Consumer Council Competition in the Market for Lift Maintenance
(Executive Summary) (Dec 11, 2002)
EXECUTIVE SUMMARY
Introduction
1. The Consumer
Council has over time received inquiries and complaints regarding
the lift maintenance industry, specifically the lack of choice in
obtaining lift maintenance services and allegations of
anti-competitive conduct.
2. Consumers of
lift maintenance services, i.e. tenants, through their property
management companies, do not exercise choice in purchasing lifts.
In the case of private residential properties, the monthly lift
maintenance charge is about 11% -12% of the monthly property
management expenses. In the absence of a viable independent
maintenance provider sector, tenants' demand for lift maintenance
services will be captive to the services provided by the original
lift supplier.
3. This report
provides a summary of the Consumer Council's initiatives in holding
a public seminar, producing discussion papers for the Government
and industry, arranging meetings between the parties, and holding
discussions with the Government and market participants in relation
to the building owners' concerns and the allegations of
anti-competitive conduct.
4. The Council's
report highlights the progress that has been made on a number of
issues, and indicates what future work can be done. The Council
trusts that the report not only informs the public of the progress
made in relation to this sector, but also points to areas for
further action in the future.
Scope Of Research
5. The scope of
research in this report has examined the question of relevant
market definition and market power in relation to lift maintenance
and repair services in Hong Kong, some statistical information on
market shares and associated costs for end users. The results of
various discussions with industry, government and end users of lift
maintenance services are also presented.
Issues Addressed
6. In light of the
information obtained and discussions with various government policy
bureaux, Electrical and Mechanical Services Department (EMSD) and
the industry, the following issues have been addressed through
negotiation between the parties:
Access to Business Inputs to Enhance Competition
7. A major issue in
maintaining a competitive maintenance market is whether parties
other than the original lift suppliers can have access to technical
information that is necessary to safely and efficiently provide a
competitive maintenance service.
8. In previous
discussions with industry and Government, the Council has
recommended that lift suppliers should be required to provide the
Government with relevant information necessary to undertake repair
and maintenance of lifts, and that the information in the data bank
can be made available by the Government to building owners
incorporations and relevant lift maintenance service providers.
This process of information storage and dissemination is similar in
principle to the current requirement whereby some information on
electrical, water and gas supply is filed with the relevant
authorities and made available to relevant service providers for
maintenance and repair purposes [ 1
] .
9. The Council
considers EMSD's alternative proposal to require lift suppliers to
provide Operation and Maintenance (O&M) manuals direct to
building owners incorporations is a positive response to the
problems that independent maintenance contractors are facing or
will face in the future. Nevertheless, the Council suggests that
maintaining a data bank should remain a long-term option.
The Role of Property Developers
10. Because the
eventual consumers of lift maintenance services do not exercise the
initial choice in lift supply, the initial competitive pressures
relating to maintenance will come from the property developers in
the bargaining stage of contracting for supply of lifts.
11. Property
developers can therefore play a part in attempting to reduce the
ongoing costs of lift maintenance by the building's eventual owners
or by assisting owner corporations in their future negotiations
with regard to lift maintenance. They could do this through a
number of alternative means:
a) Securing a
longer warranty period than currently provided, with comprehensive
coverage for regular maintenance work, inclusive of spare
parts.
b) Ensuring that an
indication is given, within tenders for supply of lifts, of the
life cycle costing of the particular lift or lifts supplied, and
incorporating this as important criteria for selection.
c) The supply
agreement includes conditions regarding the provision of technical
drawings and diagrams to the building owners for the purpose of
ongoing maintenance work, after the warranty period has
expired.
12. As building
owners become more conscious of the burden on management fees
attributed to lift maintenance, this factor could be a selling
point for prospective unit purchasers.
The Role of Government
Safety
13. Safety must
always be the prime concern. According to EMSD it has been
exercising close monitoring and exerting tight control on the
performance of contractors and technical personnel. It also notes
that a high lift/escalator safety level has been maintained in the
territory as compared to other major cities. EMSD should continue
to vigilantly enforce legislative and administrative
safeguards.
Assistance to Building Owners
14. EMSD, industry,
and Home Affairs Department's District Building Management Liaison
Teams can provide a valuable role to assist building owners to
choose and negotiate competitive maintenance agreements as
follows:
15. As far as EMSD
is concerned:
a) EMSD is now
considering the preparation of an Owners' Guidebook to facilitate
building owners in maintaining lifts/escalators.
b) EMSD issues
circular letters to lift contractors on technical matters. The
circular letters are also posted on the EMSD Homepage at which
interested parties (including building owners) can access.
c) EMSD issues and
updates the Code of Practice for Lift Works covering the mandatory
maintenance requirements for putting lifts in safe working
order.
16. Both industry
associations are willing to provide information on their members'
services that can assist building owners in considering their
options for lift maintenance; for example, a list of accredited
contractors.
17. Home Affairs
Department has indicated that if details for constructing a tender
specification and the ways to negotiate competitive maintenance
agreements are provided by professionals in the lift maintenance
industry, and the details are described in layman terms, it will
put the materials for reference of the public in Building
Management Resource Centres.
Capacity Building
18. In light of the
Government's sector specific approach to competition policy, the
Government should consider to devote more resources to promote
competition in the market for lift maintenance.
Building Owners Obligations
19. Building owners
have an obligation to ensure maintenance programmes are up to the
best standards possible and to put in place a plan for long-term
maintenance programmes and budgeting for major refurbishment work
to lessen the financial burden of substantial one-off costs.
20. Owners
incorporations should take initiatives to acquire the necessary
information that will enable them to choose and negotiate
competitive maintenance agreements, by making full use of both
EMSD's information service and that of Home Affairs Department
district building management liaison teams; and to have dialogue
with building management companies to have the best interest of all
building owners in mind. The more informed that consumers of lift
maintenance services are, the more pressure there will be on
service providers to satisfy demand for lower prices and a high
quality of service.
Issues For Further Consideration
21. Safety, choice
and price are issues of major concern to consumers when making
decisions in the market for lift maintenance services. The Council
puts forward the following suggestions for further deliberation by
the concerned parties, recognizing that gauging public feedback and
industry response on the viability of these suggestions takes
time.
Consumer Price Information
22. A common
concern for owners incorporations and management companies (more so
for the former) is whether the maintenance cost quoted is
reasonable. Where building owners are unable to obtain competing
quotes from a range of lift maintenance service providers and they
are captive to the services provided by the original lift supplier,
those building owners will not be in a position to determine
whether the maintenance service charge is reasonable.
23. The inverse can
also sometimes be a problem. For example, where a price quoted is
too low to be realistically capable of providing a sufficiently
professional service, and consumers need to be aware of potential
problems in taking the cheapest quote.
24. As for pricing
disputes where the concern is that consumers might have paid too
much, the Council considers that the industry should explore
offering a service to members of the public, on request and at
reasonable cost, administered by an industry association
secretariat that delegates an independent body to provide some
indication as to whether the maintenance charges quoted are
reasonable. This is similar to the process of taxation of the costs
billed by a solicitor, where a dissatisfied party is entitled to
require any costs to be 'taxed' (i.e. examined) by the court. The
Council considers that having regard to the current economic
climate there is an opportunity for the development of independent
consultancy services for lift maintenance.
Industry Code of Practice
Competitor access disputes
25. In view of the
Government's preference for self-regulation and administrative
measures to address competition issues, the Council considers that
in the absence of a competition law administered by a competition
authority (which is its first preference) a joint code of practice
for the lift industry could address the means by which disputes, if
any, over supply of spare parts, and technical information, can be
resolved.
26. For instance,
the relevant industry associations could construct a code of
practice introducing competition safeguards such as the ability for
a competitor to seek arbitration where it claims it is being
unreasonably denied access to inputs necessary to compete in the
repair and maintenance market. While it is up to industry to work
out the means by which a code can come about, EMSD, as the
industry's supervising agency, could play a facilitation role in
this aspect.
Pricing conduct
27. The industry
code of practice should also include a general exhortation to
association members requiring that where building owners are unable
to obtain competitive quotes and are thereby locked into the
services of a particular lift maintenance contractor:
a) an association
member is not to take advantage of any position of market power by
levying unreasonable charges; and
b) where a
complaint is made to the association by a building owner in the
position described above, the association member should submit its
charges to independent cost assessment, as described above.
(Paragraph 24 refers).
Data Bank for Operation and Maintenance Manuals
28. With regard to
the Council's suggested data bank option, both LECA and EMSD have
raised doubts on its feasibility. For example, EMSD notes that the
proposal would not be feasible without the cooperation of the lift
suppliers; there are liability issues as to the accuracy of the
information kept by the operator of the data bank; and there may be
conflicts of interest for the Government to operate the data bank
and to act as a service provider as well as a regulator at the same
time.
29. The Council
notes the position of both parties, but considers that the option
should remain an ongoing matter for long-term consideration. The
extent to which this becomes a more pressing matter will depend on
how effective the current agreed positions on the development of
O&M manuals for use of maintenance contractors will provide
positive results for competition in the industry.
Industry Overview
30. Lift safety is
governed by the Lifts and Escalators (Safety) Ordinance. As at
November 2002, there were 48 registered lift contractors in Hong
Kong. Information provided to the Council indicated that in 1999
there were close to 50,000 lifts in Hong Kong, of which about 6,000
(i.e. approximately 12%) were being serviced by contractors who
were not the original installers of the lifts (independent
contractors). As at end of 2001, EMSD stated that there were about
7,000 lifts out of over 50,000 (14%) that were maintained by
independent contractors. It is likely that the percentage of
independent maintenance is higher for older lifts, rather than for
the latest generation of lifts that have a higher degree of
computerisation.
31. 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). Initial information
provided to the Council was that maintenance charges are generally
discussed as a percentage of the current cost of supply for an
equivalent lift.
32. Information
provided to the Council indicates that in Hong Kong the annual
maintenance charges tend to be around 7.5% of price for supply,
which is similar to the percentages for Singapore and Taiwan, lower
than in Japan and higher than Indonesia.
33. The following
estimates of the cost of lift supply and maintenance charges in
residential developments over the last four decades were provided
to the Council in November 2002 by REECA. LECA considered that the
figures provided in the following table were not particularly
informative due to the fact that pricing information is quite dated
and may vary depending on models, and the table might not reflect a
correct maintenance cost/price ratio. Also, the coverage and
quality of maintenance services may vary widely. Nevertheless, the
Council considers that the information is indicative of price
movements in the industry over time.
|
|
Lifts installed in
residential developments
(no. of floors) |
|
in 60s (<15
floors) |
in 70s (25
floors) |
in 80s - 90s
(>35 floors) |
|
(a) Price of lift
(HK$) |
$500,000 -
$600,000 |
$600,000 -
$700,000 |
$800,000 -
$1,000,000 |
|
(b) Annual
maintenance charge (HK$) |
|
|
|
|
Serviced by LECA
members |
$30,000 |
$37,800 |
$65,000 -
$110,000 |
|
Serviced by REECA
members |
$26,400 |
$31,200 |
$45,000 -
$63,000 |
|
(b) / (a) (%) |
4.8% - 5.5% |
4.8 - 5.8% |
6.0 - 9.7% |
Note:
Figures are for reference only.
Source: Figures are provided by REECA.
Consultation Process
34. The issue of
limited choice of service contractors, and difficulty in obtaining
spare parts and technical information, was first referred to the
relevant policy bureau for this sector, the Trade and Industry
Bureau (TIB), in October 1997.
35. TIB's response
at time was that limited choice did not necessarily reflect
anti-competitive practices in the market, but might simply reflect
the dynamics of the market. More research was undertaken by the
Council and a public
seminar on the subject was held in May 1999 in conjunction with
the Home Affairs Department. A copy of a speech outlining the
Council's preliminary findings and recommendations at the time,
made at the seminar can be found at .
36. Following the
seminar, a Council discussion paper was provided to the recently
formed Competition Policy Advisory Group (COMPAG), the then
Planning, Environment and Lands Bureau (PELB), and EMSD. That paper
served the basis of further discussions with those agencies in the
Council's efforts to progress the matter. The paper also forms a
part of this report.
37. In light of
subsequent responses from the Government and industry associations
to the paper, further discussions were held between the Council and
concerned parties to assess the feasibility of the Council's
initial recommendations. More information was obtained from
industry and Government, and further recommendations were made,
refining the Council's initial views and leading to the position
currently reached between industry, the Council and Government.
38. In relation to
the Council's main recommendations concerning the code of practice
and the data bank, LECA remain of the view that an industry code of
practice to resolve consumer or competitor disputes is not
required, due to its perception of the high state of competition in
the industry. EMSD considered that the code option required further
study and discussion and in any event required industry agreement.
Given the Council's statutory function under Section 4 of the
Consumer Council Ordinance to encourage industry associations to
develop codes of practice, and the Government's preferred option to
use codes of practice to address competition concerns in the
economy rather than a competition law, the Council considers the
code of practice option is still worth pursuing and is willing to
assist in this regard.
Information Sources
39. The report has
been constructed from information obtained from the following
sources.
a) Views made to
the Council by individual building owners, owners incorporations,
business corporations, and independent lift repair and maintenance
contractors (i.e. not aligned with lift suppliers).
b) Issues raised at
the May 1999 seminar by users and service providers, and at
subsequent meetings with the Lift and Escalator Contractors
Association (LECA) and the Registered Elevator and Escalator
Contractors Association (REECA).
c) Responses
received from related Government bureaus and departments, in
particular the EMSD.
d) Research on
other jurisdictions concerning their approaches to the issue of
competition in the lift maintenance industry.
40. The Council
also conducted site visits by invitation from major lift
maintenance and supply companies in Hong Kong.
41. The Council
wishes to express its appreciation to those persons and
corporations who have assisted the Council in its work.
11 December 2002
Notes:
1 With regard to water, electrical and gas network information
it is noted that while some information is in the hands of related
authorities, other information on those services is also in the
custody of the developers or owners, and not kept by the relevant
authority.
The full text
of the report can be purchased from the Consumer Council at
HK$80 per copy. Enquiry telephone number: 28563123
