As the public sector continues to grow and evolve over the next 10 years, the opportunity for external providers to support the direction of government will grow. FM providers will increasingly adopt a greater role as co-creators since the demands of public sector organizations will further exceed their capacity to deliver in-house. We call this change: the great government transition. Involving FM providers and other private sector actors will help drive innovation, and thus help shape the future of the public sector. The challenge, however, is aligning the financial and strategic interests of multiple stakeholders.
Social Impact Bonds (SIBs)
There are already a number of public sector initiatives designed to reduce costs and improve service quality by involving the private sector in novel ways. For example, social impact bonds (SIB) are contracts in which private sector organizations pay for improved social outcomes that eliminate false economies and result in public sector savings, as illustrated below.
The SIB model is an innovative method of financing and developing public services. It aims to improve a social outcome through the collaboration of government, service providers and external investors. A SIB involves a series of contracts based on an agreement by government to pay investors for an improvement in a specific social outcome once it has been achieved.
Service providers address the social outcome by delivering an intervention to a group within a target community. The primary focus is on increasing spending on preventative services, and thus, SIBs act as a social futures contract. Unlike many existing public sector contracts, the measurement of social outcomes is a necessary component of a SIB. The roles of stakeholders involved are as follows:
- Government commissioners: SIBs ensure that payments are only made by the public sector if SIB-financed services improve outcomes for service users. Government transfers the financial risk associated with failures to improve outcomes to investors.
- Investors: SIBs offer trusts and foundations, commercial and institutional investors, high net worth individuals, and retail investors an opportunity to generate a blended social and financial return on investment. The social and financial returns are aligned since investors receive higher financial returns for greater improvements in social outcomes.
- Service providers: SIBs offer extra investment for service delivery. Providers are encouraged to innovate in order to maximize outcomes for their target populations. The focus is on collaboration and the social outcomes that service providers can generate together, rather than on the cost of services or outputs alone. Long-term contracts allow providers to employ full-time staff and gain the trust of service users.
- Intermediaries: SIBs create a new market for intermediaries across a range of functions in their development and execution. For example, they can conduct feasibility studies, perform due diligence, negotiate the deal, establish a special purpose vehicle (SPV), raise capital, and manage performance.
- Service users: Services are delivered to a cohort of service users for whom outcomes could be improved. Payments by government are made on the basis of improvement of outcomes for this group of individuals. Services are flexible, responding to individual need rather than prescribed processes or units of time.
Again, as FM shifts to outcome-based metrics that support social good and broader public sector initiatives, FM providers maintain a critical position to assume the role of investor and co-creator. FM providers as investors changes the dynamic of private-public relations in that this approach shares risk, manufactures incentive, and to some extent challenges the intricate ownership-control dimension of the public sector.
As such the challenges faced by the public sector towards 2020 requires having external FM providers play an active role as partners, developers, co-creators and educators.
This blog post is based on the ISS 2020 Vision: Future of Public Sector Outsourcing whitebook.