Description

In PPP agreements the bulk of the risk is placed upon the shoulders of the SPV or Service Provider so there needs to be a clear system in place to demonstrate a relationship between the service and the scale of any potential deductions. To reduce or eliminate any financial losses and disputes there has to be ready access to accurate and up to date information. The quality of the activities performed for the Public Sector Client by the Service Provider need to be clearly demonstrable and this is the function of the Payment Mechanism.  
Ian discusses the types of payment mechanism (paymech), Key Performance Indicators, warning notices, mitigating circumstances, performance management systems, input specifications versus output specification, service requirements versus asset condition and hand back conditions. 
KEY TAKEAWAYS

• Due to the complex nature of this task, spreadsheets are far too simplistic to accomplish this task so specialised software with a Payment Mechanism built in is usually utilised.
• Availability/Performance based payments are based on the public sector making a monthly payment, (known as a Unitary Charge), to its private sector partner based on performance specified by agreed levels and availability of the contractor infrastructure. Any work below agreed standards leads to deductions in the payment.
• Revenue based payments rely on the private sector collecting revenue to recoup the development work from the infrastructure user. For example, a toll road or car park charging etc. 
• KPI’s can include project benchmarks, targets, milestone dates, numbers, percentages, variants, distribution rates, time, cost, indexes and ratios which are then used to inform Performance Measures. 
• There is often confusion between input and output specifications. Input specifications are specific instructions on how to complete an activity, output specifications detail the standard of service required, e.g. room temperatures, lighting levels, cleanliness standards etc. The input measures are irrelevant to the Paymech as long as the output measures are achieved. 

BEST MOMENTS
‘A Payment Mechanism is central to the PPP contract, providing the agreed means of allocating risk between public and private sector partners and incentivising the private sector partner through performance based payments.’
‘By using Availability Payment Mechanism, the public sector can limit the amount of profit earned by the private sector partner and thereby allay any public fears of public money lining private sector pockets. However, Revenue Based Payment Strategies transfers more of the risk to the private sector and allows it to build PPP projects that are perceived as too expensive to build and maintain.’
‘Whether the input takes twice as long or three times as long or hardly anything at all is irrelevant. It’s whether the output specification has been met that, in my opinion, is critical. Input specifications have no part in a payment mechanism or indeed, in KPI’s.’
VALUABLE RESOURCES
https://www.ianjrogers.com/
ABOUT THE HOST
Ian Rogers is an entrepreneur running businesses in the Real Estate, Construction and Facilities Management arena. Ian has over 40 years’ industry experience, as he was effectively born into construction with his father having his own building company and Ian spending time working on sites from the age of 11!. As a result Ian has seen the industry from a trades person perspective, as a chartered quantity surveyor working on large commercial projects, as a project manager and then working on structured project finance through PFI/PPP deals. This has given Ian a unique whole life approach to any project by considering the end game at the beginning.
CONTACT METHOD
https://www.ianjrogers.com/

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