Once the regulatory regime has been carefully selected, the Regulator's challenge is to now turn to the key contract issues which he will be required to negotiate with the PPP provider. The more defined the regulatory framework is and the better prepared the regulator is to address the key contract issues, the more likely that an agreement will be reached in a timely manner. Key issues that the regulator must focus on include:
- Concession period
- Time to recover target rate of return; repayment of debt
- Procedure for toll rate approvals (and linkage to cash flows and costs - this is converted in toll rates and structure below)
- Procedure for monitoring cash flows
- Rules related to transfer of assets for non fully amortized investments (other wise investment at end of concession period is discouraged)
- Investment, including
- Provisions to ensure investment commitments are met
- Timing of toll rate increases and linkage to political cycles
- Amortization rules (accounting, tax and concession agreement specific)
- Toll rates and structure
- Where the rubber meets the road
- Set to allow operator to break even under targeted rate of return reflecting targeted efficiency gains (modeling of uncertainty and changing financial coverage ratios become key parameters in the negotiation process)
- Handling of any non-regulated activities must be carefully addressed
- Cross subsidies clearly defined and any restrictions placed on use of cross subsidies fully understood. (Are they to be used only on projects which enhance the economic return to the PPP provider - feeder roads for example, or for projects which may have the potential for an adverse impact on the PPP provider - a competing facility, or neutral - fund a school.)
- "Social engineering" objectives and their potential impacts on toll rates and structure must be clearly developed. (For example a facility that let HOV-2 ride for free or at a reduced rate could have an adverse impact on economic returns if growth rates in HOV-2 usage grew suddenly as a result of changed economics or policy; where as targeting a free HOV percentage as a cap would allow the HOV levels to be raised (HOV-3 or higher) in response to any such change.)
- Quality
- Technical and service quality standards
- Caps or floors
- Level of fines
- Relationship between cost, quality and level of fines