3.18 The contract defines the Department's required standards for each of the services. These are defined in terms of reliability, and maximum average times to restore services in the event of failures. BT are responsible for monitoring their own performance through an agreed procedure. The Department have direct access to BT's management information system and the performance data contained on this, and also meet BT regularly at working and senior management level to receive and discuss regular performance reports.
3.19 If BT fail to provide the levels of reliability of services due under the contract, they may incur service credits, which are a standard form of compensation in telecommunications contracts. Under the service credit regime, if BT's performance in a particular period has been poor, then a percentage of the payments, defined in the contract, which are made for that period is deducted from payments for the following period. BT become liable to pay credits in phases as services migrate to the new system, between September 1998 and July 2000.
3.20 The Department intend that the service credits should act as an incentive for BT to return a service to full performance as quickly as possible in the event of a failure. We have compared these compensation arrangements with other Private Finance Initiative contracts and our consultants compared the terms with those in a number of large contracts with national telecommunications operators, across a range of industries. While this was one of the first major Private Finance Initiative contracts let by the Department and Treasury guidance on the standardisation of privately financed contracts was not yet available, the Department's terms are not as stringent as in many of the other contracts which we and our consultants examined. In particular, we have the following concerns about the service credit regime in this contract:
■ The maximum level of service credits that BT can incur is capped at between twenty to fifty per cent, depending on the service involved. In other Private Finance Initiative projects deductions of up to 100 per cent can be made if a contractor's performance is sufficiently poor.
■ The levels of service failure allowed before service credits are incurred under the contract are higher than usual under a long term telecommunications contract so the regime is less stringent than industry norms.
■ BT's total liability to the Department in any one year, including service credits payable, is limited to £20 million (approximately 15-20 per cent of the annual contract price) with lower figures for individual telecommunication services.
■ The contract states that BT will not be liable for compensation for poor performance by third parties such as sub-contractors, unless BT have full and exclusive responsibility for the delivery of the service. Although the contract separately places responsibility for service delivery with BT, we consider that this condition could allow BT to try to avoid compensation, for example, if poor performance arises from a sub-contractor's decision to which BT were not a party, or if the Department influence the method of service delivery. We have concerns, however, about this point as much of the contract is being sub-contracted by BT. The Department accept that compensation would not be payable by BT if, in exceptional circumstances, they were to direct BT to use another service delivery method from that normally used by BT and that other service delivery subsequently failed to perform to contractual requirements. The Department say, however, that their interpretation, which BT agreed, was that BT would be liable to pay compensation for poor performance by their sub-contractors. This provision has not been tested yet during the contract period.
■ In addition, we have noted that not all services provided are subject to service credits, performance is to be monitored quarterly rather than monthly as is common on other contracts, and the same level of service credit is levied on any site regardless of its size.