2.17 As part of our survey, authorities were asked if they considered that their private sector contractors still had suitable long term incentives to deliver the contract satisfactorily after they had benefited from a refinancing. All of the project teams who responded on this issue felt that there were still sufficient incentives to perform. The main reasons given to support this view were that:
■ the contract specified penalties for under performance;
■ there were contractual incentives for good performance; and
■ there was the possibility of reputational damage to the contractor if they under-performed.
2.18 The risk that investors may be less concerned about performance after taking early benefits is balanced by the fact that their ability to realise the further benefits they expect to earn over the remainder of the project will continue to be dependent on the performance of the contractors. One would expect the investors, therefore, to be concerned about any decline in service performance and to seek to address delivery problems. In addition, there is an added comfort for the public sector in a refinancing from the funders' checking process known as due diligence. The lender will be concerned that the repayment of their debt, which may have increased on refinancing, is not put at risk. It will take care to assess the future profitability of the project and the likelihood of termination before agreeing to the proposals. An integral part of this assessment is an evaluation of how incentivised to perform the contractor would be following the refinancing. The Treasury has also observed that the financing structures of PFI project companies following a refinancing are normally in line with the structures of new PFI deals. It therefore expects the risks to service delivery following a refinancing to be no different than in new deals. It further considers that the PFI contract is what drives the PFI contractors' incentives and that the mix of finance is not a direct contributor to performance.
2.19 The need for good performance incentives following a refinancing reinforces the importance of a strong performance management system within PFI projects. A public sector authority considering a refinancing should review their performance management system and re-evaluate its effectiveness in a post-refinancing environment. Where necessary they should seek to strengthen the PMS although the private sector may demand a pricing adjustment if there is a significant change in the risks they are being asked to bear.