2.42 The payment mechanism is critical to ensuring appropriate risk transfer and incentivising the PPP Contractor to meet the Authority's objectives. The results of the research indicated the importance of a fully calibrated payment mechanism and as such the following steps will be included within the Key Stage Review process:
o Pre-ITPD KSR - this will review a range of payment mechanism scenarios. The scenarios are on the Scottish Government's website at www.scotland.gov.uk/Topics/Government/Finance/18232/12271 and are tailored to individual sectors. Procuring Authorities will be required to demonstrate that they have undertaken a thorough calibration exercise to ensure that the performance deductions, warning notice and termination thresholds are appropriately set within the ITPD documentation. Procuring Authorities should be willing to share the results of the calibration exercise with Bidders to ensure all Bidders have a common understanding of how the payment mechanism is intended to work.
o FBC/Pre-Financial Close KSR - at this stage of the procurement process, Procuring Authorities should:
■ Specify and justify any departures from the standard form payment mechanism.
■ Demonstrate the calibration of the financial model and how this ties into the agreed warning notice and termination thresholds. For example, that unavailability of 5% of teaching or clinical space, for a day, results in a significant deduction. Alternatively, understanding the proportion of the teaching or clinical spaces which need to be unavailable, and for how long, to trigger a warning notice.
■ Indicate how they propose to manage the payment mechanism as part of their ongoing contract management arrangements.
■ Provide details of how the retained risk elements for example, inflation, staff costs, energy unit costs will be managed.