2.10 The calibration of the payment mechanism is critical to ensuring that a PPP contractor provides facilities and services to the required standards and that a Procuring Authority can enforce these standards. It is therefore, a key aspect of transferring the risk of operating the PPP facilities and services which underpin the value for money of the PPP contract.
2.11 The payment mechanism therefore needs to be considered within the context of:
o the services specification - this defines the services to be provided, the priority attached to these services and the rectification time available to a PPP Contractor to resolve a service failure. During the rectification period a PPP Contractor will not incur deductions - these will only be levied if a service failure is not addressed by the expiry of a rectification period. The services specification may include both temporary rectification periods and permanent rectification periods.
o the accommodation schedules and the weightings or priorities given too different areas. For example, if a hospital project has a difficult to mend light broken in an operating theatre and an easy to mend light broken in a store room. The payment mechanism should apply a greater deduction for unavailability of the operating theatre to incentivise the provider to prioritise resources to rectifying the more difficult but critical failure in that area.
o the termination triggers to be included within the project agreement - these will include triggers related to the level of deductions which trigger a termination event.
2.12 The research indicated that the calibration exercise undertaken by a Procuring Authority needs to consider these aspects of the calibration very carefully. For example, a payment mechanism can appear very robust or even penal but if the rectification times are overly generous, or the services are not specifically defined, it will be difficult to enforce. Similarly, if the termination triggers are set at too high a level it is unlikely that a contract would be terminated for poor performance. Both these aspects would undermine the payment mechanism. In contrast a "draconian" approach may put off bidders and act as a disincentive to contractors.
2.13 A practical example of the difficulties of comparing calibration exercises would be two schools project teams comparing their deductions for the unavailability of a toilet. If they are materially different, one team may try to re-calibrate its model. However, on further investigation the difference may be the definition of a toilet - one team defining this as a toilet block and the other as a toilet cubicle.
2.14 Advisers will assist Procuring Authorities to ensure the right balance is achieved.
2.15 Payment mechanism principles are established in most sectors through the standard PPP contracts. In some sectors, generic service standards and payment mechanism models are available. At a project level, these need to be reviewed in detail to ensure they reflect the scope and objectives of the individual scheme. The approach which should be adopted in this process is outlined below.