Contracting for Social Impact

May 19, 2017 | By Jessica A. Gover

The implications of the Trump administration’s call for $1 trillion in infrastructure investment are profound. While the policy details of this infrastructure plan remain undeclared, there is one thing that we can all hold to be true for the years ahead: public sector resources for public works are going to be scarce. The President’s FY18 budget will bring significant cuts to public funding and poses immense challenges for the delivery of social services and meeting the needs of Americans.

The changing fiscal environment will put new public-private partnership (PPP or P3s) models to the test. Today, governments around the world are demonstrating the value of PPPs that link resources across sectors and offer exciting opportunities to do more with less, and perhaps better than ever before. The US government expects to leverage private dollars for the $1 trillion investment, but critics see limited incentives for private industry to prioritize non-urban infrastructure and question the role and value of utilizing PPPs.

Resolving these questions is key to achieving social outcomes in this country. In our recent report, The Architecture of Innovation, we argue that “improving services and creating a more effective government requires recognition that government cannot do it alone.” Across all levels of government new partnership models that not only bridge the public, private, and nonprofit sectors but also re-engage citizens in policymaking can help reinvigorate social service governance. But governments need to do more than just link cross-sector resources: they need to use smart, effective models that connect private capital to public sector priorities.

Funding for Results

New and innovative financing approaches like outcomes-focused public-private partnerships, pay for success, and other innovative financing models have introduced transformative models that can infuse public services with private sector capital (both financial and human) while simultaneously holding private actors accountable to social impact goals.

Overcoming tight government budgets and limited resources to address social problems is not new; advances in innovative financing such as results-based contracting, PPPs, and advanced market commitments have developed as possible solutions. Traditionally, government procurement for social service delivery has been based on volume of services rendered and short-term outputs, but new models like pay for success contracts focus on procurement based on outcomes rather than outputs.

With these types of models, it is not always about supplementing public sector funding shortages — sometimes they offer a way to introduce new methods, skills, and techniques to public sector procurement and service delivery. Governments across the world, most notably in Canada, the United Kingdom, India, and Australia, have leveraged public-private partnerships to deliver key infrastructure and other public service needs, but New Zealand is forging the way for robust social investment practices by building outcomes into their PPP contracts.

Cross-Sector Procurement: Spotlight on New Zealand

New Zealand’s government is rethinking procurement for infrastructure. Under the leadership of the former Minister of Finance (now the Prime Minister), Bill English, the Treasury is testing outcomes-based contracts to engage the private sector and provide improved social services to New Zealanders.

Building upon the legacy of new public management and a ‘managing for outcomes’ policy, in 2004, the Treasury released a working paper announcing a shift in funding practices, a shift towards funding for results. Today, procurement methods that engage cross-sector actors are being tested across the New Zealand government. By focusing on expanded PPPs (including the establishment of a PPP Programme within the Treasury), private sector resources are being integrated into public service projects at the Department of Corrections, the Transport Agency, and other ministries to create pipelines for social sector innovation.

Former Transport Agency Chief Executive Geoff Dangerfield stated, “Using a PPP for key infrastructure projects will open the door for private sector innovations that are not always achievable under traditional public sector procurement methods.” While PPPs can be a bit of a catch-all term, New Zealand has innovated what would otherwise be a typical approach to PPPs by incorporating outcomes-contracting through complex performance regimes that are designed to hold private sector and non-governmental entities to social impact results.

The first major outcomes-focused PPP project in New Zealand was for a new prison. Auckland South Corrections Facility (ASCF) at Wiri is designed, financed, built, operated, and maintained by a consortium, Secure Future, that was awarded a 25-year contract by the New Zealand government. Unlike models in the US and elsewhere, this new, privately managed facility is financed by a payment-by-results model where the Secure Future consortium will operate and manage the facility around the shared goals of reducing recidivism, improving inmate safety, and delivering better outcomes for Māori — the indigenous people of New Zealand and the country’s overwhelming majority population in prison.

New Zealand is not alone in its pursuit of reducing recidivism rates through innovative financing and contracting: In 2010, the United Kingdom introduced the world’s first social impact bond at Her Majesty’s Prison Peterborough to reduce prisoner recidivism; the US followed in 2012 with its first social impact bond to reduce recidivism rates among young offenders at New York City’s Rikers Island. But, unlike the UK and US models that sought to reduce recidivism through interventions implemented in the prisons and upon release from jail, New Zealand’s approach seeks to lower recidivism by re-thinking prisons as facilities that are designed and managed to enable and support prisoner rehabilitation and to contribute to community safety. While the recidivism rates are not officially in, early indications suggest that ASCF is performing well.

Given the highly contentious role of the private sector in the US prison industry, it is critical to say here that simply ‘privatizing’ is not the goal, nor is it what makes ASCF such a compelling example of applying a new model of PPPs to infrastructure. Rather, it is the use of a robust outcomes regime that simultaneously motivates improved social impact while also incenting capital investment. The outcomes-focused performance regime developed in New Zealand for the facility at Wiri provides a powerful and instructive demonstration of how cross-sector resources can be linked together to deliver services with unprecedented efficacy. (In future posts, I will explore what the p’s of a PPP really mean, so stay tuned.)

Another project currently in development in New Zealand is the PPP construction of Transmission Gully, a motorway outside of Wellington. The PPP operator is penalized for any fatalities on the roadway. By putting the safety of travelers first and foremost, this PPP is testing the bounds of typical risk sharing.

What’s next?

From safer motorways to more effective prisons, New Zealand is transforming its approach to paying for infrastructure and improving social service delivery by focusing on long-term, sustainable contracts designed for better outcomes. In anticipation of the White House’s infrastructure priorities announcement, US policymakers can draw on examples like these to adopt best practices and broaden the market for better outcomes. New Zealand’s social investment practices are just one example of how the US could put the public good first in its effort to revitalize our infrastructure and deliver better services to the American people.

Stay tuned, a case study on PPPs in New Zealand coming this Fall from the Beeck Center.

Originally published at beeckcenter.georgetown.edu on May 19, 2017.