Sustainable Development and Managing Director, The China Water Company Limited
Limitations of Traditional Approaches
Infrastructure projects require the deployment of public resource. Hence they are always promoted in the name of public interest. But what exactly is “public interest”? Typically governments deal with this question through either one of the two approaches, which sit on the opposite ends of a spectrum.
The first approach is to apply traditional evaluation tools such as cost-benefit analysis, discounted cash flow analysis or internal rate of return estimates to assess whether a project is feasible. However in the context of sustainable development the limitations of these tools are obvious. For instance, how can these tools be applied to the impact on climate change? How much value should we place on conservation of water resource for future generations which may require certain sacrifice by this generation? How can we quantify the value of social equity or inequity a project may bring to the local population? Despite the hard work of many economists these traditional tools are still grossly inadequate to cope with the social and environmental dimensions that the pursuit of sustainable development now demands.
Hence some governments turn to the second approach: since there are so many intangibles involved in the evaluation of an infrastructure project, why not simply apply a political judgement to what the society needs? After all, many social costs and benefits are long-term, value-dependent and hard to quantify. Who can argue that politicians or governments are not in the best position to make those judgements? Indeed, this is not an uncommon approach adopted by many governments under the pretence of rational analysis. Last October the Chinese Minister of Construction Wang Guangtao, when speaking at the “Human habitat award” ceremony, warned against the huge wastage involved in so-called “Image Projects” undertaken by many local governments. His warning is a testimony to the potential pitfall of this “political judgement” approach to decision-making. Much too often it is a recipe for white elephants.
Let us now turn to two recent case studies.
Case Study 1: Water Infrastructure in Qitaihe City , China
Three years ago in Qitaihe, a medium-sized city in northeast China , the government was planning to upgrade its water supply system, including the construction of a new water treatment plant with a capacity of 100,000 cubic meters per day. Historically its water tariff had been set below the cost-recovery level and hence it badly needed external funding. Its challenge was how to attract sufficient investment of nearly RMB 200 million for the project. Yet no investor would put his money into the project were the water tariff not raised above at least the cost-recovery level, which would be 50% above the prevailing tariff.
For its urban population of around 440,000, less than one-third was connected to the central water supply system of the local water company. Half of the population was supplied by another system operated by the Coal Mining Bureau. Still around 80,000 residents living at the city fringes were not connected. They had to depend on expensive but unreliable water vendors, some of which still used donkeys to cart water in reminiscent of an age-old practice. These communities, though often much poorer, paid over RMB10 per tonne of water, about ten times what the connected residents paid to the water company.
It is clear that the public interests as perceived by the city centre community and the fringe community are markedly different. The wealthier community with existing water connections would prefer to enjoy continuously low water tariff, albeit with implicit government subsidy, whereas the fringe community would prefer the government to increase the water tariff charged by the local water company, so as to raise sufficient funds to invest in new pipeline network and hence connect them to the central water supply system. Since the city applied an unified water tariff system for all connected residents, the fringe communities, when connected, would be able to enjoy central water supply with more reliable service and a water tariff still seven times below what they were paying to the water vendors.
From the government’s perspective, its primary concern was political affordability – whether any increase in tariff would dent too much of its popularity. Its leadership was however also motivated by the political credos it might get by attracting foreign investors to the city. With regard to this infrastructure project there were at least three sets of ‘public interest’ demanding to be heard.
Case Study 2: Harbour Reclamation in Hong Kong
Now look at a current case in Hong Kong – the controversial harbour reclamation saga.
Hong Kong government planners traditionally see the harbour as a “plain of no resistance”. Unlike existing urban areas, once a portion of the harbour is reclaimed the government acquires automatic ownership, allowing it maximum freedom for urban planning and providing it with an immediate source of direct or indirect revenue. For public officials charged with the duty of solving traffic congestions building roads on newly reclaimed land is also the least-resistance solution. Faced with public demand for cost cutting the engineering work generated from the reclamation and other related infrastructure projects also provides an useful defence against job redundancy within many government departments.
From the business sector’s perspective its concerns range from contract opportunities, potential development profits, tourism attractions, to economic stimulus in general. Of course different businesses and different developers will enjoy or suffer from different cost-benefit profiles depending on the specific location and zoning of proposed reclamation.
On the other hand, civil society groups perceive another diverse set of public interest: protecting the environment, conserving the harbour area for future generations, improving water quality, providing opportunities to re-design the harbour front, enhancing public accessibility, increasing amenity value for disadvantaged communities, or finding sustainable solution to traffic congestions.
Public Interest is Public Process
The lessons from both cases are evident. Whilst each stakeholder can lay claim to a subset of public interest, no stakeholder, governments included, can monopolise public interest in its entirety. Neither the first “economic analysis” approach, nor the second “political judgement” approach is able to fully determine the complexity of public interest behind a project.
The answer is to put in place a public participatory process, backed by professional analysis, to determine the genuine public interest behind any infrastructure project. Public interest is none other than the informed consensus emerged from a legitimate, widely accepted process by all stakeholders. In short, public interest is public process.
The ‘public interest’ justification is only as valid as the quality of the public process per se. A poor process, or the lack of a legitimate process, demolishes the ‘public interest’ argument behind any allocation of public resource.
Over the last decade many cities around the world have applied sustainable development principles to their decision-making processes in strategic development. In all over 6400 cities have developed Local Agenda 21. It is now time to apply this pool of experience to the decision-making processes of major infrastructure works. The most optimal process for any particular community will of course vary from country to country, from city to city. However, a set of best practice distilled from worldwide experience has been well established and they contain some common principles related to participation, legitimacy, accountability, ownership, flexibility, equity, transparency, effectiveness, good governance and a host of other values. Learning to apply these principles will likely improve the quality of infrastructure projects, and ultimately lead to better quality of life for city-dwellers.
Nature of Public Private Partnership
Public-private partnerships (‘PPP’) are viewed by many as a means to delivering more infrastructures with less public funds. Recent experience has shown that this model can only succeed under a specific set of conditions. To understand its limitations we must first understand the nature of PPP.
Despite the glossy label, PPP is in essence a contractual arrangement between a government and a business enterprise. In an era of globalisation where all governments compete with each other for market-friendliness, this government-business relationship can sometimes be too cosy for comfort.
The other feature of PPP is that the contractual arrangement invariably extends over a long time span involving significant resources of the community. As external social or market conditions are bound to change, few contractual arrangements can stand the test of time without re-negotiation or re-structuring prior to the end of the project cycle.
The third notable feature in PPP is the unusual change of the government’s role from an umpire to a player, as it becomes a party to the contract, rather than a rule-setter or regulator in most other areas of governance. Most governments and government officials are not used to such change, as it requires a different mindset and a different skillset.
Applying SD Principles to PPP
Sustainable development will not succeed without the integrated effort of government, business and civil society. It is easy to note that there is a missing partner in PPP – the public as represented by civil society institutions. Just as we have seen in the previous analysis a missing partner will not only distort the representation of public interest but will also make the arrangements inherently unstable because of the lack of legitimacy.
From experience worldwide two remedial measures have been proven to work. The first is to establish a platform for civil society groups to participate as partners from project planning to contract negotiation. This way community values can be reflected in the contractual arrangements between government and business. Not only is public interest safeguarded, wider public acceptance will also ensure smoother project execution.
The other measure is to set up an independent, ongoing institution to adjudicate between public interest and commercial interest. As external conditions change, the need for an umpire is inevitable. It is neither fair nor conducive to business confidence for the government to suddenly switch back from a player to an umpire role when circumstances require. In the water industry, the Office of Water Services in the U.K. and a similar regulator in Chile are good examples of such institutions. In China the mandatory use of public hearing processes in setting water tariff is also a step in the same direction.
From the private sector perspective, in particular for companies conscious of corporate social responsibility, the key to any PPP is not to make profit in one-off cosy deals, but to profit from efficiency gains in a stable environment. Public participatory processes at the planning stage and an ongoing, independent institution capable of taking longer-term perspective than governments normally do will certainly be conducive to a stable environment.
To quote Principle 7 of the Melbourne Principles for Sustainable Cities: Empower people and foster participation.
“The journey towards sustainability requires broadly based support. Empowering people mobilises local knowledge and resources and enlists the support and active participation of all who need to be involved in all stages, from long-term planning to implementation of sustainable solutions.”
In order for city-dwellers to enjoy better quality of life, let us not be shy to put this into practice in all major infrastructure works.