This risk refers to the risk (especially from the public perspective) of the infrastructure not being available to use and/or not meeting the quality or expected performance levels. This risk is borne by the private partner as it is the essence of the PPP objectives. The mechanism to transfer the risk is the payment mechanism (in government-pays) which allows for reductions in the payments to the extent that the private partner is failing to meet the requirements, including the ability to step in or ultimately terminate by default (see sections 8.2 and 8.3). In user-pays, the risk is transferred by means of explicit penalties (or Liquidated Damages (LDs)).
From the private partner’s perspective, this is therefore a revenue risk which is reallocated to one or several contractors (passing risk and reward through the contractual structure – see appendix 6A).
From a public perspective, there is no revenue/payment risk as the payment mechanism is built to be paid as long as the service requirements are met. Payments will be accordingly reduced when the service requirements are not met in order to keep the Value for Money equation duly balanced.
However, the public partner should also be concerned by the risk of revenues being affected by unavailability or service breaches. This is not only because the objective is to prevent this occurring, but also as large deductions from payments may drive the private partner to insolvency and finally to bankruptcy.
The government should not explicitly mitigate the risk of lower payments due to lack of performance, but it should be cautious to set up realistic and achievable (while challenging) performance criteria (see section 8.2 and 4.10).
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