Design-Build With Finance - Design-Build for Water and Wastewater Projects - page 321

There are three basic variations of the DBOF approach with respect to ownership of
the project:
1. Build-own-operate-transfer , where the DBOF contractor owns the project until
the end of the term of the financing, at which time, ownership is transferred.
2. Build-own-operate , where ownership of the project starts and remains with the
DBOF contractor in perpetuity and beyond the term of the financing.
3. Build-operate , where ownership starts with and remains with the owner (i.e., the
other party to the service agreement), but the DBOF contractor provides some or
all of the financing.
The applicable procurement laws and current income tax laws and regulations are
key factors to consider when evaluating ownership arrangements for a given project. The
procurement laws need to be carefully evaluated to determine which of the ownership
approaches are allowed. In some cases, the scope of available contracting and procure-
ment authority may be limited. Tax laws and regulations also need to be considered. The
income tax benefits, such as accelerated depreciation or investment tax credits, may or
may not be generated for a private owner. If tax benefits can be generated, this can reduce
the net cost of the project to the benefit of both the municipality and the DBOF contrac-
tor. It is important to recognize that the tax laws and regulations are revised periodically,
and the potential tax benefits associated with private ownership vary from time to time.
Status and Trends of DBOF
The use of DBOF by municipalities for water and wastewater projects, while relatively
common internationally, is limited in the United States. This can be explained by the
low-cost and readily available supply of capital funds for municipalities through the issu-
ance of tax-exempt revenue bonds, general obligation bonds, or SRF loans. The costs and
terms for financing in a DBOF arrangement, as dictated by the current tax laws and regu-
lations, oftentimes do not compare favorably to financing with municipal bonds or SRF
loans. Even though a project that is delivered by DBOF may be more costly than projects
financed with municipal funds, there are certain circumstances where DBOF may prove
attractive to a municipality.
DBOF may be selected when there are certain risks, such as market uncertainties,
state regulatory differences, or performance uncertainties of new or proprietary technol-
ogy, that can be more effectively managed by a DBOF contractor. One example would be
having a long-term contract for the management of wastewater treatment biosolids.
Some state procurement laws limit the use of DB or DBO contracting, but allow the
use of a service agreement where the assets of the project are not owned or financed by
the municipality. In this case, DBOF may be attractive.
When at-risk project development activities need to be undertaken or unique financ-
ing constraints exist (e.g., legal debt limitations), the project might best be accomplished
through the use of contractor-provided financing. An example of this circumstance would
be the development of a new shared source of water supply for multiple communities.
DBOF can be attractive when tax-exempt private activity bonds are available, as
they can narrow the cost difference with traditional municipal financing sources. When
income tax laws favor private ownership through investment tax credits and/or accelerated