The operational period will usually only begin after certification has taken place and confirmed that the project meets the construction requirements set out in the contract. As noted previously, the operational scope of services may be different to the scope of the works.

(a)        Nature of service

In many PPP contracts the services are measured against an output specification, rather than an input specification. An output specification describes the outputs (end goals) that the government wishes to achieve (e.g. a facility with a certain number of available rooms with agreed environmental characteristics, and with equipment suitable to meet certain operational functions), whereas an input specification would specify in detail what services the concessionaire should provide (e.g. to provide a daily cleaning service or security service for a certain number of hours). An output specification allows more flexibility to the private sector to propose different solutions to meet the desired end-goals of the government.

The consequences of non-performance are discussed at section 4.4 “Payment Regimes” below.

(b)        Interface with users

If the government’s staff are the principal users of the facility (e.g. medical staff in a hospital, government employees in a government accommodation contract etc.) then the service specification will need to include provisions that deal with responsiveness to service requests. Many such projects operate a “help desk” system that logs calls and requires the concessionaire to attend to these within a certain timescale to avoid performance penalties.

Where the users include members of the public outside the direct control of the government, such as patients in a hospital, pupils in a school, or passengers on a metro system, the position may be more finely balanced. If damage is caused, for example, it may be reasonable for the concessionaire to manage this through insurance. If persistent damage is a risk (e.g. vandalism or graffiti where the facilities are by their nature open to trespassers), then this may need to be a shared risk if the risk cannot be financially predicated or managed out through innovative design solutions (such as vandalism-proof trains).

(c)        Transfer of employees

Some projects will involve a transfer of existing employees. In some countries there are mandatory laws about protection of employment when an “undertaking” is transferred from one entity to another. Even if such rules do not exist, the government may also wish to ensure – for public accountability purposes – that the transferring staff are treated appropriately when transferring to the private sector and do not find their public sector benefits eroded (public sector pension benefits being a common example). Conversely, the government may wish to ensure that a “two tier” workforce is not created, such that any benefits agreed with the remaining public sector staff for the same service are also honoured by the concessionaire after they are transferred to private sector employment.

It may be inevitable on a termination or expiry of the project that the same body of staff will re-transfer to the public sector. If so the government would seek to ensure that appropriate indemnities are put in place regarding outstanding claims or pension deficits that may transfer with the employees.

In a privatisation context, it may be that retrenchment (redundancy) of staff is an unfortunate necessity in order for the business to be economically viable. If so, this risk will need to be addressed explicitly in the contract to avoid disputes and reputational problems.

(d)        Benchmarking and market testing

If labour costs make up a high proportion of the operational cost of the project, and the project is structured on an availability-fee basis (such that costs cannot be recovered through increased user prices), it may not be cost effective to ask the concessionaire to price the risk of labour cost increases over the full concession period because labour costs can often be more volatile than general inflation.

The concept of benchmarking is a mechanism whereby labour prices are compared to the market periodically (e.g. every 5 years) so that the government can be assured that the price being paid for that service is in line with the market. If the parties cannot agree on the benchmarked price for the next period then the government may call for individual services to be market tested – i.e. put out to tender (but still engaged by the concessionaire or its operating sub-contractor). The mechanism acts as a convenient hedge for both private and public sector risks as the risks are reset every five years.

(e)        Handback requirements

At the end of the operational term, the concessionaire’s principal asset – the concession agreement – will cease to exist and the concessionaire will no longer have an income, and the shareholders will no doubt wish to wind it up as soon as they can and recover any residual money left in its accounts. As such, if the government wishes to specify any requirements for the condition of the assets on their handback at the end of the concession, such as a minimum residual value or life for certain assets, it cannot rely on the covenant of the concessionaire after the expiry date to meet these requirements.

Accordingly, the government must inspect the assets at some point before expiry (24 months is common, but periods up to 60 months or more are also seen) to assess whether any rectification work is necessary before the handback date. If so, then the government has the option of reserving funds otherwise due from the concessionaire and/or requiring it to put up some performance security against these liabilities. When the rectification works are complete, the funds or security are released back to the concessionaire.