5.2  Risk allocation and the payment mechanism

The payment mechanism is at the heart of social infrastructure PPPs, as it puts into financial effect the allocation of risk and responsibility between government and the private party. It determines the payments that government makes to the private party and establishes the incentives for the private party to deliver the service required in a manner that gives value-for-money.

Key features of the payment mechanism should include:

•  no payments should be made until the contracted service is available. For example, in a water treatment project, no payments would begin until the plant has been commissioned and water of the required quality is being received;

•  there should be a unitary charge for the service, not separate charges for elements relating to availability or performance;

•  the unitary charge should be paid only to the extent that the service is available (e.g. proportionate to the number of available places or units);

•  the payment mechanism should allow abatements for sub-standard performance so that the private party's financial motivators coincide with those of government;

•  abatements should reflect the severity of failure, so that no service should lead to no payment, but a minor failure to a lower level of deduction.  However, in some circumstances (for example, a package of schools), unavailability of one whole facility (school) may result in no payment for that one facility rather than no payment for the whole package;

•  performance measurement should be linked to an agreed set of standards or key performance indicators which generally will relate to quality, timeliness or other service delivery requirements; and

•  arrangements should allow government adequate flexibility to require, and reward, changes in the nature or volume of services to be delivered over time.