The public partner must not only monitor and disclose performance standards; it must also have the capacity to enforce the standards in reasonable ways. Appropriate penalties for poor performance should be spelled out in the contract and invoked when appropriate. NYCDOT's contract with Cemusa has a detailed schedule of liquidated damages that must be paid if Cemusa fails to meet installation or replacement schedules or maintenance standards. For example, Cemusa is subject to a $50 daily fee for every automatic public toilet it fails to clean and restock on a daily basis.
These penalties will only be effective if they are not too weak, too stringent or too complicated to implement. A 2006 U.K. study by Her Majesty's Treasury found that penalties were only somewhat effective in stimulating improved performance for these reasons. Of the 105 project managers surveyed, 50 percent found penalty mechanisms too complicated to implement. Of those that did apply penalties, 32 percent reported no change in performance by the private partner. Too often, the penalties were low in relation to the availability payment, and did not offer enough of a kick in the right direction. 92 At the same time, penalties that are too stringent risk not being invoked.
To find the appropriate balance, HMT recommended establishing penalty deductions for all key areas; limiting the performance measures that would trigger penalties; calibrating penalties so that the service provider would be incentivized to fix the problem; and creating a graduated or tiered penalty system so that major offenses trigger larger deductions than smaller ones. The report also recommended balancing penalties for poor performance with incentives for exceptional performance.93
One way to create a graduated penalty system is to assign points to each performance failure, with the number of points increasing according to the severity of the failure. More points should be amassed for failure to remove broken glass than failure to empty the garbage. This schedule of penalty points should be linked explicitly to performance measures and should translate into a specified financial impact.94 For example, each failure of the private operators of the London Underground to meet minimum standards for the ambience of individual stations and train fleets resulted in the allocation of service points. For each service point accrued, £50 penalty was levied against the availability payment made to the private operators every four weeks.95
Ultimately, if a PPP is not working as intended, the public partner must be able and willing to end the relationship. This may mean transferring responsibility to another private partner or having a public agency assume full responsibility. Two of the three PPP contracts for the London Tube, which failed for other reasons rather than weak reporting and penalty mechanisms, reverted back to the control of the public partner, Transport for London. The failure of the SR91 express lanes in California as a PPP led to a transfer of control from the private partner to a public authority. When traffic volume fell under projections on the Pocahontas Parkway and the association managing it was close to defaulting on its debt, the Virginia Department of Transportation intervened to negotiate a deal with a new private partner to assume the debt and manage the parkway.
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92 HM Treasury. "PFI: Strengthening long-term partnerships." March 2006. Available online at http://www.hm-treasury.gov.uk/media/7/F/bud06_pfi_618.pdf.
93 HM Treasury. "PFI: Strengthening long-term partnerships." March 2006. Available online at http://www.hm-treasury.gov.uk/media/7/F/bud06_pfi_618.pdf.
94 HM Treasury. "Standardisation of PFI Contracts: Version 4." March 2007.
95 Metronet Rail. "Metronet Rail: Performance Measures." Accessed 9 September 2008. Available online at http://www.metronetrail.com/default.asp?sID=1079542145940.