3.31 Some PFI contracts may have the option to set up a retention fund in the final years of the contract. This fund allows the authority to segregate a portion of the unitary charge for rectification work identified in the asset condition survey. The authority can use this fund if rectification work is not completed according to the contract. Any remaining balance will be paid out to the SPV. This can create an incentive for the SPV to limit expenditure on maintenance and rectification work so that higher returns can be paid out to shareholders. This incentive is increased if the cost of completing any rectification work is greater than any performance penalty for not doing this work. If the retention fund is not large enough to cover the rectification work, the authority will need to recover the balance from the SPV as a debt. Of the 28 contracts in our survey that contain a retention fund, 10 respondents do not expect it to be large enough.56
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56 Question 12b: Was or does the authority expect the size of the retention fund to be large enough to cover expected rectification work? Number of responses: Yes - 11, No - 10, Don't know - 7, from a survey response of 28 (as only 28 replied yes to Question 12 - footnote 55).