Performance & Payment

A PPP contract needs to clearly specify what is expected from the private party, in terms of the quality and quantity of the assets and services to be provided. A key feature of a PPP is that performance is specified in terms of required outputs (such as road surface quality), rather than inputs (such as road surfacing materials and design) wherever possible and that performance is linked to payment and penalties. The performance and payment/penalty mechanisms are typically specified in an annex to the main PPP contract.

Performance Mechanisms

Typically includes:

  • The performance monitoring method: that is, the information that must be gathered, by whom, and reported to whom. This can include roles for the government’s contract management team, the private party, external monitors, regulators, and users.
  • The consequences for failure to reach the required performance targets, clearly specified and enforceable, done through either penalty payments, or payment deductions for poor performance built into the payment mechanism.
  • A performance warning system that defines the results of persistent unsatisfactory performance (including temporary step-in of the public authority to eventual termination).

Payment Mechanisms

The payment mechanism defines how the private party to the PPP is remunerated. Adjustments in payments to reflect performance or risk factors are an important means for creating incentives and allocating risk in the PPP contract.

A PPP payment mechanism can include some or all of the following elements, defined in the contract including the timing and mechanism for monitoring or making the payments in practice:

  • User charges: Are payments collected by the private party directly from users of the service. In most cases, user-pays PPPs are in sectors with monopoly characteristics, and tariffs are typically regulated by government (along with service standards) to protect users. The key question for risk allocation is how tariffs will be allowed to change—for example, with changes in inflation or other economic variables, or changes in different types of cost. These charges can be controlled by establishing tariff formulae in the contract, or by regulation, or a combination of the two. Governments may define only the maximum tariff, or a maximum weighted-average tariff allowing the private party to structure the rates according to business conditions.
  • Government payment: Are payments by the government to the private party for services or assets provided. These payments are typically usage or availability base. Key considerations when defining government payments include the following:
    • Risk allocation implications of different mechanisms: for example, under a usage-based mechanism, demand risk is either borne by the private sector or shared; whereas an availability payment mechanism means the government bears downside demand risk.
    • Provision of upfront capital subsidies: means the private party bears much less risk than if the same subsidy is provided on an availability basis over the contract lifetime.
    • Links to clear output specifications and performance standards: linking payments to well-specified performance requirements is key to achieve risk allocation in practice.
    • Indexation of payment formulae: as for tariff specification, payments may be fully or partially indexed to certain risk factors, so the government bears or shares the risk.
  • Penalties: Under both government and user-pays PPPs, the penalty mechanism may include deductions to payments to the private party, or penalties payable by the private party, due if certain specified outputs or standards are not reached; or conversely, bonus payments due to the private party if specified outputs or standards are reached.

Learn More

    • 2014
    • Asian Development Bank (ADB), World Bank Group (WBG), Inter-American Development Bank (IDB), PPIAF

    PPP Performance and Payment

    PPP Reference Guide Version 2.0

    PPP Reference Guide section on performance and payment (Version 2.0).

    • 2014
    • European Investment Bank (EIB)

    The EPEC PPP Guide

    The European PPP Expertise Centre (EPEC) has published several versions of its Guide to Guidance over the last few years. The Guide to Guidance is principally aimed at public procuring authorities considering the use of public-private partnership (PPP) arrangements. Given the positive feedback it has received, EPEC decided to turn the Guide to Guidance into a webtool rebranded as the EPEC PPP Guide. The aim of the EPEC PPP Guide is to give users easy access to regularly updated PPP guidance and allow them to interact with the EPEC team (e.g. propose new guidance, rate the EPEC PPP Guide).  

    • 2007
    • HM Treasury, United Kingdom

    HM Treasury - Standardisation of PFI Contracts

    • 2003
    • Timothy Irwin
    • World Bank Group (WBG)

    Public Money for Private Infrastructure

    Deciding When to Offer Guarantees, OutputBased Subsidies, and Other Fiscal Support

    This report sets out a framework intended to help governments make better decisions about giving fiscal support for private infrastructure services and provides some tools to facilitate analysis. It contains five possible government goals: (a) internalizing externalities in infrastructure markets, (b) overcoming failures in markets for financing infrastructure, (c) mitigating political-and-regulatory risks, (d) circumventing political constraints on prices or profits, and (e) redistributing resources to the poor via infrastructure.

    • 1998
    • Michel Kerf, R. David Gray, Timothy Irwin, Céline Levesque, and Robert R. Taylor
    • World Bank Group (WBG)

    Concessions for Infrastructure

    A guide to their design and award

    This report aims at helping policymakers and advisers better understand some of the most important and difficult aspects of concession design, award, implementation, monitoring, and modification. Concession is broadly defined as any arrangement in which a company receives from the government the right to offer a service under conditions of significant market power.

    • 2006
    • PPIAF

    Approaches to Private Participation in Water Services: A Toolkit

    This Toolkit assists developing country governments that are interested in using private firms to help expand access to safe water and sanitation services at reasonable cost. It also aims to assist in the design of arrangements that maximize the benefits for their countries, provinces, or municipalities.

    • 2012
    • UK Government

    Standardisation of PF2 Contracts (Draft)

    On 5 December 2012 the Government published “A New Approach To Public Private Partnerships”. This policy document sets out the conclusions of the Government’s “Call for Evidence and review of PFI” and introduces a new approach for involving private finance in the delivery of public infrastructure and services. This new approach, called PF2, is the Government’s successor to the PFI for the delivery of infrastructure and services through public private partnerships (PPPs).  The main objectives of this guidance are:

    • firstly, to build on “A New Approach To Public Private Partnerships” setting out the approach to be taken to structuring PF2 contracts, allocating risks between the public and private sector parties and promoting a...

    • 2010
    • Edward Farquharson, Clemencia Torres de Mästle, E.R. Yescombe, and Javier Encinas
    • PPIAF

    How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets

    This guide reviews the necessary steps to successfully engage and manage a public-private partnership (PPP) from the early stages. It presents a framework that highlights the requirements, options, and challenges that governments face when embarking into PPPs, and explains how to address them so that a sound PPP program can be implemented and the benefits for both public and private partners can fully materialize. This book draws on experiences from both mature and developing PPP markets across the world, and case studies illustrate the key messages throughout. It discusses the policies, processes, and institutions needed to select the right projects and then manage preparation for market and operation. It identifies the underlying...

    • 2007
    • Hong Kong Efficiency Unit

    Serving the Community by Using the Private Sector: A User Guide to Contract Management

    The purpose of the user guide is to (1) provide guidance on how to address commonly encountered challenges in contract preparation, management and monitoring, and (2) share both local and overseas outsourcing experience and lessons learnt. The target audience of the user guide includes any personnel who are involved in planning, managing and supporting the outsourcing projects in government departments.

    • 2010
    • Ministry of Defense
    • UK Government

    Output-Based Specifications for PFI/PPP Projects

    Version 0.2 - Cionsultation Draft

    Please note this guidance was withdrawn on 23 November 2016.       

    • 2009
    • Jonathan Halpern; Charles Kenny; Eric Dickson; David Erhardt; Chloe Oliver;

    Deterring Corruption and Improving Governance in the Water Supply & Sanitation Sector

    Governments typically provide the water and sanitation sector with substantial amounts of public money. Monopoly power, public funds, and discretionary decisions, coupled with poor accountability, breed corruption. The best hope for reducing corruption in the water and sanitation sector is to incentivize water sector officials and managers to be responsive to citizens' demands.

    • 2007
    • Elisabetta Iossa, Giancarlo Spagnolo, and Mercedes Vellez
    • World Bank Group (WBG)

    Best Practices on Contract Design in Public-Private Partnerships

    Provides guidance on several elements of contract design for public-private partnerships, including risk allocation, designing the payment mechanism, flexibility and renegotiation, contract duration, and other contractual issues to do with dealing with change. Features numerous case studies. This is the final version of a report (also prepared for the World Bank), which had been titled "Best Practices on Contract Design in PPPs: Checklist."

    • 2007
    • HM Treasury, United Kingdom

    HM Treasury - Standardisation of PFI Contracts

    • 2004
    • Government of South Africa

    PPP Manual: Module 6: Managing the PPP Agreement (South Africa)

    • 2004
    • Government of Scotland

    Output Specifications: Building our Future - Scotland’s School Estate

    This guidance on the output specification for school Public Private Partnership (PPP) projects has been developed as part of the school estate strategy Building our Future: Scotland’s School Estate.1 It explains what the output specification is, how it contributes to the project, describes the main issues to be considered in developing the specification, and offers a model structure for an output specification. It is intended for local authorities and others involved in school PPP projects to help them achieve their objectives through well considered and clear output specifications.

    • 2011
    • United States Government

    Key Performance Indicators in Public-Private Partnerships

    A State-of-the-Practice Report

    This report provides a state-of-the practice description of domestic and international practices for key performance indicators (KPIs) in public-private partnerships. The report is based on a comprehensive literature review and eight case studies from Australia, British Columbia, the United Kingdom, and the United States. The report identifies how government-developed performance measures reflecting societal goals such as congestion management or environmental impact are translated through KPIs and included in project documents for designing, constructing, operating, and maintaining transportation facilities.

    • 2014
    • Asian Development Bank (ADB), World Bank Group (WBG), Inter-American Development Bank (IDB), PPIAF

    Desempeno y Pago

    Asociationes Publico-Privadas: Guia de Referencia Version 2.0

    Sección sobre desempeño y pago de las APP de la Guía de Referencia de las Asociaciones Público-Privadas, Versión 2.0.

For legal and regulatory resources go to PPPIRC

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