THE GOVERNANCE OF PUBLIC-PRIVATE
PARTNERSHIPS: A CASE STUDY
by
Tjakko Zijlema
MSc Thesis BA: Organizational & Management Control
University of Groningen
Faculty of Economics and Business
ABSTRACT
Over the recent years, the attention towards collaborations between public entities and private companies has increased. This thesis focuses on the characteristics and governance practices of this specific form of collaboration: the public-private partnership (PPP). This study wants to describe the characteristics of these PPPs. By conducting a case study, namely the construction of the A-59 motorway project with a DBFM-contract, it is examined what practices occur and whether a ‘package’ of practices is used for the governance of this type of interfirm relationship. The influence of these governance practices on the collaboration between the public and private partner is also a topic of this study. The characteristics show that within the long-term PPP-project characteristics can change between different phases. A combination of hierarchical practices together with relationship practices was observed in governing the partnership. This combination promoted collaboration and stimulated the cooperation between the partners, what contributed to the success of the project.
1. INTRODUCTION
Collaborations between companies have become an important aspect in doing business. The interdependencies of firms are growing, resulting in various forms of collaborations and partnerships. Partnerships can have different forms, such as customer-supplier arrangements, contractual agreements or joint ventures. In the 1990s, management accounting and control research had given little attention to management control issues with regard to cooperation between independent companies (Van der Meer-Kooistra and Vosselman, 2000). Over the last decade, the contributions to this field of research have steadily increased. Caglio and Ditillo (2008) provide a review of the theoretical and empirical literature on management control in inter-firm contexts. They classify the papers according to the varying breadths of inter-organizational controls, which they classify as cost and accounting controls (based on cost and accounting information), management controls (more individually specified controls) and control archetypes (mixes of different control mechanisms). Their paper concludes that, after discussing a variety of studies, the role of accounting and control mechanisms in more parity-based forms of alliances is poorly understood and further research should concentrate on this domain. Other forms like franchise-based or license-based agreements are also rather unexplored according to their review.
The described collaborations usually take the form according to the value chain principle. Not only relations between direct activities are described, but also the firms’ relations with different buyers and sellers. In these vertical forms the parties can act as providers of inputs or consumers of outputs. When the partnership is taken beyond a strictly contractual relationship, for instance when they become partial owners of a project, the characteristics of the strategic alliance change. In the case of joint ventures the partners jointly own the new separated incorporated entity involved (Das and Teng, 2000). These partnerships have a more horizontal form of collaboration. There are numerous examples that can be given on joint ventures, for instance in the production and construction industry.
shared opinions on public-private collaborations. As main advantages of the PPP approach, Tang et al. (2010) mention that it can save resources in many ways by combining resources and competencies of the public and private sector. Main disadvantages they mention are that political obstacles stand in the way of using PPPs and that, when a project runs into problems, the government and general public often bear the costs of failure.
Despite that the definitions vary, the idea that the PPP concept promises a new way of managing and governing organizations that produce public services is generally accepted and they are seen as a qualitative jump ahead in the effort to combine the strong sides of the public sector and the private sector (Hodge and Greve, 2007). Due to increasing collaboration between public and private organizations, PPPs have become a frequently used alliance structure. As mentioned by Caglio and Ditillo (2008), these parity-based collaborations are rather unexplored from a management accounting point of view. Limited research is available that specifically focuses on the management control of these public-private partnerships.
Research in PPP construction projects distinguishes three major themes: risks, relationships and financing (Tang et al., 2010). Since the public and private parties have different characteristics, these partnerships often deal with several difficulties and risks that are involved. Public bodies like governments or local councils can change in their occupation due to periodical elections what could have great effect on ongoing or proposed projects. Also the decision making structure differs between public and private bodies. Cultural and institutional differences ensure that when these parties are brought together these risks and difficulties emerge. The research on public-private partnerships is rather fragmented. This study tries to present a structured view on PPPs by setting three consecutive goals. The first goal is to determine of the characteristics of PPPs based on the characteristics of interfirm relationships of Van der Meer-Kooistra and Vosselman (2000). The second goal is to determine the package of governance practices that are present in PPPs, based on Van der Meer-Kooistra and Scapens (2008) their classification of governance practices of lateral relations. The influence of these practices on the collaboration between the public and private partner is the final goal of this study.
2. LITERATURE REVIEW
The contributions to the literature on management control systems and management control in inter-firm relationships have steadily increased over the past years. The aim of this chapter is to provide an overview of what has been written about this topic and will review the management control structures of interfirm relationships. Characteristics of transactional relationships are mentioned, and different control archetypes based on these characteristics are reviewed. The final paragraphs present the structure of governance practices that are used in interfirm relationships.
2.1 Management control of interfirm relationships
In the last two decades, the shift in focus on organizational controls towards the governance of long-term relationships between organizations lead to an increased scope on the management control of interfirm transactional relationships. Where the earlier frameworks for studying the design of management control systems focused on the control systems within an organization (Ouchi, 1979; Birnberg, Turopolec and Young, 1983; Simons, 1995), models of the design of MCS in outsourcing relationships started to emerge around the early 2000s (Langfield-Smith and Smith, 2003). Main insights in these models came from the transaction cost economics (TCE) developed by Williamson (1979). TCE is founded on three aspects that determine the type of governance. These aspects are the frequency of the transactions, the uncertainty that comes with those transactions and the asset specificity of the transactions, what is the degree to which an asset can be redeployed to alternative use without sacrifice of productive value (Langfield-Smith and Smith, 2003). Out of these aspects, three forms of governance structures where developed: markets, hierarchies and hybrids (Williamson, 1991). These governance structures rely on different control mechanisms to enable successful contracting. Whereas markets rely on free competition to ensure control and hierarchies rely on authority, hybrid forms of control generally entail long-term contracts (Langfield-Smith and Smith 2003).
specified conditions (Chenhall, 2003). These characteristics determine the choice of practices to govern the relationship. Van der Meer-Kooistra and Vosselman (2000) claim that the characteristics of the following elements of this relationship are relevant for this choice: (1) characteristics of the transaction, (2) characteristics of the transaction environment (market circumstances as well as the institutional environment), and (3) characteristics of the transaction parties. By taking these different kinds of characteristics into account, the most suitable control pattern can be determined.
2.4 Models of control archetypes
In a review of the literature on management control in inter-firm relationships, Caglio and Ditillo (2008) indicate that three models of control archetypes (mixes of different control mechanisms) can be distinguished in the literature. They divide the existing literature on interfirm relationships in three archetypes. These archetypes have features on the governance structures of Williamson (1991) and the control patterns of Van der Meer-Kooistra and Vosselman (2000), and consist of market models, hierarchical models and alternative models. Each of these models can have different characteristics and contextual variables. For this study, we adopt the typology of market model, hierarchical model and hybrid model. The models are explained in the following paragraphs.
2.4.1 Market model
For the market model it is agreed that the information necessary to regulate transactions is included in the price, which is linked to standardized activities and outputs. Contextual variables or contingency factors that are relevant in this control archetype are mainly related to transaction characteristics. Market based models are preferred to be used with high repetition of transactions and low asset specificity (Van der Meer-Kooistra and Vosselman, 2000; Speklé, 2001; Vosselman, 2002). In the presence of effective market mechanisms, no specific management control mechanism is needed and only control concerns the regular measurement and evaluation of the performance of the other partners (Caglio and Ditillo, 2008).
2.4.2 Hierarchical model
2.4.3 Hybrid model
The third model of control is the hybrid model. The hybrid model, or alternative archetype, is based on multiple elements. Caglio and Ditillo (2008) specify the trust-based pattern, exploratory or hybrid control, and business relationships or cooperation as denominations. Relatively unspecific ‘general thrust’ contracts, latent competition, broad performance measures and self-enforcing information sharing characterize hybrid control. The business relationships are characterized by coordination through cooperation, finding matching plans and suitable solutions, and a focus on socialization (Håkansson and Lind, 2004). One of the other mentioned elements is trust, sustained by personal consultations and intensive communication and by informal-social forms of controls (Caglio and Ditillo, 2008). Research indicated that trust based patterns are best adopted when transactions are highly uncertain, the transaction environment is very risky and parties are characterized by competence reputation, experience in networks, a risk-sharing attitude and a symmetrical bargaining power (Van der Meer-Kooistra and Vosselman, 2000; Langfield-Smith and Smith, 2003). The trust-based pattern is merely trust-based on relationships, more flexible framework contracts and personal coordination. Since the hybrid model is based on different elements, different control patterns can be distinguished.
2.6 Governance structures of inter-firm relationships
contracts and the formal nature of the relationship. The social structure refers to the social ties between the parties which shape the character of the interactions between the individuals who are involved: how they should behave, the norms and values which are important, their commitments to each other, how they communicate and share information, who takes the leadership role and when, how they learn and so on. The technical structure governs the technical aspects of the transactions and of the production and information processes. The technical interfaces between the parties, the technical features of the products and production techniques, the technical competencies of the parties, the information systems and information processing techniques and the knowledge of available accounting procedures and techniques are all elements of the technical structure (Van der Meer-Kooistra and Scapens, 2008, p. 374). The contingency variables of the lateral relationship establish these structures, or: “the specific elements of each structure will be determined by the features of a particular lateral relationship” (Van der Meer-Kooistra and Scapens, 2008, p. 376). The four structures provide room for a balance between firmness and flexibility. That balance is needed since long-term relationships evolve over time what means that the characteristics can evolve as well. However, this study assumes that the parties in the relationship operate on a relatively equal level. This is doubtful for the public-private partnership, where a formal vertical relationship exists with the public partner demanding a service from a private partner. Nevertheless, this notion of firmness and flexibility and the evolving nature of the characteristics are important to consider for this study because of the long-term relationship in public-private partnerships. A broader concept is used than the concept of control, which is traditionally used in the management accounting literature. The term ‘governance’ is used, because the study of these relations goes beyond the hierarchical management viewpoint and beyond the boundaries of the organization. Due to this approach it also goes beyond the boundaries of management control systems. (Van der Meer-Kooistra and Scapens, 2008) The term governance captures the essence of the management of interdependent collaborations. These collaborations need to be governed since they have a horizontal form, joint ownership and a high degree of interdependency. Nooteboom (1999, p.1) describes that governance ‘aims to express that there are multiple interests and that the challenge is to achieve a viable and fruitful balance of interests and power’. This explanation can be adopted regarding the management of PPPs and seems better suited than the term ‘control’ which is normally used in management accounting literature for discussing the more hierarchical vertical relations. Therefore, the use of the term ‘governance’ is important since a more cooperative relationship is established rather than a hierarchical relationship with a super- and subordinate.
cooperative coordination. Van der Meer-Kooistra and Scapens (2008) refer to hierarchical practices, market practices and relationship practices. According to them, various practices can be used in combination to ensure governance when the relationship is formed, but it can also extend beyond the boundaries of the parties involved and practices can initiate before activities take place. Van der Meer-Kooistra and Scapens (2008) argue that these governance practices are used in a ‘package’ to achieve the exchange of knowledge, co-operation and competition, flexibility and standardization, and shift in leadership role required in a lateral relationship. The next paragraphs will further elaborate on the practices that can be used in combination.
2.6.1 Hierarchical practices
Hierarchical practices can be considered as an intentional coordination form. In a hierarchy, two activities within a company are directly coordinated. They basically become one activity, and as far as the organization is concerned, they are meshed together (Håkansson and Lind, 2004, p53). The bureaucracy based pattern of Van der Meer-Kooistra and Vosselman (2000) indicates that the scope of control structures and processes will also be determined by the quantifiability of the activities and its output. Hierarchical practices are being used in a relationship in which there is no formal superior or superordinate authority, but in which equally responsible parties work closely together (Van der Meer-Kooistra and Scapens, 2008).
2.6.2 Market practices
Market practices are based on a coordination form where the interface between the two coordinated activities is standardized to ensure that several customers’ demands are matched with the supply of several producers of similar products (Håkansson and Lind, 2004, p53). It that sense, when one of the parties behave opportunistically the other party can easily choose another contracting party since there are many potential transaction parties and the market price contains all the market information. Market practices are mainly related to the market model described earlier.
2.6.3 Relationship practices
Meer-Kooistra and Vosselman (2000), trust plays an important role in overcoming information asymmetry by the development of goodwill trust. These practices that coordinate relational matters can focus on communications, information sharing, trust and shared goals.
Considering the literature of the recent years it can be said that various useful contributions have been made about the different forms of management control of inter-organizational relationships. However, the topic of public-private collaborations remains unexplored and, as Caglio and Ditillo (2008) mention, little studies examined the more parity-based forms of alliance, for instance agreements between two competing firms at the same stage of the value chain, or arrangement involving a two-way, rather than a one-way transfer of knowhow, products or services. Håkansson and Lind (2004) raised the notion that a combination of forms of coordination can be present. Van der Meer-Kooistra and Scapens (2008) based their study on lateral relations with parties that are horizontally related. Looking at the characteristics of the public-private partnership, it could be stated that the PPP is more parity-based because of the shared risk and resources in these projects, but that the parties are formally engaged in a vertical relationship. It therefore needs more investigation. This study aims to offer more explanation of the governance of PPPs with support of the existing literature since many characteristics are shared. The conceptual model of this study is presented in figure 1. At first (Step 1), this study will try to determine the characteristics of the contingency factors in PPPs, like the transaction characteristics, transaction environment characteristics and party characteristics. Thereafter (Step 2) it is examined whether governance practices are used in the PPP-A59 (like market practices, hierarchical practices and relationship practices) and if a package of practices can be determined. Finally (Step 3) it is examined how these combined governance practices influence the collaboration in in that public-private partnership.
Figure 1: Conceptual model of this study
Characteristics of the PPP Package of governance practices within the PPP Influence of governance package on collaboration in the PPP
3. PUBLIC-PRIVATE PARTNERSHIPS
In this chapter, the concept of the public-private partnership will be extensively reviewed by referring to existing literature about this subject. The purpose of this chapter is to provide a clear picture of the PPP-phenomenon and the existing literature on PPPs, and to extract the relevant characteristics of the PPP that can be used for this research. The first paragraph will introduce the PPP-phenomenon, while the second paragraph describes the characteristics of the PPP.
3.1 Introduction of the public-private partnership
Public-private partnerships are loosely defined as co-operative institutional arrangements between public and private sector actors, but few people agree on what a PPP actually is (Hodge and Greve, 2009). A recurring characteristic of the PPP is that the public and private actors share risks, costs and resources (Klijn and Teisman, 2003). The difficulty in governing the horizontal relationships is that the PPP includes partners from very different networks, each with their own history and practices, and they are constantly influenced by decisions made in other ‘arenas’. Arenas are the action context in which the games take place and can be characterized by a specific set of actors, the decision-making situation in which they find themselves, and the organizational arrangements according to which decisions are made (Klijn and Teisman, 2003, p. 138). Games is a frequently used metaphor, defined as ‘an ongoing, sequential chain of (strategic) actions between different players (actors), governed by the players their perceptions and by existing formal and informal rules, which develop around issues or decisions in which the actors are interested’ (Kickert, Klijn and Koppenjan, 1997, p. 101). A PPP is created by a ‘game ‘that involves more than one arena (for instance, the public and private arena, or central and local government) and more than one network. A game surrounding a PPP project can at the same time be influenced by decisions taken in other games and arenas (Klijn and Teisman, 2003). Because every partner in the PPP game chooses their own strategy, the decision-making and governance of PPPs is made complex, because not only institutional complexity but also strategic complexity influences the partnerships.
projects? According to Hodge and Greve (2007) PPPs seem to have at least two dimensions, (1) finance and (2) organizational. The financial dimension is concerned with how public and private actors are engaged financially in PPPs. The organizational dimension concerns how tightly the public and private actors are organized.
Koppenjan (2005) identified and summarized multiple factors that obstruct or promote the formation of a PPP in infrastructure projects, including project characteristics. These are the properties that characterize the project. The first project characteristic is whether the project is suitable for PPP. As mentioned before, PPP are often initiated because it is assumed that it has increased value for money compared to other forms. According to Koppenjan (2005), the question is whether these expectations can be achieved in every project. The second project characteristic concerns the degree of complexity of the project, where uncertainties and risk will rise with complexity. The third characteristic is the distinction between line and point infrastructure. This specific project characteristic separates line infrastructure (for example road and railway links) from point infrastructure (for example, traffic intersections and terminals). It is argued that line infrastructure seems to lend itself less easily to the alliance model than point infrastructure, because the costs and benefits of line infrastructure are spatially spread out and it is therefore more difficult to realize trade-offs through an arrangement than in the case of point infrastructure (Koppenjan, 2005, p. 140).
When the parties commit themselves to a complex project or investment, they expose themselves to the opportunistic behavior of others. The risk and uncertainties that are complementary to these collaborations cannot be banished by means of contracts since these are by definition incomplete. The interaction between the parties and the interactional competences of the parties are critical here. Trust and joint image building have proven to be important factors here to increase interaction between parties (Koppenjan, 2005; Edelenbosch and Klijn, 2007; English and Baxter, 2010).
A case study from Koppenjan (2005) concluded that previous cooperation does not have to be a guarantee of support, and if interaction is not firmly embedded in existing decision making-structures the results may end up far from beneficial. He states that not only the interaction itself is important, but that it is crucial whether the right parties and representatives are interacting.
In complex decision making networks like PPPs, the importance of trust is stressed for cooperation, coordination and achieving results. It is remarkable then that the amount of literature on trust in public administration is rather limited (Edelenbosch and Klijn, 2007).
into relationships, and (3) research into financing. Tang et al. (2010) their research approach does provide better understanding of the characteristics of PPPs, however is does not provide any empirical insights on the governance of these partnerships. Overall, the literature seems rather fragmented. By analyzing existing literature of case studies on PPP, this research will try to achieve a more understandable framework of the characteristics of PPPs from a management accounting perspective. By adopting the characteristics typology of Van der Meer-Kooistra and Vosselman (2000) a more specific overview of the PPP characteristics can be drawn. By analyzing several case studies conducted in the Netherlands the characteristics of the transactions, characteristics of the transaction environment and the characteristics of the parties can be observed and determined from the literature.
3.2.1 Characteristics of the transaction
The framework of characteristics of Van der Meer-Kooistra and Vosselman (2000) is based on the characteristics the transaction cost theory and the trust based approaches see as influencing interfirm relationships. Characteristics of the transaction include the properties that concern the actual transaction. Degree and type of asset specificity, the frequency of the transactions, the length of the transaction period and the measurability of outputs are mentioned here.
Eversdijk and Korsten (2009) mention that the duration of public private partnerships is longer than traditional contracts. The average length of the contracts in the Netherlands varies between 15 and 30 years. Internationally, the contract duration varies considerably: from less than 15 years to periods of 60 years (Greve, 2007). The length of the contract or transaction period depends on the availability, the achievable returns and the repayment of the private capital (Greve, 2007, p. 116).
The public-private partnerships have high transaction costs and preparation costs for the public partner compared to traditional contracts because of the often long and complex tendering procedure and formulation of the contract between the public and private partner (Eversdijk and Korsten, 2009). Ruding (2008) also mentions the relatively high transaction costs, particularly in the preparation and contracting phase and in the contract management. The frequency of transactions is considered high in those phases, but expected to decrease after the completion of the construction.
Hodge and Greve (2007) provide a typology of PPPs based on the tightness of the organizational relationship and the financial relationship. The tightness of the organizational form, according to Steijn et al. (2011), can vary from strongly contractual arrangements and more informal arrangements such as project groups lacking any formal judicial status to very tightly organized consortiums
phase and thereby has to take on a loan from one or multiple banks. This loan thereby has preferably the same duration as the length of the transaction period between the public and private partner (Ruding, 2008). Also the extensive tendering phase, where a private partner is carefully selected for a project, impose large costs. So the continuity of the contracting relation is of great value and termination during the project would lead to high switching costs.
3.2.2 Characteristics of the transaction environment
Looking at the environment in which the transactions of the PPP take place, some specific factors can be identified from the literature. The institutional environment of the public and private party is rather dissimilar. For the public party the lines of demarcation, or boundary lines, between different sector networks or departments may cause problems for PPP projects. Several problems of domain demarcation have occurred, what lead to the conclusion that institutional fragmentation of PPP projects can create enormous barriers, enhances complexity of decision-making and requires huge managerial effort (Klijn and Teisman, 2003). A case study regarding several Dutch PPP-projects mentions due to the fact that decisions in PPP projects are linked to different actors, arenas and networks, a domain problem can emerge (Klijn and Teisman, 2003). Van Ham and Koppenjan (2002) therefore raise the question how the public interest can be protected for the short-term profit-driven strategies of the private parties. These values and strategies create the tension out of which the domain problem can emerge, because the creation of added value is not realized due to conflicting domains. Ruding (2008) mentions that because of the supremacy of politics the chance of reversing previously taken agreements always exists.
Also the external domain of the project plays a role and can determine the characteristics of the transaction environment. The external domain can be described as the external actors that are not involved in the PPP but can have an influence or interest, like residents, local governments, municipalities and authorities or, in case of privately financed projects, banks. Klijn and Teisman (2003) defined them as peripheral actors, which may intervene suddenly. The actions of these peripheral actors may have a substantial impact on the development of the area and the progress of the project.
3.2.3 Characteristics of parties involved
costs (Klijn and Teisman, 2003). The cultures of public and private parties are also rather distinct. Van Ham and Koppenjan (2002, p. 602) describe the public culture as “not geared to exploitation and cash flow” and state that political primacy handicaps the partnership. The culture of the private party is defined as solely focusing on returns and cash flow, and having a lack of understanding of the political and public process.
Public and private parties often have little conception of the way in which the others assess partnership. Van Ham and Koppenjan (2002) argue that the public and private parties can be characterized by their risk attitude. For instance, risk for public authorities emerge when a private party withdraws from a project or when a company no longer exists as a result of bankruptcy. Also political risks occur, such as public organizations entering into agreements with private parties with the backing of their political superiors, to which the latter, whether or not as the result of an electoral shift, they do not consider themselves bound. For private parties, the risks can include insufficient cash flow (for example, oppressive costs of long term investments), uncertain transaction costs (due to change in government policy or political discontinuity), administrative uncertainty (whether the public party is able to complete the administrative procedures in time to realize the project), and social uncertainty because of the greater visibility of the project to the public (Van Ham and Koppenjan, 2002). Steijn et al. (2011) conclude that, according to the literature, shared risk and profit sharing is a main characteristic of PPP. They argue that the co-operation between public and private actors has to result in at least some risk sharing. The main risks that are addressed are financial risks, what could also result in the sharing of profits that arise out of the project. It is mentioned however that profit sharing not always has to take the form of financial profits. For instance public actors might get recognizable societal benefits from a co-operation (Steijn et al., 2011; Hodge and Greve, 2005). Due to the complexity of the PPP collaboration the involved parties play different roles at the same time (Van Ham and Koppenjan, 2002). Since the public party is, besides being a partner, in essence the initiator of the project they are required to play the directive role and have to set limiting conditions. Van Ham and Koppenjan (2002, p. 605) provide a division of roles that the public and private parties play, where the aim is not to limit the involvement of partners to a single role but to create clarity regarding the nature of their involvement and the way in which they handle their multiple roles.
The decisiveness of the private sector is perceived higher than that of the public sector, together with more expertise in dealing with financial risks and opportunities. Also the management of employees is tighter in the private sector because of different conditions, like performance pay and protection against dismissal (Ruding, 2008).
4. METHODOLOGY
This chapter will elaborate on the methodology of this study. The first paragraph explains what research approach is used and why this approach is suitable. In paragraph 4.2, the structure of the research is explained. The last paragraph of this chapter is about the gathering of the data for this study.
4.1 Research approach
This study will follow the theory development approach. Because there is not much literature available on the governance of public-private partnerships, this approach could provide additional information, new insights on theories and variables through an exploratory research approach. Case studies that have been conducted prior to this research, which mainly present contributions about risks, advantages and disadvantages of PPPs, provide support for this empirical study on governance practices. Since we are also interested in the characteristics of PPPs, these case studies provide substantial data about these characteristics. Since the study of the public-private partnership phenomenon is addressing a system and not isolated variables, the exploratory approach is well suited. According to Yin (2003) case study research allows investigators to retain the holistic and meaningful characteristics of real life events. The aim of conducting this research is to gain more insights and information on the characteristics and governance of PPPs, what factors are relevant and how do they influence the collaboration. In that sense, this study goes beyond describing the advantages and disadvantages of PPPs that have mainly been described in earlier case studies.
4.2 Research structure
4.3 Gathering of data
For this study, the PPP-A59 case is selected for the analysis and gathering of data. This case will consists of a PPP project where several parties were involved. The case study will consist of the study of a recently finished infrastructure project in the Netherlands. By conducting interviews with representatives of the parties involved in the PPP-project, data will be gathered about the factors that influence the governance of the project. According to Eisenhardt (1989) cases may be chosen to replicate previous cases or extend emergent theory. It is also mentioned that the goal of theoretical sampling is to choose cases that are likely to replicate or extend the emergent theory. It is therefore necessary that a corresponding case study concerning the PPP collaboration will be selected. The A59 is such a case and is therefore very useful for conducting this study.
Case studies typically combine data collection methods (Eisenhardt, 1989). Since the scope of the study is exploratory it will rely on qualitative data. As mentioned the data will be collected through interviews and observations. However, since the A59 project started in the early 2000s, several publications about this partnership or referring to this partnership have been published. The main examples are the evaluation of Deloitte (2003) and the evaluation of the Provincie Noord-Brabant and Poort van Den Bosch (2005). In December 2003, Deloitte presented an evaluation of the PPP-A59 commissioned by the Provincie Noord-Brabant, Ministry of Transport, Public Works and Water Management, and the Kenniscentrum PPS (PPP Knowledge Center, an advisory council on PPPs of the Dutch Ministry of Finance). This evaluation of the formation of final contract was commissioned to use the results of the evaluation in other PPP-projects, to gain insight to the strong and weak points of DBFM-contracts and to use the results for developing PPP-contracts and the standardization of contract forms and tendering procedures. The evaluation of the Provincie Noord-Brabant and Poort van Den Bosch is issued by the public and private partner and presents an overview of the project from the origin until the completion of the construction. These publications provide useful additional data for conducting this research.
5. CASE DESCRIPTION
This chapter includes a detailed description of the case study that has been selected for this research. The first paragraph contains the introduction to the case. The second paragraph will further explain the PPP-phenomenon by describing the concept of the DBFM-contracts. A similar contract was used in the A59. In the third paragraph, the process of the formation of the DBFM-contract in the PPP-A59 project is described. The final paragraph describes the project organization.
5.1 The PPP-A59 project
The PPP-A59 project involves the construction of the A59 Rosmalen – Geffen motorway, located in the Provincie Noord-Brabant (province of Noord-Brabant). The four-lane A59 motorway replaced the two-lane N50 road. The former N50 road was a great bottleneck for the traffic between Nijmegen and ‘s-Hertogenbosch. The increasing traffic intensity caused problems in terms of traffic flow and safety. The nearby residents were subject to air pollution and noise nuisance, mainly because of the traffic that tried to avoid the N50 by using local roads. These problems were the motive for Rijkswaterstaat (Directorate-General for Public Works and Water Management) to start an investigation for the transformation of the road to a motorway in 1992.
5.2 DBFM-contracts
This infrastructure project was the first motorway in the Netherlands that was constructed by means of DBFM (Design, Build, Finance and Maintain). In this section, the DBFM phenomenon is described in more detail. The different parts in Design, Build, Finance and Maintain contract imply that it is an integrated contract form where the several stages, from realization to exploitation, of a particular construction project are assigned by the client to one single contractor (Kenniscentrum PPS, 2008). Public as well as private clients can close DBFM-contracts. In the PPP-A59 project, the Provincie Noord-Brabant acts as the public client, and a consortium of companies act as the private contractor. The exact composition of the consortium will be explained in paragraph 5.4.
The structure of a DBFM-contract is rather different than that in traditional contracts. In a traditional contract, the client pays for the delivered product during the project. After completion of the construction activities a final settlement takes place. In a DBFM-contract the private parties lend the necessary funds for financing the project from a private financer, for instance a bank.
Eversdijk and Korsten (2009) mention several distinctive principles for DBFM. The integration of the construction disciplines in one single contract that is assigned to one private party is a key feature. With DBFM, a government does not buy an object or product, but it pays for the delivery of a service through complex financing constructions. The services must meet functional requirements rather than product requirements. The private party provides the financial resources and is responsible for the quality, cost control and timely completion of the project (Ruding, 2008). Risks of the project are transferred between the public client and the private contractor. Instead of assigning all contractual risks to the client, the risks are assigned to the partner that is able controlling that particular risk the best. The duration of the DBFM-contract is longer than the traditional contracts for construction projects. In the Netherlands, DBFM-contracts have an average duration between 15 and 30 years. The duration depends on the availability, yield and repayment of the private capital (Kenniscentrum PPS, 2008; Ruding, 2008).
According to the literature, the main advantages of a DBFM-contract arise from the synergy between the partners. As mentioned earlier, the various disciplines are integrated in the DBFM-contract. When the different stages of the project are assigned to different contractors, they will not take each other’s risks and costs into account. For instance, an esthetic optimal project design can lead to disproportional high construction costs, or a financial attractive design can lead to increased exploitation costs in a later stage. When all the stages in the project are assigned to one contractor, this will create a large incentive to optimally align the costs for designing, building and maintaining the object what results in increased value for money for the public client (Kenniscentrum PPS, 2008; Ruding, 2008; Eversdijk and Korsten, 2009).
5.3 Towards the DBFM-contract of PPP-A59
As mentioned earlier, the PPP-A59 project was the first Dutch road infrastructure project in the DBFM form. The trigger for this project was the re-prioritization of the Meerjarenprogramma
Infrastructuur en Transport (MIT) in 1998. The MIT is the long-term agenda of the Dutch Ministry of
Transport, Public Works and Water Management. In their plans, the reconstruction of the N50 to the A59 motorway was delayed until 2007. The Provincie Noord-Brabant proposed the DBFM-concept with the funding by a private party as an answer to this re-prioritization. The ministry agreed to this plan in 2000 and gave the province the responsibility to invite tenders for the project and made a budget available.
When the Ministry of Transport allowed the province to take on the project, the Provincie Noord-Brabant formed its own internal project organization. Several discussion groups are formed to ensure internal and external alignment and adequate communication with the stakeholders involved. These stakeholders are for example the municipality of Den Bosch, operators of cables and pipelines, and nearby residents.
compliance of the offer with the legal requirements that are set for the project, for instance the risk allocation. The technical team reviews the technical and design aspects of the offer, for instance the compliance with the Tracébesluit of Rijkswaterstaat. These are the minimal technical requirements that are set by Rijkswaterstaat that the new motorway has to comply to. The financial team reviews the financial terms, conditions and attractiveness of the offer. Regarding the offers, the teams had no contact with each other whatsoever. They were located separately in the basement of the province headquarters to guarantee confidentiality and secrecy during this phase. In this way the offers are reviewed as transparent as possible. The offers receive points of each of the three expert-team reviews and finally the three scores are combined to one total result. After evaluating all offers, the two last and best offers were announced on February 19th 2002. However, the negotiations with these two remaining consortia could not already take place. The province had to renegotiate with the Ministry of Transport about the available budget for the project. The two best offers appeared to be higher than the MIT-budget that the ministry had reserved. The Public Sector Comparator (PSC) that is developed by the province indicates that the offers are financially feasible. The PSC compares the costs of the PPP-offer with carrying out the project in the traditional form. The province reviewed the PPP-offers as positive, because the best offer has lower total costs compared to the traditional form computed with the PSC. The ministry reviewed the offers as negative, because the PPP construction appears to be more expensive than was budgeted. Eventually the ministers of Finance and Transport agreed to increase the budget and the project can carry on. In the final negotiation phase, the remaining two consortia negotiated with the province towards their best and final offer. One of these final offers did not meet the requirements that were set for this offer and was excluded; therefore the consortium of companies named Poort van Den Bosch was awarded the project.
5.4 Project organization of private partner
communication and traffic management. The consortium is contractually required to manage and maintain the road until the 31st of December 2020. Until this date it bears all risks and responsibilities that come with ensuring the safety of the road users and the environment, preventing damage to the environment and minimalizing any form of nuisance.
The Poort van Den Bosch BV consortium is legally established through a Special Purpose Vehicle (SPV). An SPV is a legal entity created by a firm by transferring assets to the SPV, to carry out some specific purpose or circumscribed activity or a series of such transactions (Gorton and Souleles, 2007). The SPV Poort van Den Bosch BV (hereafter called Poort van Den Bosch) is a separate legal entity that is created specifically for the A59-project and has the form of a limited liability company. SPVs are often used for PPP-projects where contractual arrangements are based on the provision of services instead on the provision of assets (Grimsey and Lewis, 2005). In the Poort van Den Bosch, Royal BAM Group participates with 70%, Boskalis BV with 20% and Fluor Infrastructure with 10%. All these shareholders have mandated a separate director in this company. The Poort van Den Bosch is the legal entity that is solely responsible for the execution of the contract that is closed with the public client, the Provincie Noord-Brabant, and is therefore the only private entity that forms the public-private relationship is this collaboration. Public-public-private transactions take place between the Poort van Den Bosch and the province.
In order to finance the project, the Poort van Den Bosch contracted loans with two banks, the ING Bank and the Bank Nederlandse Gemeenten (Bank Dutch Municipalities). With these funds, the costs of the design, construction, insurances and project organization are paid. For the provision of this debt, the banks closed a facility agreement with the Poort van Den Bosch. This agreement consists of several requirements that have to be fulfilled, for example a technical advisor report, which explains the technical state of the project, and liquidity requirements. The Poort van Den Bosch is responsible for all financial risks that come with the project.
bears all risks that are involved with the construction and maintenance activities of the project through the EPC and MTC contracts. An overview of the project organization is displayed in figure 2.
After almost three years of construction, the A59-project was completed at the end of 2005. The motorway was realized four years earlier than planned in the MIT and was 14% more cost effective compared to a traditional contract. The consortium repays their loan to the banks in a period of 15 years. After the completion of the project the Provincie Noord-Brabant repays the consortium an amount of money every quarter during the maintenance period of 15 years. During this period, the consortium is responsible for every maintenance aspect of the motorway except the prevention of slippery roads what is organized regionally. After the 15-year maintenance period, the responsibility for the road is transferred from the Poort van Den Bosch to Rijkswaterstaat.
Figure 2: Simplified overview of project organization
By looking at the organization of the PPP-A59 project it is clear that in a DBFM-project several parties, both private and public, are involved or have some sort of influence. Transactional
SPV
Poort van Den Bosch BV
Client
Provincie Noord-Brabant
Industrial Investors
Koninklijke BAM Groep NV Boskalis bv
Fluor Infrastructure BV
Lenders
ING Bank NV
Bank Nederlandse Gemeenten
EPC/MTC Consortium
Poort van Den Bosch VOF
BAM Civiel BV BAM Wegen BV Boskalis BV Fluor Infrastructure BV Concession Contract Facilities Agreement
6. ANALYSIS
In this chapter the analysis of the results of this research are presented. The characteristics of the PPP-A59 are presented in the first paragraph. The second paragraph will present the governance practices that were used in the PPP-A59. The third paragraph describes the influence of these governance practices on the relationship between the Provincie Noord-Brabant and the Poort van Den Bosch.
6.1 Characteristics of the PPP-A59
Van der Meer-Kooistra and Vosselman (2000) mention several characteristics that are regarded as influencing interfirm relationships. The characteristics of the transaction concern the degree and type of asset specificity, the frequency and reputation, the length of the transaction period and the measurability of output. The degree of asset specificity in the PPP- A59 project is medium/high in the construction phase, since the repayment of the consortium is contractually structured and starts after completion, together with the financial obligation to financers of the consortium. Terminating the project will lead to high switching costs. The frequency and repetition of the transactions between the province and consortium are medium/high in the construction phase because of the many activities that take place then, but low in the maintenance phase. Because the consortium is fully responsible for the construction, transactions take place in the form of meetings that concern the progress of the project and the payment of the availability fee. Many of the transactions are predetermined in the contract. The project is long-term with duration of 18 years and output is relatively well measured by audits and standardized procedures. However, the measurability of output is merely concerned with the compliance to the requirements that the province and the Tracébesluit have set for the road. The province is focusing more on the quality of the process rather than the quality of the output, because that has to have a minimum level what has to be demonstrated by the consortium.
The characteristics of the transaction parties in the PPP-A59 indicate that, although both parties had many experience in constructing motorways, the new form of the PPP-project made them relatively equal in experience. Without this experience the partners started off relatively on the same foot. Despite of the obvious dissimilarities between the partners at first glance, the partners shared characteristics. The formation of separate project teams and the ISO-certification of the private as well as the public partner promoted the equality between the partners. The factor reputation was very important since this was the first infrastructure project carried out in this form and both parties had the desire for success. The bargaining power of the province in the contracting phase resulted in allocating the majority of risks contractually to the consortium. The concept was that most risks were allocated to the party that was most suitable for coping with these risks. When the contract was signed, the consortium takes on the responsibility of the construction and maintenance. Therefore, the associated risks were allocated to the private partner.
Looking at the characteristics of this public-private partnership, it is observed that these characteristics change or evolve during the project. Especially between the construction phase and the maintenance phase various changes in characteristics are observed. This resulted in a changing need for governance, what will be explained in the following paragraph.
6.2 Governance practices in the PPP-A59
In this section we continue by determining the ‘package’ of practices in this public-private partnership that governed the relationship between the Provincie Noord-Brabant and the Poort van Den Bosch consortium during the construction and the maintenance phases.
Van der Meer-Kooistra and Scapens (2008) presented three categories of governance practices that are described in the literature review, namely hierarchical practices, relationship practices and market practices. Under these categories, several examples of governance activities can be given that were used during the PPP-A59 project. These governance practices are categorized as hierarchical, relationship or market practices and will be described in the following sections.
6.2.1 Hierarchical practices
stimulates clarity and ensures the alignment between both parties. The contract has some specific hierarchical practices to govern the relationship and to align the province and the consortium. These elements are discussed in the following sections.
The concession contract between the province and the consortium contains three important milestones for the contractor. These milestones take the form of certificates and are awarded when the project reaches a certain phase and the necessary requirements are met. The first milestone is the commencement certificate at the start of the project. This milestone was set to ensure that the consortium started off the project well prepared. Several obligations were attached to this milestone, for instance a bank guarantee, the transfer of local roads and agreements with owners and operators of cables and pipelines. When this milestone is achieved the first financial compensation is initiated. This first initial compensation was 20% of the eventual quarterly fee. The second milestone is the award of the availability certificate. When this milestone is achieved, the construction work within the project is finalized and all parts of the road can be opened for traffic. The financial compensation for achieving this milestone is the payment of 80% of the eventual quarterly availability fee. The third milestone formally confirms the completion of the construction phase and is awarded when all requirements of the completion certificate are met. With the achievement of the completion certificate, the building phase of the project is finalized and the project enters the maintenance phase. With the award of the completion certificate, Poort van Den Bosch receives 100% of the quarterly availability fee.
In the maintenance phase, the compensation to the consortium consists of the fixed 100% quarterly availability fee and a variable availability fee. This variable fee can be influence by ‘penalty points’. When Poort van den Bosch does not comply with their quality or safety system, the province can impose a fine in the form of penalty points. This penalty point system was carefully negotiated before the start of the project. The consequence of a certain amount of penalty points is a reduction on the variable quarterly fee. This makes the penalty point system an incentive system; when Poort van de Bosch meets the agreed requirements, the province will pay 100% of the variable fee. Another measure that can lead to reduction of the variable quarterly fee besides penalty points is the ‘lane reduction’. Whenever parts of the motorway are unavailable, for instance because of maintenance activities, the province cuts the quarterly fee to the Poort van Den Bosch. This gives the consortium the incentive to design and construct a high quality road that requires less maintenance. Another incentive is to plan the maintenance activities in such a manner that no traffic disruptions occur, otherwise this will have negative financial consequences.
merely focused on the availability rather than the quality of the motorway. The quality has to be secured by the consortium in order to guarantee availability.
The financial structure of the concession contract includes specific payment terms. These payment terms are attached to the milestones that were discussed earlier. These terms contribute to the fact that the consortium conformed to the contractual agreements. For the Poort van Den Bosch to receive their compensation for the output they have delivered, they needed to comply with what was expected of them contractually. When the audits were positive and confirmed that the construction work was done according to the contractual requirements, they would receive their fee. Also the fixed price of the quarterly fee resulted in little ambiguity between the partners. When the construction works and maintenance activities were carried out according to the contract, Poort van Den Bosch received their full amount of the availability fee at the agreed time. This simple though very essential agreement ensured further alignment between the partners to a great extent.
The hierarchical role of the private financers contributed to the governance of the relationship between the province and the consortium. The province and private financers share in essence the same interest; that the motorway is constructed according to the contract in the agreed period. The technical advisor of the banks performs an audit and reviews the technical state of the motorway and the financial administration of the Poort van Den Bosch. The audit of the banks again ensure that the construction and maintenance is carried out according to the contract, apart from the internal audits of the province and the internal audits of the consortium. The banks thereby stimulate the Poort van Den Bosch and create the awareness to act according to the contract. When the province has to impose penalty points to one of the contractors, the private financer will demand an explanation from the consortium. The banks want to prevent repetition of the penalty points since it could influence the return on their investment.
The contract also provided a safeguard for the continuity of the project. For instance, the conservation manager (who is responsible for overseeing the maintenance of the motorway) was considered as a crucial role within the project. This person is responsible for the daily activities during the entire 15-year exploitation phase. Guaranteeing the continuity for this role was identified as an important issue. This was dealt with by establishing a quality system with every activity of the conservation manager, describing every process into detail in a manual. Also employees of other projects were introduced to the role of the conservation manager and looked into his activities. Putting processes and agreements into paper, and securing a clear paper trail, was regarded as essential for securing the continuity of these activities that had this long-term duration.
6.2.2 Relationship practices
disturbance of the role of an operator with changing demands in this relationship. However, this separation led to increased tension in the relationship between the province and Rijkswaterstaat. Because the province is the client of the project, Rijkswaterstaat very strongly stressed their responsibility. The project team of the province perceived little cooperation from Rijkswaterstaat, and also has the opinion that Rijkswaterstaat applied double standards. For instance, when the maintenance company of Poort van Den Bosch is performing maintenance activities, it has to comply with the highest standards. At the same time the contractor of Rijkswaterstaat, who is performing similar activities 15 kilometers further down the road, is allowed to perform these activities under rather moderate standards
The project organization of the consortium also shaped the governance of the partnership. The division of responsibilities of every actor within the Poort van Den Bosch organization promoted transparency, what was formally established by underlying contracts. The Poort van Den Bosch was responsible for financing the project, the EPC was responsible for the construction, and the MTC was responsible for the maintenance. During the tendering phase preceding the actual activities, the public and private partners intensively negotiate about the division of risks and responsibilities within the project. With the signing of the DBFM-contract, the Poort van Den Bosch takes the responsibility for the design, construction and funding of the road. Because this project was the first infrastructure project in the Netherlands there was little experience with the PPP-form and DBFM-contracts. The allocation of the project risks needed to be worked out very carefully. The intention was to allocate the risks to the partner that is best suitable for bearing that particular risk. The risks are dealt with in the most efficient manner because the partners only focus on risks that are important for them. The partners will try to minimize their exposure to risk as much as possible. The notion is however that the public party tries to allocate as many risks to the private partner because of the transfer of responsibility. Within the A-59 project, the Poort van Den Bosch was responsible for almost all risks except risks that come with procedures, permits and licenses.
Because the A59 project was the first of its kind in the Netherlands and the province and Poort van Den Bosch had little experience with these types of contracts, there were moments of consultation between the partners during the entire project. The contract prescribes consultations meetings at every level along the project, including the frequency of these meetings and who should be attending them. The consultation meetings had a higher frequency and intensity in the construction phase compared to the maintenance phase. All these various meetings contributed to the alignment of the partners and were arranged to oversee the activities of the Poort van Den Bosch. A result of the transfer of responsibilities to the private partner was that the project team of the Provincie Noord-Brabant kept their office and was not physically present at the construction site. Neither were there supervisors present at the construction site on a daily basis. In the construction phase there were several meetings between the province and Poort van Den Bosch that were prescribed in the contract. The core team meetings and construction meetings were held every month. A consultation meeting was held every two weeks to tune the alignment between the partners and to discuss the current affairs. Also communication meetings were held, and on an operational level there was occasionally daily contact by phone to discuss the details. The project directors had a meeting every six weeks to discuss the progress of the project in general.
During the maintenance phase, there is one consultation meeting every week on an operational level and one meeting every quarter on the management level. The conservation manager reports about the physical state of the motorway and about the maintenance activities in the operational meeting. In the management meeting, the financial position of Poort van Den Bosch is discussed. These meetings are very much straightforward since the activities are not very intensive, both operationally and financially. All these meetings, both in the construction phase and in the maintenance phase, were held according to the contract and provided exchange of information for both partners to oversee the progress and activities of the project.
was the client in this project, it did not take on the dominant role en it let room for the consortium to work in without constantly interfering.
The desire for success of both parties stimulated the cooperation in the partnership. For the province it was the first time that an infrastructure project was carried out in in a PPP-from where it acted as the client. The project team of the province wanted to show the general public that they were capable of handling this project. Poort van Den Bosch wanted the project to succeed since they invested in it by taking on a loan to finance the construction activities. Only when they finished the project on the agreed terms and within the agreed timeframe, they would receive their fee so that they could repay their debt. This consensus led to a desire for success on the operational level, as well as on the managerial level. This desire resulted in finding solutions as quick as possible for problems that arose and working them out together. During the start of the project, a conflict was likely to take place between the project team of the province and a representative of the consortium. A person within the project team of Poort van Den Bosch had a strict legal stance towards the project, what had a negative influence on the cooperation between the two project teams. The province mentioned this fact in general, and decided to plan a retreat for a few days with both project teams somewhere remote to work on the relationship. The concept of the contract was well explained again during this retreat, and the emphasis of the province on the ‘partnership’ in PPP was stressed. Emphasizing the importance of cooperating led to a change in personnel in the project team of the consortium. This interference before the start of the construction activities seemed to have positively influenced their relationship during the project. This informal negotiation was needed in order to align the formal agreements from the contract.
The desire for success and the common interest led to the willingness for support between the partners. Several examples illustrated that both partners tried to act equals and wanted to overcome indifferences. One example is the mediation of the Provincie Noord-Brabant in the ‘wildlife crossing’ situation. The Tracébesluit included a wildlife crossing that appeared to be too small. Therefore, the Ministry of Transport and the Ministry of Agriculture, Nature and Food Quality were informed that this needed to be changed. Then, the ministries demanded a much wider crossing than the province and consortium had expected. This crossing took much more space and was much more expensive. The province and consortium negotiated with the ministries, and eventually they agreed that a smaller crossing than the ministries demanded was going to be built, and that the ministries financed the additional work. The consortium assisted the province by presenting alternatives for the demanded crossing. The cooperation between the province and the consortium, and the political mediation of the province between the ministries and the contractors resulted in little delay of the project and no further extra costs. The province mentioned afterwards that is was doubtful whether the consortium could have negotiated these terms without mediation of the province.
Wegen BV). During the maintenance period of the project, the conservation manager was replaced. The new employee needed to be prepared for his new role. The province also took an active role here and supported this new employee were possible. Some minor details were sometimes unclear to the conservation manager because of his inexperience, and then the project team of the province supported him when it was needed.
6.2.3 Market practices
The influence of the market is primarily present during the tendering phase. The extensive tendering phase, according to the European rules for public tendering, had to make sure that the most suitable party was chosen for the project. The separation of the project team of the province into three expert teams ensures that the consortium with the most attractive offer was awarded the project and promoted transparency. By giving the offers points on each expertise (legal, financial and technical), the province could compare each offer and thereby choose the most attractive offer. Also the use of the PSC in the preparation of the project made it possible to compare the offer with executing the project in a traditional form. By ignoring some of the annotations of the consortia in the negotiation phase, the province forced them to attach a ‘price tag’ to the risks involved in the project. In that way the province made effective use of the market. It is doubtful whether these activities can be regarded as actual governance practices, but the province did use the effectiveness of the market in these occasions during the tendering phase. Once the concession contract was signed, market practices seemed to be less important. The fixed price of the availability fee ensured that the consortium had to stay within the budget, which were calculated using a discounted rate. The public party accounted for fluctuations of interest, tax and inflation rates.
6.3 The influence of the governance practices on the collaboration
In this section the influence of the previously mentioned governance practices are discussed. The first paragraph will present the influence of the hierarchical practices on the collaboration. The second paragraph discusses the influence of the relationship practices on the collaboration between the public and private partner.
6.3.1 Influence of hierarchical practices
The contractual agreement in the concession contract formed the core of the relationship between the province and the consortium and provided for the most essential governance of the relationship. The concession contract was worked out in such detail in the negotiation phase that little ambiguity existed about the project.
