A 25-year PPP commits a government to six things simultaneously: a payment obligation that behaves like long-term debt, a fixed risk allocation, a service definition frozen at close, a constrained right to change what it buys, a termination liability that is often the largest single number in the contract, and a reporting obligation that determines whether any of this is visible in the public accounts.
All six are negotiated in the months before financial close. Every government that follows inherits them, generally without the ability to reopen them at acceptable cost.
What you will learn
- Why a PPP converts capital cost into a payment obligation the state cannot avoid without paying to exit.
- The six commitments fixed at financial close, and which of them decide long-run cost.
- What to settle before close: indexation, change pricing, termination compensation and refinancing gain-share.
Written by the G2G Deal Design practicepowerabode DMCC's neutral buy-side practice for government-to-government procurement. We hold no position in the transactions we advise on — no cargo, no supplier, no equity. People, standards and certifications.
The commitment is fiscal, not only contractual
A PPP is often presented as a way of delivering infrastructure without capital expenditure. The capital cost does not disappear; it converts into a stream of contractual payments running for the concession term, secured against the state's covenant and priced accordingly by lenders.
The distinction that matters for a finance ministry is between a commitment that appears in the accounts and one that does not. Accounting treatment varies by framework and by structure, but the economic reality is stable: an availability-based PPP creates an obligation the government cannot avoid without paying to exit. Whether it is classified as debt affects headline ratios; it does not affect what has to be paid.
The six commitments
1. The payment obligation
Availability payments, shadow tariffs, minimum revenue guarantees or offtake commitments — whichever form is used, the government has agreed to pay for a defined service across the term. The indexation basis matters enormously: a payment escalating with a general price index behaves very differently over twenty-five years from one linked to a sector-specific cost measure, and the divergence compounds.
2. The risk allocation
Risk allocation is priced. Every risk transferred to the private party appears in the cost of capital and therefore in the payment stream. Risks the government retains — demand, certain change-in-law categories, force majeure exposure, interface risk with adjacent public assets — do not disappear either; they simply sit unpriced on the public balance sheet until they crystallise. The allocation agreed at close is effectively permanent, because reopening it means reopening the financing.
3. The service definition
The output specification defines what the government is buying, and the payment mechanism defines what happens when it does not get it. These two documents together determine whether the contract delivers. A specification written for the technology, demand pattern and policy environment of the year of close will be applied in circumstances nobody modelled — and the payment mechanism will apply it literally.
4. The right to change
Change provisions determine what it costs the government to want something different. Weak change mechanics — no benchmarking of variation pricing, no market-testing of soft services, no cap on the private party's margin on changes — convert every future policy adjustment into a bilateral negotiation with a counterparty that has no competitive pressure. This is where long-tenor concessions most commonly become expensive, and it attracts far less negotiating attention than headline price.
5. The termination liability
Termination compensation is frequently the largest number in the agreement, and the least examined. The structure differs by termination cause — authority default, contractor default, force majeure, voluntary termination — and the differences are material. A voluntary termination clause that compensates lost future equity return sets a price on policy reversal that a future government may find prohibitive. It is worth calculating the number at close, for each cause, and recording it.
6. The reporting obligation
What the government has committed to is only governable if it is visible. That requires the contingent liabilities to be recorded, the payment profile disclosed, and the performance data reported in a form the finance ministry can aggregate across a portfolio. Where this is absent, fiscal exposure accumulates project by project without anyone holding the total.
Refinancing and upside
Concessions are commonly refinanced once construction risk has passed and the asset is performing. Refinancing can generate substantial gains, and whether the public sector shares in them depends entirely on a gain-share provision negotiated before anyone knows the numbers. Points that determine whether the provision has value:
- Which refinancings are caught, and which are carved out as "exempt".
- How the gain is calculated, and whether the authority can verify it.
- The share percentage, and whether it varies by refinancing type.
- Whether the authority can require its share as a payment or only as a reduction in future charges.
What to fix before financial close
The negotiating window is narrow and closes permanently. In practice, the provisions worth the most attention are the ones whose effects are furthest away:
- Indexation basis — tested against a long series, not the current rate.
- Change and variation pricing — benchmarked or market-tested, with a margin cap.
- Operating cost benchmarking — periodic, with a defined method rather than agreement to agree.
- Termination compensation — calculated for each cause and recorded.
- Refinancing gain-share — scope, calculation and verification rights.
- Step-in and handback — condition standards, survey mechanics and the reserve that funds them.
- Reporting — data the authority receives by right, in a form it can use.
A discipline worth adopting. Before close, write the note that a public accounts committee would want to read in year twelve: what was committed, what it costs, what can change and at what price, and what exit would cost. If that note cannot be written clearly from the contract, the contract is not yet finished.
Key takeaways
- A PPP converts capital cost into a contractual payment stream; the obligation does not disappear with the accounting treatment.
- Risk transferred is risk priced; risk retained sits unpriced on the public balance sheet until it crystallises.
- Change provisions decide what future policy adjustments cost — the most common source of long-run expense.
- Termination compensation is often the largest number in the contract and the least examined.
- Write the year-twelve accountability note before close; if it cannot be written, the contract is not finished.