Ensuring the financial sustainability of infrastructure and service projects implemented under Public–Private Partnerships (PPPs), effectively managing the government’s long-term obligations, and protecting the private partner’s investment interests require careful design of payment mechanisms and revenue regimes. Both mechanisms must be structured in accordance with the government’s fiscal policy requirements, service quality standards, and principles of economic efficiency.
Nature of Revenue Streams
Revenue streams define the primary economic framework through which a private partner earns income in a PPP project. This framework is determined based on the government’s regulatory policies for the service, the tariff structure, and the social-economic nature of the project.
1.1 User-Pay Model
Under this model, revenues are generated from fees paid by physical and legal entities using the service or infrastructure.
Typical sectors include:
- transportation infrastructure (toll roads, bridges),
- parking services,
- port and airport service fees,
- water supply and utility services.
In this model, demand risk primarily falls on the private partner. The government’s regulatory responsibility is to ensure that tariffs are socially justified and economically sustainable.
1.2 Government-Pay Model
In this model, the private partner’s revenues are provided by the government through payments contingent on the availability and quality of the service.
Typical applications include:
- education and healthcare infrastructure,
- social service facilities,
- laboratories and diagnostic centers,
- environmental and waste management complexes.
Here, demand risk remains with the government, facilitating project financing and reducing financial uncertainty for the private partner.
1.3 Hybrid Revenue Models
When demand risk is high, a combination of user payments and government payments can be applied.
Hybrid approaches include:
- minimum revenue guarantees,
- revenue cap and floor mechanisms,
- government subsidies and additional payments.
This model is considered effective for risk balancing and ensuring financial stability.
Payment Mechanism Structure
A payment mechanism is the technical and legal system that defines the conditions and principles under which payments are made to the private partner within a project. Proper design enables outcome-based service delivery, strengthens service quality monitoring, and allows for predictable long-term fiscal planning. The main components of a payment mechanism are:
2.1 Availability Payments
Availability payments are made to the private partner for maintaining the infrastructure in continuous operation at the contractually required standard.
Key features:
- payments decrease if the service is interrupted or any part of the infrastructure becomes unusable;
- quality and safety standards must be maintained;
- payments are predictable and stable.
2.2 Performance-Based Payments
Under this mechanism, payments are linked to the achievement of predefined performance outcomes.
Performance indicators may include:
- timely provision of technical services,
- network or facility service levels,
- response times,
- sanitation and safety standards.
Payments are proportionally reduced if standards are not met.
2.3 User Payment Mechanisms
Mechanisms based on user fees are commonly applied in transport, urban development, and utility services.
The government is responsible for:
- tariff indexation,
- protecting socially vulnerable groups,
- establishing the regulatory framework.
2.4 Hybrid Payment Mechanisms
Hybrid mechanisms involve combining different payment sources. This approach can optimize risk allocation and enhance fiscal management efficiency for the government.
Key Principles for the Government
When structuring payment mechanisms, the government should adhere to the following institutional principles:
- mechanisms must be simple and transparent;
- performance indicators must be measurable and precisely defined in contracts;
- fiscal obligations must be predictable and manageable;
- risks should be allocated according to the “party best able to manage” principle;
- social impacts must be considered and tariff policies balanced;
- legal and regulatory compliance must be ensured;
- financial attractiveness of the project must be maintained.