Key considerations when defining government payments include the following:
• Risk allocation implications of different government payment mechanisms. For example, under a usage-based mechanism, demand risk is either borne by the private sector or shared; whereas an availability payment mechanism means the government bears downside demand risk. Providing an upfront capital subsidy means the private party bears much less risk than if the same subsidy is provided on an availability basis over the contract lifetime. Irwin's paper on fiscal support decisions [#160] describes some of the trade-offs between different types of subsidies to infrastructure projects (alongside user payments), and how governments can decide which is appropriate
• Linkage to clear output specifications and performance standards-linking payments to well-specified performance requirements is key to achieve risk allocation in practice. See Section 3.4.1: Performance Requirements for more resources on specifying output and performance targets in the contract. The section below on defining bonuses and penalties provides more on how adjustments to payments should be specified
• Indexation of payment formulae-as for tariff specification, payments may be fully or partially indexed to certain risk factors, so the government bears or shares the risk.
The EPEC Guide to Guidance [#83, page 24] provides a helpful overview of how to define the payment mechanism for government-pays PPPs. Yescombe [#295] provides more detailed description of the different options and their implications for risk allocation and bankability. A note developed by the Scottish Government [#258] describes experience with defining and implementing payment mechanisms in PPPs.