A guidebook on public-private partnership in infrastructure

H. REGULATORY ARRANGEMENTS 
There is a need to regulate a service provider to ensure that services provided 
reflect the adequate level and meet the desired standard or quality. Several risks are 
involved in the absence of a regulatory system. The main risks are: 
• Excessive 
tariff 
• Inadequate service level and quality 
• Non-compliance of contractual obligations to users, government or other 
parties 
• Low efficiency in production and in the provision of goods and services 
• Inadequate level of investment in the sector, and 
• Frequent discontent between the parties involved. 
In order to eliminate or minimise these risks, an appropriate regulatory system 
needs to be in place and should be considered at the planning stage of a project. 
The powers to regulate are provided in the relevant legal instruments, 
statutory rules, concession/contract agreements, and other applicable documents.
The structure of the regulatory authority varies from one country to another 
and may also vary by sector within a country. There can also be various institutional 
arrangements with respect to regulatory authorities that may include: the concerned 
ministry, a special cell within the ministry, regulation by contract, and an independent 
regulator with discretionary powers.
Often, PPPs rely mainly on regulation by contract, particularly in the early 
years of PPP development. This is also a common form of regulatory arrangement in 
the roads sector. In such a case, a contract administrator monitors compliance with 
the contract agreement. Investors may often prefer such arrangements because of 
low discretionary powers on the part of the regulator. However, the major 
disadvantage of regulation by contract is that such contracts may be difficult to adjust 
or renegotiate, if such a necessity arises.
I. SERVICE AND OUTPUT SPECIFICATIONS 
The focus of a PPP project is usually on delivering specified amount of 
services at defined levels and not on delivering a particular class/type of assets. For 
many projects, however, the assets created will have to be transferred back to the 
government and the assets may have very long life. As such, they should be usable 
29.
For more details on contingent liabilities on government, see Polackova, Hana (undated). Government 
Contingent Liabilities: A Hidden Risk to Fiscal Stability, World Bank, available at: 
http://www.worldbank.org/html/dec/Publications/Workpapers/WPS1900series/wps1989/wps1989.pdf 
The recent bailouts of financial institutions and other interventions by many governments to pacify the 
financial sector may be an extreme case but clearly shows the extent of contingent liabilities on governments 
in the event of any major credit defaults.

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A Guidebook on Public-Private Partnership in Infrastructure 
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in delivering the required amount of service much beyond the contract tenure of the 
project. The new assets may also require compatibility with the existing ones. In 
such cases, the class/type of assets may also be specified. In all cases, the 
preparation of details of the service/performance requirements of a project is very 
important. 
Once the service that the implementing agency wants to provide through the 
project is specified, the outputs required to deliver that service have to be 
determined. The project has to produce those outputs in order to deliver the 
specified service.
There may be four types of output specifications: 
• The main outputs required to deliver the specified service; 
• Ancillary outputs that are not directly related to the main service (for 
example, a park-and-ride facility with an urban rail project or a community 
building facility with a power project); 
• Input specifications; and
• Conditions of assets at the time of handover of the project to the 
government (if applicable). 
As an example, the broad service specification for an urban transport project 
may read: to meet the travel needs of at least 50 percent passengers in a corridor by 
a fast and efficient mass transit system. The corresponding main output 
specifications may read: the design, construction, commissioning and operation of 
an elevated mass transit system that follows the universal design concept to provide 
access to all groups of users; has a capacity to carry 50,000 
passengers/hour/direction at an average travel speed of 30km/hour; and is available 
for 16 hours everyday. 
Further details on the quality aspect of each service delivery element will then 
have to be worked out. A common approach to specifying the quality of service 
outputs is to develop a matrix of key performance indicators which set the 
requirements for each service output. For the above project, performance indicators 
can be developed related to universal design of access to facilities, level of on-board 
loading (say, at least 40 percent passengers seated and not more than 6 
standees/sq m), average waiting time at platform, average waiting time in queue to 
buy ticket, total ingress/egress times, ambient conditions in the vehicles, transfer 
arrangements to other service operators, fare collection system, etc.
Since the payment/penalty regimes of a PPP project are normally linked to 
service availability and its quality, the performance indicators have to be very 
detailed. There is, however, a problem associated with too many details. The more 
detailed the specification is, the closer it becomes to an input rather than an output.
Mention of any particular choice of technology may be avoided as far as 
possible as this may inhibit the private party to choose the most efficient technology 
and innovation in design. For example, rather than mentioning any particular 

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A Guidebook on Public-Private Partnership in Infrastructure
 
 
technology in fare collection/payment, mention may be made of an electronic fare 
collection system that does not require fare payment for every single trip separately.