Under more traditional commercial contracts (between private parties), the service provider usually passes the costs of any change in law directly to its customers through an increase in price, to the extent that competitive forces allow. The difficulty in using this approach in public private partnership projects is that, generally, the services are not provided into a competitive market.
However, where the public private partnership arrangement is such that the contracted services are offered directly to the public (so that there is a direct commercial relationship between the private party and end-users), it may be appropriate for the cost of a change in law to be passed through to the public in the form of increased tariffs (within limits). The feasibility of this approach depends on the elasticity of demand, competition from substitute services and whether there are regulatory restrictions on increases in tariffs. If full pass-through can be achieved, the risk is effectively transferred to the public through the private party. If not, it is borne by the private party as discussed above, unless government agrees to share the risk.
The position is different where the contracted services are offered directly to and paid for by government. In these circumstances, it may not be appropriate for the private party to bear all the change in law risk, as it cannot be passed on to the third-party end-users. Where, for example, the change involves capital expenditure that cannot be accommodated within the existing costs (or is above an amount specified in the contract), the contract may require the parties to negotiate a solution.
Where government receives the contracted services on behalf of its customers, a further approach is for government to take the change in law risk, or part of it, where it can reasonably and legally pass through the cost and impact of that change of law to its customers. For example, in a water treatment project, the water authority may agree to compensate the private party for the net adverse financial effect of a change in law (whether of a capital or operating cost nature) by increasing the toll payable to the private party under the contract. This is limited to the extent that the authority is able to pass on the costs of doing so to its customers by increasing the water tariff paid by them.