3.2.1.1 Lack of pricing flexibility -

Unlike other businesses which can pass on increased costs to their customers or can take a view on the risk because their contracts are usually much shorter term, the Private Partner will not typically have the same flexibility. It will have priced its proposal to perform the PPP Contract on the basis of the legal framework in effect at the time of pricing and the PPP Contract will typically contain an agreed pricing formula in both the "user pays" and "government pays" payment models (see Section G, PPP Contracts in Context) which will limit the ability to increase pricing. Although these formulae will typically incorporate some form of indexation which will reflect general cost inflation, indexation will not compensate for significant costs (such as capital expenditure) arising from changes in law. The Private Partner will therefore be unable to recover these unless they are expressly addressed under the PPP Contract.

Even if the payment mechanism is a "user pays" toll or tariff where arguably costs could be passed on to the users of the facility, as highlighted in Section 1, Force Majeure, the Contracting Authority is likely to want to place contractual constraints on any price increases for public policy (and customer protection) reasons. Another factor against simply increasing the toll or tariff is that significant price increases could undermine users' desire for the service and result in lower PPP Project revenues than forecast by the Private Partner in its Original Base Case.