As mentioned in Section E above, the payment mechanism and how payments under it may be affected is key to bankability. The model adopted may also influence how certain risks are agreed by the Parties to be managed. There are three main ways the Private Partner can be paid - by collecting fees from service users, by being paid by the Contracting Authority, or by a combination of the two. The common defining characteristic between these approaches is that payment is contingent on performance.
"User pays" model - In PPP Projects using this payment mechanism, the Private Partner provides a service to users and generates revenue by charging users for that service (e.g. some toll roads). These fees (or tariffs or tolls) can be supplemented by subsidies paid by the Contracting Authority, which may be performance-based (for example, conditional on the availability of the service at a particular quality standard), or output-based (for example, payments per user).9 Under this approach, the Private Partner and its Lenders bear the "demand risk" associated with the PPP Project, namely, how many users will pay to use the asset. There may also be some scope for the Parties to agree that costs associated with the occurrence of certain risks may be managed by increasing the user fee commensurately and/or extending the term of the PPP Contract.
"Government pays" model - In PPP Projects using this payment mechanism, the Contracting Authority is the sole source of revenue for the Private Partner. This is more usual in PPP Projects where the Private Partner has no influence over user demand (e.g. in the case of a hospital or prison) or where user demand will be too low or uncertain to generate sufficient revenue for the PPP Project to be bankable. Contracting Authority payments are usually conditional on the asset or service being available at a contractually-defined quality regardless of the level of use, and are often termed "availability payments". In this approach, the Private Partner and its Lenders are exposed to the Contracting Authority's credit risk and will assess it carefully.
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9 In some jurisdictions, fees (or tariffs or tolls) under a "user pays" model may also be supplemented by a minimum revenue guarantee provided by the Contracting Authority to make the project commercially viable and bankable.