Agents never become stewards: explaining the lack of innovation in public

Abstract

Design–Build–Finance–Maintain–Operate contracts, as a specific public–private partnership, supposedly provide opportunities for innovation due to the long-term perspective, the use of output specifications and the collaborative environment. The literature suggests that the dynamics between procurers and consortia influence the actual contribution of these conditions to innovative practices. We therefore assess in three cases in the Netherlands and Spain how and to what extent the relationship between procurers and consortia affect these three conditions and therewith the possibilities for realising innovation and for capturing economic and social value. Findings show that the potential of Design–Build–Finance–Maintain–Operate contracts for innovation is hampered because procurers and consortia behave like principals and agents who distrust each other and who let short-term self-interested goals prevail over long-term pro-organisational goals. The cases have shown that the limited realisation of innovation and less-than-expected value generation seem to be due to the absence of a clear scheme that allows for capturing value.

Points for practitioners

• Potential innovation in Design–Build–Finance–Maintain–Operate contracts is restricted to the building of the infrastructure and the early operational phases of the contract because renegotiation clauses are normally too rigid.

• An adequate system to work out financial risks that create economic value for the contractor are needed to produce social value through innovation.

• The contract needs to work out a ‘binding’ collaboration scheme among the consortium members to reap the benefits of innovation.

Keywords

agency theory Design–Build–Finance–Maintain–Operate contracts innovation partnerships stewardship theory value creation

Introduction

Design–Build–Finance–Maintain–Operate (DBFMO) contracts are a specific type of public–private partnership (PPP) that transfer the responsibility for the design, construction, maintenance, operation and financing of public infrastructure (such as highways and water purification plants) or public utility service buildings (such as schools, hospitals and detention centres) to a multi-headed consortium through a long-term performance contract (Reynaers, 2014). Extant literature suggests that three specific conditions of DBFMOs facilitate innovation: the long-term perspective; the use of output specifications; and a collaborative environment (Bloomfield, 2006; Grimsey and Lewis, 2005; Hodge and Greve, 2007; Yescombe, 2007).

Empirical contributions on innovation in DBFMOs suggest that such conditions do not generate innovation per se. Rather, the answer to whether innovation is realised seems to depend on whether public procurers and private firms are able to generate economic (Kivleniece and Quelin, 2012) and social value through innovation (Caldwell et al., 2017; Mahoney et al., 2009). When the interaction allows for the creation of such value, defined as ‘the sum or entirety of benefits obtainable from the exchange’ (Kivleniece and Quelin, 2012: 275), innovation is likely to be realised.

The extent to which public–private interaction allows for value creation and innovation is likely to depend on how the relationship between public procurers and private firms is governed. Caldwell et al. (2017), for example, show that relational rather than contractual coordination fosters innovation and social value creation. Although this latter study, and other studies focusing on innovation and distinct frameworks, provide valuable insight into the impact of innovation in DBFMOs (see, among others, Fischer et al., 2006; Javed et al., 2013; Roehrich and Caldwell, 2012; Roehrich et al., 2014; Roumboutsos and Saussier, 2014; Wang, 2014), we detect three gaps that we want to explore.

First, articles researching innovation often ponder just one condition at a time, instead of focusing jointly, as we do, on the long-term perspective, the use of output specifications and a collaborative environment. Second, most studies describe the degree of innovation in DBFMOs without providing a theoretical explanation of its (lack of) realisation and without linking innovation to value creation. Finally, most studies only include single cases from Anglo-Saxon countries.

Following the suggestion that the relationship between public procurers and private firms determines and explains the level of innovation and value creation, our research question, using stewardship and agency theory, is: how and to what extent does the relationship between project members in DBFMO projects influence the possibility of realising innovation?

Agency theory perceives man to be an individualistic, opportunistic and self-serving homo economicus. Contractual partners seldom collaborate, pursue short-term self-interested goals and rarely promote goal alignment with the principal (Davis et al., 1997: 20), thus hampering the achievement of innovation and the generation of value for the partners. It is suggested that DBFMOs are based on a stewardship model (Barlow and Köberle-Gaiser, 2009), conceiving human nature to be collectivist, pro-organisational and trustworthy. Contractual partners are collaborative, display a long-term perspective and seek goal alignment, thereby promoting innovation and value generation, mainly due to trust-building mechanisms (Koppenjan and Klijn, 2004).

Mahoney et al. (2009: 1039) suggest that agency theory, based on a contractual relation, has to be ‘extended significantly to consider how the generation of new value-creating opportunities depends specifically on the interplay between public and private interests’. Therefore, stewardship theory, which understands public–private interplay in relational rather than contractual terms (Davis et al., 1997; Jensen and Mechling, 1976), is also considered.

In order to overcome the limitations of a single-country case study, we analyse three DBFMOs in Spain and in the Netherlands, interviewing 48 project members. We find that the more relational, trusting, long-term perspective promoted by DBFMOs fails to materialise. Instead, a more contractual relationship typical of the principal–agent model develops, hampering the implementation of innovative practices and the creation of joint value.

This article is structured as follows. The first section discusses the theoretical linkage of stewardship and agency theory, DBFMOs, innovation, and value creation. The second section describes the multiple and comparative research method applied. The third and fourth sections present and discuss the findings around the three conditions potentially conducive to innovation in DBFMOs.

The theoretical framework

Following the literature on joint value creation through the interplay of public–private values (Caldwell et al., 2017; Kivleniece and Quelin, 2012; Mahoney et al., 2009), we consider that innovation can be realised if joint value is created or if economic value for the private partner is generated without damaging social value. To understand whether value can be created, one should study the interaction of the public and private partners. It is suggested that a more stewardship relation fosters value creation and thus innovation, whereas a more agency-like or contractual cooperation hampers both.

Stewardship theory

Stewardship (Donaldson and Davis, 1994) and agency theory (Jensen and Mechling, 1976) hold different understandings of actor behaviour in a contractual relationship and of its potential effect on innovation. Innovation in an organisational context is an ambiguous concept that can refer to processes, products, infrastructure, equipment and services. In connection with a contract, we define innovation as ‘proactive undertakings, with or without the outsourcer’s collaboration, but in any case on their behalf, that in the outsourcer’s perception result in new or improved ways of delivering transactions’ (Sumo et al., 2016: 3). Therefore, the existence of a particular innovation is identified and perceived by the outsourcer, but its actual appearance depends on the relationships between the contractual parties.

The suggestion that DBFMO contracts are based on a stewardship model (Barlow and Köberle-Gaiser, 2009) posits that cooperation, collectivistic and pro-organisational behaviour between partners or subordinates (stewards) and superiors (principals) have a higher utility than self-serving individual action (Davis et al., 1997: 24–25). This is because the managers’ and owners’ interests may be aligned in an allegedly conflict-free relationship (Lee and O’Neill, 2003, 2012). Principals and stewards make decisions benefitting the entire organisation and behave collectively, even if financial payoffs are absent and individual utility will not be maximised (Van Slyke, 2006: 165). Actors seek collaboration and share risks that benefit the project overall (Davis et al., 1997) thanks to a relationship based on trust (Mayer et al., 1995) that impedes one actor from pursuing ‘his/her own self-interest to the exclusion of the collectively agreed upon goals of the contract’ (Van Slyke, 2006: 165). Even if goals are not aligned, autonomous actors will cooperate. High commitment, participation, open communication, empowerment of staff and trust building constitute the main elements of the stewardship approach (Davis et al., 1997: 34). Intrinsic incentives for stewards are the alignment of their mission with that of the principal and being treated as equals by the principal. Therefore, a steward prefers a partnership as opposed to a control-oriented management system based on sanctions to elicit performance (Donaldson and Davis, 1991). This approach inspires theories on relational governance which assume that contracts are ambiguous, almost always incomplete or open to interpretation. Contractual partners, therefore, cannot simply rely on the contract but have to interpret and collaborate in order to overcome ambiguities. This joint interpretation provides opportunities for collaboration and innovation (Roehrich and Lewis, 2014).

Agency theory

Agency theory is based on a relationship ‘in which one or more persons (the principal) engages another person (the agent) to perform some service on their behalf which involves delegating some decision-making authority to the agent’ (Jensen and Mechling, 1976: 308). In contrast to stewardship theory, the agent acts rationally and maximises his individual utility by displaying self-interested behaviour, which may hinder goal alignment (Jensen and Mechling, 1976). Unlike stewards, principals and agents may deploy strategies assuming different risk preferences (Eisenhardt, 1989: 58). Financial incentives and governance structures with strict monitoring are intended to align goals and motivate agents to act as desired (Eisenhardt, 1989), as well as to limit the opportunism of the agent (Hill and Jones, 1992: 132). A control-oriented management approach eliminates the need to build trust between partners (Davis et al., 1997: 34). According to transaction cost economics, contracts are supposed to be complete (containing all the safeguards against the hazard of opportunistic behaviour by the service provider), to include ex ante specifications of service requirements and to establish mechanisms to prevent deviations from the contract (Roehrich and Lewis, 2014). However, it is suggested that DBFMOs informed by a stewardship model (Barlow and Köberle-Gaiser, 2009) provide opportunities for innovation because of three conditions.

Conditions and opportunities for innovation

First, it is suggested that the long-term perspective of the 20- to 30-year duration of the DBFMO contract promotes innovation, allowing for the integration of the different project phases in a life-cycle approach (Fischer et al., 2006; Roehrich et al., 2014; Wang, 2014). The contribution of long-term commitment is twofold: it fosters innovation through strategic forward thinking (De Valence, 2010; Miozzo and Dewick, 2004); and it can generate social value while allowing consortia to reap economic value through innovative technologies (Barlow and Köberle-Gaiser, 2009; Estache, Ellis and Trujillo, 2007; Eversdijk and Korsten, 2008; Wang, 2014). Others, however, argue that cost-cutting decisions trump life-cycle value (Leiringer et al., 2009: 35), that the silo mentality of consortium partners with focused responsibilities on specific project phases restrains the potential for innovation (Barlow and Köberle-Gaiser, 2009) and that being locked into long-term contracts stifles innovation.

The output specifications of a contract, the second driver of innovation (Javed et al., 2013), are often linked to performance payment (Selviaridis and Wynstra, 2015). Performance-based contracts seem to foster supplier-led innovation (Sumo et al., 2016). Through output specifications, consortia are expected to provide the requested output while they are free to choose their techniques, methods and materials, providing opportunities for innovation (Fokkema, 2009; Javed et al., 2013). Financial and legal stability resulting from well-written output specifications are also supposed to provide opportunities for innovation (Barlow and Köberle-Gaiser, 2009). In practice, procurers use input-/process-oriented specifications or design/technology-based standards to prescribe how consortia should achieve goals. Contract input specifications hamper the possibility of innovation (Javed et al., 2013; Lodge and Wegrich, 2012; Reynaers, 2014).

The third condition for innovation concerns the collaborative environment of DBFMO projects (Davies and Salter, 2006). The relational logic of the contract, and not its crude legal enforcement, seems more amenable to the framing of long-term cooperative relationships between procurers and consortia. Relational governance does not replace, but complements, the contractual obligations (Poppo and Zenger, 2002). This relational perspective is key for promoting collaboration, which may produce innovation as an impact or an effect (Bryson et al., 2006). Whether procurers and consortia members indeed collaborate to promote innovation depends on how risks are transferred (Barlow and Köberle-Gaiser, 2009). Sørensen and Torfing (2012: 852) propose that collaboration can strengthen innovation in each phase of the service production cycle, as suggested by empirical analysis (Borins, 2001) and meta-analysis (Damanpour, 1991). However, Leiringer, Green and Raja (2009: 39) conclude that ‘collaborative partnerships remains more of a rhetorical aspiration than a lived reality’.

When procurers and consortia act in accordance with the agency model: (1) consortium members are expected to integrate different project phases only when financially beneficial to them – short-term cost-saving priorities, risk-averse behaviour and narrowly focused responsibilities are likely to dominate; (2) procurers tend to rule through input and process specifications, and design and technology-based standards, because they distrust consortia when interpreting ambiguities; and (3) procurers and consortia observe contractual governance and act individualistically rather than seeking collaboration. When procurers and consortia act as stewards, we expect: (1) consortium members to integrate different project phases; (2) procurers to use output specifications and trust consortium members in interpreting ambiguities; and (3) procurers and consortium members to apply relational governance and to seek collaboration. Thus, the innovative potential of the three DBFMO-related conditions would be realised because the consortium is not tied by a strict contract. The literature suggests that horizontal coordination through professional drive (Caldwell et al., 2017), integrative partnering (Kivleniece and Quelin, 2012) and public–private interest interplay (Mahoney et al., 2009) form the basis of the realisation of innovation that creates value for both partners. In sum, a relational governance approach akin to stewardship theory is superior in joint value creation to a contractual agency-based approach.

Comparative methodology

In order to answer our central research question of how and to what extent the relationship between partners in DBFMO projects influences the possibility of realising innovation, we carried out 48 semi-structured interviews with project members of three utility services that were in the operational phase: a Spanish hospital, and a detention centre and government ministry in the Netherlands. In Spain, the procurer had transferred the responsibility for the design and construction of a new hospital and for the provision of 11 non-clinical services to a private consortium for 30 years. The 27-year contract for the detention centre project included the design and construction of the building, equipment such as security systems and fire alarms, and the delivery of catering and cleaning. The ministry project included the renovation and accommodation of the ministry headquarters and the provision of catering, cleaning, waste management and energy supply for 25 years.

The comparative approach allows for replicating findings from several cases (Eisenhardt and Graebner, 2007: 27). The study represents the ‘least similar cases’ of structured, focused comparisons for some of the variables, but ‘most similar’ for other independent variables (George and Bennett, 2005: 58–67). As the ‘least similar countries’ for comparison, in the Netherlands, the details of the contract, within the limits of a framework contract, are negotiated with the winning bidder. In Spain, however, the procurer, the regional government, published a detailed contract for the eight hospitals under PPP. There are no bilateral negotiations, but bidders can help to refine some clauses through open consultation. At the same time, the three DBFMO projects are the ‘most similar’ cases given the comparability of the basic contractual structure and the services transferred. Furthermore, in both cases, the procurer and the PPP unit from the public sector have a role in approving the innovation proposals.

The data collection followed the same logic in Spain (February–May 2016) and in the Netherlands (September 2011–September 2012). Semi-structured interviews were conducted with actors representing the procurer’s and the consortium’s side (including contract managers and project members) and external advisors to both parties (see Table 1). The interviews averaged 90 minutes and were transcribed verbatim.

Table 1.

Number of respondents per case.

	Hospital	Detention centre	Ministry
Procurer	6	9	10
Consortium	4	2	8
External	2	0	7
TOTAL	12	11	25

The selection of respondents followed the chain-sampling technique (Guest et al., 2006: 62), through which interviewees contacted other interview partners. This strategy helped to overcome the difficulty of finding out who had been involved in the projects. The selection of new respondents stopped when the interviews would no longer provide new data for the development of conceptual categories (data saturation) (Francis et al., 2010: 1230).

Using the software Atlas.ti, the interviews were coded by both researchers and checked against Cohen’s kappa index for inter-coder reliability until reaching agreement. Following three different strategies, codes were organised into categories to identify patterns and relationships. Through open coding, we labelled text fragments under a predefined code. Through axial coding, codes were combined, separated into sub-codes and renamed. Selective coding allowed a search for patterns between innovation and the three conditions outlined earlier using a process of ‘constant comparison’ (Boeije, 2005). The citations represent the general findings, except when explicitly stated that a quote represents an atypical finding.

Findings: innovation on paper is elusive in the praxis

This section presents the findings on whether the three DBFMO-related dimensions have promoted innovation.

The long-term perspective

It is suggested that the long-term perspective of DBFMO projects facilitates innovation since the consortium has the time to apply imaginative solutions and integrate project phases to receive the return on the investment. The three cases examined provide mixed results as innovation is not always realised, or is realised only with respect to a specific project phase, and so does not fully exploit the potential of the long-term perspective.

The Dutch cases provide innovative and costly solutions that integrate different project phases. The introduction of such innovative solutions is directly linked to economic benefits, as suggested by agency theory. A deputy director of the ministry illustrates the point:

The architect played an important role by proposing very innovative and drastic solutions that solved a lot of the problems we experienced with the old building. Higher floors, a roof of glass … all big investments but with a life cycle of 25 years, you’ll earn that investment back. (Ministry 01 – deputy director, procurer)

Similarly, the consortium of the detention centre invested in a highly innovative food distribution system that allowed cost savings in the long run. In this way, both social and economic value were created.

The consortium of the Spanish hospital did not bundle the project phases. The main contractor, a construction company, outsourced the services to other firms after winning the bid and did not open up space for innovative solutions in the contracts with third parties. The long-term perspective had no impact during the construction phase because the procurer was very specific on how to build the infrastructure. This was asserted by a member of the procurement team of the (Hospital 12) and corroborated by managers of the consortium.

However, the consortium did provide innovative and initially costly solutions during the operational phase that helped to maximise profit in the long run, while creating both economic and social value: ‘This is an investment made by the consortium that we didn’t anticipate and it entailed an improvement for the patients, the professionals and us as managers because we had better control over our care services’ (Hospital 02 – project manager procurer). Other examples of innovative solutions are automated laundry management, food supply to patients and waiting list and patient record management.

In general, though, the integration of different phases did not bring about a continuous search for innovation. Innovation seems more likely during the design and construction phase, except in the Spanish hospital case.

The lack of innovative initiatives that integrating several phases was supposed to remedy is the result of agency-like behaviour, where the consortia seem to favour short- over long-term goals and profits. This was explained by a project manager from the procurer of the detention centre (Detention centre 04 – project manager procurer). Similarly, according to one external advisor of the procurer (Hospital 07 – external advisor procurer), an innovation suggested during the design phase of the hospital was not implemented because it required a considerable investment while financial returns were uncertain since the innovation could not trigger a change in the availability fees and the consortium had to bear all risks.

In general, consortium members only seem to provide innovative solutions when these are linked to delivering economic value, as suggested by the principal–agent model. Lack of long-term vision and focus on short-term goals and profits undermine the potential for innovation. When innovation results in social or economic value alone, rather than both social and economic value, it does not happen.

The use of output specifications

The use of output rather than input specifications is suggested as a trigger for innovation since the consortium is free to choose the techniques and instruments to provide the requested output. Again, the cases demonstrate mixed results.

All cases show that output specifications help the consortium to come up with innovative solutions. The innovations at the ministry, the detention centre and the hospital in the form of a glass roof, automated food supply system and laundry service also refer to the output specifications since the contract did not prescribe any of these solutions. In the hospital, some operational areas were open to output specifications, such as ‘the food has to reach the patient at the right temperature, the medical clothing has to be washed according to the proper hygienic conditions’ (Hospital 13 – general manager) or ‘the surfaces have to be cleaned according to the prescribed standards’ (Hospital 07 – external advisor procurement team).

However, the tendency across all the cases is for procurers to limit opportunities for innovation by using either too-detailed output specifications or stringent input specifications. In line with the agency model, procurers try to prescribe consortia’s behaviour in order to remain in control. A construction manager from one consortium (Ministry 05 – construction manager consortium) said: ‘Everything is too detailed…. The procurer should describe what they want, in general terms. And then the creative process should start at our end. Perhaps they do so because they tend to control everything’. Likewise, the contract manager acting for the procurer of the detention centre (Detention Centre 04 – contract manager procurer) used input specifications because it would be too risky otherwise: ‘The Ministry of Justice had its own ideas about security. So we could not define that in output terms’.

In the hospital, although some interviewees claimed that the contract was based on open ‘output specifications’ that would spur innovation (Hospital 15 – director general regional ministry of health), procurement team members admitted that they overregulated the contract:

When you are in the health business for a long time, you have very clear ideas about how to set up a surgery theatre or an emergency area … you are not willing to accept many inventions … we were a bit assertive in what we wanted for the infrastructure. (Hospital 12 – procurement team member procurer)

In general, equipment, furniture and infrastructure were subject to concrete input specifications, ‘and the consortium would not budge from the contract’ (Hospital 07 – external advisor procurement team). To introduce innovation, the contract has to be changed and this is not always easy. For instance, the procurer of the hospital made a mistake over the efficiency gains from the electricity bill. Since the investment to redress that had to be made by the consortium and the benefits would be reaped by the hospital, the consortium decided not to invest (Hospital 6 – operation manager consortium). Although social value could have been created through this innovation, it was not implemented because it did not create economic value.

Ideally, output specifications contribute to innovation because they do not prescribe techniques or methods. The procurer is aware of this but, at the same time, is fearful of introducing output specifications in infrastructure, or in some operational processes, because they have a clear idea of what they want. In general, though, some contract clauses were not highly prescriptive and left room for innovations.

Collaborative environment

DBFMO projects are expected to promote a collaborative environment and consequently innovation because the long-term perspective fosters trust among partners having daily contact to discuss service delivery results. All cases show little collaboration conducive to innovation. Regarding the collaboration between consortium partners, a consortium manager of the ministry (Ministry 08 – manager consortium) stated: ‘My experience is that the members of the consortium find it difficult to have a fluid communication’.

Consortium partners are commonly hindered from collaborating by the absence of an institutionalised joint scheme of responsibilities and benefits. Whereas consortia present an integrated project proposal on behalf of all the members, collaboration is not guaranteed and often dissipates over time. Consortia are internally divided into two groups: design and construction; and operation and maintenance. Thus, the design and construction group’s responsibility towards the other partners ceases when the operational phase starts, regardless of whether they bid together or not. As a result, deficiencies during the construction phase may have a negative financial impact for the operating company. In the Dutch cases, consortium members often argued about which partner was financially responsible for which part of the contract. As a project member of a procurer stated: ‘At the beginning, we worked together, but in time, every company goes its own way. No one wants to be responsible for someone else’s work’ (Detention centre 10 – project member procurer).

According to the agency model, distrust among consortium partners supports individualistic behaviour and hinders collaboration. At the detention centre, the consortium partners did not always trust each other and even suspected that some members took advantage of the others. A project director from the procurer (Detention centre 09 – project director procurer) explained:

The project director of the consortium has to be able to trust his partners. If they tell him that the quality of the paint is fine, he has to trust them.… The consortium members are just not fair to each other. The builder fails, but he does not care because he leaves.

With respect to collaboration between the procurer and the consortium, our cases demonstrate that both parties predominantly abide by the contract in line with contractual governance and agency theory, and this often hinders true collaboration. The contract normally sets the limits of what can be done and even what will happen if a new method is applied. A construction manager of the consortium (Ministry 11 – construction manager consortium) stated: ‘Both parties behave in a traditional way following the contract. The procurer wants to collaborate but also to tell them how to do it. And you can kill every project by questioning everything, by never approving any suggestion’.

Since the consortium needs to get authorisation from the procurer for any innovation, only clear cooperation can spur innovation. An example was a system introduced by the consortium by which the doctor could know if a patient had entered the hospital. This benefited every party (Hospital 16 – general manager).

However, this collaborative spirit is rather exceptional. Problems arise when an innovation clashes with the contract clauses, or when money has to be put up front without the financial support of the procurer (Hospital 07 – external advisor procurer). This was particularly the case since the consortium had to borrow money to build the infrastructure, and lacked resources to invest in innovation (Hospital 06 – manager operation consortium). When innovation creates only social value, consortia are reluctant to introduce innovation. In fact, innovations are not all spontaneously generated out of collaboration. In the Spanish contracts, there is a ‘technological progress clause’ that forces the consortia to implement innovations that are needed for the delivery of the service. The specifics of ‘what is needed’ remain open and this can cause tension between the procurer and the consortium (Hospital 05 – manager construction consortium).

In general, collaboration within the consortium and between the consortium and the procurer is prescribed rather more by the letter of the contract than by its spirit. The collaboration attempts clash with the contract prescriptions and each party displays individualistic behaviour.

Discussion of findings and conclusions

This study assesses how and to what extent the relationship between procurers and consortia influences the three conditions that promote innovation in DBFMOs. The literature has suggested that in PPPs, stewardship or relational governance rather than agency or contractual governance fosters innovation and value creation. Our findings show that procurers and consortia apply both the stewardship and the agency model, which coincides with the suggestion that both frameworks constitute extremes on a continuum (Barlow and Köberle-Gaiser, 2009). However, given that procurers and consortia predominantly act as principals/agents who distrust each other and who let short-term self-interested goals prevail over long-term and organisational goals, the potential for innovation to arise from the integration of different project phases and the use of output specifications and collaboration is hampered.

Although all cases provide examples of innovation, this was not a priority for the contract parties in any of the projects. Rather, reducing financial and technical risks, and providing legal stability and financial and technical predictability, are the priorities. In general, when economic value is explicitly at stake, the principal–agent model is applied. In line with Roumboutsos and Saussier (2014), the private contractor does not address innovations that may provide social value unless the private party can also appropriate economic value. The inclusion of adequate renegotiation clauses in the contract may achieve this. Pastoriza and Ariño (2008) suggested that the stewardship and the agency models do not need to be alternatives, but can complement or evolve into each other.

Since a long-term relationship encourages the use of trust in order to comply with the requirements of the contract, one could expect that a pure principal–agent relationship would give way in time to a steward–principal relation that fosters joint value creation through innovation. However, we could not observe this evolution.

In general, the three most mentioned conditions do not seem to make a difference when it comes to innovative practices in DBFMOs. With respect to the project phases and the long-term perspective, our findings show that innovation is limited in general and restricted mainly to the design and construction of the infrastructure or to the early period of the operational phase. These results are in line with those reported by Eaton, Akbiyikli and Dickinson (2006), Hodge and Greve (2007), Barlow and Köberle-Gaiser (2009) and Roehrich and Caldwell (2012). The spillover effects of innovation across different DBFMO phases are limited to a couple of examples. As Miozzo and Dewick (2002) stated from a comparative study of DBFMOs, innovation is only fostered when the promoter benefits from irreversible investments through appropriate value capture. In the cases examined, each innovation requires the authorisation of the procurer, as well as changes to the contract, sometimes affecting the formula through which the availability fee is paid. Since those amendments are time-consuming and procedurally burdensome, innovation does not materialise because the social value that can potentially be generated does not produce value that the consortium wants to capture. Roehrich, Lewis and George (2014) suggest that innovation cannot profit from the long-term perspective because these complex contracts are too rigid to allow for the introduction of new techniques. Furthermore, the authors suggest that innovations would require new performance indicators to honour the availability fee, and this is not always possible.

The lack of spillover effects of innovation across different phases is normally a consequence of the lack of collaboration among the consortium partners, in line with the results from Leiringer, Green and Raja (2009). The philosophy that dominates is the traditional cost-cutting approach of silo departments instead of cost-related decisions across different consortium partners.

Although all interviewees agreed that output specifications are more suitable for a DBFMO contract and could spur innovation, all procurement teams instead prescribed inputs and processes, and, in some cases, output specifications contained prescriptive elements. Even in this case, innovation can be encouraged in order to enhance operational efficiency. The automation of the catering services followed similar patterns in the detention centre and in the hospital, although they were triggered by different events. In the Netherlands, the automation of the catering service was a result of the negotiation of the contract. However, in Spain, the interpretation of the output specifications (i.e. meals should be brought to the patients at the right temperature) encouraged the innovation. In these cases, the value generated was appropriated by both parties.

In general, the contract needs to include the right incentives to encourage both partners to capture the value arising from innovative practices. DBFMO is a scheme with a trade-off between the financial risks assumed by the consortium and the public values that the procurer fosters. The financial risks refer mainly to the unexpected increase in construction and maintenance costs, the dependence on financial markets, and the decrease in services demanded by the procurer (or the population). The public values during the operation refer to the quality of the service to the users and responsiveness to the ever-changing needs of service users. The contract does not always allocate risks adequately since any innovation during the operational phase requires some sort of change in the contract, and for legal reasons, this can be difficult. The contract must anticipate risks from innovative practices, and failing to do this is detrimental to potential innovation (Barlow and Köberle-Gaiser, 2009). Barlow, Roehrich and Wright (2013) suggest that the way in which the private finance initiative (PFI) contract is managed in the UK restricts the possibility of innovation because: (1) project design is concurrently attached to the bidding process, and this restricts innovative ideas for fear of being unable to enter the next phase of the bidding; and (2) the final risk-allocation scheme takes place when drafting the contract clauses. However, the different contract-bargain style of the Dutch and the Spanish cases could have encouraged more innovation in the Netherlands since the successful bidder can still negotiate the contract and change the risk allocation. This contextual key difference did not manifest itself in more innovative solutions in the Dutch cases.

Innovation is said to be an instrument of PPPs for its potential to generate joint value for both partners. The cases have shown that the limited realisation of innovation and less-than-expected value generation seem to be due to the absence of a clear scheme that allows for capturing value. The horizontal collaborative and relational dynamic expected by the stewardship theory cannot overcome the limitations of contracts framed in a rather distrustful fashion with a principal–agent approach. Therefore, as a consequence of the different approaches in drafting the contract and of the interplay between public and private partners during the delivery of the service, there is a mismatch between value generation and capture.

Footnotes

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 research has been funded by the Spanish Ministry of Science and Innovation thanks to the grant: CSO2016-77493-P – Public values, professionals and public–private partnerships in the area of health.

Salvador Parrado teaches political science and public administration at the National University of Distance Education (UNED), Spain. His research interests focus on executive politics and comparative public administration.

Anne-Marie Reynaers teaches public administration at the Universidad Autónoma de Madrid, Spain. Her research interests focus on public values and public–private partnerships.

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Agents never become stewards: explaining the lack of innovation in public–private partnerships

Abstract

Points for practitioners

Keywords

Introduction

The theoretical framework

Stewardship theory

Agency theory

Conditions and opportunities for innovation

Comparative methodology

Findings: innovation on paper is elusive in the praxis

The long-term perspective

The use of output specifications

Collaborative environment

Discussion of findings and conclusions

Footnotes

Declaration of conflicting interests

Funding

References