A DBOM revival
Once upon a time, Central Government had money to invest in a private finance initiative (PFI) programme to design, build, operate, maintain and finance new leisure facilities. As finances plummeted, interest grew in how this model could work on a self-funded basis. Hence the arrival of the ‘design build operate and maintain’ contract (DBOM) where the end operator took charge of the new leisure centre, whilst the design and build (D&B) was paid concurrently, by the commissioner.
Essentially, DBOM is a ‘holistic’ solution that revolves around the ideal operational model. The same team responsible for guaranteeing the numbers is also responsible for designing and building the facility. The operator takes over D&B risk when the contractors walk away as a one stop shop to the commissioner. That’s putting your money where your mouth is!
This model was great for a while, and I helped develop the template document and test it on live deals. Unfortunately, the 2008 economic crisis reduced appetite for DBOM – it requires a long term view and the crisis encouraged short-termism and navel gazing.
However, from market enquiries, this model is making a revival, particularly with local authorities. So why? In part, this is because local authorities have accepted their new environment, and are looking, as local leaders, at income generating replacement investment, to retain economic stimulus whilst also profiting from the indirect benefits investing in leisure can offer – improved social well being and a reduced spend on mental health, general health and youth crime. As well as a better quality centre, at lower operational cost and greater usage, this can lead to an operator making it work on a self-funded basis without recourse to the commissioner, hence its attraction.
A number of commissioners are looking for income generation and better use of maintenance budgets for dead end centres. Why spend that on patch ups when you can get more bang for your buck on new build? Further, set the service free and watch it blossom from focussed attention. Looking at things from a leisure manager’s perspective, a modern, purpose built centre, with careful choice of materials and configuration of areas, can increase revenue and reduce staff costs, as well as reduce maintenance budgets and down time. It will impact on hard issues such as security, vandalism, energy efficiency and CO2 commitment, as well as soft issues such as creation of a light, welcoming, amenable environment encouraging footfall, flexibility and continuing usage.
So DBOM means greater operator responsibility, pulled together in one contract between the operator and commissioner. The operator in turn takes on direct D&B warranties.
Key issues to consider
Business case and soft market testing – ensure there is sufficient market appetite.
Procurement rules & Contract duration – consider length of concession to repay finance/investment and consequent impact on bidder appetite. Public sector commissioners also to note the Concessions Directive.
Lifecycle fund – consider how replacement plant will be funded, any spend/fund and surpluses and deficits managed.
Payment for & management of build – carefully consider the type of build contract and pricing structure. Can you afford to make no payment until operational (ie pay for operator/builder finance)? Management of build is important here.
The operator – is the deal on balance sheet for the operator? Think about covenant strength, guarantees and performance bonds.
Managing risks – a DBOM contract allows the commissioner more control and flexibility to assess risk and likely costs, using a formal risk register.
Payment on Termination – how much is to be paid on termination, considering contract phase? It is vital that the maintenance fund remains with the commissioner and there is insolvency protection, although fund surpluses arising from efficient use are often negotiated.
Managers of DBOM facilities can expect more from the facility and as paymasters have direct recourse to the D&B team not the commissioner, through collateral warranties, you can see why DBOM is making a comeback!
Article originally published by S&PA Professional magazine.