2.4.3 The objectives of the PPP payment mechanism is to:
a) Provide an incentive for the private provider to meet the availability and performance standards set out by the public agency;
b) Match payments to the outcomes and outputs that the public sector agency wishes to deliver;
c) Provide an incentive for the private provider to rectify problems promptly when availability or performance fails to meet the agreed standards; and
d) Provide an incentive for the private provider to innovate and secure efficiency gains and deliver best value for money throughout the contract period.
2.4.4 In general, the key features of a payment mechanism in a PPP projects are:
a) The public agency will make no payments to the private provider until the service is available. For example, in a water treatment project, no payments will begin until water of the required quality is received.
b) Payment will only be made to the extent that the service is meeting the availability and performance standards set out in the contract and specifications.
c) The payment mechanisms should provide for incentives for improved efficiency or outstanding performance by the private provider, as well as penalties to be made for unavailability or sub-standard performance. Incentives and penalties should reflect the magnitude of the improvement or severity of failure. For example, 'no service' will lead to 'no payment', but a minor failure should only cause at most a minor deduction, except in the case of prolonged failure where the public agency can increase the penalties for persistent failures.
d) The payment to the provider should not be related to inputs. Since the basis of the PPP project is the procurement of a service, the unitary charge should not be made up of elements which relate to delivery of any inputs. For example, the payment should not be related to completion of stages of construction, cost of materials or labour. As far as possible, the payment mechanism should not contain a fixed element that the provider always receives, irrespective of availability or performance of the service. For example, where possible, the payment mechanism should not commit the public agency to make a fixed payment which covers the provider's debt service obligations, even when the service is not available in the first instance.
e) As far as possible, there should be a single charge for the service, not separate payments for elements relating to availability or performance. Typically, the unitary charge consists of a number of separately identifiable availability and performance elements (e.g. availability of office building space and performance of catering services). However, the public agency is buying an integrated suite of services. Hence, the payment for these elements should be integrated to ensure that no payments commence until the essential services/facilities are delivered. For example, for a student accommodation PPP project, no payments should be made if the accommodation facilities are not available even if the ancillary services, such as laundry services, are available.