Six ways to adapt outcomes-based approaches for Covid-19 recovery
The ability of outcomes-based contracts to respond effectively to change and uncertainty indicates that they could have an important role to play. However, they need to move from design to launch more quickly than they have done in the past. How could this be done?
By Louise Savell, Director, Social Finance & Visiting Fellow of Practice, Blavatnik School of Government.
In the 10 years since the launch of the first contract in Peterborough, 174 Impact Bonds have been launched across 27 countries, mobilising $447m of capital. Whilst this represents a significant shift in the procurement of public services, social outcomes contracts — also known as ‘outcomes-based contracts’ — remain a footnote in terms of both overall global public sector spending (estimated at $23 trillion per annum) and government procurement (estimated $7 trillion per annum for OECD countries alone).¹
One reason social outcomes contracts haven’t been used more is the challenge of defining and valuing success. To maximise the potential for adaptive service delivery, contracts aim to define the smallest number of contractual payment metrics that incentivise the right service provider behaviours. However, ensuring that such metrics are strongly linked to lasting social impact, avoid perverse incentives and can be measured reliably and cost-effectively takes time and expertise. On average existing social outcomes contracts across the world have taken over two years to develop prior to launch.²
In contrast, huge quantities of funding have been mobilised over a matter of mere weeks to support health responses and economic recovery in the face of Covid-19. The IMF has made its entire $1 trillion lending capacity available to its members; the World Bank expects to deploy $160 billion over the next 15 months to support Covid-19 measures; and the EU has approved a €540 billion package for immediate responses, with agreement to work towards a larger recovery fund. Devex estimate that, in total, $15.9 trillion has been announced towards the fight against Covid-19 between January 1 and May 17 2020.
In the face of the rapid deployment of such large funds, do outcomes-based approaches still have a role to play?
How outcomes-based approaches could support effective Covid-19 responses
To enable large amounts of funding to be deployed quickly, established checks and balances on public spending tend to be softened. The urgency of responding also places additional burdens on procurement staff which may in turn be further exacerbated by increased staff absences due to illness or isolation. These weakened systems create additional opportunities for corruption at a time when pressure on health systems, economies and public finances mean that it is paramount to ensure maximum social impact for every dollar spent.
Given the time historically required to develop social outcomes contracts, they are unlikely to play a role in Covid-19 response efforts over the next three to six months. The principles that underpin them, however, have a critical role to play:
- Outcomes-based contracts have at their heart the principles of governance, transparency, accountability for impact and cross-sector partnership, all of which underpin effective crisis response.
- Other characteristics of outcomes-based contracts — including alignment around a shared definition of success, the use of data to monitor progress and the contractual flexibility to pivot service delivery to course correct — will be essential to ensuring that funding is spent effectively in both immediate crisis responses and longer-term recovery.
Outcomes-based approaches are well-suited to delivering impact in contexts of uncertainty
Initial indications suggest that existing outcomes-based contracts are adapting to the radical contextual change caused by Covid-19. In the Impact Bond contracts that Social Finance is involved with in sub-Saharan Africa, Latin America and the Middle East we are seeing public, private and philanthropic stakeholders working together to ensure service continuity, relevance and adaptation to operational and evaluation constraints.
The ability of outcomes-based contracts to respond effectively to change and uncertainty indicates that they could have an important role to play in post-Covid recovery. However, to play this role they need to move from contract design to contract launch much more quickly than they have done in the past. How could this be done?
- Pool outcomes funding: Pooling funding for priority outcomes and populations at a national or regional level would greatly accelerate outcomes-based contracting. Employment, nutrition, water and sanitation, education and health are likely to be high need sectors in low and middle income countries during the post-Covid period. They would benefit from specialist, large scale funds.
- Simplify outcomes metrics: Tying payments to data that is already systematically collected and/or independently auditable. Don’t let the best be the enemy of the good — if the alternative is spending against no impact data, spending against indicative impact data will do.
- Develop outcomes rate cards: Capping outcomes payments at the maximum dollar benefit of an outcome would circumvent the time-consuming process of analysing provider intervention models and costs. Rates could be adjusted according to the cost structure of each country or region; contracts could be awarded on a reverse price auction; and rates adjusted fairly across providers, to discourage intentional under-bidding, at scheduled contract renewal points if necessary. If the socio-economic value of benefits cannot readily be estimated, err on the side of over-paying for impact and adjust in subsequent contracting rounds.
- Remove the need for upfront finance : Funding provider delivery costs for an initial period (e.g. 6–12 months) with contract renewal/expansion contingent on outcomes would remove the need for investment as a source of pre-financing and accelerate outcomes-based contracting.
- Encourage a broad set of providers: Outcomes-based contracts will ensure best value for money if outcomes funders are agnostic about which sector providers come from. Public, NGO and private providers should all be encouraged to bid for contracts with renewal based on demonstrated impact.
- Establish strong governance processes: Outcomes contracts create the conditions for effective cross-sector partnerships but rely on relationships, transparency and accountability to deliver results. Governance has been shown to be a key driver of productivity and is particularly important in countries with high perceived levels of corruption. In Social Finance’s outcomes contracts, governance that actively involves public sector stakeholders has been important to ensuring both the smooth delivery of services and effective adaptation to change.
Outcomes-based contracting : what do we have to lose?
When significant funding is disbursed quickly, accountability can be reduced to “keeping the receipts”. IMF guidelines flag fiscal transparency, public accountability and institutional legitimacy as the key pillars of this approach. They place the emphasis on governments being open about how they plan to spend funding, ensuring democratic debate where possible and implementing systems to ensure that money goes where they said it would. Preventing corruption and the misuse of public funds should be a minimum condition for success. Outcomes-based contracts, like other public sector contracts, should be transparent in their selection criteria, approval and reporting processes.
To the extent that IMF guidelines mention accountability for performance it is limited to the identification of indicators, linked to policy goals, to facilitate ex-post assessment of impact. The strain placed on public funds and the extent of the social need created by Covid-19 will require us to move beyond this.
Outcomes-based contracts, however imperfectly designed, would seek to actively incentivise positive impact for the intended beneficiaries. The space that such contracts create for adaptive delivery and course correction will be particularly important in a context of ongoing uncertainty around both which interventions will be effective to address changing human needs and the context in which those interventions will be delivered.
With transparency, accountability for impact and strong governance at the level of both the outcomes fund and the contracts it commissions, it should be possible to ensure better value for money, correct for perverse incentives and minimise unintended consequences through successive rounds of contracting.
If the alternative is billions of dollars disbursed rapidly with minimal accountability for impact then, however imperfect rapidly designed outcomes contracts might be, this must be the better option.
Two ways outcomes-based approaches could be applied in practice
The case for a nutrition outcomes fund
Recent estimates suggest that global targets for reducing stunting could be met at a cost of just $8.50 per child if high levels of effectiveness and efficiency can be achieved at scale. But there are significant obstacles to achieving that efficiency:
- Accountability: The Global Nutrition Report points to the lack of accountability in nutrition funding — especially for programmes that fail to deliver results — with too few commitments specifically linked to measurable outcomes. In particular there is weak accountability.
- Data: While there has been some progress in the collection of nutrition data, there is still a need to improve databases and tracking capacity.
- Value chain of interventions: Funding for nutrition is often input driven, and typically focused only on a few critical elements, such as micronutrient supplementation or breastfeeding, precluding introduction of other important measures.
Nutrition outcomes have never been more important. The World Food Programme predicts that, in a worst case scenario, as many as 36 countries may face famine due to Covid-19. Of these, 10 countries already had over one million people each on the brink of starvation before Covid hit.
A Nutrition Outcomes Fund that pools and rapidly commits donor funding against clear evidence of impact could play a critical role in ensuring funding delivers on its ambitions during the critical post-Covid recovery period and beyond.
The case for an employment outcomes fund
The economic impact of Covid-19 will dwarf anything we have seen within our lifetimes. The International Labour Organization which, just a few weeks ago, predicted 25 million job losses, now reports a high risk that the end of year figure will be significantly higher. At present the lockdown is, to some extent, affecting 2.7 billion workers, or four in five of the world’s workforce. The drop in working hours in Q2 of 2020 alone is estimated to be equivalent to 305 million full-time jobs. The world’s 1.6 billion informal economy workers have been hardest hit, experiencing an estimated 60% drop in income in the first month of the Covid-19 crisis alone.
Outcomes-based employment programmes in the UK, Latin America and the Middle East have been able to adapt quickly to the lockdown. They are now supporting vulnerable populations to access new opportunities in healthcare and logistics where demand has been created whilst employment in other sectors has reduced.
These contracts incentivise training and placement support that is responsive to market demand. As economies reopen over the coming months, such approaches may have an important role to play in supporting reskilling and re-employment in contexts of continuing uncertainty and unpredictable market demand.
[1] World Government Expenditure obtained by multiplying the global share of public spending by global GDP. OECD Government Procurement Expenditure obtained by multiplying the average of 12% of GDP (p.172 Government at a Glance 2017. OECD, 2017) by OECD GDP.
[2] Dr. Eleanor Carter, Research Director, GO Lab — personal communication, 12.05.20
