D. Use KPIs and payment mechanisms to ensure the Project Company is performing in accordance with the PPP contract, not as punitive measures

The Procuring Authority should not take a 'soft stance' on the enforcement of payment deductions as they relate to KPIs. KPIs embody the level of service and the allocation of risk that was agreed to in the PPP contract and so should be appropriately managed to ensure the Project Company is performing in accordance with its contractual obligations. The approach taken by the Procuring Authority should be 'strict but fair'.

It is not uncommon for there to be some disagreement between the Procuring Authority and Project Company over KPIs at some stage during a project lifecycle, with the study data showing 20% of disputes in PPPs globally involve KPIs. Disputes are detailed in Chapter 5 (Disputes). At a fundamental level, the incentives of each party are divergent with regard to KPIs, as the Procuring Authority wants the highest level of service for the lowest price to deliver the greatest value for money to the public, and may be incentivised to apply payment deduction strictly. On the other hand, the Project Company wants to deliver what is required in the most cost effective way for the highest revenue. These opposing drivers increase the likelihood of a disagreement or dispute. For example, in the research there were a number of instances where the Project Company perceived KPIs as too onerous or unrealistic, while the Procuring Authority saw them as a means of 'keeping pressure' on the Project Company to perform.

Both parties should acknowledge the inherent divergence of interests, and approach KPIs with an open mind to work together to resolve any operational difficulties. Application of payment deductions has the strong potential to damage the relationship between the Procuring Authority and Project Company. The main objective is to ensure proper service delivery and not to use payment deductions as punitive measures, as this puts the relationship at risk and will not improve long-term value for money. Stakeholder management with respect to the Project Company is detailed in Section 3.3 (Stakeholder management).

In certain circumstances the Procuring Authority may decide not to enforce its contractual right to impose a payment deduction or a penalty if it considers there is an overriding interest for it not to do so. Similarly, it may decide to apply it at a lower level than contractually entitled. In these circumstances it is important to communicate clearly that the inaction is deliberate, and to clarify the grounds for the decision should similar circumstances arise in the future. Waiving rights under a contract should only be undertaken after receiving legal advice, to ensure an appropriate waiver is effected (i.e. that the Procuring Authority is waiving only what it is intending to waive and not waiving any other rights under the PPP contract). The Procuring Authority must weigh up the risk of damage to its relationship with the Project Company with the financial gain and precedent-setting of strictly applying the deductions.