What is the Design Build Finance and Operate procurement model and what are its advantages and disadvantages

What is the Design Build Finance and Operate procurement model and what are its advantages and disadvantages

What is the Design Build Finance and Operate (DBFO) procurement model and what are its advantages and disadvantages?

 

 

 

 

1.0 What is the Design Build Finance & Operate (DBFO) procurement model?

The design-build-finance-operate (DBFO) model, also called the public private partnership (PPP) model, or the Public Finance Initiative (PFI), is one of the procurement methods used predominantly by governments. In this model, the government is the project owner and it floats a contract inviting private firms to participate in the project. The government may provide part of the funds by using special purpose vehicles, or bonds, funds, and through lotteries. The private party funds either the whole amount or the balance; it designs the project, builds it as per the specifications, and then operates the completed infrastructure for a fixed amount of time. During the time when it operates the infrastructure, the private party earns income from the project, to recoup its investment. After the fixed tenure expires, the project reverts to the government. The UK government uses this model extensively and some examples of PPP projects are the Chunnel Tunnel Link, the London Underground system, many NHS projects to build hospitals, toll roads on the highways, Stoke on Trent schools, Blackburn Hospital, and many others (Abou-bakr, 2013).

1.1 The DBFO procurement model

The following image illustrates the manner in which the DBFO model works.

Figure 2.1. The DBFO Model

The DBFO Model

(Source: Abou-bakr 2013)

 

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The DBFO model starts with a contract between the private party and the public sector. The terms of the contract can vary, but they generally indicate that the risk in designing the project as per the requirement, constructing the facility, and operating it, rests with the private party. The government helps by obtaining all the necessary clearances, transferring the property and assets, obtaining project subsidies, and other help. In case the project is very expensive, or the risks are very high, then the government may decide to provide a onetime grant. Either the private party obtains revenues through annual payments from the government, or it levies charges from the taxpayer for using the facilities (Spackman, 2002). 

When the project cost is very high, then the private party and sometimes the government, float a special company called as the special purpose vehicle (SPV). The SPV is used to develop, construct, maintain, and operate the project for the project duration. In some cases when the government provides some funding, it receives equity and a share in the SPV. Several banks can be involved in funding the projects by providing secured debt. These institutions may receive an additional allotment of the equity. SPV is useful since it is an independent entity, with all decision-making powers. By involving banks, there is a further dilution and transfer of risks, and a better assurance that the private party cannot declare insolvency midway through the project (Zheng & Lewis, 2008).

1.2 Advantages and disadvantages of the DBFO procurement model

There are many major advantages and disadvantages of the Design Build Finance and Operate (DBFO) procurement model.

Advantages to the government include the fact that it transfers the full responsibility and risk of the project to the private party. It does not have to deploy any resources, other than a team to monitor the progress. The disadvantages are that if the private enterprise goes bankrupt or if it faces technical and funding problems, then the whole project can stop. In many cases, the terms of the agreement can extend to 30 years or more. If the public continues to pay for using the facilities, then a backlash is created, leading to rescinding the contract, and lengthy lawsuits (Spackman, 2002). Some of the many benefits and possible risks that emerge from the DBFO model are illustrated in the following figure.

Figure 2.2. Advantages and disadvantages of the DBFO model

Advantages and disadvantages of the DBFO model

Source: Adapted from (Spackman, 2002)

While many DBFO projects have seen success, some of them are considered as problematic. One of them is the iconic Chunnel Project, completed in 1993. For this project, costs were underestimated at 1.2 billion GBP, while the final costs rose to more than 4.1 billion GBP. The traffic was overestimated at 21 million passengers per annum, and in 2012, the number of passengers was less than 10 million, leading to loss of income. The project complexities, the advent of low cost airlines, and the other unpredictable factors created these problems (ADBI, 2014). However, this is an isolated incident, and the majority of DBFO projects in UK are successful.

 

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