Design-build-operate (DBO)

Design-Build-Operate (DBO) is a type of Public Private Partnership (PPP) model where a private contractor is engaged to design, build and operate the facility on a single-responsibility basis.
Download

Instrument Category

  • Public Private Partnership (PPP)

Other ınstruments ın the same Category

Build-operate-transfer (BOT)
Concessions

Relevant case study

Description

A Public Private Partnership (PPP) is a long-term contract between a government entity and a private entity for providing a publicly beneficial service or asset, where the private party bears some risk and responsibility. PPPs can be attractive for governments as they can transfer upfront costs to private partners, take advantage of external expertise, and open new financing options.

Design-Build-Operate (DBO) is a type of PPP model where a private contractor is engaged to design, build, and operate the facility on a single-responsibility basis. The public sector finances the new facility and owns the resulting assets. By procuring the design, build, and operation as a single contract, the government can reduce interface risks and improve the incentives for innovation, cost efficiency, and performance delivery.

The DBO model is an output-based contract where the contractor is accountable for meeting the contract outputs. DBO contracts are typically medium to long-term contracts with operational service periods of 15-20 years. DBO contracts are typically suitable for greenfield projects and/or complex projects that require a high degree of technical expertise.

Enabling Conditions and Key Considerations

  • Legal and regulatory framework for PPPs. A robust legal and regulatory environment in the project’s country is crucial for structuring PPP projects, including DBO projects. This framework should define private sector investment rights, ensure transparent procurement, outline arbitration processes, and establish measures for bankruptcy/payment defaults. Clear delineation of enforcement capacities among institutions is essential. The regulatory framework not only creates business opportunities for private investors but also influences transaction speed, pricing decisions, and legal certainty in contractual arrangements and rule of law enforcement.
  • Public sector expertise in design and implementation. Successful PPP implementation relies on an effective institutional framework that clearly delineates roles and responsibilities across ministries and coordinating bodies. This enhances efficiency and ensures effective enforcement of PPP agreements, fostering the overall success and sustainability of collaborative ventures between the public and private sectors.
  • Competent private sector providers. PPP will only be successful if the private sector has the capabilities to add value to the delivery of public services. Hence, PPP should only be applied to projects where the private sector has the competencies to meet the service standards required by the government or the public. This is particularly important in a DBO model where a single private sector contractor is responsible for delivering the project across all stages of design, build, and operation.

Potential Challenges

  • Lack of public sector capacity to implement PPP frameworks. Inadequate public sector capacity in policy formulation and regulatory management may hinder the creation of a robust PPP legal/regulatory framework and discourage private sector participation. Additionally, limited public sector capacity in planning and managing PPP projects may result in poorly structured contracts, unclear risk allocation, and diminished appeal for private investors. In particular, DBO projects require public sector expertise across the design, construction, and operation phases to ensure successful and sustainable PPP implementation.
  • Lack of private sector capacity to manage project stages. Limited capacity within the private sector may pose challenges for contractors to adhere to legal and regulatory frameworks, leading to bottlenecks and delays in project implementation. This issue is particularly significant in a DBO model where a single contractor is responsible for managing all project stages, underscoring the need for private sector capacity for the successful execution of projects.
  • Risk of potential service discontinuity. If the contractor faces financial challenges during the contract, service continuity might be compromised if the government or alternative private providers are unable to take over and continue delivering the service. This challenge is particularly relevant for DBO projects, where a single contractor oversees all project stages, increasing the risk of service disruptions if financial difficulties arise.
  • Requirements for large capital investment from the public sector compared to other procurement methods. Contractors may price considerable risk into their tenders given the long-term nature of the project. Thus, DBO contracts may be more expensive up-front and require a greater amount of capital investment from the government compared to other procurement methods (e.g., concessions-based PPP models).
  • Inflexible long-term contracts. DBO contracts are often viewed as fixed-price contracts between the government and the private sector partner, meaning that any changes or modifications require mutual agreement from both parties. This inflexibility may hinder responsiveness to unforeseen events, such as shifts in public demand or technological changes, if the DBO contract lacks variation provisions.

Potential Benefits

  • Potential cost efficiencies for the project. Private sector contractors, tasked with overseeing various project phases of design, building, maintenance, and operate, are incentivized to optimize lifecycle costs for long-term cost efficiency. This results in enhanced value for the public sector, as the private sector providers prioritize maintaining high-quality standards while minimizing lifecycle costs. This is particularly pertinent in DBO projects where the contractor is encouraged to develop a project with its long-term performance in mind from the outset, rather than simply designing to fitness and to pass tests on completion, as the contractor will be responsible for any high operating, maintenance, or repairs bills.
  • Private sector contractors are incentivised to deliver optimal outcomes. Private sector contractors are incentivized to deliver optimal outcomes as they seek to meet and exceed performance targets across various project phases. This results in enhanced service quality, timely project delivery, and the effective long-term management of public assets, ultimately benefiting both the public sector and end-users. In particular, DBO projects exemplify the performance advantages of PPPs, as a single organisation overseeing the entire project lifecycle enhances coherence, accountability, and efficient delivery of optimal outcomes.
  • Government has greater control of project progress. In a DBO project, the government has more control over how the project progresses since they maintain ownership of the asset and there is a single point of responsibility (which reduces the coordination and interface risks between design-build and operation). This makes it easier to ensure that projects are completed on time and within the agreed-upon budget. Additionally, it allows for greater flexibility when changes need to be made to the project.
  • DBO models allow for early determination of capital and recurring costs. DBO models often entail a higher degree of budget certainty (both capital and recurring) at an early stage with less risk of cost overruns for the procuring entity, given that DBO models allow for early determination of capital and recurring costs.

Sources/Additional Information

Case Study

Scroll to Top