23/04/2019

Could We Interest You in Some Results?

Public procurement is looking to have more strategic impact—after all, public procurement does account for as much as 15–18% of GDP in the EU. No legislative reforms are necessary to achieve this, as there are already some highly innovative models available, such as social outcomes contracting. New models will be sorely needed if the economy deteriorates. As private funds are increasingly seeking impact in addition to profit, new opportunities are also arising.

Social impact is relatively straightforward to implement in procurement. Part of the price of the service can be tied to results and the reaching of targets. In contracts with several service providers, an option period can be reserved for the service provider that had the best results. The energy efficiency of public buildings can be improved, and CO2 emissions indirectly reduced, through ESCO projects, in which the investment is financed using the savings brought by energy efficiency. In school construction projects carried out using the PPP model, the contractor can be paid only for the days when the school buildings are fit for use. In the employment service business, agencies can be paid a part of their fees based on how well the job-seekers within the scope of the service find employment. All of these models are already in use.

Impact Investing Gaining Ground

Social impact considerations have been taken the furthest in impact investing projects where private investors bear the financial risk and the public sector pays for the results. This model originates in the UK, which has a much longer history of impact financing and social impact bonds (SIBs). The Finnish Innovation Fund Sitra has had a major role in developing impact investment models for Finland’s needs.

The are a number of models and structures that can be applied to impact investing. The projects that have been implemented in Finland to date have followed the following model: the contracting entity or central purchasing body puts out the role of project fund manager to tender as a public procurement. In the tender process between the project fund managers, the service providers are subcontractors to the managers. The project fund manager establishes a fund and procures investors for it. The fund pays the service providers for the services that they provide to the end customers. Meters are agreed in advance for measuring the results, and if the targets are met and society saves money, the investors receive part of the savings as reasonable profit.

The impact investing model works best in projects where early intervention can prevent problems. This is the underlying intent in, for example, a recent SIB project for the prevention of marginalisation of children and youths. Bringing at-risk pre-schoolers into the scope of preventative services can significantly reduce the need for child welfare services later on. Fewer children are taken into custody, the future prospects for these children can be significantly improved and society as a whole can save a great deal. Private investors are able to make an impact, and if the project succeeds, a reasonable profit. In Finland, the impact investing model is currently being used to promote employment among immigrants and the long-term unemployed. There are also projects in the preparatory stages to prevent type 2 diabetes and maintain the ability of senior citizens to function as well as an environmental impact investment project.

In international debate, the SIB model is seen as a major opportunity to promote the UN’s sustainable development goals using private financing.

From Careful Preparation to Results and Benefits

In order to succeed, impact investing projects need careful preparation and a great deal of background information on the social issue in question, the costs it causes and feasible models for addressing it. The preparation phase requires expertise from a wide range of fields and careful design of the basis for payment and the meters for success. When preparing the competitive tender process, it is vital to ensure that the model is in compliance with the Procurement Act. It is well worth consulting experts and service providers in the early stages of planning. Managing the stack of agreements relating to service production and investments also requires its own experts. Though these kinds of projects come with fairly large transaction costs, at best they can achieve major results and savings and lead to a genuine win-win situation for everyone involved.