Public Service Contracts – Challenges and Opportunities David Hunter Consultant

New EU procurement directive Payment by results contracting Social impact bonds What we will cover

EU procurement directive – the background European Commission’s Europe 2020 Strategy –“to enable procurers to make better use of public procurement in support of common societal goals” EU Directive 2014/24 in force on 17 April UK seeking to implement this autumn (Fleeting) consultation imminent

EU procurement directive – different regimes Bye Bye Part B –“light touch regime for social and other services” –Higher threshold of EUR750,000 –An example of an issue where Member States have some discretion in implementation The Employee Mutual Exemption –For certain health, social and cultural services, procurers may limit the competition to organisations satisfying relevant conditions and award a contract for not more than 3 years Innovation Partnerships –A mechanism for a procurer to work collaboratively with one or more bidders to develop new products, services or works

EU procurement directive – simpler processes Financial standing: required minimum yearly turnover not to exceed 2x estimated contract value European Single Procurement Document: a self declaration and sufficient evidence (at least till selection of successful bidder) Division into lots: an option for the procurer, but if it does not do this, it must explain its decision Conditions for participation: can only be from an exhaustive list and only then if relevant

EU procurement directive – the specification Specific processes can be required if they are linked to the subject matter of the contract and are proportionate to its value and objectives Labels can be used as proof that the works, supplies or services achieve particular environmental, social or other characteristics (subject to conditions) Compliance with environmental, social and labour laws in the performance of public contracts has to be ensured by measures to be introduced by member states

EU procurement directive – award criteria MEAT –As defined, still allows scope for a contracting authority to select on price alone –This can be prohibited by member states, or limited to certain contracts Price – quality ratio –Another way to establish MEAT –Based on criteria, including qualitative, environmental and/or social aspects linked to the subject matter of the contract Life cycle costs –Form part of the price – quality assessment –Can cover costs borne by the contracting authority or other users –Can cover costs imputed to environmental externalities –Need to be objective, verifiable, accessible

EU procurement directive – contract performance Special conditions around economic, innovation-related, environmental, social or employment-related considerations linked to the subject matter of the contract Identification of subcontracted elements: member states may require procurers to ask tenderers to indicate any share of the contract to be subcontracted and to whom Direct payment of subcontractors: member states may provide direct payment of subcontractors by procurer is possible in relevant circumstances

So what difference will it make? Depends on how introduced to UK law Depends on how implemented by procurers Depends on how much trouble people are prepared to make if it is ignored But another positive step in the right direction

Payment by Results A seductive concept Lost in translation Creating unintended consequences

Payment by results – incompatible aspirations Two of the heralded benefits of PbR –it passes performance risk to the provider –it allows the space for innovation

Payment by results - risk Financial risks Delivery risks External risks Reputational risks Constitutional risks Commissioner risks

Payment by results - innovation Tends to arise where new challenges emerge Tends to arise where little to lose Tends to arise in unconstrained situations

Payment by results – characteristics (1) Payment mechanism –are targets realistic? –are volumes guaranteed? –are payments being made for what would happen anyway? –are the measures binary? –is it simple to implement? –are the right behaviours being encouraged? –who has created it? –are the timing of payments commercially feasible and financially desirable? –is it distorting the market?

Payment by results - characteristics (2) Measurement –a baseline has to be established –targets have to be identified and calibrated –have to be fair and realistic and incentivising –mechanisms have to be introduced to record the data –processes have to be introduced to assess the data –bureaucracy increases on all sides –has to be worth it

Payment by results – characteristics (3) Specifications and contracts –in theory, should be light touch, leaving provider free to deliver the outcomes however they choose –in practice, procurer often has statutory duties and responsibilities to the public which sit uncomfortably with the theory –requires more than using the same documents with a different payment clause –requires a new approach to commissioning and to contract management

How might commissioners use PbR more effectively? Start with asking what they are trying to achieve and why Then assess whether and how PbR will assist in that Involve service users pre procurement to help identify the desired outcomes Involve providers pre procurement to input into contract design Develop a coherent specification and contract Implement the contract flexibly, encouraging collaborative approaches

What can the not for profit sector do to engage more effectively with PbR? Don’t disengage with PbR as a matter of course Invest time in engaging with commissioners pre procurement Assess the ability of the commissioner to procure and manage a successful PbR contract Assess whether what the commissioner is asking for is consistent with your own mission Think creatively … maybe consider …

Social Impact Bonds – what are they? Projects with the following characteristics: –a commissioner looking to achieve significant social outcomes and financial savings at the same time –use of payment by results contracting –a civil society sector provider applying innovative interventions to deliver the desired outcomes –investors funding the work of the provider in the first instance and taking the risk of the interventions’ success, accepting a relatively modest financial return accompanied by a social one –robust metrics and data capture to evidence the impact –(often) the involvement of several commissioners

SIBs – why are they attracting so much interest? Address some of the problems with PbR –Risk Risk still not with commissioner, but passes now from provider to investor (to a large degree) –Innovation Greater scope for providers to explore genuinely new approaches to service delivery (part of the attraction to investors to a degree) –New way of commissioning and contracting Potentially introduces a more explorative and collaborative relationship between commissioner and provider that can be replicated –More systemic solutions Potentially introduces preventative service provision creating benefits beyond the life of the immediate contract and template for future service provision

SIBs – why are they attracting so much interest? (2) Potentially bring new money into the sector at a time of cuts Introduce additional rigour with investors’ due diligence of proposals and operations Build on the commonalities of interest between public service and public benefit organisations

SIBs – why aren’t there more of them? They are complicated They require a lot of preparatory work –to identify suitable outcomes; the means to measure them; the savings that could be delivered, other commissioners that could benefit –to be sure there are providers and investors with the ability and interest in delivering those outcomes –to develop a payment mechanism that works commercially and financially and operationally –to run a procurement process They take up time and resource and money and attention when all in short supply There are perceptions they are expensive

SIBs – what is being done to address this? Centre of Excellence Social Outcomes Fund Commissioning Better Outcomes Fund Providers taking initiative New models being developed