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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



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



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).




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).




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

ARTICLE IN PRESS




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.




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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http://europa.eu.int/comm/internal_market/publicprocurement/ppp_en.htm


http://www.kgst.de/

http://www.ncppp.org/howpart/index.html




http://www.kgst.de/





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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