10. We are satisfied that a clear strategy behind any particular contract management approach is essential to avoid unexpected outcomes and unnecessary erosion of goodwill and/or trust between the parties. We would recommend all Public Authorities and Government Departments to consider the following points before either implementing changes to contract management approaches, or commencing a dispute:
(a) Addressing poor performance with a strategic goal - to the extent that a Public Authority believes that its PFI Contractor is under performing, it is important for that Public Authority to understand what its rights and remedies may be with respect to that under performance, but it is just as important (if not more important) for the Public Authority to have a clear understanding of (i) what a "good" outcome would look like; and (ii) its strategy for achieving that outcome. In our view, a Public Authority should not assume that the "best" outcome will always be achieved if it expeditiously exercises its contractual rights and remedies. The better approach is for the Public Authority to finalise its strategy and then determine the extent to which its contractual rights and remedies can be used to help deliver that strategy. Further, if the Public Authority sees value in maintaining (or improving) the level of trust and/or goodwill between the parties for the remaining term of the PFI Contract, a good strategy would be put together with that in mind.
(b) Relational -v- Penal - when considering its strategy for achieving any outcome associated with the improvement of the performance of a PFI Contract, Public Authorities should consider the different routes that can be taken towards achieving that outcome and, in particular, the pros/cons of using the PFI Contract to penalise the PFI Contractor for its performance, as opposed to using the PFI Contract to incentivise the PFI Contractor to improve its performance. Although every situation should be judged on its merits, as a general rule we believe that taking the approach of using the PFI Contract to incentivise the PFI Contractor is the better one, particularly if the Public Authority aspires to moving the PFI project into the "Reinforce" quadrant of the Performance -v- Relationship graph shown in Figure 1 set out in paragraph 22 of Section 1 above. This judgement will also be informed by the culture and approach of the SPV Owners. A relational approach is, in our view, more likely to be successful where the SPV Owner has an "industrial owner" outlook (see paragraphs 10-14 of Section 2 above).
11. Based on the feedback that we received from both public and private sector consultees, we are satisfied that there has been historic under management of PFI Contracts by both the public and private sectors and that this collective under management has been to the detriment of the performance of some PFI projects. It is for this reason that we make the following recommendations with respect to the joint development of a "reset" approach by the public and private sectors:
(a) Encourage good behaviour by creating a "reset"environment - consultees appraised us of various attempts across the market to introduce the opportunity for parties to undertake (by way of third party technical surveys) audits of operational PFI Contracts, with a view to the PFI Contractor then having a reasonable period of time to remedy any issues highlighted by those surveys. Provided those issues are adequately addressed within a reasonable period of time, the Public Authority would provide some level of relief from any associated Deductions, much like in the same way that relief is typically granted in respect of Deductions associated planned preventative maintenance. We recommend that these approaches be further developed (and sponsored) by the IPA, Government Departments and SPV Owners, with a view to this approach becoming a cornerstone of the opportunity for the PFI market to "reset" itself. This recommendation is discussed in more detail in Section 5 of this report.
(b) Urgency needed in most stressed sectors - Government Departments in sectors where relationships are more adversarial, such as health, should consider a "reset" approach as a matter of urgency, provided the private sector is equally willing to embrace this approach.