The basis upon which the private sector will be remunerated for services delivered is an integral component of the output specification. As a general guide, payment mechanisms should be structured that:
■ reinforce the behaviour expected of the private sector to achieve policy objectives;
■ involve significant performance-based incentives and penalties;
■ are commensurate with the expected quality of the service. Payment is made for results achieved, not tasks or processes completed; and
■ reflect the real risks the private sector carries to support the expected outcomes.
While standard commercial contracts usually provide for penalties in the event of a breach of contract, material breaches often have to be addressed through a lengthy judicial or arbitration process. The service mechanism must therefore be structured so as to minimize the potential for errors in interpretation and the possibility of protracted disputation.
The terms of the payment mechanism must be unequivocal, simple to apply in practice and linked to outcomes that can be objectively observed and measured. It is also important that payments are made for specified services of a specified quality and no more. The private sector should not receive any additional remuneration for the provision of discretionary services or services of a higher standard than specified. Incentive payments should be linked to a predetermined service objective and clearly specified in the service contract.
Incentive payments and penalties for substandard outcomes must be commensurate with the relative importance or priority of the service received. Penalties for critical service failures will be greater in monetary terms than for services of lessor importance.