The impact of the Hong Kong Competition Ordinance on the construction industry: market concentration & entry barriers analysis

Abstract

Since the enactment of Competition Ordinance in Hong Kong in 2012, the government has planned to publish the non-statutory guidelines covering interpretation of the Competition Ordinance, block exemptions, investigation procedures and complaints procedures in 2014. It could be expected that the construction industry in Hong Kong is likely to be affected by its enforcement in the near future. It is thus necessary to analyze the particular impact of Competition Ordinance have on the construction industry and prevention measures that can be taken to avoid possible infringements.

The project focuses on the possibilities of the current practice and market structure in the construction industry infringing either the first conduct rule or the second conduct rule. To have a deeper understanding of the conditions of the construction industry in Hong Kong, interviews have been conducted with the practitioners in the industry to identify the vulnerabilities of the common practice in the industry to the rules of Competition Ordinance. Besides, market concentration tests based on the data of Ten Mega Projects were carried out to indicate the current competition level and the market structure so as to identify the possible anti-competition practice as well as to suggest the feasible methods to encourage competition.

Response from the first interview indicates the practice of fixing trading conditions and setting technical or design standards are the most vulnerable practices under the first conduct rule. Tying and bundling behavior, especially in the sector of suppliers and specialists, is likely to fall foul of the category of the second conduct rule. To better estimate the vulnerabilities of the industry to Competition Ordinance, the market concentration level is analyzed and can be identified as two-tier (moderate concentrated for large contractors and fully competitive for small contractors) through the analysis of the in Ten Mega Projects market. In analyzing the market concentration, it was found that entry barriers are key factors. The procurement and listing methods adopted by the government and MTRC were analyzed to assess whether their operations instill any anti-competitive effects. A second interview was conducted with MTRC to further understand the procurement approach in enhancing competition.