There has been a shift in recent years to innovative mechanisms that has allowed PPP to define public goals in a more effective way. Proponents of PPPs have asserted models that encourage private sector innovation and thereby improve the (dynamic) efficiency and quality of public services. But this has proven not to be enough. Innovation in PPPs has been attributed mostly to the move from an input specification, under traditional procurement, to output specification. Output specification changes incentives because once works are terminated public sector assumes responsibility for continuing operation and maintenance. Under PPPs public sector provides an output specification wherein they specify the requirements for service to be provided. This allows competing bidders the scope to create innovative solutions under Value for Money, while attaining public sector goals.
By setting the output specification, the public-sector party delegates to the private-sector party the decision of how to organize the service provision. For the purpose of control and monitoring the service provision, the performance standards should be clearly defined, measurable in quantitative and qualitative terms, and verifiable by third parties like courts or arbitrators. The output specification is important not only for control and monitoring but also to design an incentive-oriented payment mechanism. Well-defined performance standards allow to reward the private partner for meeting them and to penalize it for failing to do it. This payment mechanism turns the private partner's creativity and know-how instrumental to the pursuit of the public sector's aims.
There should be simple and transparent rules linking payments to the measurable project. deliverables determined in the output specification. These rules should be carefully design to provide strong and appropriate incentives for the private-sector party to perform. Since the payment mechanism heavily affects the financial structure of the project, the rules should ensure the private-sector party is able to finance the project given the risks allocated to it, and that the public-sector party can afford the pledged payments.
The contract specification for a public private partnership affords the opportunity and freedom to potential contractors to propose innovative solutions which integrate the design, construction, operation and maintenance of a new or existing public facility. It should be expressed in terms of the service outputs and outcomes required rather than a tightly specified list of inputs. In some cases, the main outputs of projects may be green objectives, for example targets for recycling and composting in PFI projects for waste management. The specification should be sufficiently tight to ensure compliance with what is required but not so explicit that it discourages innovative solutions that offer good value for money. PPP contracts are based on output specifications in the sense that the public-sector party defines only basic standards of service, leaving the private-sector party with the choice as to how to meet and possibly improve upon these basic standards. The idea of the output specification is to provide incentives for innovative approaches, allowing for private sector's skills and knowledge to feed into public service provision.
Transparency of the criteria for evaluating the performance of the private partner [Brazil: Lei 11.079, Art. 5] The clauses of public-private partnership contracts shall be in accordance with the provisions of art. 23 of Act 8987, dated February 13th, 1995, as applicable, and shall also state: VII - the objective criteria for evaluating the performance of the private partner; [Mexico: Acuerdo Secretaria de Hacienda Diario Oficial 9 Abril 2004] 27. LA solicitud de autorización, las dependencias y entidades deberán anexar los siguientes documentos: I. El proyecto de contrato de servicios de largo plazo, que deberá contener, entre otros términos y condiciones, los establecidos en la fracción VI del numeral 21, así como los siguientes: h) La metodología y fórmulas para evaluar el desempeño del inversionista proveedor y, en su caso, la forma y términos en que se determinarán, calcularán y ejecutarán los descuentos que resulten aplicables, de acuerdo al título IX de estas Reglas; |
But output specification may give rise to multiple problems. First, output characteristics specified in the contract, in the form of contractual obligations, may be ill or not clearly described. Problems may also arise to the extent that the output specifications could be inconsistent with the infrastructure needs that the PPP intends to satisfy, and that should be identified by conducting a careful assessment previous to the contract drafting. Mistakes at the contract drafting stage can be very costly for the public sector party because of the long-term nature of PPPs.