4.7 Categories of Revenue Regimes in PPP Projects

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.

• For some forms of economic infrastructure (such as rail transport or water), a PPP project may be just one component of a broader network or service that is operated by another entity (the incumbent operator) and the user is paying that operator for the final service (transportation, water supply to homes). Examples are HSR projects in Europe (mainly in France and Spain), or WWTP and purification plants where the water is taken off by a public water authority that operates the service;
• For other projects, where it would be possible to charge the user for the use of the infrastructure contracted under the PPP (for example, a road), it may be decided that no charge will be applied (that is, it would be a toll free highway). That is a public finance decision as to whether the project should be funded through user charges to the specific users or through utilizing tax revenues to make government payments (the tax revenues could be derived from usage-related taxes, such as a fuel tax, or from general tax revenues). Examples are found worldwide, including in Canada, Hungary, Mexico, Spain, and so on);
• There are projects in which charges to users will be applied (for example, a light rail transit system) and collected by the private partner. But if those user charges are insufficient to meet the private partner’s costs and provide a return on its investment (that is, the project is not commercially feasible and there will be a viability gap), the government can assign the user payments to the private partner and supplement the user charges with government payments to fill the viability gap (see section 4.4.);
• Finally, there may be user charges, but the PPP is structured so that the private partner’s revenue consists entirely of government payments. The government retains the user revenues in public hands (so as to offset part or all of the payment to the private partner and retain the risk and reward of the toll collection). An example of this approach is the I-595 road project in Florida[16] (US), the Port of Miami Tunnel[17] project, and the newly-renegotiated road PPPs (the former SCUTs) in Portugal; and
• The choice between these options relates to risk and VfM considerations, and is made in the Appraisal Phase.

In all these cases where there are government payments, the contract will have to provide a payment regime (the payment mechanism) which is usually based on volume or usage, or on availability and/or quality. These concepts and the most relevant structuring matters are explained in subsequent headings (4.9 and 4.10).