2.1.17 The DBFO contract includes a performance based payment mechanism, where the public sector only pays when services are delivered (e.g. the private sector is not paid during the construction phase) and recurrent payments varies depending on whether the services provided meet specified performance standards. The private provider can be encouraged to improve performance beyond the specified standards through incentives or benefit sharing arrangements. On the other hand, there could be deductions/penalties to the payments if the PPP provider fails to perform satisfactorily. However, it is important to note that a mechanism that veers too much towards penalty will not encourage partnership over the PPP contract life and hence should only be used on critical performance standards. More guidelines on the PPP payment mechanism are in Section 2.4.
2.1.18 If the private provider consistently fails to meet required performance requirements, the public agency can ensure that service levels are restored through the following ways:
a) Deductions/Penalties. If a private provider fails to deliver the project on schedule or the services provided fall below the standard originally specified, deductions and penalties can be imposed on the payments made by the public sector. This is to ensure that the private provider will work towards remedying any shortcomings in service delivery.
b) Step-In to take over operations. The public agency can also step in to take over the operations and delivery of the services in certain circumstances (even where there is no default), e.g. serious risk to public health, safety or the environment, serious national security implications.
c) Terminate the contract due to private sector default. Where a private provider consistently fails to deliver the services to the standard specified and the private sector has failed to remedy this deficiency, the PPP contract will fall into default, giving the public sector the right to terminate the contract and step in to ensure continuity of service delivery. In these circumstances:
i. Projects will revert to public ownership, including the assets necessary to continue to deliver the service;
ii. Compensation may be due to the SPV based on the termination compensation clauses as stipulated in the PPP contract; and
iii. The public sector would then take ownership of the project itself or re-tender the opportunity to take over the project to other private sector contractors. The public agency concerned would have to proceed with legal action, as appropriate, to recover from the defaulting private partner the costs incurred in rectifying defects, and in the maintenance and management of the facility.