The payment mechanism defines how the private party to the PPP is remunerated. Adjustments to payments to reflect performance or risk factors are also important means for creating incentive and allocating risk in the PPP contract, as described in the EPEC Guide to Guidance [#83, page 24].
Iossa et al [#159, pages 41-49] provides a helpful overview of payment mechanisms for PPPs. The basic elements of PPP payment mechanisms can include:
• User charges-that is, payment collected by the private party directly from users of the service
• Government payment-that is, payment by the government to the private party for services or assets provided. These payments could be:
- Usage-based-for example, shadow tolls or output-based subsidies
- Based on availability-that is, conditional on the availability of an asset or service to the specified quality
- Upfront subsidies based on achieving certain milestones.
• Bonuses and penalties, or fines-deductions on payments to the private party, or penalties or fines payable by the private party, due if certain specified outputs or standards are not reached; or conversely, bonus payments due to the private party if specified outputs are reached.
A PPP payment mechanism could include some or all of these elements, which should be fully defined in the contract-including specifying the timing and mechanism for making the payments in practice. Key considerations in each case are described briefly in turn below, with references for further information.