A guidebook on public-private partnership in infrastructure

E. PRICING POLICY AND COMPENSATION TO THE PROJECT COMPANY 
A major responsibility of the government (or the regulator) is not to allow any 
excessive profit to the private sector in a PPP deal. Ideally, the price should be set at 
a level that allows a fair return on the investment to recover the cost of financing and 
to meet the contractual obligations.
An appropriate level of base tariff can be established by considering the cost 
of capital. Ideally, the Internal Rate of Return (IRR) of a project should be equal to its 
cost of capital. If IRR is greater than the cost of capital, the concessionaire/investor 
makes excess profit, and if IRR is less than the cost of capital, the 
concessionaire/investor loses money.
The established base tariff rates can be adjusted periodically (yearly, or every 
two years, etc) according to an agreed formula based on a weighted adjustment 
index that may take into consideration items such as:
• The total amount of outstanding debt to finance the project; 
• The rates of inflation in the host country and the overseas countries that 
provided equity and debt;
• The increase in cost of operation due to cost escalation by major 
components; and
• The local/(agreed) major international currencies exchange rate. 
The issue of subsidy may also be taken into consideration when the pricing 
structure of infrastructure services is established. A PPP does not mean that there 
would not be any element of subsidy in pricing. Even when government subsidy is 
not available, pricing may be based on cross-subsidization between two groups of 

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A Guidebook on Public-Private Partnership in Infrastructure 
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users of a facility or between two components of the same project, if possible. For 

example, cross-subsidization of domestic users by industrial and commercial users 
can be considered while the pricing structure of water from a water project is 
considered. The government may also consider providing price subsidy to a 
particular group in the society to achieve its broader social and political objectives. 
There are five main ways to compensate a private investor of a PPP project: 
• Direct charging of users 
• Indirect charging of (third party) beneficiaries 
• Cross-subsidization 
between project components
• Payment by the government (periodic fixed amount or according to use of 
the facility or service) 
• Grants and subsidies (discussed below) 
Direct charging of users by the private investor is most common for economic 
infrastructures, such as power, telecommunication, water, and transport, particularly 
for port, airport and railway projects. In case of road projects, however, 
compensation may be provided either through direct charging of users or payment 
by the government. Direct charging of road users may not always be possible 
because of social and political reasons. In such a situation, the government pays the 
operator on behalf of the road users. 
Systems for collecting payment from the indirect beneficiaries of many 
projects can constitute a major source of compensation. Such systems include a 
capital gains tax in the form of certain land-related taxes and fees imposed on the 
property owners and developers. However, in most countries, such payment 
systems either do not exist or have very limited applications. Some countries have 
used the land readjustment tool
27
for the financing of urban infrastructure projects. 
PPPs can be designed based on cross-subsidization between project 
components, when excess revenues generated from one component can be used to 
compensate the shortfall in another component in order to make the whole project 
commercially self-sustainable
28
. 
The government may make periodic payments of fixed amount or according to 
the use of the facility, product or service at a predetermined agreed price. This is a 
common feature of the PFI model and is commonly used for social infrastructures 
27.
Land readjustment is a comprehensive technique for urban area development that provides network 
infrastructure and other utility facilities and amenities in an integrated manner together with serviced building 
plots. This approach is also known as land pooling or reconstitution of plots. It may be undertaken by a group 
of landowners or by a public authority. In this method, all the parcels of land in an area are readjusted in a 
way that each land owner gives up an amount of land in proportion to the benefits received from the 
infrastructure which is determined on the basis of the size and location of each site. The provision of public 
facilities enhances the land value and a sound urban area is created. The land contributed by the 
landowners is used to provide community facilities and amenities and can also be sold or leased out to meet 
the project costs including those for the infrastructure. 
28.
The rail-property development model used in Hong, China is a good example of such an arrangement. In this 
model, part of the profit made from real estate development on lands at or close to station areas, and along 
the right-of-way of rail transit routes is used to partly finance the rail system. 

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A Guidebook on Public-Private Partnership in Infrastructure
 
 
such as schools, hospitals and other public buildings. However, this is also practiced 
for many economic infrastructures. Shadow tolling of roads is an example.