Public Service Contracts – Challenges and Opportunities

1. Public Service Contracts – Challenges and Opportunities David Hunter Consultant

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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

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

11. 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

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

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

14. 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?

15. 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

16. 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

17. 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

18. 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 …

19. 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

20. 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

21. 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

22. 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

23. 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