It is almost inevitable that some performance dimensions are difficult to specify in a contract, or it is difficult to put an effective penalty/reward regime in place to incentivise it. In the case of shorter contracts, the periodic re-tendering of the contract incentivises the contractor to perform well even along dimensions that are not well specified. And if the contractor doesn't perform well, the contract can be transferred to someone else at the time of the re-tendering. This problem is clearly a function of the length of the contract term, ie, the longer the contract term the more severe this problem is.12
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12 A PPP that failed because of the problem of difficult to specify performance dimensions is the Latrobe Regional Hospital, - a PPP entered into by the Victorian state government and a private sector consortium, Australian Hospital Care Limited (AHCL). The Victorian Auditor-General noted in a report in June 2002 that: Although the contractual arrangements for the privatisation of the Latrobe Regional Hospital were successful in transferring financial risk to the private sector, the social responsibilities of the State meant that any threat to public health and safety or hospital service provision could not be allowed to occur. In this case, the State stepped in when it appeared that a risk to the provision of ongoing hospital services was increasing. The final outcome was that AHCL was able to avoid the full financial risk obligations embodied under the contractual arrangements ("Report on Public Sector Agencies", June 2002).