ppp procurement germany
TRANSCRIPT
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Journal of Purchasing & Supply Management 11 (2005) 221–231
Public–private partnership—Development of long-term relationships in
public procurement in Germany
Michael EssigÃ, Alexander Batran
Chair of Materials Management and Distribution, University of German Federal Armed Forces, 85577 Neubiberg, Munich, Germany
Received 25 May 2005; received in revised form 14 November 2005; accepted 18 January 2006
Abstract
Hybrid partnerships are well established in the private sector combining market efficiency with the possibility of hierarchical steering
mechanisms. By implementing Public–Private Partnerships (PPPs), public authorities seek to benefit from cooperation with specialised
suppliers. However, many complex factors, including legal regulations, have to be considered in relation to outsourcing activities in the
public sector. The decision on public–private cooperation is not driven only by economic principles. This paper deals with the economic
and legal decision process of PPPs. The theoretical and legal framework is then applied and illustrated through a case study of the
German Aerospace Center (Deutsches Zentrum fu ¨ r Luft- und Raumfahrt e.V./DLR).
r 2006 Elsevier Ltd. All rights reserved.
Keywords: Public procurement special issue
1. Introduction
‘‘New Public Management’’ (NPM) is the label typically
given to the contemporary paradigm shift in public
administration applied to a set of reforms over the past
20 years. The perceived lack of effectiveness and efficiency
of traditional bureaucracy led to the emergence of
alternative management models (Farazmand, 2001; Pollitt,
1993). NPM has its origin in the established business
administration concepts of private sector institutions. As a
consequence, new concepts designed to overcome the
inefficient allocation of resources in public authorities
and the production of (public) goods and services
(Budaeus, 1998; Loeffler, 2003) have emerged. Manypublic authorities suffer from financial crisis as a con-
sequence of their functional and structural organisation,
and exacerbated by decreasing tax revenues as a result of a
falling rate of gross domestic product (Schedler and
Proeller, 2003). NPM therefore attempts to enhance the
performance of the public sector by adopting management
methods from the private sector. Some key terms are,
concentration on core competencies (Prahalad and Hamel,
1990), outsourcing and, more recently, supply chain
management as a portfolio of vertical arm’s length and
closer relationships between supplier and buyer (Loeffler,
2003). Long-term partnerships with suppliers can build
‘‘social capital’’ (Erridge and Greer, 2002). Social capital,
mainly developed by trust and commitment (Morgan and
Hunt, 1994), may reduce transaction cost and enhance
linkages between public, private and not-for-profit sectors
(Erridge and Greer, 2002). Major perspectives of NPM are
embedded in the macro- and microeconomic level as shown
below (Fig. 1; Hammerschmid, 2001) although they also
contain strong ideological overtones (Pollitt, 1993).Macroeconomic considerations result in a basic change
in the role of the state, as it is enabled by the public
sector. Public sector authorities are expected to concentrate
on core competencies in the hope of eliminating non-
efficient operations, thus creating a ‘‘lean state’’ (Kyrer,
2001). Further tasks, those outside the core competen-
cies should, ideally, only be vertically integrated if
accompanied by economic advantage, a major emphasis
being the reduction of transaction costs (Coase, 1937, 1960,
1988).
ARTICLE IN PRESS
www.elsevier.com/locate/pursup
1478-4092/$ - see front matter r 2006 Elsevier Ltd. All rights reserved.
doi:10.1016/j.pursup.2006.01.001
ÃCorresponding author. Tel.: +49 89 60044221; fax: +49 89 60044222.
E-mail addresses: [email protected] (M. Essig),
[email protected] (A. Batran).
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First, microeconomic reforms relate to the internal
organisation of public authorities, in terms of deficits in
bureaucratic governance leading to the implementation of
revised management concepts and tools. In Germany, these
new paradigms are known as ‘‘Neues Steuerungsmodell’’
and were developed by an association of local authorities
named ‘‘Kommunale Gemeinschaftsstelle fu ¨ r Verwaltungs-
vereinfachung’’ (Local Authorities Association for Simpli-
fying Public Administration; KGST). As many activities of
‘‘modern government’’ failed to meet the efficiency goals of
NPM, a more fundamental, strategic approach was needed
(Savas, 1987). Performance management with a strong
focus on outcomes replaced the former input-oriented
steering mechanism. Labour and management incentives
were seemingly matched to enhanced output quality, and a
customer service orientation provided citizens with a moretransparent view of public organisations.
Second, the external reform of public organisations
intersects with the basic strategies arising from the
macroeconomic view. A concentration on core competen-
cies has become associated with decisions about out-
sourcing former public responsibilities as a consequence of
the ‘‘lean state’’. Public managers operating in this
environment are simultaneously endeavouring to introduce
managed competition and are contracting with the private
sector to deliver public goods and services more efficiently
and effectively (Savas, 2000; Hammerschmid, 2001) though
this is not always achieved (Callender and Johnston, 2001).
Contracting is a critical point of a continuum between
market and the public sector hierarchy (vertical integra-
tion), now often dependent on outsourcing activities and,
in specific situations, more innovative forms of public–pri-
vate cooperation might be needed.
2. Theoretical background
2.1. A new approach to public authorities’ responsibilities
Public Choice, a theory which underlies contemporary
macroeconomic and microeconomic external reforms,
suggests that politicians and bureaucrats may not act in
the public interest, but with their own self-interest in mind
(Budaeus and Gruening, 1997; Loeffler, 2003). This view
also suggests the public sector needs to foster more market-
driven incentives (competition) and their related micro-
economic control mechanisms instead of bureaucratic
control (Vogel and Stratmann, 2000; Harms and Reichard,
2003a, b; Bundesministerium fu ¨ r Wirtschaft und Arbeit,2003). One of the main questions posed by NPM is
concerned with optimal ‘‘public service market penetra-
tion’’: which tasks have to be fulfilled by the state itself and
which tasks should better be co-produced by private
companies? That is, what activities might be arranged by
the public sector, but produced by private institutions? In
the case of outsourcing, the state is responsible for steering
goods and services delivery (Gewaehrleistungsstaat). For
example, under the NPM model for energy supply, the
state remains responsible, but the institution that ‘‘pro-
duces’’ this energy can be in private hands (Budaeus, 2003;
Bundesministerium fu ¨ r Wirtschaft und Arbeit, 2003;
Callender and Johnston, 2001).
Energy supply is an example of toll goods which are
characterised by joint consumption and the feasibility of
exclusion. Toll goods (Savas, 1982) and purely individual
or private goods, such as a personally owned motor car,
are characterised by individual consumption and the
feasibility of exclusion of other users can be created and
handled in markets which reflect individual demand. But
there are also goods and services which are characterised
by an absence of such feasibility of exclusion. These are
either joint consumption, collective or pure public goods,
such as national defence or individual consumption goods
such as public transport. Goods such as pure public goodspose a particular problem, as entrepreneurs are unwilling
to produce these goods and services unless there is some
artificially created method of receiving payment, especially
where an individual has an incentive to act as ‘‘free rider’’,
using such goods without paying for them.
However, many of the goods and services, especially toll
goods, previously provided by public authorities are also
well suited to being provided by private partners (Savas,
2000; Borins and Gruening, 1998). Pure public goods lack
self-regulating mechanisms, due to their singular charac-
teristics and, in this case, public authorities need to be
active in both steering and monitoring the position. In
situations where market solutions are not necessarily
available, cooperation in Public–Private Partnerships
(PPPs) offers a closer relationship between markets and
traditional hierarchical governance (Budaeus and Gruen-
ing, 1997). The structure of public goods and services stays
unaffected by PPPs, as these are mostly exogenously
determined by politics and law (Schedler and Proeller,
2003). However, development of PPPs facilitates the
movement of the state from the role of direct operator to
one of organiser, regulator and controller of the outputs
produced by the private partner (Commission of the
European Communities, 2004). Categories of responsibil-
ity, including public–private co-working, can be divided
ARTICLE IN PRESS
Economic
perspective
Organisational
perspective
General
objectives
Macroeconomicreforms(Fundamentalchange of tasksfulfilled bystate)
Microeconomicreforms (Reform
of governance
mechanism and
structures)
Externalorganisation= Publicgovernance
Internal
organization
= Public
management
Implementation
of economic
management concepts
("Management-gap")
Redefinition of public tasks("Lean state",concentration oncore competencies)
Structure
(Decentralisation,
privatisation,
cooperation)
Steering mechanism,
(Output-orientation)
Labor (incentives)
I n t e r d e p e n d e n c e
Cooperation
public-private
("Resource-gap)"
Outside view
(Customer
orientation)
Fig. 1. Framework for new public management (Sources: Adapted from
Hammerschmid, 2001; Budaeus, 1994).
M. Essig, A. Batran / Journal of Purchasing & Supply Management 11 (2005) 221–231222
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into responsibility for warranty (public), responsibility for
financing (public or private) and responsibility for execu-
tion or production (private) (Naschold et al., 2000;
Schedler and Proeller, 2003). Depending on the PPP
structure, a continuum emerges from joint co-production
to public governance structures only retaining the respon-
sibility for steering public service production where it isundertaken by private businesses.
2.2. An economic and legally determined outsourcing
process
In the private sector, the optimal level of in-house
production has been a long-discussed management issue in
relation to total cost of fulfilment and transaction costs
(Williamson, 1985). In the public sector, some jurisdictions
have suffered budget deficits owing to falling tax revenues
and increasing costs (Budaeus, 2003; Gottschalk, 1997). As
a consequence, the public sector is forced to bring down itscosts. Outsourcing decisions of public authorities are often
cost driven as well as ideological decisions. Economic
analysis is the first step (Fig. 2). The transaction and
production costs of in-house production (make) are
compared with external sourcing (buy) options. Transac-
tion cost analysis leads to a choice in terms of the public
governance structure between make or buy decisions
where markets and hierarchies are two main alternatives
(Williamson, 1979). For the public procurement process, a
second step is required. Besides economic criteria, public
authorities have to comply with a complex framework of
legal regulations and laws, as will be discussed later in
this paper.The different forms of PPPs can be explained in an
extensive framework of New Institutional Economics
(market exchange versus hierarchy) (Williamson, 1979,
1985), the Theory of Contract (Macneil, 1978), and the
Theory of Organisations (Budaeus et al., 1997) as shown in
Fig. 4.
Definitions of PPPs vary widely in the literature. It is a
special form of hybrid cooperation (Eichhorn, 1998)
between public and private sectors. However, some authors
include all forms of cooperative interaction between public
and private institutions as PPPs. In the latter case, the term
PPP thereby loses much of its analytical value, because all
kinds of buying from external sources would be treated as a
PPP relationship. Beginning with a narrower definition, the
US-based ‘‘National Council for PPPs’’ (NCPPP, 2004)
defines, a PPP as ‘‘a contractual agreement between a
public agency (federal, state or local) and a for-profit
corporation. Through this agreement, the skills and assetsof each sector (public and private) are shared in delivering
a service or facility for the use of the general public. In
addition to the sharing of resources, each party shares in
the risks and rewards potential in the delivery of the service
and/or facility’’. This definition describes the general
purpose of a PPP and provides a working definition that
will be formalised later in this analysis.
2.3. Transaction cost analysis: public–private hybrids
between market and hierarchy
Outsourcing results in a concentration on and increased
importance of supplier management and as a consequence,
the growth in the role of procurement within institutions.
For many years, the strategic importance of the procure-
ment function was not recognised in either the public or
private sectors. Recognition of the strategic nature of
procurement has emerged very slowly. The structure of
public goods offered is determined primarily by politics
and cannot be changed quickly as such change is embedded
in the social system expenditure traditions and other
ideological influences. Therefore, public governance has
to seemingly concentrate on efficiency (doing things right)
within the public (procurement) system. Savings in
production cost may be reached by economies of scale,by bundling production quantities, and by outsourcing.
This means sharing tasks with specialised suppliers.
Limitations exist according to Transaction Cost Theory,
because of increasing coordination efforts, which William-
son (1985) describes as the ‘‘costs of drafting, negotiating,
and safeguarding an agreement’’ (Williamson, 1985).
A two-step approach to the analysis of a PPP involves,
first, assessing the strategic importance of a potential
outsourcing project, and, second, the specificity of an
outsourcing project, to identify the volume of transaction
costs (Picot, 1991). Strategic importance and specificity
may be interdependent, as many strategically important
assets are also highly institution-specific. But there may
also be very specific parts of an end-product (e.g. bolts)
which are non-strategic (Picot, 1991). It would be expected
that the strategic importance of public goods would be
defined clearly and precisely before proceeding with the
public outsourcing process, although there is evidence that
this is not necessarily the case (Callender and Johnston,
2001). Many public tasks have also been kept in-house
through ideologically based ‘‘specious’’ arguments of
strategic importance.
Differences between the strategic choices of private and
public institutions come from their particular aims. Private
sector institutions seek to react to market changes and,
ARTICLE IN PRESS
N e w I n s t i t u t i o n a l
E c o n o m i c s ,
P u b l i c C h o i c e T h e o r y
Economic analysis
(Public authorities)
Outsourcing
decision
No
No
Yes Yes
Vertical integration
Vertical integration
PPPLegal analysis (restrictions)
Basic Constitutional Law,
Federal Budgetary Regulations,
Act against Restraints of Competition,
Public Procurement Law,
EU CommunityRules, EC Treaty, ...
Fig. 2. Economic and legal analysis.
M. Essig, A. Batran / Journal of Purchasing & Supply Management 11 (2005) 221–231 223
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presumably, maximise their profits in the form of share-
holder wealth (economically determined objectives). Public
authorities do not only react, they often create, through the
political environment, a set of socially and ideologically
driven welfare determined objectives. Strategic importance
has therefore to be discussed in the context of general
political objectives. A democratic decision-making processidentifies general political objectives with significant
relevance to the long-run development of the society.
Political programs are constituted through a mixture of
laws, regulations, budgetary decisions and political deci-
sions which serve as the framework for public authorities.
The output of these public programmes leads to an impact
on citizens based on their reaction to the realisation of
these policies.
This impact may differ from the primary intentions of
politicians. This stepped system, balancing strategy and
project strategy, produces an outcome as a reaction to the
whole system which shows the consequences of politics and
therefore is seen to be strategically relevant. Public strategic
objectives (or politics at the highest level) are not only
internal to public authorities, but externally are dependent
on the level of political process. The strategic importance
of tasks at different levels of the public system are directed
towards the outcome which has to be secured (Naschold
et al., 2000; Schedler and Proeller, 2003). The responsibility
to realise public strategic objectives is not connected to
institutions. If monitoring of compliance of activities
within the public value chain undertaken by private
partners is feasible, outsourcing will be an adequate
approach. Limitations are set, if risks arise that endanger
the realisation of defined strategic objectives (Naschold etal., 2000; Schedler and Proeller, 2003), they then should be
noted by the compliance system in place. For example, the
German social welfare system cares for high-maintenance
citizens with individual health support. This is a political
and strategic objective of a social welfare system with a
visible output: individual care. The output is financed by
taxes paid by citizens as a whole—not the individual who
uses the services; however, almost everyone has to pay
taxes to keep the system running. This situation is called a
non-coherent exchange relationship (nichtschluessige
Tauschbeziehung). If organised by private institutions,
nobody wants to pay voluntarily for services taken by
others and thus the major financial burden falls on the
state. Nevertheless, cooperation with private sector institu-
tions is possible. In Germany, local health care services are
provided by organisations such as ‘‘Rotes Kreuz’’ (Red
Cross) which is a not-for-profit institution. The impact of
this system might dissatisfy the younger generation which
has to finance the elderly!
Specificity is one main factor responsible for differen-
ces between various public and private transactions
(Williamson, 1985). Specificity has relevance to the degree
to which an asset or product can be redeployed to
alternative uses and by alternative users without losing
productive value (Williamson, 1991). With the behavioural
assumptions of bounded rationality and opportunism,
behavioural uncertainty takes on greater importance with
the increase in specificity (Williamson, 1985). Non-specific
relationships have little value in regard to continuity
(Williamson, 1985). However, specificity in relation to
citizen or public sector outputs causes parties to transac-
tions to operate on the basis of ex-post bilateraldependency, and therefore poses added contracting ha-
zards. Both continuity and specificity thereby increase the
transaction cost of all forms of governance, although the
comparative transaction cost advantages of market, hybrid
and hierarchical coordination at different degrees of
specificity (Williamson, 1991; Coase, 1937) need to be
considered. Determinants are crucial differences in adapt-
ability, and the use of incentives and control instruments.
Whereas markets are believed to provide efficient price
mechanisms (incentives), the public sector hierarchies
provide better control mechanisms and adaptability
(Williamson, 1991). Hybrid structures are found between
strong market incentives and bureaucratic control of
organisations. As specificity increases, hybrid and hier-
archical solutions are recommended (Picot, 1991), although
the extent of uncertainty decreases the benefits of internal
organisation (Williamson, 1985). Outsourcing of public
tasks requires an effective governance structure considering
categories of responsibility in public–private cooperation.
Dependent on strategic relevance and degree of specificity,
several forms of cooperative integration are suggested.
(Fig. 3).
Strategic importance and specificity are therefore con-
nected with the core competences of public authorities with
strategically important tasks being highly integrated within
ARTICLE IN PRESS
Specifity of
goods and services
Strategic
importance,
degree of
integration
Vertical
integration
PPP on
institutional
basis
("Equity Joint
Venture")
Traditional
award of
contract
PPP on
contractual
basis
MAKE
BUY
Field of PPP-application
III IV
I II
Fig. 3. PPP portfolio (Sources: Naschold et al., 2000; Commission of the
European Communities, 2004).
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public administration and public companies. If specificity is
low and core competences are not involved, public
authorities set up a public–private organisation (quasi-
hierarchy) as a distinct entity (Fig. 4). The investment must
be large enough so that the minority partner enjoys an
acceptable level of power (Eichhorn, 1998). This is the
strongest form of PPP, with a high degree of formalisation
(closer definition of PPP with a high degree of formalisa-tion and a high degree of objective conformity to the
strategic goals of both public and private institutions and
thus clear agreement on objectives) (Budaeus, 2003). PPP
resources are allocated under the governance arrangements
of the contracting organisation (Budaeus, 2003), although
the strategic objective remains the responsibility of the
public sector.
From a contractual perspective, a PPP represents a form
of pure market contract, Fig. 4. Market, hybrid, and
(quasi-) hierarchies differ with respect to contract law
(classical, neoclassical, relational contract law; Williamson,
1991). A pure contractual basis will possibly also influence
to a lesser extent the degree of formalisation which leads to
a wider definition of PPP (also with a high degree of
conformity to public objectives, but a low degree of
formalisation; Fig. 4). Governance over joint resources
remains on both sides (Budaeus, 2003).
For non-specific goods and services markets, exchange
and discrete contracting may be sufficient. There is a low
level of objective conformity and thus a potentially high
level of conflict over objectives but also a need for a high
level of formalisation. This form of cooperation is called
contracting out (for more detail, see Budaeus and
Gruening, 1997). This is the traditional award of contract
for standardised goods and services where public autho-
rities define the standard of goods and services delivered
and compensate the producer for it (Budaeus and
Gruening, 1997).
2.4. Legal analysis
The German system of public authorities is quitecomplex and is reflected in the structure of the public
procurement system. Public authorities are located at the
national level (‘‘Bund’’, federation), the federal state
(Laender) and the regional level (‘‘Kommunen’’, munici-
palities). Within each level, there are separate sub-levels.
National as well as federal state and regional-level
authorities have to consider administrative and constitu-
tional law, together with legal regulations on the European
level in regard to the assignment of public tasks to private
sector companies. There is no explicit law governing the
general PPP in Germany, except a ‘‘Green Paper’’ of the
Commission of the European Communities which dis-
cusses legal aspects of PPPs. This can only be regarded as a
preliminary report of government proposals that is
published in order to stimulate discussion without any
commitment to action, although it delivers a very useful
framework with laws, legal directives and guidelines that
have to be applied in order to build PPPs.
Legitimation for common public–private institutions is
basically set by ‘‘public purpose’’ expressed through public
tasks and priorities. Limitations with respect to the
privatisation of public tasks are set by constitutional law.
For example, Article 33 (4) Basic Constitutional Law states
that the ‘‘exercise of sovereign authority y [will] be
entrusted to members of the public service who stand in arelationship of service and loyalty defined by public law.’’).
There is no general interdiction in relation to privatisation.
However, public authorities as executive authorities are
obliged to use the requirements of democracy, which means
executing public tasks under the monitoring and influence
of parliament by creating a hierarchical governance
structure (Becker, 1997). Furthermore, if there are organi-
sations operating under private law that must be controlled
to guarantee responsibility for their output, public–private
organisations are a legitimate instrument for reforming
public authorities. This measure is dealt with in the Federal
Budgetary Regulations (Section 65 (1)), which allows the
‘‘Federationy
participate in an organisation under
private law y only (1) y if there is no alternative to
fulfil a defined purpose more economically y (2) y
governance must be feasible in a sufficient way, like a
board of directors, or others y’’. Deciding to join a
public–private organisation, following step one of this
analysis, is explicitly efficiency driven. However, constitu-
tional law also postulates economic efficiency (Article 114
(2), Basic Constitutional Law). Objectives of this kind are
directed at the structure and processes of public authorities
to apply resources in the most efficient way available at this
time. Taxes should be used for public tasks as defined by
the Commonwealth (Becker, 1997).
ARTICLE IN PRESS
Market
exchange
Classical
contract law
Hierarchy
Relational
contract law
Transaction cost theory
Theory of contract
Neoclassical
contract law
Formal
cooperation
Informal
cooperation
Traditional
award of contract
Theory of
organisation
Cooperationbased on trust
PPP
Fig. 4. Theoretical influences of PPP (Sources: Adapted from Budaeus
et al., 1997).
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The total range of public tasks and sovereign authority
on a national and federal state level are determined by the
Basic Constitutional Law (Articles 30–37). Authorities at
the national level are not allowed to undermine the basic
competences of the federal states (Article 30 Basic
Constitutional Law), although an allocation of tasks can
be found in Articles 30–37 and, at the national level, inArticles 87 (a)–(f) of the Basic Constitutional Law.
Limitations are also set by individual Municipal Codes of
the federal states. For example, the Municipal Code of the
Bavarian federal state (Article 92 (1)) permits ‘‘Mixed-
economy [public–private] participation y is only per-
mitted for (1) public purposes y (2) with appropriate
governance y board of directors y and (3) y limited
liability of the municipalityy’’. There is less legal strength
on the level of municipalities. Municipalities can decide
whether to work together with private partners as they
have less sovereign tasks which must be kept in-house
(Article 28 (2) Basic Constitutional Law). Such local affairs
include, e.g. waste management, water and energy supply.
The legal issues at the time of an outsourcing decision
are also influenced by the rules of public contract (Fig. 2).
If a public authority decides to award a service fulfilment to
a third party, it is bound to comply with a set of rules that
take place downstream of the economic and legal choice
made by a local, regional or national authority. Every
contractual action between public–private organisations
must also be examined in respect of the EC Treaty,
especially the principles of freedom of establishment and
freedom to provide employment (Article 43 EC Treaty)
and services (Article 49 EC Treaty). Furthermore, princi-
ples of transparency, equality of treatment, and mutualrecognition are also included. These guidelines may help to
avoid both the risk of inappropriate preference being given
to local or national tenderers when awarding a contract,
and eliminate other than economic considerations (Com-
mission of the European Communities, 2004). In Fig. 3,
two different forms of PPP are outlined in respect of their
procurement procedures: first, contractual partnerships
designated as a ‘‘ public contract’’ or ‘‘concession’’; and
second, partnerships involving the creation of a joint
organisation (Commission of the European Communities,
2004).
In Germany, public contracts are also regulated by the
Act against Restraints of Competition which sets out
‘‘general principles’’ (Section 97) and defines ‘‘contracting
entities’’ according to whether they are regional or local
authorities with special funds, or functional contracting
bodies which perform tasks as a special interest of the state
(for example, hospitals). Legal regulations for a functional
contracting body are only applied if the organisation
exceeds distinct threshold values. ‘‘Public contracts’’, are
officially defined as ‘‘Supply contracts y for the procure-
ment of goods’’, ‘‘Works contractsy for the execution or
the simultaneous design and execution of works or a work
which is the result of civil engineering or building
construction work’’, and ‘‘Service contracts’’ for all other
types of contract (not covered by the other two subsec-
tions) of Section 99.
In Germany, the national procurement law is further
divided into regulations or ‘‘Verdingungsordnungen’’,
contracting rules for award of public contracts for those
public contracts, deliveries and other services (VOL),
construction and buildings (VOB), and services providedby freelance contractors (VOF). Service contracts are
covered by VOL/A and VOF (Section 100 and Section
101). Guidelines for the application of different categories
and procedures of award are specific to regulations VOB,
VOL and VOF. Unlike private sector organisations, public
authorities and also public–private corporations are forced
to apply these guidelines through open procedures
(oeffentliche Ausschreibung), restricted procedures (bes-
chraenkte Ausschreibung) or negotiated procedures (frei-
haendige Vergabe), whereas open procedures are standard
to contracts of regulation of VOL and VOB. Procedures
must be used in a hierarchical way.
The concept of a concession is defined as a contract of the
same type as a public contract except for the fact that
consideration for works to be carried out or services to be
provided consists solely in the right to exploit the
construction (Commission of the European Communities,
2004). There are fewer specific regulations for concessions.
The contracting authority is free to select the award
procedure, although the minimum requirements of the EC
Treaty must be met (Commission of the European
Communities, 2004).
A joint organisation can be put in place, either by
founding a jointly held organisation or by the private
sector taking control of an existing public undertaking. Inthe meaning of Section 99 (1), Act against Restraints of
Competition, a public contract implies supply activities
which are not searching for cooperative partners only.
However, this would ignore Public Procurement Law, if the
organisation to be established aims to fulfil services
originally undertaken by the public authority. Following
a recent adjudication of the European Court of Justice, the
phase of selection of private partners is already treated
legally as a public contract (Benken, 2004). Beside, these
requirements, partnerships need a particular fit between
their partners. Traditional procedures for awarding a
contract are not suited to the parties getting to know each
other as an open and unrestricted procedure is formally
forbidden. Recently, a new procedure known as ‘‘compe-
titive dialogue’’ has become applicable when awarding
particularly complex contracts (Article 29 Directive 2004/
18/EC). The competitive dialogue is launched when a
public authority is objectively unable to define the technical
means that would best satisfy its need and objectives. This
new procedure allows the contracting authorities to open a
dialogue with the candidates to find a solution meeting
their procurement needs. At the end of this process, the
candidates are invited to participate in the final tender.
Similar to awarding a public contract or concession, the
highest demonstrable efficiency will be the decisive factor in
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the ‘‘competitive dialogue’’, not only the lowest price
(Section 25, No. 3 VOL/A, by analogy see Section 25,
No. 3 (3) VOB/A and Section 16 VOF). High requirements
are set for transparency and equality of treatment. In
choosing the legal form of public–private organisations,
the need to limit the liability of public authorities has to be
carefully considered and, therefore, a ‘‘limited liabilitycorporation’’ (‘‘Ltd.’’, in Germany ‘‘GmbH’’) is established
(Article 92 (1), No. 3, Bavarian Municipal Code).
3. Case study
3.1. Methods
Treating the public–private dyad as the unit of analysis,
this exploratory study focuses on the public buyer’s
perspective upon a self-selected private supplier. The
highest level of the procurement function in the public
organisation, which plays a significant role in managing
PPPs, was targeted for this study. The data for the single
case study was collected in a personal interview. Owing to
the complexity of a PPP, a single case was chosen, as
fundamental problems in implementing a single PPP in
Germany could be identified and compared with the
economic and legal analyses set out above. The adoption
of business administration concepts from the private sector
is not useful for this study even though these concepts
could contribute to the reform of the public sector
procurement. A questionnaire was prepared based on
theoretical and conceptual considerations with different
topics capturing different stages of a PPP. The main stagesof a PPP implementation were found to be: first, the field of
PPP application; second, outsourcing decision, responsi-
bilities, governance structure and degree of formalisation;
third, objectives of partners; and fourth, the phases of
implementation (preparing and decision phase, implemen-
tation phase, operating phase, termination phase).
The selection of the public organisation deliberately
excluded investigations at the German municipal level
which have already been the subject of case studies about
cooperation in citizen-related services at the local level.
Questions were formulated in open form, primarily to serve
as an interviewer guideline. Structuring the questionnaire
provided a framework for analysis and the basis for further
comparative investigations. The selected object of analysis
was T-Systems SFR (Systems for Research) a joint
organisation of the German Aerospace Center (Deutsches
Zentrum fu ¨ r Luft- und Raumfahrt e.V./ DLR) and T-
System, a subsidiary of Deutsche Telekom AG for IT-
services. DLR is member of the Helmholtz-Society, where
all 15 so-called ‘‘Grossforschungseinrichtungen’’ (large-
scale research institutes) in Germany are working together.
This research institution is mainly financed by the German
national government (‘‘Bundesministerium fu ¨ r Bildung
und Forschung’’, or Federal Ministry of Education and
Research) and therefore is a typical public institution (see
also Section 98, 2 Act against Restraints of Competition,
‘‘functional contracting bodies’’).
3.2. Results
3.2.1. Field of PPP-application
DLR, its associated members and research institutesformerly provided all information technology services
(ITS) in-house. These services ranged from simple service
support of individual desktop PCs, telecommunication and
data networks up to highly specific supercomputers.
Arising from a 1996 review, the outsourcing object was
the entire bundle of IT services which are primarily related
to DLR internal ‘‘customers’’.
3.2.2. Outsourcing decision, responsibilities, governance
structure and degree of formalisation
Optimal manufacturing service penetration first consid-
ers the strategic relevance of potential outsourcing objects.
ITS only play a supporting role for DLR’s strategic core
competence in research activities. Second, transaction costs
mainly refer to the degree of specificity. Service support of
desktop PCs is generally non-specific. In fact, the problems
associated with standard software can be seen to be the
same in all companies while supercomputers are likely to be
customised and therefore are highly specific. Furthermore,
ITS must be provided in the headquarters in Cologne as
well as in seven subsidiaries all over Germany. Transaction
Cost economics recommends hybrid governance structures
for medium or high specificity, especially bilateral govern-
ance, and relational contracts for recurrent frequency
(Williamson, 1985). Regarding legal restriction (Section 7‘‘efficiency’’, Section 65 Federal Budgetary Law) an
essential condition must be the economic advantage of
private provision of public goods and services. Indeed,
DLR identified deficits in efficiency to also provide legal
argument for an outsourcing decision. A pure market
governance would endanger the whole research organisa-
tion if fulfilment could not be guaranteed by DLR as
research activities are strongly dependent on ITS. As a
result, DLR decided to found a joint organisation with
T-Systems as a private partner.
3.2.3. Objectives of partners
The main objective of DLR has been to enhance ITS
efficiency using market-driven mechanisms. In-house re-
forms (e.g. profit centre) are often difficult and are based
on old structures. Therefore, for a fundamental reform a
PPP is a suitable instrument. A new organisation facilitates
the use of the capacity of supercomputers by other research
organisations, such as the ‘‘Gesellschaft fu ¨ r Reaktorsicher-
heit’’ (Association for Reactor Safety) which has joined the
group bringing IT personnel and assets. However, task
sharing involves potential agency-related problems regard-
ing the objective of common welfare of public authorities
and profit-seeking private partners. Furthermore, as a
result of potential principal-agent problems, governance
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mechanisms have to be established (Gottschalk, 1996;
Budaeus et al., 1997; Bundesministerium fu ¨ r Wirtschaft
und Arbeit, 2003; Budaeus, 2003) as the private partner
works to achieve profit and also gains market status
because of its relationship with DLR.
3.2.4. Phases of implementationPreparing and decision phase: Initiated by top manage-
ment of DLR (buy decision) and supported by a well-
known consultancy, DLR started with an initial market
analysis for IT services in 1997 throughout Europe. An
internal sourcing project group, consisting of the head of
DLR’s ITS, a lawyer for mergers and acquisitions, the
Chief Financial Officer, a delegate representing all mem-
bers and research institutes, and the head of procurement
of DLR, was constituted to specify the project. Addition-
ally, several HR department members joined the project
team as DLR planned to transfer all IT employees to the
new organisation. Safeguarding the rights of these former
public employees in the new private organisation was one
of the major challenges.
As IT services are difficult to define, a negotiated
procedure (called ‘‘Verhandlungsverfahren’’ for Eur-
opean-wide tendering) was applied (Section 3, No. 4a
VOL/A, and Section 5 VOF). Definitions were only based
on the functional level (for example, time requirements a
user helpdesk must be available or response time) and the
best solutions to fulfil these requirements had to come from
the private bidders. Performance criteria to evaluate
candidates were based on their previous experiences with
PPPs as well as the potential of annual productivity growth
rates of 25 percent. Having regard to the rate of development in IT hardware, this was not seen to be a
utopian value. As the contract value was above the
threshold value of h200.000, a European-wide tender
process had to be undertaken (Article 7 (1) Directive
1992/50/EC). For this reason, the tender had to be
advertised in the EU Official Journal (Article 16 (2) and
17). Negotiation afterwards took place with pre-selected
potential partners (Section 4, No. 1 VOL/A).
Additional requirements were set by the founding
institution of DLR, the Federal Ministry of Education
and Research. It required analyses of fiscal effects,
Budgetary Regulations restrictions, restrictions of the Act
against Restraints of Competition and in particular, an
evaluation of the efficiency of the PPP solution. The DLR
also limited the duration of the PPP to 3 years. In the first
quarter of 1998 DLR accepted the bid of DEBIS, a former
subsidiary of DaimlerChrysler AG, now T-Systems.
Implementation phase: The entire negotiation process
lasted almost 1 year. A number of conflicts escalated to the
top management level and forced the development of a
number of compromises. Problems arose over the short
contract period of only 3 years followed by a new tendering
process, and the transfer of all IT employees of DLR to the
new PPP with all safeguards inherent to public organisa-
tions (for example, layoff protection). Neither aspect is
common in private organisations in Germany. Specific
investments were required to be amortised over this short
period making such arrangements problematic considering
the sunk cost. Second, guarantees to employees caused
significant problems to DLR in the negotiation phase. Risk
sharing aspects are an important process step for a
successful conclusion to the formation of a new PPP.However, feeling responsible for its employees, DLR
guaranteed all ‘‘DLR–PPP employees’’ the right to return
to DLR, if the partnership with DEBIS was terminated in
2002 whether or not the PPP continued with another
private partner. DLR also signed an acceptance duty as
high as the former cost of ITS creating in-house DLR as
minimum transaction value. To keep in mind the effici-
ency goal an annually decreasing acceptance duty was part
of the contract—in the first year after foundation
95 percent, in the second 90 percent, and finally in the
third 85 percent.
DEBIS SFR had been found by signing the contract in
May 1999. DLR contributed additional resources (real
assets) to the PPP. A second contract followed in 2002, a
third one will follow in 2005 with a period of 5 years after
signing twice for 3 years. The period of 5 years was chosen,
as the PPP is stabilised and is working well. However, this
does not mean that a new tendering process necessarily
results in the appointment of the same private partner. The
legal form of the PPP, from the beginning, is a ‘‘limited
liability corporation’’ with a 25.1 percent participation of
DLR. This amount of participation is required due to the
need for an adequate minority power within the board of
directors of the PPP (responsibility for output).
There is an inevitable risk in depending on an externalpartner. Every single service is regulated in individual
service contracts (Section 1a, No. 3 VOL/A) including
performance criteria in relation to service and quality and
penalities for non-performance. On the operational level,
control activities proceed via one centralised and several
decentralised IT managers at all seven locations of DLR.
In 2003 all DEBIS shares were transferred to T-Systems.
Therefore, the PPP was renamed T-Systems SFR. The
service contracts stayed untouched, separate from the
ownership framework as termination of cooperation was
not intended by the transacting parties. In the future, if a
new tender results in more than 20 percent of the contract
being awarded to another private company, the existing
arrangements would be terminated.
Operating phase: Initial problems in the operating phase
were solved by learning processes. Improvements concern-
ing economic consequences have been achieved by the
implementation of exit scenarios, and the termination of
guarantees to employees for the award of contract in 2005.
In addition, the definition of services awarded has been
improved. In the past, DLR based its definition of services
on a historical IT infrastructure which was unique to each
group of users in DLR. Now, definitions are based on a
consolidated homogenous IT infrastructure which is DLR-
wide, thus making specification much easier.
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Termination phase: The founding institution of DLR, the
Federal Ministry of Education and Research also seeks to
leave the PPP within the next few years. This will become
an issue after the first 5 year contract which will be the
third contract from 2005. For this reason there are two
possible exit models (Trigeorgis, 1995): first, DLR will sell
its shares to the private partner (put-option) or will buy theshares of the private partners for a subsequent total
privatisation (call-option), or, second, DLR will take back
all resources (assets), except employees who will stay with
the private company.
4. Conclusion
This study aims to compare conceptual and theoretical
findings inherent in a typical public sector PPP-decision
process, compared with the findings contained in a specific
case in practice. Looking at the decision process at DLR,
there was an economic demand for new solutions arising
from the need for increased efficiency in the beginning.
Founding a joint organisation brought considerations of
strategic importance and specificity of ITS. In this case,
strategic importance was more important than specificity,
as responsibility for output must be guaranteed by public
institutions. Overall, research activities are the core
competence of DLR, and this output might be seen as a
genuine public good. These basic research activities are
often at such an early stage that economic success is not
predictable and very uncertain, although incurring high
costs. Nevertheless, as a public institution, DLR provides
these activities. Private research activities on the other
hand are mostly based on concrete products. As a result,government and its associated organisations (such as DLR)
are in a position to provide research activities in the
common interest (Gewaehrleistungsstaat), where pure
private institutions would fail, since everyone tries to act
as a ‘‘free rider’’. Strongly connected with its core
competence, DLR must also secure its ITS which are
necessary sub-services to support research activities. For
that reason the strategic importance of ITS evolves, and,
with low to medium and high specificity, the requirement
to choose a joint organisation as the PPP model becomes
fairly clear. With only two major types of PPPs, we
consolidated a lot of mostly empirically oriented PPP
definitions which make a limited contribution to an
economic and legal-based analysis.
This case study is based on the national level in
Germany. Hence, further investigations to close the gap
should be based on the regional and local levels. For
example, at the regional ‘‘Laender’’ or state-level out-
sourcing of police clothing production and administration
to a PPP could be achieved. Police uniforms have very high
specificity and special importance to ensure officers are
identified as police. At the local level there are several
examples of cooperation between municipalities and
private companies for energy supply, waste disposal, public
baths and hospitals.
A further question might be whether PPPs are the first
step towards a complete restructuring of public services.
Within EU public procurement regulations, there is now a
new instrument called ‘‘competitive dialogue’’ which allows
the integration of suppliers at a very early stage of
purchasing procedure and as a result the implementation
of supplier relationship concepts (Erridge and Greer, 2002).Public Procurement also moves towards Public Supply
Chain Management (Fig. 5), and, taking into account that
PPPs offer changes in the ‘‘role’’ of the public sector, the
whole public value chain comes into an NPM focus. Public
Supply Chain Management is a possible development route
for public procurement. Networks are traditionally much
more common to the public sector, especially in the state
structures, where coordination of efforts on different levels
of politics are required.
Economic analysis proceeds at network levels of admin-
istration, public companies and also private companies that
need to implement differentiated management structures.
Management is more difficult, with competing priorities
which cannot be balanced completely. Compared with the
characteristic private sector commercial focus, public
procurement is determined by regulatory requirements
and socio-economic responsibilities (Erridge and McIlroy,
2002).
The politics network at the top level, followed by the
administration network level that takes responsibility for
the execution of policies, occurs at the federal, state
and local (municipality) level. As the results of this
paper show, execution might also be carried out by private
sector companies constituting a private supply chain but
ARTICLE IN PRESS
+ = Public supply chain management in a wider sense+ +
P u b l i c p r o c u r e m e n t l a w
C o m p e t i t i v e t e n d e r i n g C o m p e t i t i v e d i a l o g
Aw a r d o f c o n t r a c t
P u b l i c p r i v a t e
p a r t n e r s h i p
O b j e c
t i v e o
f a n a l y
s i s
D y a d
N e t w o r k /
c h a i n
G
o v e r n a n c e
R e l a t i o n a l /
r e l a t i o n s h i p
S p o t -
t r a n s a c t i o
n
Fig. 5. Public supply chain management.
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fulfilling the needs of the public supply chain. However,
coordination is more complicated as not only legal and
economic aspects have to be considered, but also the
demands and needs of society.
Acknowledgements
The German Aerospace Center (DLR), namely Berthold
Schaefer, is gratefully acknowledged for its support of this
research.
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Further reading
Budaeus, D., Eichhorn, P. (Eds.), 1997. Public Private Partnership: Neue
Formen oeffentlicher Aufgabenerfuellung. Nomos Verlagsgesellschaft,
Baden Baden.
Budaeus, D., Conrad, P., Schreyoegg, G. (Eds.), 1998. New Public
Management. Walter de Gruyter, Berlin.
Dyer, J.H., Cho, D.S., Chu, W., 1998. Strategic upplier egmentation.California Management Review 40, 57–77.
Scheer, A.-W. (Ed.), 1998. Neue Maerkte, neue Medien, neue Methoden—
Roadmap zur agilen Organisation. Physica-Verlag, Heidelberg.
Stoye, J., Freitag, O., Benken, H., Herma, M., Ko ¨ ppen, J. (Eds.), 2004.
Aktuelle Probleme des Vergaberechts. Deutsche Hochschule fu ¨ r
Verwaltungswissenschaften, Speyer.
Thom, N., Ritz, A., 2003. Mo ¨ glichkeiten der Wertscho ¨ pfungssteigerung
durch Public Private Partnership. In: Bach, N., Buchholz, W., Eichler,
B. (Eds.), Geschaeftsmodelle fuer Wertschoepungsnetzwerke). Gabler
Verlag, Wiesbaden, pp. 435–457.
Urban, S. (Ed.), 1998. From Alliance Practice to Alliance Capitalism.Gabler Verlag, Wiesbaden.
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