In Section 7.2 of "Standardisation of PFI Contracts Version 4" (SoPC4) there are a number of core principles which should apply to the Payment Mechanism. In this guidance these have been applied as follows:
• The Authority should pay only once the facilities are able to process waste;
• The Authority should make payments to the Contractor proportional to the level of service being provided;
• Deductions should reflect the severity of failure;
• If the Contractor incurs additional cost (e.g. unbudgeted landfill costs) as a consequence of the Contractor's failure to meet the Performance Standards as set out in the Output Specification giving rise to the need to provide an alternative service, then the Payment Mechanism should not allow the Contractor to pass these costs onto the Authority;
• If the Authority incurs additional costs as a consequence of the Contractor's failure to meet the Performance Standards as set out in the Output Specification, then the Contractor should compensate the Authority for those additional costs. In the waste sector, there are a number of specific factors which need to be considered in this context which are considered in more detail below;
• There should be an incentive for the Contractor to exceed the Performance Standards if this leads to cost savings, net revenue generation or other desirable outcomes for the Authority. In the context of the waste sector this could mean for example, financial incentives for achieving higher recycling rates or a gain share for exceeding contractual diversion targets;
• Performance Standards should be objective, transparent and easy to measure; and
• The deduction per period should increase over time for certain prolonged and/or persistent failures to meet a Performance Standard.