The contract needs to clearly specify what is expected from the private party, in terms of the quality and quantity of the assets and services to be provided. For example, this could include defining required maintenance standards for a road, or defining the required service quality and connection expansion targets for utility services provided directly to users. Performance indicators and targets are typically specified in an annex to the main PPP agreement.
A key feature of a PPP is that performance is specified in terms of required outputs (such as road surface quality), rather than inputs (such as road surfacing materials and design) wherever possible. This enables the private PPP company to be innovative in responding to requirements, as described in Farquharson et al [#95, page 34]. For more guidance and examples on the differences between output and input specification, see Hong Kong's guidance on managing outsourcing contracts [#130, pages 32-33], and Guidance on output specifications from the United Kingdom's Ministry of Defence [#249], which also sets out a process for developing the specification for a PPP project.
Specifying outputs rather than inputs also helps keep competition as open as possible. For example, the World Bank's sourcebook on governance in the electricity sector describes a power sector procurement, in which a particular technology was specified in the request for proposals, with the intent of limiting competition, and facilitating corruption.
The PPP contract should set out the following:
• Clear performance targets or output requirements. Farquharson et al [#95, pages 34-36] note performance targets should be 'SMART-that is, Specific, Measurable, Achievable, Realistic, and Timely-and provides an example of SMART targets for a government accommodation PPP
• How performance will be monitored-that is, the information that must be gathered, by whom, and reported to whom. This can include roles for the government's contract management team, the private party, external monitors, regulators, and users (see Section 3.7: Managing PPP Contracts)
• The consequences for failure to reach the required performance targets, clearly specified and enforceable. This could include:
- Specifying penalty payments, liquidated damages or performance bonds. Iossa et al [#159, pages 47-49] describe the pros and cons of these kinds of enforcement mechanism. The United Kingdom's standardized PPP contracts also include a chapter on protection against late service commencement [#234, chapter 4], describing when and how liquidated damages or performance bonds may be used
- Specifying payment deductions for poor performance (or bonuses), built into the payment mechanism (see Section 3.4.2: Payment Mechanism)
- Following a formal performance warning system, and how persistent unsatisfactory performance can escalate into eventual termination for default, as described in Section 3.4.5: Termination Provisions
• Step-in rights for the public party, to take control of the concession (typically temporarily) under certain well-defined circumstances. As described by Iossa et al [#159, pages 81-83], the intention is typically to enable step-in to deal with problems threatening service provision that the public party may be better able to deal with, such as urgent environmental, health, or safety issues.
The following resources provide more guidance and examples on these three elements of setting performance requirements:
• Kerf et al's Guide to Concessions [#169, pages 70-74] describes issues and provides examples of performance targets in the context of concession contracts for utilities
• 4Ps paper on the United Kingdom's PFI experience [#228, pages 7-10] presents lessons learned on specifying output requirements. These include the need for clarity to avoid differences in interpretation, leading to disagreement, and ensuring reporting requirements are adequate
• The South Africa PPP Manual Module 6 on 'managing the PPP agreement' [#219, Module 6, pages 25-26] briefly outlines how performance requirements, monitoring and enforcement mechanisms should be established; more detail is set out in South Africa's Standardized PPP Provisions on 'performance monitoring' [#219, Standardized PPP Provisions, pages 121-133]
• The Scottish Government has produced standard output-based performance requirements for PFI schools [#257], which also describe some key issues in defining performance requirements
• The United States Department of Transportation's Key Performance Indicators in Public-Private Partnerships [#268] reviews the indicators used in several countries and their efficiency.