A win-win for PPPs

A consortium making its bid for an availability payment contract will take into account the entire costs of the project, including construction and long-term maintenance. In order to reduce future total costs, the consortium is more likely to construct the asset using better materials, which require less maintenance.

In a normal construction contract procurement, construction companies aim for the lowest price given the technical requirements. This may leave the public authority with higher long-term maintenance costs. Studies have confirmed that the availability payment P3-DBFM-approach can lead to a 10%-20% life cycle costs savings.

Additionally, the availability fee is only paid to the SPC if the asset is available. If the asset cannot be used due to malfunctioning, delays in construction or long maintenance periods, the SPC’s availability payments will be reduced. This creates a financial incentive for the SPC to ensure maximum availability of the asset and to monitor construction progress meticulously, leading to a greater chance of on-time delivery.

In DBFM contracts, risk allocation is structured along the principle that each risk is allocated to the party that can best control it, which typically reduces the required contingencies and prevents overpricing.

And as availability fees are defined before the start of construction, there is usually no compensation for construction cost overruns or higher-than-expected maintenance costs (unless the public authority changes the specifications of the project). As a consequence, the risk for construction cost overrun or maintenance cost overrun is transferred from the public side to the private side.

In the procurement documents, the technical specifications are usually defined toward output instead of input. This creates more freedom for the private party to design the asset, which results in a high degree of flexibility for the private partner to utilize innovative solutions.