5.11 The test of the quality of a PPP contract is the extent to which risks which are best borne by the private sector have been transferred. The financial effect of risk transfer is variability of the payment. This is why variability is considered so important in the assessment of the accounting treatment of projects.
5.12 The payment mechanism must be sufficiently variable for there to be a real risk of significant reductions in the project return if performance by the operator is not satisfactory. Significant reductions in return should not simply be the result of extreme low probability consequences such as default by the project company.
5.13 The payment mechanism should be developed with this in mind and it is important that its practical effectiveness is not reduced by over long rectification periods, low acceptable standards or by small deductions for very poor performance.
5.14 The payment mechanism is a key commercial interface which sets the level of non performance/availability that results in replacement of subcontractors and eventual termination of the private sector contractor if failure to perform is not remedied. Calculation of failure thresholds and warning notices are a key part of calibration development.