Partners in Infrastructure
professionals, making the project easier to manage for the municipality. Significantly, the defects liability remains with this contractor for the duration of the operations phase. By being responsible for operating the plant, the contractor will also take into account the total cost of ownership when designing the plant, which often introduces efficiencies and reduces construction time. “These contracts are typically structured in such a way that the real revenue commences on commissioning of the works. So there is an added incentive for contractors to expedite construction so that they can start turning over revenue,” explains Massey.
Standard-form contracts According to Massey, standard-form DBO contracts can be amended to address specific skills requirements in terms of longterm community participation, skills transfer and the general upliftment of communities. There are two relevant standard-form contracts currently available in South Africa, namely the ‘FIDIC Conditions for Design Build Operate Projects, First Edition (2008)’, and the ‘NEC4 DBO Contract’. These contracts typically require significant amendments to accurately specify the employer’s requirements
and ensure the standard-form mechanisms are appropriate. “One of the shortcomings of these contracts is that the people who put the contracts together don’t always recognise their longterm nature. If the requirements are not precisely specified, there can be problems down the road,” says Massey. Bespoke contracts are also an option and while they do require a lot of work, they offer the advantage of being designed to address both parties’ needs and requirements.
Current framework DBO contracts share many traits with PPPs and are therefore governed by National Treasury Regulation 16, which defines a PPP. Section 120 of the Municipal Finance Management Act (No. 56 of 2003; MFMA) also provides for PPPs. According to section 120, municipalities may enter into PPPs where they provide value for
money to the municipality, are affordable to the municipality, or transfer appropriate technical, operational and financial risk to the private party. Although there is a big question mark around whether municipalities have the skills and capacity to manage PPPs, there are provisions within the MFMA that allow municipalities to rely on national resources in managing them, explains Massey.
Are DBO contracts the answer? Massey warns that DBO contracts are not always suited to brownfield projects. They also require contractual mechanisms, such as audit committees and dispute avoidance boards, to be properly implemented and maintained, or the contract could fail. Cooperation is crucial, owing to the long-term nature of these contracts. A breakdown in the relationship between the parties could lead to the contract being terminated. However, if properly structured, Massey believes DBO contracts can address the current budgetary constraints, skills shortages and lack of adequate maintenance, and ensure the long-term sustainability of infrastructure. “The current constraints will not be addressed if there is no change. The current procurement model needs to be disrupted and DBO contracts provide a good opportunity for this.”
IMIESA October 2018
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