Because the PFI is partly a contract for the provision of services, the special purpose vehicle (SPV) – the company set up to run the project – gets paid a fee for providing a functioning building. This basic fee is reduced if performance is bad. It is interesting to see what effect the adoption of this type of mechanism has. One thing it does is take the focus away from the capital cost of the building and move it on to the proper functioning of the building.
It is easy to see why. Take the example of a ward in a hospital. If the temperature in the area drops below the level required in the performance specification, the ward becomes unavailable and a penalty will be imposed, which can mean the SPV losing x amount of money a day. This penalty will probably increase quite steeply if the situation continues. Problems like this can be caused by something as simple as a failed valve in the heating system. The building therefore has to be designed with the right combination of back-up systems to minimise the risk of something going wrong. The result is a balanced decision-making process and a real focus on the whole-life performance of a building. The contract performance mechanism is direct, and it works.
Some of the more recent and complex public–private partnership contracts edge well away from the straightforward provision of buildings to the whole-life management of facilities in partnership with the client. This involves integrated delivery of a combined service by the SPV and the client. The aim of these contracts is to allow the SPV the freedom to make decisions on how best to meet its obligations for such things as carrying out catch-up backlog maintenance and future renewal works. The client is relieved of the responsibility for these issues and can focus on delivering its core service. However, the structure of the partnership basis of the PPP means that delivery, or otherwise, of the SPV's obligations closely affects the delivery of the client's service.
In these cases the contract typically includes both penalties and incentives. Normally the SPV is paid an underlying charge for the running and maintenance of the facility – usually on a monthly basis. On top of this basic payment sits the contract mechanisms that are designed both to encourage good performance and to penalise bad. These mechanisms are designed to create adjustments, either up or down, for results that on the face of it may be more to do with the client's service than the SPV's performance.
Performance factors measured can include:
The partnership basis of PPP means that delivery of the SPV’s obligations closely affects delivery of the client’s service
It is by no means clear that the incentivisation element will work in these circumstances, for several reasons:
Andrew Hemsley is managing director of consulting at Cyril Sweett and can be reached on 020-7242 9777 or at email@example.com.