In an availability-payment structure the public entity pays the concessionaire for making an asset available to a defined standard, with deductions for unavailability and performance failures. Demand risk stays public. That single choice makes the structure appropriate for assets whose usage the private partner cannot influence — courthouses, schools, water treatment, most social infrastructure — and it shifts the entire analytical burden onto how the remaining risks are allocated.
The allocation principle and its limits
The standard rule is that risk should sit with the party best placed to manage it. This is right and incomplete. Three capacities matter, and a party may have one without the others:
- Control — can the party influence whether the risk materialises?
- Pricing — can the party assess the probability and cost well enough to price it without an excessive premium?
- Absorption — can the party survive the consequence if it materialises at severity?
A special purpose vehicle capitalised at a fraction of project cost may control a risk it cannot absorb. Allocating catastrophic risk to it produces contractual comfort and no economic transfer: at severity, the vehicle fails and the asset returns to the public entity in the middle of a crisis.
Risk-by-risk allocation
| Risk | Typical allocation | Where disputes arise |
|---|---|---|
| Design adequacy | Private | Where the entity prescribed design elements or approved deliverables |
| Construction cost and schedule | Private | Entity-caused delay; scope change; permitting outside partner control |
| Ground conditions | Shared, with a defined baseline | What the baseline covered and who bore investigation cost |
| Permitting and approvals | Split by which authority issues | Approvals from the contracting entity itself |
| Change in law | Shared; general law private, discriminatory law public | Whether a law is discriminatory in effect |
| Lifecycle and maintenance | Private | Handback condition definition and measurement |
| Utility and interface | Usually public | Coordination failures with third-party utilities |
| Force majeure | Shared, relief without compensation | Scope of qualifying events; insurance availability |
| Insurance unavailability | Public, typically | Whether the market genuinely withdrew or repriced |
| Demand | Public | Rarely disputed in this structure |
The payment mechanism carries the allocation
Allocation is implemented through deductions. A mechanism that is too blunt produces deductions for trivial failures and adversarial administration; one that is too lenient produces an asset that meets the letter of availability while degrading. Four design features determine which:
- Availability versus performance failures. Availability deductions apply when a defined area cannot be used for its purpose; performance deductions apply to service standards short of that. Conflating them produces disproportionate outcomes.
- Rectification periods. Time to remedy before deductions begin, graduated by severity. Without them, every minor fault becomes a financial event.
- Ratchets. Escalating deductions for repeated or persistent failures, which is what actually drives behaviour.
- Caps and termination triggers. A cumulative deduction level at which the entity may step in or terminate for default.
Handback is negotiated at the start and litigated at the end
Residual value provisions — the condition in which the asset must be returned, how it is measured, and what security stands behind the obligation — are commonly given the least attention during negotiation and produce the largest disputes twenty-five years later. A handback reserve funded during the final years of the concession, with an independent condition survey and a defined remedy for shortfalls, is worth more negotiating effort than it usually receives.
Retained public obligations
An availability structure does not eliminate the public role. The entity must administer the payment mechanism, verify deductions, manage change orders, monitor insurance and financial covenants, and maintain the capability to step in. That capability is a staffing commitment for the life of the concession, and it is frequently omitted from the affordability analysis. Entities that dissolve the project team at financial close typically discover within five years that nobody in the organisation understands the contract.
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