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"The
Provision of Lift Maintenance Services in Hong Kong"
by
Professor Tsang Shu-ki
Chairperson Competition Policy Committee
Consumer Council
User Experiences and Complaints
The Consumer Council has, over a number of years,
been made aware of concerns regarding lift (and escalator)
maintenance. The concerns have been that:
- there is little
alternative but to use the lift/escalator supplier to provide
maintenance;
- lift maintenance is
expensive; and
- lift owners are not
always sure that repairs or replacements are necessary and will
resolve recurring problems.
2. The general
impression is that major lift and escalator suppliers do not
compete with each other in the market for lift and escalator
maintenance and that the growth of third party maintenance is being
impeded, most likely because of the difficulty in obtaining spare
parts.
3. In one case, a
complaint was lodged by a major developer/ property owner that it
had tried to invite competitive tenders for lift maintenance
services from third party maintenance operators, but it had not
received any expressions of interest.
4. This apparent lack
of competition in the market warrants in-depth investigation and
analysis.
Safety and Cost Effectiveness Concerns
5. Of course, cost
effectiveness needs to be balanced against the primary
consideration of safety. Lift safety is governed by the Lifts and Escalators
(Safety) Ordinance (Cap. 327), which provides the
Government with authority to regulate the design, operation,
examination and testing of lifts. In March 1999, 41 registered lift
and escalator contractors in Hong Kong were qualified to perform
duties of maintenance, tests and examinations.
6. Building owners,
through either property management companies or owner
incorporations, are responsible for ensuring lift maintenance is
adequately carried out. After a warranty period has expired,
building owners will need to enter into periodic maintenance
agreements. The Council understands that the cost of entering into
maintenance agreements can vary according to various factors, e.g.,
the number of lifts in an estate or building, the age of the lifts,
and the degree of complexity (especially for newer lifts). The fees
for maintenance are usually limited to cover only labour, and
possibly some consumables for the appropriate number of visits and
maintenance work required to comply with safety standards. Major
spare parts, and repair work would not usually be covered by the
periodic maintenance agreement.
The Lift Maintenance Market
7. Two trade
associations represent the lift maintenance industry in Hong Kong.
The Lift and Escalator Contractors Association (LECA) represents
the ten major companies that supply lifts as well as maintaining
them. The Registered Elevator and Escalator Contractors Association
(REECA) represents some 14 companies that only do maintenance work,
while some REECA members are affiliated companies of LECA members.
There are also some independent lift/escalator
contractors.
8. REECA has informed
the Council that in Hong Kong there are currently around 50,000
lifts, of which about 6,000 (12%) are being serviced by third party
contractors. Information furnished by members of LECA in 1997
indicated that there were about 43,000 lifts at the time, of which
39,300 were serviced by original suppliers. Third party maintenance
at that time accounted for only 8.6% of the total lifts serviced.
It appears therefore that in the past two years the percentage
growth in third party maintenance has outpaced the growth of lifts.
Nevertheless, the overall third party maintenance share is still
small in absolute terms.
Competition Analysis
9. The key questions
to examine are whether the market for lift maintenance can be
viewed as separate from the market for supply, and whether
suppliers can exercise market power in the maintenance market.
Moreover, the decision on the purchase of the lift will usually be
made by a property developer; whereas the maintenance charge will,
once the building is occupied, be paid by tenants or the members of
the incorporated owners. In other words, final users pay
maintenance charges for lifts that were largely selected by
developers.
Few LECA members maintain lifts
they have not supplied
10. Response from LECA
members indicated that six of them undertake no third party
maintenance business. It was explained to us that this is because
the companies, or their overseas principals, have decided they do
not wish to enter this business. Of the remaining four companies
only one has a substantial third party maintenance
business.
11. It is of course up
to companies themselves to decide whether to enter a business or
not. Some LECA members did, however, say that one of the reasons
behind limited third party maintenance is that owners'
incorporations are not always knowledgeable about lifts, and in a
position to put together a specification for tender. This raises a
question as to whether third party maintenance will increase if
building owners are given guidance on how to prepare the tender
documents, adequate information on the lifts, and are acquainted
with third party contractors who are potentially capable of
undertaking maintenance.
Supply of spare parts
12. According to some
REECA members, their ability to compete for third party maintenance
contracts is impaired by the difficulty in obtaining original spare
parts. They may obtain the parts they need in the grey market or
purchase compatible parts, but this puts them at a
disadvantage.
13. LECA members have
told the Council that they will supply spare parts at a reasonable
price and in a reasonable time. However, the LECA members only hold
stocks of spare parts for the lifts they maintain and the stock
levels are calculated with reference to their own maintenance
contracts, and not the potential demand from third party service
providers. Parts ordered by third party maintenance contractors
may, therefore, not be available and may need to be flown in from
the factory. This leads to extra costs and delay. What appears to
REECA members to be unreasonable prices and delay for supply of
spare parts might therefore be considered reasonable by LECA, due
to the above reasons.
14. In sum, there are
a number of potential reasons why maintenance charges may become
excessive from the user's viewpoint.
- It does not appear
that major lift suppliers compete with each other in the market for
lift maintenance;
- Third party
maintenance operators have difficulty in obtaining spare
parts;
- Lift suppliers might
factor into their maintenance contracts, separate costs to recoup
the revenue lost in the competitive bargaining stages of tendering
for supply of lifts to property developers.
The Way Forward
15. The
Council is keen to attempt some resolution of this long-standing
matter. It believes the way forward is for all stakeholders to play
their part in improving the environment in which the maintenance
market operates and develops. This involves not only the lift
manufacturers and maintenance contractors, but building owners,
property developers, and relevant government
authorities.
The Council suggests a
number of recommendations in order to improve the
environment.
Recommendation 1
16. Safety
must always be the prime concern. Currently, the Electrical and
Mechanical Services Division (EMSD) enforces the Lifts and Escalators
(Safety) Ordinance (Cap. 327). Considering the vast number
of lifts and escalators in Hong Kong, we urge Government to ensure
that EMSD is provided with adequate resources to vigilantly enforce
the Ordinance. Any indication that safety might be compromised by
the actions, or the inaction of those parties involved with
ensuring lifts and escalators are safe, should be addressed by
EMSD.
Recommendation 2
17.. A higher degree
of competition can and should be promoted in the market for lift
maintenance. In its May 1998 Competition
Policy Statement, the Government stated that it would
promote economic efficiency and free trade through competition by
(amongst other things) initiating pro-competition measures on a
sectoral basis, through administrative measures, and through
encouraging industry self regulation.
18.. The EMSD can play
a part in promoting competition in the market for lift and
escalator maintenance. In fact, because there is no general
competition regulator in Hong Kong, the responsibility to examine
the means by which competition can be improved in one of the
economic sectors under its scrutiny will fall on the shoulder of
EMSD. By the same token, the Government has a responsibility to
ensure that EMSD has adequate resources to undertake this
role.
19. The Council
believes there are a number of ways in which competition can be
promoted in the industry, as indicated below.
Recommendation 3
20. Property
developers could be urged to play a part in attempting to reduce
the ongoing costs of lift maintenance by the building's eventual
owners. They could do this by ensuring that included within tenders
for supply of lifts, there is a quoted sum for an ongoing
maintenance agreement, for a reasonable amount of time, after the
warranty period has expired. The supply agreement should include
conditions regarding the ongoing supply of spare parts and
provision of technical drawings and diagrams to the building
owners, after the maintenance contract has expired. This would
assist building owners to negotiate advantageous maintenance
agreements with subsequent maintenance contractors.
Recommendation 4
21.. Building owners
have a role to ensure that their maintenance programmes are up to
the best standards possible. There are two things that can be
done.
- First, building
owners must collectively plan the extent of their long term
maintenance programs and budget for major refurbishment work to
lessen the financial burden of substantial one-off costs. This
should remove any temptation to avoid expenditure by compromising
on maintenance and refurbishment.
- Second, building
owners should be educated not only in relation to the mandatory
safety requirements in lift maintenance, but also to how to
maximize their competitive position in the maintenance market.
Information on the range of options in the maintenance market, the
detail in constructing a tender specification, and the ways to
negotiate competitive maintenance agreements would assist in this
regard. The Home Affairs Department's Building Management
Coordination Team will have an essential role to play.
Recommendation 5
22. A major issue in
maintaining a competitive maintenance market is the resolution of
disputes between different market participants. At the very least,
the concerns by third party maintenance contractors regarding
access to spare parts and technical information should be
addressed. In view of the Government's preference for self
regulation and administrative measures to address competition, EMSD
could facilitate the development of a joint code of practice for
the industry by LECA and REECA members.
23. Of course, one of
the matters that the code should address is the means by which
disputes over supply of spare parts are resolved. For example, an
arbitration process could be devised, with an arbitrator jointly
agreed to by the parties, and if possible, the process being
overseen by EMSD. Such a process would provide transparency as to
the causes of delay etc, and provide an expert forum that would be
in a position to resolve disputes. There may also be additional
matters affecting competition in the industry, in addition to
safety and consumer welfare matters that should be addressed in the
code. The Council would be willing to assist in this
regard.
Summary
24.. The
Council believes that the time has come to seriously address the
ongoing concerns that have been expressed regarding lift and
escalator maintenance. The above recommendations are proposed.
There may be other measures that could also be applied. What is
clear is that the way forward towards a safe and competitive
industry requires a cooperative approach between business, the
community and the government. I trust that we can achieve that
goal.
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