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What are payment mechanisms

A payment mechanism is central to a public-private partnership (PPP) contract, providing the agreed means of allocating risk between the public and private sector partners and incentivising the latter through performance based payments. There are two forms of payment mechanisms: availability and revenue-based.

Availability payment mechanism

This is based on the government entity making monthly payments to its private sector partner based on performance to specified levels and the availability of the contracted infrastructure. Any work deemed below the agreed standard leads to deductions in the payment to the private company. With this method, the government retains the demand risk and provides the private sector partner with a steady revenue stream, reducing their own risk premium and providing more incentive to invest.

Revenue-based payment mechanism

This payment strategy relies on the private sector partner collecting revenue to recoup development work from the infrastructure users, for example on a toll road. The demand risk then sits with the private sector partner but it also stands to deliver a profit to its investors.

The choice of which payment mechanism to use gives the government entity control of how to manage the risk. By using the availability payment mechanism, the government can limit the amount of profit earned by the private sector partner and therefore allay any public fears of public money ‘lining’ private sector pockets. However the revenue-based payment strategy transfers more of the risk to the special purpose vehicle and allows it to build PPP projects that are perceived as too expensive to build and maintain.

Integrated Payment Mechanism Software

The importance of having access to accurate and timely data for effective performance under the contract is widely understood in most PPP markets. Despite this, many service providers continue to support their payment mechanisms utilising spreadsheets that are unable to provide the required level of functionality and auditability to manage complex PPP Payment mechanism calculations.

P3rform software from Service Works provides an integrated payment mechanism which automatically calculates deductions from jobs that have been entered into the system. The performance of the service provider can be monitored on a real-time basis and in a transparent manner through the use of remote monitoring and the running of abatement and performance reports. This level of functionality is essential in order to provide the level of transparency and auditability required by public authorities and to ensure that service providers have the data they need to manage project risks intelligently.