Performance requirements may be considered a part of the broader concept of "technical requirements" or "technical specifications", which in general terms refers to the specifications in the contract for what is requested of the private partner in terms of quality and/or quantity. Performance requirements may also be named “output specifications”, and they may be referred to under the broader concept of “operation and maintenance requirements”. The technical requirements related to construction may also be named “construction requirements” or “technical prescriptions for construction”.
Previous chapters have explained how PPPs are service oriented, that is, the government is contracting for a result in terms of services provided (measured by availability mechanisms, or measured in terms of volume but with quality adjustments or direct penalties based on under-performance).
The government is not paying (or granting a right to charge a fee in user-pays PPPs) for the public asset, but for the ability of the government or the final users to use that asset under certain conditions or criteria described in the performance requirements.
The performance requirements may be understood as quality standards that the private partner has to meet. Performance requirements represent the bar to measure the performance, that is, they represent the benchmark for service measurement, usually defined through a description of the "target level of services", based on a performance indicators regime (KPIs).
When the requirements are based more on inputs (prescribing how to operate or the means to be used rather than on the results of the operation), it is inappropriate to talk about "performance requirements". Generally speaking, prescriptions of inputs or means should be avoided, as service requirements should be based on results or outputs as much as possible (so as to allow flexibility for innovation and efficiency from the private partner, and to transfer risk in terms of the inputs and means).
The performance requirements, and especially the target levels, should be “challenging but achievable” for a good or high standard operator. The government needs to be conscious of the risk of setting overly ambitious targets that may become unrealistic and unachievable, putting at risk the financial sustainability of the project contract and even its commercial acceptability. But the government should also be ambitious.
The requirements must also be measurable, so as to avoid conflicts when assessing the accomplishment of targets through the monitoring process.
Some authors describe the features to be met by the requirements and specifically the output specifications as SMART: specific, measurable, achievable, relevant, and time constrained.
The contract has to clearly set out how performance will be monitored. Many guides advocate monitoring systems using information provided by the private partner, based on the principle of cost-effectiveness. This is because the operator is closer to the information on performance and it should, in any event, develop and manage a quality management system (QMS) which by itself has to be a contractual requirement/obligation.
Under this approach, the procuring authority assesses and reviews the information recorded by the quality management system, rather than directly assessing quality. The procuring authority will also conduct spot checks and audits to ensure the information recorded by the quality management system is correct (the contract should give the public party these rights).
Performance information can also be obtained from other sources independent of the private partner (for example, through users in general, teachers or doctors in a social infrastructure PPP, and so on).
Performance requirements and the level of service prescribed are intrinsically linked to the payment mechanism in availability or quality-based mechanisms. The lack of performance will have consequences in terms of payment deductions. The payment is adjusted to reflect the level of service, depending on whether the asset is considered available or unavailable, as described in "payment mechanisms".
Another way to see it is that payment is earned on the basis of availability (a private partner meeting 99 percent of availability will earn 99 percent of the payment, which is the value of the service rendered), rather than thinking of deductions (that is, a payment is deemed to be 100 percent, but a penalty of 1 percent is imposed).
Performance requirements may also be a relevant factor in payment mechanisms linked to volume or use (for example, shadow tolls). However, in these projects, performance is more frequently incentivized through the application of explicit penalties or LDs imposed for the lack of performance.
In user-pays contracts, as in government-pays contracts where the revenue is linked to volume, there may also be output requirements (quality standards or criteria) that will result in direct penalties or LDs if not met. However, linking the output specifications to payment is less relevant and usually less specific in these contracts, as a lack of quality will often result in lower demand/volume with a consequent loss in revenue for the operator. This consideration should be carefully challenged depending on the circumstances of the project. For example, if a toll road PPP provides the only viable road connection between two points, traffic may have to use that route regardless of quality. In this case, the government may need to include more specific quality requirements in the contract, linked to direct penalties or LDs, than would be the case if there was an alternative route.
The immediate consequence of failure to reach the performance targets required by the contract is deductions (or penalties). Therefore, payment adjustments and penalties represent the first remedial tool for the procuring authority to manage and protect performance. See box 5.30.
However, there are other remedial actions and threats that the contract should recognize and regulate. These include direct audits, termination by default, and step-in (taking on some or all of the obligations of the private partner, which may include taking direct control of the project and potentially hiring a different operator. This is called “kidnapping” the contract in some countries such as in Spain and some Latin American countries).
The next section explains in more detail the concept of contract breach and the role of the penalty system. It also explains those other remedial tools in the hands of the procuring authority to protect performance and ensure compliance by the private partner
 Attracting Investors to African PPPs (PPIAF, World Bank and ICA) includes an interesting example of what constitutes SMART or non-SMART output specifications in an accommodation PPP. https://openknowledge.worldbank.org/bitstream/handle/10986/2588/461310re...