The outsourcing initiative is a long-awaited New Year gift to the IT industry. The new scheme, aimed at enlarging delivery capacity for government IT services, will certainly create a market of sufficient size to encourage further development of the IT industry.
Very often, winning government business comprises an important part of the strategy of many IT companies. Serving the government sector is attractive not only because of the size of the market, but also the range of opportunities available and the strategic importance of having an internationally recognized customer.
Uncapped liability
For this reason, an effective procurement policy is extremely important to support industry growth while realizing government ICT procurement objectives.
But under the existing procurement policy, there is an accepted, yet onerous, practice: the government requires contractors to accept uncapped liability for all losses and damages arising out of, or resulting from the performance of the contract, including both direct and consequential damages.
The effects of such uncapped liability requirements are several, and they are largely negative.
First, it appears that suppliers, including multinational vendors and local SMEs, are bidding less often, because these companies cannot afford to put their company's reputation and future at risk of incurring a significant liability. If suppliers are required to take on high levels of risk in a project, particularly a risk that they are not able to manage, some will refuse to bid on government projects. This means that the government will not receive the full range of potential vendors and technologies.
Second, there is imminent pressure on the project bid prices. As uncapped liability can result in a significant potential liability for the vendor, capital may have to be provisioned against such contracts, leading to higher insurance premiums for vendors. The obvious effect is that the government may end up paying more for ICT products and services.
Clearly, uncapped liability regime is in contradiction to Hong Kong's drive for innovation. Such an obsolete practice is detrimental to the healthy development of Hong Kong's ICT industry as a whole, as it leads to fewer choices of technologies and solutions, and reputable suppliers may not be willing to bring state-of-the-art technology to Hong Kong.
In nearly all circumstances, a reasonably set liability adequately covers the risk of performance for government, as has been recognized by other leading governments, such as Canada, Australian, Singapore, the UK and other European countries. They are now adopting a more commercial approach to the liability issue. Determination of contractual liabilities is not typically based on the assessment of who is best placed to manage and control the risks.
Industry prosperity
The HKSAR government is the largest ICT customer in Hong Kong. As such, the procurement environment in which suppliers operate must be conducive to industry prosperity. To modernize existing procurement policies, the government must move from a default position of uncapped liability to a flexible and commercial approach of limiting the liability of ICT vendors which can be tailored to the individual circumstances of each contract.
In line with the practice of the governments in other countries and the practice in the private sector, the limitation of the liability clause included in the government standard terms and conditions should be:
1. Liability for death, personal injury and property damage remains unlimited;
2. Liability for other direct damages is limited and calculated on the basis of the complexity of the contract and its risk profile of the total contract value;
3. Liability for special, indirect or consequential damages and loss of profits, business, revenue, goodwill or anticipated savings is excluded; and
4. Liability for loss of data is excluded except that the contractor is responsible for restoring the data to the same state as in the last available backup copy.
Sin Chung Kai is Hong Kong's Legislative Councillor for IT. Contact him at cksin@sinchungkai.org.hk