Making social services more sustainable10 Enero, 2012 # 18:09 # Cuarto Sector, Ecosistema innovador, Innovación Social, Modelos de gestión # No Comment
In order to comprehend all the impacts of this global recession, it is necessary to highlight that this economic crisis might have developed into a social – and even structural – crisis. One common step to face a recession is to make a shared diagnosis of the situation and follow it with the implementation of the changes that are needed to reverse the critical situation. Nowadays, a strong version of this view has resulted in a claim for structural reforms – that some believed – had been delayed for too long. That is the main reason why several Governments, such as the Spanish, are implementing rough austerity measures, from the labour market flexibility to the reform of the pension system or cuts in the public spending. Governments have long struggled to face the cost of maintaining the welfare state and the debate is consequently focused on their social spending. It seems then that there is a crisis too ‘in public funding for public needs’.
Although some of these efficiency measures mentioned before might be useful and even necessary, the social cost of these decisions has to be taken into consideration. That is why public and private cooperation might be an alternative path to make social services more sustainable and to avoid reductions in the welfare state. Even if we believe that the public administration has to guarantee the delivery of public services and goods – such as health, education or infrastructures –, this does not mean that it has to deliver them by itself. Furthermore, public and private cooperation should be developed not only for efficiency reasons. It might be a central component to the modernization and adaptation of social services to the real needs and desires of the ‘users’. That is social innovation in public services.
One type of thinking is to believe that public and private cooperation is based just on the delivery of ‘public services’ through private organizations. Since the 1960s, when the private and public partnership (PPP) was settled, large infrastructures have been built and developed with these parameters. This initial approach – of the PPP as the vehicle to finance public infrastructure – has been criticised by several because it overlooks part of the potential of this type of collaborations between public and private sector, based on a ‘firm price turnkey’ contract. Nevertheless, it has provided the basis to a new model of public and private cooperation in which the nexus between the public sector’s needs and the private sector’s goals are met and developed as a key part of an innovation strategy for public services. In this new model – utilized in times of economic uncertainty and in periods of prosperity – the objective is still the same – the need to do thing better and cheaper – but the means are slightly different. Even if public and cooperation is seen as ‘a way to make projects happen sooner and more cost – effectively than they would if managed by the public sector alone’ (Finn Poschmann), it is argued that the benefits of this cooperation are much wider.
This new model suggests that public and private cooperation means cooperation in designing, providing or financing public services. Through public and private cooperation, different approaches and views are addressed to enrich and improve the respond to a social need. In this new approach to PPP, cooperation is not only formed by the public administration and the companies, but by universities, research and development centres, schools or even individual citizens that desire to take part in this process. In consequence, this new model of cooperation has the goal to meet social needs in an effective way – taking into account the cost and the quality – without overlooking the power of transformation and innovation of every collaborative project.
Even so, the need to find the balance point where the public services are optimized and the private benefits are maximized is still a key factor for public and private cooperation. This equation raises the question of which the benefits and the risks are for each of the parties involved.
A main argument supporting the public and private cooperation is the increase in the efficiency while delivering the service. This reduction in cost for the public sector is mainly due to two factors. On one hand, as the private management is supposed to be more efficient – with the proper incentives – the overall cost of the delivery is usually lower. On the other hand, as the operational and financial risk is shared for both parties, the failure cost decreases. In addition to this, the quality of the delivered service might improve due to the transfer of know-how from the private partner – that usually works with a higher innovation level – to the public. The public savings provoked by this efficiency might relieve tax payers of the tax burden – if the public administration decides to -.
From the private sector’s point of view, cooperating with the public sector gives the opportunity to private parties to enter in new market niches, expand its business and work with a more long term vision – softening the day a day market pressure -. In addition to this, it contributes to develop the ‘triple bottom line’ approach in the private sector. In this cooperation projects, it is easier for the firms to work taking into account the three different criteria of benefits considered in this approach. The first one is the profit and summarized the common rational economic standard – there cannot be loses to threaten the development of the project-.The second one is the environment and its objective is to guarantee the sustainable handling of the resources and to protect the habitat in which the project is developed. And the last one is the social level that is focused on incorporating the stakeholders into the decision making process and on reducing the externalities that affect to the people involved in the project.
But while it is important to take notice of the benefits of the public and private cooperation, the risks should not be overestimated. There are several hazards of public and private cooperation that can be of importance. One of the main risks observed in the public and private cooperation is the loss of control of the public sphere over the management of the project. In a traditional PPP contract, an adequate allocation of the risk is critical to guarantee the control and the right management of the service or the good provided. These findings suggest that monitoring and regulation are essential to avoid problems related with the control and evaluation of the projects or services. In addition to this, it is claimed that public and private cooperation does not have to result in the privatization of the public services that might even cause at the end a bigger ‘real cost’ for the public administration. Not just a higher financial cost, but the consequences of prioritizing the economical view in the management of social needs.
Nevertheless, as it has been pointed previously, the new model of public and private cooperation tries to fight these inconsistencies and add more value trough innovation in the output and in the process. One example of this new approach of collaboration is the social impact bond, a contract with the public sector in which it commits to pay for improved social outcomes (www.socialfinance.org.uk).
Social finances are alternative investment models that seek to maximize economic and social impact through the collaboration with private investors in financing public programs. It has its origin in the premise that public resources are limited –and even more in time of crisis- and due to this lack of resources, the criterion of urgency takes precedence over the criterion of relevance in the public sector. This implies that for a government, at the time of greatest social needs when there are urgent social requirements, it is more difficult to invest its few resources in prevention policies. This leads to a negative expenditure cycle where the urgent matters take over the important ones.
In this situation, the private sector can provide liquidity and attractive returns to the system through this funding mechanism for social prevention. The private agents (communities, firms, associations, funds, etc.) could invest their financial resources in these bonds that are designed to finance prevention programs, obtaining interesting rents – between 8% or 12% – if the objectives of the program are achieved. Social impact bonds are not traditional bonds, because all of the investors’ capital is at risk and that is the reason why the rents are higher than in the standard bond market. There were successfully designed and implemented in the UK, in a pilot project to improve the education, skills and confidence of more than 3,000 short-sentence prisoners to break their cycle of reoffending after release and help them better integrate into the community. After this achievement, social impact bonds have been used all over the country – and in the USA – to fund new projects.
According to the mentioned arguments, it seems clear that public and private cooperation might be an excellent instrument to make social services more sustainable and to meet social need in a more efficient, precise and innovative way. Even if it is to a certain point understandable that public opinion might reject this kind of cooperation due to the abuses of the past, it is strongly believed that public and private cooperation would be compulsory to face the new challenges of modern societies – demographic challenge, globalization, income and right’s equality gap, etc.-. Innobasque is working at the moment, trough the development of the Fourth Sector Consortium, on promoting these new models of public and private co-operations analyzing its potential and giving some guidelines to its development.
For further information:
- Social Impact Bond: http://www.socialfinance.org.uk/
- The Economist: A Place in society http://www.economist.com/debate/debates/overview/166
- The Guardian: http://www.guardian.co.uk/society/2010/oct/06/social-impact-bonds-intractable-societal-problems
- Clan Creddo: The social investmente fund: http://www.clanncredo.ie/default.aspx?m=22&mi=172&ms=0
- BBC news: http://www.bbc.co.uk/news/uk-politics-14663564