20.3.1 Some early Contracts used Terminal Payments at the end of the Contract (even where the Authority retained control of the Assets on Expiry) as a means of incentivising the Contractor to maintain high standards of Service throughout the Service Period. The argument here is that if there is a Terminal Payment related to the value of the Assets at the end of the Contract then the Contractor will ensure high Service standards are maintained to the end. This argument confuses the purpose of payments for Services and payments for Asset transfer, as service standards can still be low, even if the Assets are very well maintained. Terminal Payments are not therefore recommended (except for any residual value transfer arrangement - see Section 20.6 and see generally Section 19 (Land, Equipment and other Property Interests)).
20.3.2 The payment mechanism should be the main method by which the Contract incentivises the Contractor to maintain service standards at all stages of the Contract. If there will be a re-competition of the Service, this provides further incentive on the Contractor to continue to meet the Authority's requirements until the Expiry Date.
20.3.3 One means of incentivising the Contractor to maintain Service standards where there is no alternative use for the Assets would be to structure the Contract to give the Authority an option to enter a secondary Contract period with the initial Contractor.275 This will increase the incentive for the Contractor to maintain standards through to the Expiry Date, in addition to the payment mechanism incentives, without the need for a Terminal Payment. The Contractor is obliged to enter into a second term if the Authority decides to exercise its option, but such decision will be taken in the context of an open competition with other bidders. One drawback of this is that the prices for such a second term (if it is added to the typical term for a PFI contract) are very difficult to bid in advance. The likelihood is that at best only a mechanism for calculating the price for the second period can be set out and such mechanism is of questionable value. The Authority may, of course, instead opt to contract with another contractor if this offers better value for money. If this happens, the new contractor will have to bid to take over the use of the Assets.
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275 See also Section 2.2.1.