Article
Bundling the procurement of sports infrastructure projects: How neither public nor private actors really benefit
Environment and Planning C: Government and Policy 2016, Vol. 34(8) 1369–1386 ! The Author(s) 2016 Reprints and permissions: sagepub.co.uk/journalsPermissions.nav DOI: 10.1177/0263774X15614672 epc.sagepub.com
Martijn van den Hurk Department of Political Science, University of Antwerp, Antwerp, Belgium
Abstract Public-private partnerships for infrastructure development are often conceived as puzzling governance tools. A peculiar case in Belgium has been the procurement of multiple similar projects to single private sector partners who design, build, finance and maintain infrastructure for a fixed period—bundled procurement. Under the umbrella of the Flemish Sports Infrastructure Program, several of these bundles were tendered, particularly in order to achieve economies of scale. However, bundled procurement came at a price. This article scrutinizes its tense relationship with local governments’ interests and competitive tendering. It shows that competition was hampered to a certain extent, but an equally important role in this respect was played by high contractual demands. As for local interests, in some cases the voice of local governments was given too much weight during the procurement phase. Consequently, political interests intervened and uncertainty arose. Keywords Public-private partnerships, bundled procurement, local government, competition, sports infrastructure
Introduction Public-private partnership (PPP) for infrastructure development has been gaining foothold in Flanders (the northern part of Belgium) since the early 2000s. Over the years, Flemish PPPs have been confronted with complexities of political, multi-actor, and technical nature, and doubts have been raised on the feasibility of the governance approach applied (Van den Hurk and Verhoest, 2014; Van Gestel et al., 2014). The Flemish Government is not the only one who is struggling here; across the globe, high transaction costs and demanding Corresponding author: Martijn van den Hurk, Department of Political Science, University of Antwerp, Sint-Jacobstraat 2, BE-2000, Antwerp, Belgium. Email:
[email protected]
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negotiations signify PPP procurement processes (Akintoye and Beck, 2009; Dewulf et al., 2012; Vining and Boardman, 2008). These observations certainly indicate that managing large infrastructure projects is easier said than done (Salet et al., 2013; Van Marrewijk et al., 2008). PPP has been around for many centuries and in many forms (Wettenhall, 2010). Weihe (2008) states that a variety of conceptions of PPP are in use. Most Flemish PPPs can be described as long-term infrastructure contracts (Hodge and Greve, 2010) and correspond to the concept of Design-Build-Finance-Maintain(-Operate) (DBFM(O)) contracts. They encompass the lifecycle of an infrastructure asset by integrating its design, construction, financing, and maintenance (and sometimes operation) in a one-covering contract. Some of the risks that are conventionally borne by the public actor are transferred to the private actor (risk transfer), and private actors contribute financially to the projects (private financing). Once a project has entered the operational stage, the public sector partner pays periodically recurring availability fees that reflect the degree of service delivered by the private sector partner. Although these elements are already bound to impede procurement trajectories, the case of Flanders offers a particularly interesting aspect which adds to the complexity: some PPP programs in this region are built upon a bundled procurement approach. In a bundled procurement process, a number of similar projects at lower government level are jointly tendered to a single private partner (see e.g. Willems, 2014). This implies that originally different procurement processes are consolidated into a single procedure for several contracting authorities (Jovanovic et al., 2013). The main promises of bundled procurement are that it both enables the achievement of economies of scale and the realization of catch-up movements in neglected infrastructure sectors. Nevertheless, pooling the volume of procurement can also bring in difficulties, since complex infrastructure and performance requirements are to be fulfilled (Howard and Caldwell, 2014). For instance, it can put at stake the incorporation of local governments’ interests and threaten opportunities for competitive tendering—in fact, competition is generally considered a delicate issue in public procurement (Caldwell et al., 2005; Loader, 2007, 2013). In this paper, I examine the use of a bundled procurement approach in the Flemish Sports Infrastructure Program (FSIP), an initiative launched by the Flemish central government (hereafter also: Flemish Government) in 2008 and aimed at solving a severe shortage of sports infrastructure. I pay special attention to its proclaimed disadvantages by matching theory-based critiques with empirical findings. By discussing at length the bundled procurement of PPP projects in the sports sector, this paper illuminates an issue which hitherto has not been addressed in the academic literature. First, scholarly work on sports infrastructure development has mainly dealt with investments affiliated to mega sports events (e.g. Cabral and Silva Jr, 2013; Searle, 2002) and sports leagues (e.g. Crompton et al., 2003; Long, 2005, 2013), or the legacy of these endeavors in regard to urban regeneration and sociocultural dynamics (Garcia Ramon and Albet, 2000; Jones, 2001; Misener et al., 2013). Less sizable developments, e.g. artificial pitches and sports halls, have received much less academic attention, even though these are the kinds of projects average local governments deal with most regularly. One contribution of this paper lies in filling this lacuna in sports infrastructure studies. Second, even though centralized purchasing is not nearly a new phenomenon and has received much academic attention (Goold and Campbell, 2000; Vizjak, 1994), empirical accounts on the bundled procurement of PPPs are rare. This paper both complements the latter branch of literature and provides policymakers and private contractors with important empirical insights. The article starts with a brief theoretical discussion of bundled procurement. Then, it outlines the methods used in this examination of the FSIP. The remaining sections describe
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the motivation and use of bundled procurement in the FSIP and explain its impact during the tender procedure on the safeguarding of local governments’ interests and competition. The concluding section summarizes the argument and suggests avenues for further research.
Bundled procurement: Promises and potential drawbacks Bundled procurement is a procurement method in which several similar projects are tendered at the same time to one private sector partner. This process is coordinated by one central public authority who acts on behalf of local (contracting) authorities. This definition shows similarities with the term centralized purchasing (Joyce, 2006; Karjalainen, 2011). For instance, in centralized purchasing the essential purchasing decisions, as well as the responsibilities of ensuring the integrity of a purchasing process, are also taken by one actor—the purchasing agency (McCue and Pitzer, 2000). In this paper, I use the term bundled procurement rather than centralized, pooled, or joint procurement since the former term is generally accepted in Flanders. Furthermore, it is important to make clear that bundling procurement is different from bundling project stages (cf. Roehrich and Caldwell, 2012). Integrating project stages into one contract may be an essential component of PPP (see definition above) but does not necessarily imply a centralized purchase of multiple similar projects. Finally, bundled procurement should not be mixed up with program management, which is the coordinated management of related projects, thus not similar projects, to tackle interrelated challenges and achieve multiple objectives at a time—e.g. the integration of transport projects and land use planning into one program (Busscher et al., 2013). Arguments in favor of bundled procurement mainly rest upon the promise of achieving economies of scale (Arnold, 1999; Trautmann et al., 2009). As for the private sector partner in a PPP, a critical mass of investment value can be attained through jointly tendering relatively similar and simple projects, thereby creating opportunities for higher cash flows. PPP is often too costly to be a feasible procurement option for small projects, hence private sector companies ‘‘will not be forthcoming until there is a large and sustained volume of projects requiring the involvement of the private sector’’ (Flyvbjerg et al., 2003: 104–105). By integrating small-scale infrastructure projects into a bundle, an incentive is created for private actors to make a bid. There are two strong arguments for the public sector partner to advocate bundled procurement. First, bundling is aimed at obtaining a large project volume and delivering a significant number of projects at a time. In doing so, a catch-up movement in infrastructure can be realized in the foreseeable future, which is interesting for both politicians who aim for short-term goal achievements and citizens who can profit from new infrastructure shortly. Second, and related to the promise of achieving economies of scale, the public sector partner can expect to see lower transaction costs due to the fact that the private sector partner can spread out the fixed production costs over more outputs: ‘‘the higher volume create by combining orders enables it to take advantage of quantity’’ (Joyce, 2006: 205; see also Karjalainen, 2011). In sum, bundled procurement simultaneously allows for larger project delivery and administrative savings: the private sector partner sees an interesting opportunity in the large-scale development of a certain product, and the public sector partner can expect to pay a lower availability fee. Notwithstanding its presumed merits, bundling comes at a price: it can be at odds with local political interests. In contrast to decentralized purchasing, it does not bring in awareness of differing local needs and the ability to respond to those needs (Joyce, 2006: 205). Contracting authorities are likely to suffer from a utility loss here: their degrees of freedom decrease, and the discrepancy between their demand and the supply offered by the
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private sector partner increases. The latter has to align numerous different preferences, for example in terms of design, and then find a middle ground which satisfies all public sector partners involved without losing the potential for bundling. According to Kaza, in this process ‘‘median preferences become the norm of the day’’ as ‘‘the measures of central tendency play an effective role in marginalizing the viewpoints outside the center’’ (2006: 256). This balancing act has always been relevant to PPP governance given the involvement of a multitude of actors (Conteh, 2013; Edelenbos et al., 2011), and I expect it to be critically important when it comes to bundled procurement since even more actors will be involved in one contract deal. Ideally, contracting authorities should be ready to let go of some individual preferences. Moreover, they should be excluded from the negotiation table so that there will be no disturbances or delays in the procurement process. However, I have sincere doubts that contracting authorities will agree with that approach given the opportunistic attitude of local political decision makers. What is more, Estache and Iimi (2011) claim that a tension exists between the strive for economies of scale on the one hand, and competition on the other: although large contracts bring about opportunities for scaling, they simultaneously hamper competition. Competition is an important factor for the performance of a PPP: contestability in the procurement process allows the public sector partner to patronize efficiency. The degree of competition is indicated by the bidders involved (e.g. number, nationality, and composition) and the characteristics of a tender procedure (e.g. criteria, selection process). Other aspects that provide useful insights into competition are the character of the infrastructure sector of concern (e.g. the number of players that are usually active in a specific field) and market circumstances. In this paper, it is assumed that bundled procurement instigates excess inertia (Choi, 1996; Farrell and Saloner, 1985): the larger the number of projects brought together in a bundle, the more capital intensive the required production technologies, which in turn diminishes the pool of eligible private sector partners. Large and resourceful firms remain in the game while small and potentially innovative firms are excluded from market entrance (Loader, 2007). In sum, bundled procurement of PPP could instigate unequal competition, yet it also needs to be said that fair competition is not always a top priority in procurement as competing agendas are present (Pickernell et al., 2011). Therefore, limited competition need not necessarily be a problem in the opinion of some public actors. The objective of this article is to unveil the actual role of bundled procurement and confront it with two of the theoretical premises mentioned above, namely (1) the frustrations it evokes among contracting authorities as there will be a reduced incorporation of their interests and (2) the limitedly competitive tender procedures it induces as many private bidders will not be able to deal with high project volumes. I am aware that bundled procurement gives rise to lots of other interesting premises. For instance, bundled procurement is said to increase a government’s control over purchase commitments (cf. Stanley, 1993) and trigger a private sector partner (i.e. supplier) to provide better service and closer attention to the public sector partner (i.e. buyer) (Joyce, 2006). Furthermore, since the buyers (i.e. local governments) involved in a particular bundle of PPPs are all in the same boat, they can mutually exchange purchasing knowledge and skills. These ‘‘economies of information and learning’’ (Faes et al., 2000: 541) are most welcome as governments lack expertise concerning the implementation and management of PPP agreements (Da Cruz et al., 2013). However, a full discussion of these and other aspects of bundled procurement lies beyond the scope of this study, and I have carefully decided to focus upon local governments’ interests and competition. I expected local governments’ interests to play a particularly complicating role in the case of the FSIP given the fragmented
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character of the Belgian political-administrative landscape: how did the Flemish Government iron out the many diverging interests of local governments for the benefit of a bundled procurement approach? In terms of competition, the Flemish Government has often emphasized that the bundled procurement of FSIP projects was applied in order to attract a larger number of private bidders (Van Garsse and Verhoest, 2008), hence my special interest in scrutinizing this issue.
Methods This study was conducted in 2013 and involved a case study explaining the procurement process of the FSIP through extensive, in-depth description in order to deal with causal complexity (Eisenhardt, 1989). The FSIP was selected for analysis since it includes cases of bundled procurement in two different branches of the sports infrastructure sector: artificial pitches and sports halls. It was expected to demonstrate differences regarding the benefits and drawbacks of bundled procurement so that a deeper theoretical and practical understanding would be provided (Eisenhardt and Graebner, 2007). Furthermore, as a relatively matured program the FSIP would be less sensitive and more suitable for critical analysis. Besides two bundles of artificial pitches and one bundle of sports halls, the FSIP has hitherto delivered two contract deals concerning multifunctional sports centers. These projects were procured individually and have been selected for analysis in order to put in perspective the findings on the bundled projects. I gathered a rich amount of qualitative data. A combination of publicly available, official central government documents and project-specific documents at either central, provincial, or local government level were subjected to qualitative content analysis in order to reconstruct the case. In addition, I conducted 20 interviews with 22 experts from both the public sector (15) and the private sector (7). The respondents were selected on the basis of their key involvement in the FSIP (see Appendix for an indication of their professional profiles). The interviews were recorded, transcribed, and then systematically coded using QSR NVivo 10 software (Bazeley, 2007). A thematic analysis allowed to produce themes and interpret the data on the basis of the (co-)occurrences of these themes (Boyatzis, 1998). My interpretations of what actually occurred in the FSIP were then compared with the theoretical assumptions discussed in the previous section—pattern matching, as Cao et al. (2004) label it, or in other words: ‘‘comparing the pragmatic reality with the theoretical ideals’’ (De Graaf and Dewulf, 2010: 473).
The Flemish Sports Infrastructure Program Flanders had been struggling with a severe shortage of sports infrastructure for many years when the Flemish Government launched an ambitious program of refurbishment and renewal in 2008: the Flemish Sports Infrastructure Program (FSIP). The total value of the FSIP equaled 225 million euro, which made it an unseen investment of this kind in Belgium. Within the Flemish Government a taskforce named ‘‘Sportfacilitator’’ was given the responsibility of coordinating the projects involved. This taskforce consisted of a number of central government actors with knowledge of and experience in sports, PPP, or both. Sportfacilitator would serve as an intermediate between contracting authorities on the one hand—i.e. local governments—and bidding firms or consortia on the other. Contracting authorities were asked to submit project proposals which could be selected for incorporation in the FSIP. Once a proposal was selected, the contracting authorities mandated Sportfacilitator to look for a private sector partner. As soon as this partner had
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been found, a Special Purpose Vehicle (SPV) was established. Arrangements were laid down in DBFM(O) agreements between the SPV and each contracting authority. In return for the delivery of the DBFM(O) services, the contracting authority would pay availability fees to the private sector partner during the operational phase of the PPP. Part of the availability fee was subsidized by the Flemish Government and additional funding of SPVs could be rendered through an investment fund (Invespo). In order to respect the versatility of the sports sector, four infrastructure domains were distinguished: (1) artificial pitches, (2) sports halls, (3) swimming pools, and (4) multifunctional sports centers. Artificial pitches and sports halls were procured in a bundled manner; swimming pools and multifunctional sports centers were developed on an individual basis. Figure 1 summarizes schematically the organizational structure of the FSIP. At the time of the analysis (end of 2013), the FSIP had delivered the following infrastructure: 35 artificial pitches (a bundle of 29 pitches and a bundle of 6 pitches), 9 sports halls (one bundle), and 1 multifunctional sports cente. A second multifunctional sports center came into operation in the spring of 2015.
Motivations for bundling procurement in practice I was able to deduce from the interviews the same motivations for bundled procurement as those addressed in the theoretical section. First of all, respondents confirmed that a bundled procurement process was expected to comfort private bidders by creating an opportunity for higher cash flows. PPPs with relatively low capital investment involved, such as artificial pitches, were generally deemed viable only when tendered and built in groups. Respondent E mentioned that ‘‘the total value of the domain of artificial pitches amounted up to 20 million euro; if we were to develop these pitches on a one-by-one basis, there would be no point in establishing a DBFM structure.’’ Regarding the domain of sports halls, respondents O and P (both active in the private sector) emphasized the perks of setting up bundles of projects: ‘‘there is an incalculable difference between the fixed costs for nine sports halls and the fixed costs for one sports hall.’’ As the promises for higher cash flows compared with better profits for private sector partners were initially there, an acceptable degree of competition was expected.
Figure 1. Organizational structure of the Flemish Sports Infrastructure Program.
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Despite the former promise of financial benefits for the private sector partners, the procurement of artificial pitches and sports halls was bundled primarily in order to benefit the public interest. Many respondents referred to the objective of achieving economies of scale as the main driver behind bundling procurement, and some of them were convinced that it would incur lower availability fees. I foresaw this motivation in the theoretical section. However, there appeared to be a second public-inspired motivation which I did not discuss in the theoretical section: bundled procurement was expected to serve as a supportive instrument for local governments lacking means and expertise to deal with infrastructure challenges. Respondents from local governments addressed the advantage of the fact that their artificial pitches and sports halls were procured with the help of Sportfacilitator. Respondents E and F, who actively participated in Sportfacilitator, confirmed that supporting less-experienced local governments had indeed been one of the motivations to bundle the procurement of several projects and to mandate a capable public actor to coordinate the negotiations.
Bundling procurement, instigating uncertainty? The use of so-called mandate agreements has been inherent to the bundled procurement of FSIP projects. Local governments were to sign these agreements, thereby mandating Sportfacilitator to coordinate the entire decision-making procedure (from tender call to contract and financial close) on their behalf. A mandate price was attached to each mandate agreement concerning a bundled project: as long as the negotiated availability fee would not exceed this threshold, local governments were obliged to proceed with the project of concern. Should negotiations lead to an availability fee beyond this price limit, local governments were free to go and exit the procedure free of charge. According to respondents from Sportfacilitator, working with this logic mandating was expected to create a sense of certainty at the negotiation table: local governments would be tied to the mandate prices they agreed upon, hence during the negotiations one would know exactly how far to go without risking a loss of commitment from local governments. In the domain of artificial pitches, this method proved to work well: no serious problems were encountered during the procurement process. However, in the domain of sports halls the mandate strategy actually evoked considerable uncertainty: the mandate prices were inadequate given the preferences of the local governments. This issue came to the fore once local governments started to interfere in the procurement process of the first bundle of sports halls, as I will explain below. Prior to the tender procedure, Sportfacilitator set the mandate price for each sports hall at approximately 1.5 million euro. Although 20 local governments had applied for a sports hall, some of them exited the procedure when it came to signing the mandate agreement; they found the mandate price to be too high. Consequently, opportunities for scaling decreased and the mandate price had to be increased. It was raised to 2.2 million euro on average, which evoked another wave of exits by local governments. Eventually, the average price of each sports hall landed on nearly 3 million euro, and only 9 mandate agreements were eventually signed (Flemish Parliament, 2010). Respondent A metaphorically spoke of a ‘‘house of cards that had fallen down’’ as not even half of the original project proposals had survived the cut of the tender procedure. As for the second bundle of sports halls, a tender call was launched but quickly cancelled since the mandate price caused tensions again. One of the local governments involved decided to drop out fairly soon, and the consequence was that the game was not worth the candle anymore. An important question arises here: did all these local governments exit the procedure for financial reasons and were the mandate
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prices set too high? In the remainder of this section, I will argue that the mandate prices actually were too low if the intention was to please all interests of local governments. In the theoretical section it was said that bundled procurement triggers individual utility losses of local governments. Private sector partners are mostly interested in developing groups of projects if these projects are of similar character and scale, hence their quest for a middle ground between what local governments want and what they will eventually get. As the preferred bidder in the case of the first bundle of sports halls followed this approach indeed, local governments were keen to express their widely diverging interests, thereby pressing Sportfacilitator to grant them a stronger voice in the procurement process. Respondent D understood this urge to step up: ‘‘I cannot imagine that any municipality is willing to build a box [sports hall] which looks exactly the same as the boxes in 19 other municipalities. Every local government wants to be treated as a special customer.’’ Sportfacilitator eventually gave in to these sentiments and gave local governments a stronger voice in determining the technical specifications and conditions. This incurred an increase in both prices and uncertainties, as respondent H commented. Given the unfeasible ambitions pursued by some local governments, the preferred bidder had to exceed the mandate prices (Flemish Parliament, 2011). Moreover, the initial mandate prices were solely linked to the size of the sports hall at hand, and not to the varying additional requirements which were brought in by local governments. The aforementioned situation created opportunities for local governments to exit the procedure. This threat of project dropouts significantly influenced the atmosphere at the negotiation table, as uncertainties were abundant in terms of the number of projects which would actually be developed. Respondent P, who is based at the contractor which built the bundle of sports halls, explained this as follows: ‘‘As we came up with prices which exceeded the mandate price of some projects, the total bundle of sports halls fell subject to uncertainty. Some local governments would be free to exit the procurement process, in which case the financial package we had agreed upon with the bank would be seriously threatened.’’ Respondents O and P mentioned that eventually they were able to rule out all uncertainties by confining themselves to the mandate prices. However, this solution has taken its toll on the private side of the table: ‘‘It might be an interesting project if you look at it from the perspective of producing a large project volume [i.e. public interest], but in terms of profit margins [i.e. private interest] the result has been disappointing.’’ The uncertainties discussed above signify a high degree of dependency between projects within a bundle: in the event of one local government dropping out, the progress of an entire bundle of projects is put at risk. This dependency varied from bundle to bundle and was strongly related to how projects were financed. For instance, the issue was less salient in the domain of artificial pitches, where the preferred bidder was able to finance the entire bundle with its own resources. Absent a demanding debt provider (i.e. a bank), there was less need to engage in sensitive discussions about financial guarantees and reservations. Even though in the first bundle of artificial pitches one contracting authority dropped out very late, this exit did not constitute a threat to the financial package that was offered by preferred bidder.
Bundling procurement, stifling competition? With regard to the competition involved in the procurement processes of the FSIP, Table 1 provides a number of insights. First of all, four of the six procurement processes included in this study concerned a negotiation procedure with prior publication of a contract notice. The competitive dialogue procedure was not an option for FSIP projects, because it had not yet been implemented in Belgium. Furthermore, the negotiation procedure was preferred to
Type of procedure Applications received Applicants selected for bidding Bids received
Indicators
n/a
2 1 Belgian bidder (consortium of 2 actor); 1 Dutch bidder (single)
3
2
1 Belgian bidder (consortium of 4 actors); 1 Dutch bidder (single)
3
3
Sports halls Bundle 1 (9) (all built) Negotiation procedure 5
3 Belgian bidders (one consortium of 3 actors, one consortium of 2 bidders, and a single bidder) Tender was swiftly One bidder was able granted to bidder to deliver a solid which was already financial paragraph responsible for bundle 1
Bundle 2 (6) (all built) Request for quotation n/a
Artificial pitches Bundle 1 (29) (all built) Negotiation procedure 4
Tender process One of the two remaining bidders could fully finance bundle 1 with own resources
Competition Composition and origin of bidders
Variable
3 Belgian bidders (two consortia of 2 actors, and a single bidder)
3
3
Multifunctional sports center A (built) Negotiation procedure 3
Tender terminated One bidder could due to discrepancy offer financial between mandate guarantees—it had price and market established its own price financial institution
n/a
n/a
n/a
Bundle 2 (3) (cancelled) Request for quotation n/a
Table 1. Aspects of competition in the procurement of the Flemish Sports Infrastructure Program.
Major competitor was not selected; two bidders remained, one of them was able to find commitment of a bank
2 Belgian bidders (one consortium of 4 actors, and a single bidder)
2
4
Multifunctional sports center B (built) Negotiation procedure 5
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other procurement approaches because PPP was a new phenomenon in the sports sector. The Flemish Government did not know exactly which risks had to be transferred, and the negotiation procedure was expected to create more room for the negotiators to come to a deal. The government also assumed that a negotiation procedure with prior publication of a contract notice would trigger competition. These alleged advantages were considered more important than potential disadvantages of the negotiation procedure, e.g. the risk of subjective judgment by the leading public actor. As indicated in Table 1, the second bundles of artificial pitches and sports halls were procured through requests for quotation. This was possible because the previous bundles had allowed the Flemish Government to build up expertise with bundled procurement. Second, Table 1 shows that while four potential private partners submitted an application for the first bundle of artificial pitches, only two of them made it to the final round. At a time when the market for artificial pitches is expanding and many European firms are active in this particular field, both the number of applications submitted (four) and the number of ‘‘finalists’’ (two) may have been below the government’s expectations. Moreover, since one of the remaining bidders was able to finance the pitches completely on its own, it had a particularly favored position throughout the entire decision-making procedure—it would eventually win the bid with a much higher score than its competitor. This winning firm also prepared a bid for the second bundle of artificial pitches and was quite certain of winning this tender as well. Respondent K, who was in charge of this firm’s bid, aptly argued that ‘‘bookmakers were not likely to win an awful lot of money by betting on us.’’ He emphasized his confidence in winning future tenders, given that Sportfacilitator and others ‘‘now know that closing a contract with us more or less guarantees worriless projects.’’ Third, the main observation concerning the domain of sports halls is that although three (domestic) consortia managed to deliver a bid in the final stage of the tender procedure, only one of them proved to be eligible in that it came up with a valid financial paragraph including an official loan commitment of a bank. Given the limited technical complexity and costs of sports halls, the Flemish Government had expected a larger number of eligible bidders. However, the combination of a bundled approach and private financing may have induced firms to refrain from bidding. Respondent O, who spoke on behalf of the winning bidder, referred to the importance of his firm’s former experience with PPP in regard to their successful bid: ‘‘We were aware that our debt provider would critically evaluate such elements as construction risks. The other competing bidders had no experience with DBFM models, hence may not have been fully aware of the gravity of certain issues.’’ In fact, the bids of two other remaining consortia were rejected due to irregularities: their proposals lacked official commitments of banks. Fourth, in the domain of multifunctional sports centers, projects were (or are being) developed individually. Therefore, there is no bundled procurement involved here. However, if we look at the tender process of two of these projects, competition has not necessarily been better. On the contrary, the two contracts closed to date have been the result of procurement processes with particularly weak competition—not so much in terms of the number of applications or the number of applicants selected for bidding, but in terms of the low number of truly competitive bids that were received. Consequently, doubts have been raised on the quality of the deals that were closed, and questions have been posed that relate to issues of excess inertia. Next to the fact that the FSIP’s procurement processes have witnessed relatively low numbers of competitive bids, a large share (i.e. 10 out of 12) of these bids were submitted by domestic enterprises. Even though calls for tender were published online and in multiple languages, tender reports indicate a limited interest of foreign firms in the development of
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sports infrastructure in Flanders. This observation is particularly striking given the initial ambition of the Flemish Government to make bidding more appealing to large (and often international) firms by bundling projects. In the remainder of this paper, I dig further into the reasons behind the weak ‘‘score’’ of the FSIP’s procurement processes on competition. Two aspects played a quintessential role: (1) excess inertia, as expected based upon the literature review, and (2) the use of strict (financial) contractual terms, an issue which hitherto remained unaddressed.
Excess inertia Many respondents confirmed that a limited number of major players were able to compete in the tender procedures due to the size of the contracts at hand. Right from the outset of each FSIP procurement process, there has not been an ideal environment for competition to evolve. In line with the excess inertia thesis, small potential private sector partners were outrun in an early phase due to their inadequate capacity to handle the project volume included in a contract deal. A couple of respondents were inclined to say that had it not been for this considerable project volume, these small firms would have done a good job developing the requested sports infrastructure. Respondent C commented that competition among producers of artificial pitches is generally considered to be fierce. However, he also said that ‘‘by launching a tender call and eventually granting a bid for the construction of 30 artificial pitches at a time you shut down the market indefinitely,’’ thereby suggesting that more competition would have been the case had the first bundle been of a smaller size. Respondent V confirmed this statement by saying that ‘‘there are only few consortia able to handle such sizable contracts.’’ Similar comments were put forward regarding the domain of sports halls. Moreover, respondents expressed their doubts on the composition of the bidders involved in this domain. Interviewee B posed the following thought-provoking question: ‘‘If the Flemish Government subsidizes the construction of such local sports infrastructure projects as artificial pitches and sports halls, to what extent do you tolerate that local subcontractors are overtaken by large international firms during the procurement phase?’’ Furthermore, this interviewee suggested that it could be useful to arrange future deals differently by including local subcontractors instead of excluding these small- and medium-sized enterprises from business opportunities. The procurement processes of multifunctional sports centers A and B have probably been burdened with the lowest degree of competition of all FSIP projects. The response of interviewee A illustrates the opinion of many respondents regarding the lack of competition in this domain: ‘‘When it comes to tendering the construction and maintenance of a multifunctional sports infrastructure project in Flanders, you will most often end up with the same two private bidders as in any other project of similar type and size.’’ Again, the issue of excess inertia was addressed: ‘‘It is particularly difficult to find private sector partners which have adequate resources for major capital investment at their disposal’’ (respondent U). The procurement process concerning the two aforementioned cases turned even more arduous and inconvenient as that in each case only one private bidder proved to be completely eligible for the negotiation phase. This situation significantly weakened the bargaining position of Sportfacilitator as mandated negotiator for the public sector: there were no real options to switch to other private sector partners in the event of faltered negotiations. As respondent M indicated, ‘‘there actually was only one bidder with whom we could negotiate, a condition which obviously did not simplify the negotiation process. Basically, there was no competition anymore.’’
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Strict (financial) contractual terms Besides the fact that bundled procurement intrinsically hampered competition related to FSIP projects—an assumption which was discussed in the theoretical section of this paper, the use of strict financial contractual requirements did not benefit the competition either. The latter was not discussed in earlier sections, but came to the fore as the interview data accumulated. A number of respondents considered the financial prerequisites set at the beginning of procurement procedures to be of too high standards. They did not allow for proper competition, certainly not in light of the vulnerable state of the financial market. For example, on behalf of the Flemish Government Sportfacilitator insisted on a budget neutral development of sports infrastructure; it intended to take no responsibility for the debt obligation of a private sector partner, should the latter end up in a default situation. Under these circumstances the negotiations concerning FSIP projects—be it bundled or individual projects—were not likely to proceed swiftly, and they became cumbersome endeavors indeed (Flemish Parliament, 2008, 2011). In the remainder of this section, I explain how this issue evolved in each domain. According to respondent V, in the domain of artificial pitches a number of major market players exited the tender process voluntarily since they were likely to find themselves confronted with burdensome procedures and the need to show strict financial guarantees to Sportfacilitator. This statement was reinforced by respondent C, who argued that ‘‘despite the fierce competition among producers of artificial pitches in general, the actual competition concerning artificial pitches in the FSIP has been disappointing.’’ Still, at least in this domain a couple of eligible bids were delivered by potential private sector partners. This was clearly not the case in the domains of sports halls and multifunctional sports centers. Respondent O, commercial director at the firm which eventually built the first bundle of sports halls, explained that ‘‘we were the only consortium to deliver a credible financial package’’. Moreover, he emphasized that despite his former experiences with PPP procurement processes, it had not nearly been obvious that his company won this bid. He particularly pointed to the financial strings attached: ‘‘Once you know that two of three competing consortia are not able to arrive at sufficiently credible financial packages, you also know that those financial requirements have been unmistakably strict.’’ A similar struggle occurred in the procurement of multifunctional sports centers. As for sports center A, ‘‘only one of three bidders delivered an offer which unburdened the public sector partners of their function as full warranty holders,’’ said respondent G. The other two contestants never appeared to be able of giving a similarly attractive financial package, hence never made it to the negotiation table. In the other sports center (B), one potential private sector partner managed to retrieve a loan commitment of a bank, by which it assured itself immediately of a status as preferred bidder. Here, too, negotiations were confined to the preferred bidder; no other bidders were invited to the negotiation table, not even when talks with the preferred bidder came dangerously close to discontinuation. The peculiarity of the talks concerning multifunctional sports center B was even more noteworthy due to an event which had occurred in an earlier stage: a major private bidder had been excluded from the tender procedure right from the outset since it had submitted its application a few hours late. The decision of Sportfacilitator to deny access of this market player to the tender procedure highlighted the fact that, in addition to the high financial standards that were wielded, there was also a very strict application of procedural standards. As respondent S indicated, ‘‘Sportfacilitator relentlessly refused to condone the late applicatioi of this major private bidder.’’ Yet, respondent S would have preferred Sportfacilitator to provide respite so that there would have been the opportunity to negotiate with more than one bidder—and with that enhance competition for the sake of
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a better deal. Moreover, ‘‘if we had used less strict procedural guidelines and requirements, we would have received more bids in the first place.’’ Financial aspects clearly played a critical role in choosing private sector partners for projects in each domain. Although this may have led to solid financial deals for the Flemish central government (time will tell), it has also led to less competition than many respondents had hoped for. This made respondent T question the feasibility of the requirements set by Sportfacilitator: ‘‘We are talking about the largest contractors of Belgium here. If even they cannot live up to the financial expectations of Sportfacilitator, you could suggest that we set the bar too high.’’
Concluding remarks In this article, I have discussed the application of a bundled procurement approach in Flemish PPP program in the sports sector. It is my understanding that no analyses of the bundled procurement of similar infrastructure projects were published to date, despite the fact that it is not a novel phenomenon in spatial development. I divide the conclusion in two: (1) a theoretical part which summarizes the patterns I have (not) been able to match, and (2) a practical part which is oriented towards stimulating research and enhancing future arrangements of bundled procurement. Prior to scrutinizing the bundled procurement approach of the FSIP, I outlined a few theory-based expectations with regard to the motivations and impact of bundling in general. I confronted these theoretical patterns with actual (i.e. empirical) patterns. Table 2 presents an overview and reveals some matches, but there are also unforeseen empirical findings worth mentioning. In terms of motivations, I expected that the bundled procurement of infrastructure projects would be applied merely for the sake of financial advantages on both ends of the public-private continuum, i.e. potential higher cash flows for private sector partners and economies of scale for the public sector. The empirical findings confirm the use of these motivations in practice, yet they also bring to the fore that (inexperienced) local governments were motivated to participate in the FSIP since bundled procurement was seen as a tool which unburdened them of the difficult task of running a procurement process. I had not foreseen the latter motivation.
Table 2. Theoretical expectations and empirical findings regarding the bundled procurement of PPP. Motivation Theoretical expectations Private: high cash flow, incentive for bidding Public: large project volume enables catch-up movement against lower transaction costs (economies of scale) Impact Tension between bundled procurement and local governments’ interests Tension between bundled procurement and competition (excess inertia)
Empirical findings Confirmed Confirmed
Unforeseen aspects
Bundled procurement combined with mandating as tool which disburdens local governments Unforeseen role of strict Confirmed in domain of (financial) contractual sports halls, but not in requirements as domain of artificial pitches Confirmed, yet bundled competition limiters procurement is not the only cause of limited competition
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In terms of the impact of bundled procurement, tensions were expected to rise between local governments’ interests on the one hand and the need to align project designs in order to allow bundling on the other. Contracting authorities were to give in part of their preferences for the benefit of the greater good and I did not expect them to agree on that overnight. This expectation was empirically confirmed in the domain of sports halls. Moreover, as in this domain Sportfacilitator decided to grant local governments a stronger voice in the procurement process, a jumble of preferences was brought in which troubled the FSIP with high uncertainty regarding the feasibility of the projects at hand (high demands versus mandate prices set). The domain of artificial pitches was not confronted with these issues; the profile of these projects did not leave much room for differentiation between local governments, nor did local governments have widely diverging interests. Thus, although it may negatively affect the incorporation of local interests, bundled procurement need not necessarily cause agitation. The final theoretical assumption concerned the tendency of bundled procurement to limit competition in tenders (excess inertia). This expectation was confirmed to some extent: competition among private bidders turned out to be relatively low indeed, as in most tender processes only a few resourceful and powerful bidders were able to realize multiple projects at a time in the first place. Yet, a low degree of competition was also found in the domain of multifunctional sports centers, hence there had to be more to weak competition than the number of projects involved in one tender. The strict contractual requirements as determined by Sportfacilitator also jeopardized competition: many potential private sector partners struggled with the financial clauses that were to be laid down in the contractual agreements. The financial viability of the bidders was explicitly tested, and this certainly compromised competition—this aspect was not considered in the theoretical section. The results are crucial for the development of PPP governance and bundled procurement policies in the future. I raise a number of significant points to be considered in practice. First, the bundled procurement of sports infrastructure projects can function as a useful governance tool, but only if a number of conditions are present or respected. Strong commitments from both sides of the table (and preferably from the public side) are required in order to create certainty regarding the number and volume of the projects which are to be constructed. If these commitments are lacking, as was the case in the domain of sports halls, tender procedures are at risk of being cancelled. If the Flemish Government continues to apply this uncertainty- provoking approach, potential private sector partners will be less incentivized to come up with a bid, and less competition is likely to lead to ponderous negotiations and worse contract deals. Therefore, local governments which enter bundled procurement processes will have to live with the tyranny of the median; a too strong interference of local political interests will inevitably harm the procedure. They need to ask themselves the question which card they prefer to pull: are they aiming at value for money in financial terms, or is it their intention to create a unique project? In the latter case, local governments are advised not to participate in a bundled procurement process—both for their own good and for the entire program at hand. When it comes to competition in bundled procurement processes, it would be interesting to look into the motivations of potential private sector partners refuse to compete for tenders. As addressed in the beginning of the paper, PPP is often synonymized with worrisome procurement, let alone if it concerns the procurement of multiple projects at a time to one private bidder. It is likely that some firms are simply not interested in closing this kind of deals since they prefer to avoid the risk of losing efficiency while dealing with a high degree of uncertainty. Furthermore, non-domestic firms which are not familiar with a
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specific national or institutional context might refrain from bidding, also for reasons of risk aversion. Competition may be limited not just because of the excess inertia problem or strict contractual clauses, but also due to a lack of willingness among private actors. This opens up an interesting a venue for research. Finally, it would be insightful to examine the motivations, dynamics, and impacts of bundled procurement in jurisdictions other than Belgium, in different project stages, and in a comparative way. For instance, once jointly procured projects are in their operational phase, contracting authorities are likely to start diverging in terms of monitoring and managing the projects. In some cases, contracts may require change or negotiations, but what are the consequences for other contracts signed under the umbrella of this bundle? The more empirical accounts on this and other issues affiliated to bundled procurement, the more we can do to improve its goodness of fit in different settings so that both public and private actors are more likely to experience the benefits rather than the drawbacks. Disclaimer The views expressed herein are those of the author and not those of the Flemish Government.
Declaration of conflicting interests The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This text is based on research conducted within the frame of the Policy Research Center on Governmental Organization – Decisive Governance (SBOV III, 2012-2015), funded by the Flemish Government.
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Appendix Interview respondents (1) Respondent A: member of Sportfacilitator, 27 May, 2013. (2) Respondent B: legal counsel at law firm, 19 June, 2013. (3) Respondent C: managing director of non-profit organization, 4 July, 2013.
1386 (4) Respondent (5) Respondent (6) Respondent (7) Respondent (8) Respondent (9) Respondent (10) Respondent (11) Respondent (12) Respondent (13) Respondent (14) Respondent (15) Respondent (16) Respondent (17) Respondent (18) Respondent (19) Respondent (20) Respondent (21) Respondent (22) Respondent
Environment and Planning C: Government and Policy 34(8) D: consultant at consultancy firm, 8 July, 2013. E: member of Sportfacilitator, 9 July, 2013. F: member of Sportfacilitator, 9 July, 2013. G: project coordinator at contracting authority, 18 July, 2013. H: member of Sportfacilitator, 22 July, 2013. I: commercial manager at private sector partner, 25 July, 2013. J: member of Sportfacilitator, 26 July, 2013. K: manager at private sector partner, 30 July, 2013. L: sports advisor at contracting authority, 31 July, 2013. M: project coordinator at contracting authority, 2 August, 2013. N: general manager at private sector partner, 12 August, 2013. O: commercial director at private sector partner, 21 August, 2013. P: DBFM manager at private sector partner, 21 August, 2013. Q: project coordinator at contracting authority, 23 August, 2013. R: member of Sportfacilitator, 26 August, 2013. S: project coordinator at contracting authority, 18 September, 2013. T: former alderman at contracting authority, 19 September, 2013. U: project coordinator at contracting authority, 23 September, 2013. V: project coordinator at contracting authority, 10 October, 2013.
Martijn van den Hurk wrote his PhD dissertation at the University of Antwerp and is presently a postdoctoral researcher at the Department of Human Geography, Planning and International Development at the University of Amsterdam. His work has been published in journals in the fields of public administration and planning, including Land Use Policy, Policy Sciences, International Journal of Project Management, and Public Management Review. His main research interests are public-private partnerships, spatial planning, infrastructure, urban regeneration, and contracts.
