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P3 Contracts and Automated Paymechs

Public-private partnerships (P3s) are an established and successful way of delivering new infrastructure and public services. Private consortia have designed, built and managed the operational phases of hundreds of hospitals, schools and railways in partnership with public sector authorities, typically over a 30 year period. To ensure consistent service levels and value over this time, deductions can be imposed by the public sector partner if the availability of assets or the quality of services falls below the contracted standards. A payment mechanism (paymech) automatically calculates any penalties – which can become very complex where there are repeat failures and ratchet percentages for sustained under-performance – and, unlike manual spreadsheet calculations, is fully transparent as both parties can view the data. Integrating the paymech with a specialist performance management system allows the service provider’s performance to be monitored in real time, and provides the opportunity to both predict and mitigate deductions.

Automating calculations

A specialist IWMS system ensures that all events can be recorded, measured, checked and signed off, date stamping all changes for auditability. Calculations are based on this data – and crucially are held within the system rather than exported. This keeps the information secure, trustworthy and accurate.

It is difficult to achieve the quality of information required with payment mechanisms that operate on generic software. Availability, for example, might appear to be a simple concept but calculating the appropriate deductions when areas move between available and unavailable multiple times in the space of a day or a week is not straightforward. Similarly, dealing with repeat jobs which can ratchet over several months is challenging without a real time system where the deduction system must look back to see if another failure in the same area with the same KPI has occurred. Capturing the scale of activity beyond the contract remit – activity that can often have a major impact on day-to-day operations, but is not remunerated – is challenging without a transparent and auditable system. Having the information required to predict when penalties will be applied or thresholds breached, and so facilitate the proactive management of these risks to revenue is unlikely to be possible with generic software that requires manual intervention to produce the required results.

Retrofitting a paymech

Where a P3 contract is being operated without an integrated paymech, many stakeholders are now considering adding one. The process prompts a review of the entire contract and the range of challenges faced, which can then be addressed. It’s an opportunity to review and clean the data, to create efficiencies in maintenance and service provision, increase flexibility and breathe new life into the partnership. As the bulk of the work is undertaken by the software provider’s P3 consultancy team, the process is neither complex not costly.

Where contracts are due to be benchmarked and tested (or otherwise re-negotiated), a retrofit can help to ensure that changes and local (mis-) practices have not crept in and become the common standard. In addition, where the public authority is planning an audit, a paymech can help to ensure that the scale of the service provider’s activity and the value generated is effectively demonstrated.

Whatever stage the contract is at, the benefits of effectively fitting or retrofitting a completely integrated payment mechanism designed to deliver complete transparency and auditability among the stakeholders should be transformational.

For more detailed information about the benefits of integrated paymechs and the process of successful implementation, download our complimentary white paper Automated Payment Mechanisms in PPP Contracts – Understanding the Value or contact us here.