Prefabrication and barriers to entry—a case study of public housing and institutional buildings in Hong Kong

The Housing Authority in Hong Kong provides around 30,000 subsidized residential units per annum. It is the only major client in Hong Kong requiring prefabrication in its public housing construction, a policy which began in the mid-1980s. Recently, the government has started to promote prefabrication as a general principle to improve buildability, to increase quality and efficiency as well as to reduce construction wastes. However, an analysis of public tender results between 1988 and 2002 shows that the market appears to be less competitive in this housing sector than the other institutional building sector. The former mainly consists of the construction of large residential housing estates with their auxiliary commercial centres and car parks, whilst the latter are non-residential purpose-built structures such as schools and police stations, though occasionally residential quarters are constructed for the disciplinary forces. During this 15-year period, between 38% and 74% of the total annual public housing contracts, by value, were undertaken by only three contractors. Meanwhile in the institutional building sector, the range was between 24 and 61%. This raises the concern that the prefabrication requirement might have raised the market entry barriers, and probably construction costs as well. This study addressed the competition issue by measuring and comparing the Herfinndahl–Hershamann indices (HHI) of the public housing and the institutional building sectors. Regression analyses of the HHIs were then performed on various measures of contract values and a dummy variable representing the public housing or the institutional building sector. The analyses show that prefabrication, ceteris paribus, is not related to HHI. We conclude that the prefabrication requirement by itself does not seem to have raised the barriers to entry to prefabricated housing construction.