The payment structure of a public private partnership arrangement should be used to maximise the allocation of demand risk to the private party where this can improve value for money. Where it is not contrary to the public interest to do so, the private party should also be encouraged to generate revenues from the facility independently of the revenues it earns from government through third-party usage of services (including accommodation services) that are not required by government.
Demand risk relates to the variability in demand for a project's services from the forecast levels on which revenue expectations are based. Even in the case of a project with monopolistic characteristics (such as a water treatment facility) where competitive pressures are not a major consideration, demand for the service may still vary owing to volume factors affecting that industry.
The project specifications issued by government during the initial project tender stage should outline volumes of required service based on well-developed demand projections. The capital and operating costs of meeting those and other requirements, such as potential third-party demand, are factored into the bid and form the basis on which the private party determines whether the project is a viable investment.
As indicated above, public private partnership projects should be scoped, where possible, to service additional demand, both from government (if there is elasticity in the government market) and from third parties using the facility services in ways that may differ from, but are compatible with, government usage.