KPIs are designed to allow the Procuring Authority to measure the level and quality of service that is being provided. They are a collection of measurable indicators of performance chosen to reflect how well the Project Company is providing the service that the project was designed to deliver.
Monitoring KPIs is the primary way the Procuring Authority ensures it is receiving the level of service prescribed in the PPP contract during operations. Service delivery should demonstrate soon after commencement whether the KPIs and the payment mechanism are working as intended, and if the associated contract drafting is clear in the recording of performance levels and application of the payment deductions. Where the KPIs and associated payment mechanism have been adequately designed, their application by the Procuring Authority should provide the Project Company with a real incentive to perform.
There is a conceptual difference in how performance monitoring should be implemented during operations depending on whether the PPP is based broadly on an availability payment model or on a user-fee model.
• Where the PPP uses an availability payment model, the Procuring Authority is the ultimate customer of the service being provided, and therefore has a pressing need to ensure that the quality targets are being met. For these types of projects, use of detailed KPIs is common.
• Where the Project Company earns its revenue from user fees or tariffs, it is holding some of the quality risk; a reduction in service levels and user dissatisfaction can lead directly to a reduction in revenue. As the Project Company is incentivised to provide a quality service to maximise its revenue, detailed KPIs become less crucial. However, the Procuring Authority cannot take an entirely hands-off approach. It is likely that there will be aspects where poor performance of the Project Company (e.g. failing to perform long-term maintenance or failing to provide a safe working environment) may not adversely affect the Project Company's short-term revenue, but may have an adverse impact on the Procuring Authority. The KPIs in these projects should also consider aspects that do not lead to reduced revenue but nevertheless constitute reduced performance. For example, it can take a long time after the appearance of potholes on the shoulder of a road for road users or safety concerns appearing for road users or airport passengers to look for alternatives that may be less convenient to them.
KPIs will depend on the asset type. For example, KPIs may be punctuality indicators for rail projects, time of unavailability for power supply or transmission projects, lane availability for road projects, water leakage rates, social acceptance surveys, response times, etc.
The level at which to set KPIs when negotiating the PPP contract is an ongoing challenge. The study found examples where KPIs were considered very difficult to meet as well as examples where KPIs were too vague. The over-specification of KPIs can mean that payment deductions associated with the KPIs are so minor that monitoring does not provide value for money. The Project Company may also make a decision that the cost of compliance is higher than the relevant payment deduction, incentivising it to simply ignore the KPI. The correct level of KPIs and their flexibility is a complex topic in itself and not covered in detail in this reference tool.
| EXAMPLE Different levels of KPIs On the Segarra Garrigues Irrigation System project in Spain, there are requirements to repair all damage to certain irrigation facilities within 48 hours, regardless of the scale of damage. This has the potential to sour relationships between parties, with the Project Company and its contractors feeling that they are being held to an unobtainable standard, and the Procuring Authority being put under pressure to waive deduction rights. In another example from the study, the Project Company felt that it barely had to consider the KPIs, as they were set so low, which suggests that the KPIs were not designed to incentivise good performance or penalise failures in performance standards. For more information, see the Segarra Garrigues Irrigation System Case Study. |