When a concession is paid by charging users, the approach to tariff setting and adjustment becomes an important risk allocation mechanism. In some PPPs, the private party may be free to set tariffs and the tariff structure. However, in many cases, user-pays PPPs are in sectors with monopoly characteristics, in which case tariffs are typically regulated by government (along with service standards), to protect users. The key question for risk allocation is how tariffs will be allowed to change-for example, with changes in inflation or other economic variables, or changes in different types of cost.
Tariffs can be controlled by establishing tariff formulae in the PPP contract, or by regulation, or a combination of the two. For example a tariff formula may be set that establishes initial tariff levels, and a formula by which the tariff is allowed to regularly, automatically adjust in line with inflation. The contract may provide for regular tariff formula reviews, at which point other factors could be considered-as described further in Section 3.4.3: Adjustment Mechanisms.
Kerf et al Guide to Concessions [#169, Sections 3.3, and 3.4] provides a helpful overview on price setting, and price adjustment for user-pays concessions contracts. The World Bank's toolkit on water sector PPP [#273, pages 108-118] also discusses tariff indexation and resets as a risk allocation mechanism for user-pays PPPs.
For further information on tariff-setting and adjustment, there is a wide literature available on different approaches to tariff-setting for infrastructure regulation. The World Bank's Body of Knowledge on Infrastructure Regulation, available online [#288], includes a module on price setting (that is, setting the overall price level), and a module on tariff design (that is, how tariffs may vary for different customers or circumstances). Both modules describe key issues and provide extensive links to further resources.