There are two "full" compensation methods which the Contracting Authority will need to consider:
(a) Book value compensation: this is based on the investment costs the Private Partner incurs in building the PPP Project. Third party costs would be added on top. This method is not as commonly used and although it is relatively clear and simple, it is generally not recommended as it is not guaranteed to compensate the Private Partner fairly. There is a risk of underpayment (which would create bankability issues for Lenders) or overpayment (which may wrongly incentivise the Private Partner). There may also be problems if accounting rules change during the life of the PPP Contract. It should be noted that the book value of the PPP Project assets is unlikely to take into account their physical state.39
(b) Financing-based compensation: this is based on the financing for the PPP Project (e.g. senior debt (whether in the form of bank or bond finance), subordinated debt and equity), again with third party costs on top. This approach is more common across the PPP market and is the recommended approach in this Guidance. See further detail in Section 4.3.3 and Section 4.7, Sample Drafting 4, Schedule, Clause (1).
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39 This approach is not in Section 4.7, Sample Drafting 4.