The National PPP guidelines: commercial principles and the Partnerships Victoria standard project deed guidance notes outline several options for the government party in paying for the State-initiated modifications, including:
• where the State-initiated modification involves capital works, making a lump sum payment (on completion of the works) through a one-off capital expenditure payment;
• requiring the private party to initially fund the works, with the government party then paying the cost through an upwards adjustment of the service payment over the remainder of the project; or
• with the private party's agreement, extending the service delivery phase of the project.
Other options for payment include paying periodically in arrears, paying milestone payments (where capital works are involved), or as an adjustment to the service payment.
The project deed may or may not include a list of payment options. It is always possible to negotiate a form and timing of payment for State-initiated modification that is not included in the project deed, however care must be taken to ensure that value for money can be demonstrated.
In assessing various payment options, it is important to consider the broader budgetary context, the impact on the specific project deed and the ability to negotiate with the private party.
The option to extend the term of the project deed should be carefully considered. There can be justification for the government party agreeing to the extension of the project, particularly where extending the term will enable the State to secure future services at currently contracted prices that may be cheaper than those available in the future. Contract extension may offer best value for money for relatively large modifications undertaken well into the contract term. However, changing community expectations and emerging technology can create uncertainty around the need for existing services in future, and difficulty forecasting future costs can make it challenging to evaluate whether such an extension offers value for money. Therefore, the government party should carefully assess both the benefits and risks relating to any suggestion that the project deed term should be extended in order to pay for current State-initiated modifications. Any decision to extend should be taken on operational and value for money factors. The government party should not extend the original contract term unless doing so would have been justified on a separate stand-alone basis. Extending the project deed term to ease a possible affordability constraint cannot be justified as an end in itself.
Deciding between paying upfront or through an adjustment to the service payment should be done on a case-by-case basis, as the relative cost of these options can be influenced by any difference between the State's discount rate and the private party's cost of funds. When making this decision, the government party should consider the service payment adjustment principles particular to each project, which may determine which funding option will provide better value for money. The impact of each option on any subsequent abatement calculation should also be reviewed and understood before deciding on a funding method.
Finally, contract managers should be wary of pressure to use a project's 'retained risk funding' to fund State-initiated modifications. As outlined in section 0, the risk allocation negotiated for each project will have resulted in a set of risks being retained by the government party. The project's funding allocation will recognise the price of some of these retained risks by setting aside a budget of 'retained risk funding' which can be called upon at any time during the project, in the event that these risks materialise. It is important for contract managers to recognise that the retained risk funding should only be used if the risk for which such funding is allocated eventuates, and that it should not be treated as a State-initiated modifications fund.