Implementation
The contracting authority can verify the performance of the concessionaire by: • • •
Verifying the concessionaire’s data / monitoring system Auditing the monitoring system Alternatively, an independent auditor can do an independent assessment
The contracting authority can enforce the contract by: • • • •
Adjusting payments (penalties, deductions) Imposing a financial penalty if the monitoring system is non-functioning Calling performance bonds Concessionaire default
3.3
Financial incentives
The contracting authority wants to ensure that the concessionaire performs its contractual duties. An appropriate payment mechanism can provide the right financial incentive for the private operator to fulfill or surpass the defined criteria, by aligning the interests of the concessionaire, the contracting agency, financiers and other stakeholders. In case of underperformance by the Special Purpose Vehicle (SPV)97, the “tickle, hurt, kill” principle is typically applied: • • •
A limited penalty should be imposed with the opportunity of the concessionaire to remedy the problem (tickle); If the problem or performance is not remedied adequately the penalties should be escalated (hurt); and If the concessionaire continues to fail to remedy and address the problem or performance failure, termination can be initiated.
At all times, this three-level enforcement structure needs to be accompanied by clear communication between all parties. Strong communication in line with established procedures is crucial to prevent small issues from escalating unnecessarily into big problems. Experience shows that escalating penalties upwards in the tickle-hurt-kill ladder can usually be avoided, through open and timely communication.
Textbox 6.3 below succinctly summarises the spirit of partnership that been at the heart of the successful Sangster International Airport PPP in Jamaica.
The SPV is a separate legal entity with no assets other than the project (cash flows). The SPV is financed by lenders (debt) and investors (equity). The SPV is the entity that enters into contractual arrangements with both the contracting authority on the one hand and the subcontractors, suppliers and customers on the other. Thus, all of the contracts are “pooled” within the SPV.
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