Payment mechanisms

Payment mechanisms come in the form of a range of financial incentives including increased unitary payments to the Project Company, lump sum payments (e.g. attached to a construction milestone), payment deductions, agreed compensation, adjustment of rights to receive revenue from the project, changes to the required level of investment by the Project Company, etc. The key is that there will be either a positive or a negative impact on the Project Company's revenue depending on the level of performance.

Failure to meet KPIs will typically result in a corresponding payment deduction or agreed compensation payable to the Procuring Authority.

Payment mechanisms during construction are typically tied to construction milestones, subject to quality requirements. Many PPP projects will involve no payment to the Project Company during construction, as payment is linked to availability of services or user fees during operations. This structure incentivises the Project Company to complete work within the agreed timeframe, as availability of revenue is dependent on completion of the construction works, and so late delivery will erode potential Project Company profit (in addition to any agreed compensation payable because of the late delivery). This structure still provides the Project Company with the autonomy it needs to properly manage its contractors.

The payment mechanisms during construction may be one-off lump sum payments for the completion of milestones implemented through an increase in the unitary payment as milestones are reached, or as a deduction from the unitary payment until the milestones are reached.