Public Service Contracts – Challenges and Opportunities

David HunterConsultant

• 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