5.20 Public authorities need to ensure that they get the quality of assets and services that they specify. They will also want to have incentives to improve performance and efficiency over time. PFI contracts include a performance management system where the contractors report their own performance against a set of performance indicators specified in the contract. These provide incentives to the contractor to perform to the specified standard by charging penalties for missed performance targets.
5.21 Such performance management systems help to define and monitor the required performance. But they are difficult to get right, needing to be both well calibrated and managed. Whether services meet an operating specification can involve subjective judgements, such as the meaning of "clean" in a hospital89 or the acceptable level of incidents of self harm in a prison.90 The systems do not work properly where staff may not report faults. In other situations performance indicators may be misleading or lack objectivity.91 VFM is at risk if performance monitoring is not managed well.
5.22 We normally find very few penalties applied to payments to contractors. One reason for few penalties is that public clients do not always enforce the contract. Sometimes penalties are offset for other services rendered or suspended as part of a plan to work together to improve performance.92 Sometimes public clients fear that applying penalties will harm their relationship with the contractors and cause further performance degradation.
5.23 The Committee of Public Account shas made clear its view that penalties should always be applied, except under exceptional circumstances.93 We believe that public authorities should only waive a penalty where this achieves a higher benefit than the penalty, and after consideration of any moral hazard.
5.24 The main reason for few penalties, however, is likely to be that most project managers report satisfaction with operational performance. A survey conducted on behalf of Partnerships UK in 2008 on the performance of operational PFI contracts found that 94% of the 151 contract managers surveyed felt that the contract service levers were always or almost always achieved. Ninety two per cent found that user satisfaction assessments indicated that services were being delivered to a satisfactory standard.94 High levels of satisfaction are also normally reflected in our reports and surveys of users. There may be a risk of bias in project managers self-reporting their satisfaction level. Their views, however, remain an important barometer of performance.
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89 Darent Valley hospital: the PFI contract in action, National Audit Office (HC 209, 2004-05).
90 The operational performance of PFI Prisons, National Audit Office (HC 700, 2002-03).
91 Allocation and management of risk in MoD PFI projects, National Audit Office (HC 343, 2007-08); Darent Valley hospital: the PFI contract in action, National Audit Office (HC 209,2004-05).
92 The operational performance of PFI prisons, National Audit Office (HC 700, 2002-03); The joint services command and staff college, National Audit Office (HC 537, 2001-02).
93 Benchmarking and market testing the ongoing services component of PFI projects, PAC (HC 754, 2006-07).
94 Investigating the performance of operational PFI contracts: a research study conducted for Partnerships UK on behalf of HM Treasury, Ipsos MORI (2008).