Basic Elements of a Payment Mechanism

There are a variety of elements that can be used in isolation or, as is more likely, in combination to provide payment mechanisms for a Public Private Partnership infrastructure project. In general, payment mechanisms are likely to include one or more of the following
basic elements:

• User charges-payments received by the Contractor directly from private users of the infrastructure or service (e.g. road tolls);
• Usage based payments- payments from the Contracting Authority to the contractor that vary according to how much the infrastructure or service is used;
• Availability based payments-payments from the Contracting Authority to the
• Contractor for making infrastructure or services available for use at an acceptable standard; and
• Performance based payments-payments from the Contracting Authority to the Contractor that vary according to the quality of service provided.

A well-structured payment mechanism should exhibit, as far as possible, the following features:

1. Simplicity;
2. Measurable project deliverables;
3. Strong and appropriate incentives for the private sector to perform;
4. Flexibility;
5. Bankability (the ability of the Contractor to finance the project given the risks allocated to them in the payment mechanism);
6. Affordable to the public sector; and
7. Accountability (the ability to resolve any disputes that may arise over the level of payments)

The three most common payment mechanisms are:

1. Toll concessions, in which the concessionaire receives compensation through obtaining the right to collect the tolls on a facility
2. Availability payment concessions, in which the concessionaire receives a periodic “availability” payment from the public partner based on the availability of a facility at the specified performance level.
3. Shadow toll concessions, in which the concessionaire receives a set payment called a shadow toll for each vehicle that uses the facility.