2 - Outcomes-Based Contracts in the Uk Public Sector

Summary

Introduction

In the developed nations of the world, and in the UK in particular, the state increasingly has recourse to outcomes-based commissioning to address social needs (Albertson et al, 2018). The rationale of paying for specified outcomes is that it will supposedly reduce costs and increase the effectiveness of expenditure as it ‘will link payment to the outcomes achieved, rather than the inputs, outputs or processes of a service’ (Cabinet Office, 2011: 9).

The emphasis on outcomes arises, at least in part, from the consideration that the state faces the same social problems with which it has been wrestling for at least four decades: adults and families that experience multiple social, economic and health challenges, and further expected pressures of globalisation, ecological change, ageing populations, the digital revolution and the increasing precarity of employment.

A payment by results (PbR) contract contains three elements: a commissioner, a service provider and an outcomes metric designed, in theory, to align the incentive structures of the commissioner and the service delivery agency. However, for the PbR contractor, payment – at least in part – is made after outcomes are known; implicitly, after interventions are delivered. This delay is problematic for the service provider who needs working capital in order to fund the interventions in the first place.

A related policy innovation, Social Impact Bonds (SIBs), has been proposed to address this challenge (Mulgan et al, 2011) by facilitating access of PbR contractors to private finance. SIBs are not, strictly speaking, ‘bonds’ (that is, a debt security) in the financial sense of the term. An SIB does not represent public sector debt, it is rather a contract to pay financiers of social services dependent on the social value of such services.

Mulgan et al (2011) suggest SIBs will facilitate philanthropists or charitable trusts in raising funds from philanthropic sources. These will be invested in a special purpose ‘vehicle’ (organisation) which will sub-contract with non-governmental organisations to deliver services to achieve socially desired outcomes. Alternatively, they suggest an SIB may be initiated by a public sector organisation, for example, a local authority borrowing from existing commercial markets to deliver social innovation. The costs of delivery will be recouped from central government if the innovation achieves social savings.