When the usage level of the asset is not relevant for the purpose of the public party (that is, it is not of itself a public objective), but it is still paramount that the asset be available for use by the final users, for instance health workers in a hospital, then payment should be based on the availability concept. These schemes are the most common payment regime in social infrastructure, while in some transport sub-sectors this practice is becoming increasingly common (toll free roads, rail, and water transportation).

The basic form of the payment mechanism is defined during appraisal, whether the project is a user-pays PPP that relies on significant service payments to complement the revenue, or the project is a pure government-pays PPP where the operational revenue is entirely in the form of public payments.

As introduced in chapter 4, when the private partner’s revenue is based on user-payments, there are a number of structuring parameters that should be carefully considered and outlined during appraisal. These should then be refined (and in exceptional cases reconsidered) in the Structuring Phase. See figure 5.6.

Some PPP projects are funded wholly or primarily through user payments. This is most common in economic infrastructure sectors. Financial structuring matters that arise in user-pays PPPs are discussed in section 4.8.

Other PPP projects are funded wholly or primarily through government payments. This is the case in most social infrastructure projects, but government payments also occur in many economic infrastructure projects. There are several reasons for this.

Apart from providing public funds to partially compensate for construction, or through public debt or equity instruments, there are other indirect means by which the government can increase commercial feasibility and/or reduce the budgetary burden of the PPP. These can also be considered, in broad terms, as public financial structuring techniques which have implications in the contract drafting. They have been introduced in chapter 1, but further examples are presented here;

The government may provide equity to the project company directly (participation from the procurement agency) or through a public infrastructure fund.

As explained in section 4.2, one reason for co-financing may be simply to fill the viability gap in a user-pays PPP, but there are other approaches.

A market-oriented or revenue maker project (based on user payments) may not be completely feasible on the basis of those commercial revenues (that is, the revenues net of O&M costs are not enough to amortize the funds invested).

PPPs are generally (in developed countries and EMDEs with a certain degree of financial market development) financed in the local currency[13].

National agencies (national development banks [NDBs] and other national financial institutions) may play a significant role in lending to projects, especially in countries with a lesser degree of financial development (that is, with a potential insufficiency of debt market mechanisms to finance the project).

Pure co-financing refers to public financing that is included in the mix of finance that is non-revolving, that is, it is acting in a conventional, public-financed project by means of direct payments for a certain proportion of Capex expenditure that the private partner is not required to pay back. It is also referred to as grant financing, as these funds are usually granted to the private partner and treated for legal and/or private accounting purposes as grants.

Privately financed infrastructure PPP contracts have long terms so that the government can obtain Value for Money (VfM) from life-cycle management and from effective risk transfer. There are other factors that can provide an incentive for the government to extend the term. However, at some point, increasing the contract term will not provide any additional or incremental VfM, or it may introduce more disadvantages than advantages.