The Politics and DV Engineering working group analyses current political developments in the defence sector. It provides independent facts and interpretation from the technological knowledge and experience of engineers.
The Politics and DV Engineering working group has questions and comments on the letter published on 9 July 2021 by the Secretary of State for Defence on the redevelopment of the Nieuw Milligen camp for the Marine Corps. The comments have been prepared based on publicly available information and defence technology knowledge and experience.
Download a PDF of this commentary here.
In this letter, the State Secretary indicates that, despite various risks and objections, she considers the execution variant DBFMO (Design, Build, Finance, Maintain & Operate) for the redevelopment of Camp Nieuw Milligen for the Marine Corps to be the most attractive.
Our knowledge and experience show that this method can work very well. This has been demonstrated at MINVWS. As the STASDEF points out, the method does have some drawbacks, including a risk of cost overruns and undesirable management effects. Defence tries to eliminate these by concluding agreements. However, this often fails because the interests of, and the force field between, government, provider and financier are misaligned. A bad contract leads to a bad outcome.
The role of the commercial real estate company is particularly tricky in DBFMO of real estate. The government often tries to place all risk on the company and then make unrealistically heavy demands. The division between managerial power and risk is then incorrect.
Furthermore, financing a major project like this should not go through the books of a real estate entrepreneur. That causes a perverse incentive within that company. For a major project like this, setting up a foundation with an expert board may reduce the objections. This foundation can then conclude the necessary agreements under the supervision of Defence and the investor to realise all DBFMO aspects.
This model bears strong similarities to the model we have been promoting for several years for large equipment projects. In this widely used model (in financial terms, a Special Purpose Vehicle (SPV)), the real estate entrepreneur remains a service provider and has no ownership and investor interest.
In conclusion, the risk allocation between government and provider and its consequences need to be better considered. This requires placing the risks with the organisation that can manage them and has an interest in doing so. A foundation set up specifically for this project could reconcile the various interests, especially if it is co-managed by Defence.
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The Hague, 19 August 2021
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Photo: Ministry of Defence
