Private Finance Initiatives (PFI) Performance Management

The routine use of Private Finance Initiatives (PFIs) to deliver new public infrastructure and improve the quality of service delivery is increasing internationally. As many hundreds of PFI projects enter the operational phase, it is becoming clear that most are working well and delivering significant benefits for public authorities and service users alike. It is equally clear that the value created by PFI projects is maximised when public-private relations are underpinned by a properly designed contract management framework, which outlines the service outputs that the authority requires, the methods for measuring and monitoring performance, and the regime under which the payment due to the private partner is determined.

For authorities, a PFI project can be regarded as successful if it delivers cost-effective, reliable services at the price and quality defined in the contract. Authorities will also expect service outcomes to be both auditable and transparent. Meeting these objectives requires effective interaction between the different components of the contract management regime. The authority’s requirements should be framed in terms of an output specification which the private partner must endeavor to meet through the delivery of construction and asset-related services (both “soft” and “hard” facilities management). The quality of service delivery is then measured and monitored through a PFI performance management system, which determines the correct payments from the authority. Where the quality of service delivery falls short of that outlined in the output specification, the payment mechanism determines the appropriate scale of the deduction.

The PFI performance management system allows public authorities to measure and monitor performance and/or quality of service delivered by the private partner against the standards set out in the output specification. PFI performance management deals with what is being measured (in terms of the authority’s requirements) and how it is to be measured. Normally, the object of measurement is a matrix of key performance indicators (KPIs), which are oriented around results rather than processes. The method of measurement is usually based on weighting, where each element of the service delivered is given a weighting based on the level of salience for the authority.

The PFI performance management system must also incorporate a performance monitoring regime which specifies who is doing the monitoring and when the monitoring will take place. In many cases, this will involve self-monitoring by the private partner, formal monitoring by the public authority, and user-reported failures via the helpdesk. The most important outcome is that the public sector knows that the arrangements are fully auditable and transparent, and the use of appropriate software is the best tool to achieve this.

A good PFI performance management system provides a strong incentive for the partner to understand, control and minimize availability and performance risks, enhancing value for money for the public sector client. But proportionality is essential. The payment mechanism must be structured to incentivise good performance but deductions must not be so high that they encourage excessive risk pricing by private partners, or affect the availability of finance. The benefits of a balanced payment mechanism will be maximised if the provider of the PFI performance management software is engaged during the preferred partner negotiations or even during the competitive bidding stage. Having an agreed, and objective, interpretation of the contract is key when dealing with complexities as they arise, and the PFI performance management software can avoid the problems of interpretation and communication – and the adversarial relationships that result.

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