The routine use of Private Finance Initiatives (PFIs) to deliver new public infrastructure and improve the quality of service delivery is increasing internationally. As many hundreds of PFI projects enter the operational phase, it is becoming clear that most are working well and delivering significant benefits for public authorities and service users alike. It is equally clear that the value created by PFI projects is maximised when public-private relations are underpinned by a properly designed PFI contract management framework, which outlines the service outputs that the authority requires, the methods for measuring and monitoring performance, and the regime under which the payment due to the private partner is determined. It is the PFI contract management framework that puts into effect the transfer of risk and responsibility between the authority and the private sector, creating the incentives for the latter to deliver facilities and services on time and to budget – and to deliver public services at the level of performance and quality that the client requires for the full length of the contractual period.
The economic characteristics and detailed design of the payment mechanism are central to the achievement of value for money. There are a number of points of detail involved in assigning numbers to the various parts of the payment mechanism – a process that is referred to as calibration. Getting the calibration of the payment mechanism right is critical to ensuring that facilities and services are delivered to contract and that the client can enforce them. A payment mechanism may appear robust or even rigid – but if the rectification times are overly permissive, or the services are poorly defined, then it will be difficult for the client to enforce the mechanism. The appropriate calibration of the payment mechanism is key to achieving value for money, risk transfer, workability and success of the commercial aspects of the project. Good calibration leads to a good operational public-private relationship and requires an experienced project team, supported by the right technology.
Calibration needs to be considered in the context of the services specification within the PFI contract management system. This defines the services to be provided, the priority attached to these services and the rectification time that is available to the private partner to resolve a service failure (in which the private partner should not incur deductions – so that, instead, these are only levied if a service failure is not addressed by the end of the rectification period). The services specification may include both temporary rectification periods and permanent rectification periods. In addition, the accommodation schedules and the weightings or priorities given to different areas must be considered. For the public authority client, a broken light in a class room or operating theatre is a more salient matter than the same problem in a store room. The PFI contract management system mechanism needs to apply a greater deduction for the former than for the latter to incentivise the provider to allocate resources intelligently.
For authorities, a PFI project can be regarded as successful if it delivers cost-effective, reliable services at the price and quality defined in the contract. Authorities will also expect service outcomes to be both auditable and transparent. Meeting these objectives requires effective interaction between the different components of the PFI contract management regime. The authority’s requirements should be framed in terms of an output specification which the private partner must endeavour to meet through the delivery of construction and asset-related services (both “soft” and “hard” facilities management). The quality of service delivery is then measured and monitored through the PFI contract management system, which determines the correct payments from the authority. Where the quality of service delivery falls short of that outlined in the output specification, the payment mechanism determines the appropriate scale of the deduction. It is essential that there is a good understanding among the various contractual parties of the relationship between the requirements in the output specification, the performance measurement system, and the method for making performance deductions as set out in the payment mechanism.