2.3 The objective of the payment mechanism is to incentivise the PPP Contractor to provide the PPP services to the required standards. If these standards are not met the PPP Contractor will incur financial deductions, if they are met the PPP Contractor receives full payment.
2.4 The payment mechanism involves the Procuring Authority paying the PPP Contractor a known sum of money for the required level of service with the ability to vary the sum of money to take account of:
o performance and availability risk which is borne by the PPP Contractor usually through financial deductions;
o risks retained by the public sector (for example inflation, costs of retained staff); but
o does not allow for a price change for risks transferred to the PPP Contractor (for example, construction cost overruns or increased maintenance requirements)
2.5 Sector standard documentation captures these principles as they apply to that sector.
2.6 The PPP services will be specified within a services specification. The services specification will classify services as either availability standards or performance standards. An example of an availability standard, within an accommodation PPP project, would be that a minimum temperature must be met before a space could be classified as available. An example of a performance failure would be that cleaning services had not been provided and that areas, such as toilets, did not meet the required standards of cleanliness. Services classified as performance will be prioritised, with health and safety issues usually being high priority whereas the need for PPP contractor staff to wear regulation uniform will be a lower priority.
2.7 If the total deductions reach certain pre-defined levels and/or performance standards are consistently below the requirement, the Procuring Authority will be able to issue warning notices and ultimately terminate a project for poor performance (classified within the Project Agreement as Termination for Contractor Default.) These pre-defined levels are specified within the Project Agreement.
2.8 The effectiveness of the payment mechanism is therefore determined by its linkage into both the services specification which results in the deductions which can be incurred and the warning notices and termination triggers included within the Project Agreement. The research into operational projects indicated that where these linkages had not been fully developed and considered, Authorities could not always enforce the service standards as the PPP contractor refused to address failures in the specification - for example, where temperatures did not meet pre-agreed thresholds.
2.9 The experience of operational PPP projects highlighted that it was essential that professional advice was obtained from suitably experienced technical, financial and legal advisers when developing a payment mechanism for a project. Additional guidance on the principles underpinning the development of a payment mechanism is included within SoPC4 which can be obtained at www.hm-treasury.gov.uk/documents/public_private_partnerships. The following sections provide an overview of the process a Procuring Authority should follow to develop a project specific payment mechanism and some of the issues it will need to address during this development.