Performance Regimes

3.26  Also contained within the PFI contract is a payment mechanism and performance regime which outlines how service delivery levels against the public sector's desired outputs - supported hospital beds, pupil places or prison accommodation - is measured. The public sector undertakes to make a unitary charge payment, covering both the availability of the asset and the support services provided along with it. Deductions are then made from this unitary charge to penalise poor performance by the private sector or lack of availability. While Chapter 4 contains some preliminary indications of the operational performance of PFI projects in practice, it is not possible to assess PFI's operational performance as a whole at this early stage in the life of projects.

3.27  This process of setting performance measurement and penalty mechanisms in the PFI contract ensures that the private sector delivers the specific outputs the public sector intends to purchase. It also means the public sector only pays if those services are delivered. For example:

•  if an operating theatre in a PFI hospital were unavailable, a deduction would be made from the unitary charge paid to the private sector until that theatre was again in full working order;

•  if the pipes in a school burst, flooding it and causing damage to its fabric, the private sector would be responsible for fixing the pipes and returning the school to its proper condition, and in the meantime it would not be paid unitary charges for those parts of the school that were unavailable; or

•  if there is an electrical fault in an office's lighting, and the conditions in the office therefore fail to meet the project's output requirements, then the private sector - and in this case typically a specialised facilities management firm that was a part of the private sector consortium - would have a set time period to remedy the fault. If it failed to do so, it would incur a financial penalty until the fault was remedied.

3.28  Once public service requirements have been set, the contract goes out to tender and companies in the private sector compete to fulfil those requirements. In order to produce the most competitive bid, the private sector must:

•  build a consortium which is best qualified to meet the specified requirements. This would typically involve an experienced construction contractor forming a joint venture with a facilities management company capable of running and maintaining the asset and with other contractors best qualified to deliver other outputs to be specified in the contract. Increasingly, the consortium would also include specialised investors, who ensure appropriate sub-contract structures and perform a 'due diligence' role, evaluating the project's assumptions and exploring its risks; and

•  produce a bid which takes into account the whole-of-life cost of the asset, incorporates the proper level of repairs and maintenance, and reflects the cost of the services provided and the cost of third party finance. Competitive tension between bidding consortia helps ensure value for money, while consortia would also have no incentive to place artificially cheap bids. Such bids, which compromised on design or construction quality, or underestimated required maintenance, would seriously damage the profitability of the consortium and place its equity at risk because any failure to deliver in the future would mean unitary charge performance deductions. Equally, the third-party lenders to the consortium would eliminate any such optimism bias in the bids to ensure the safety of their investment.