(Photo by iStock/Olivier Le Moal)
We are living in a period of profound uncertainty, around the scale of the pandemic and the recession and economic crisis that may follow, and what can be done to meet these and other existential challenges, given our weakened and divided political systems. In their book, Radical Uncertainty: Decision-Making Beyond the Numbers, John Kay and Mervyn King argue that to confront the kind of uncertainty that can’t be resolved by gathering more information or using probabilistic reasoning, we must focus on stories that can help us to make sense of what is happening and build resilience from this, necessarily partial, understanding. As the Roma proverb goes, “You cannot walk straight when the road bends,” and it’s wise to have flexible arrangements. But what does this mean in practice?
Impact bonds, as a subset of outcomes-based contracts, involve multiple partners and purport to create more flexibility and incentives for service providers in adapting to changed circumstances. Historically, these contracts have been used to drive better outcomes for populations with complex needs: the homeless, looked-after children, and disengaged young people, or in complex delivery contexts like low- and middle-income countries or where multiple stakeholders need to work together to deliver better outcomes.
As an academic and a practitioner, we reflect on how impact bonds (aka pay-for-success contracts) have responded to the unprecedented uncertainties thrown up by the pandemic. Shortly after the UK coronavirus lockdown in March 2020, the Government Outcomes (GO) Lab at the University of Oxford’s Blavatnik School of Government launched a series of Emergency Response and Government Outcomes (ERGO) webinars, to create a platform for peer-to-peer learning to support effective practice and adaptation and to inform academic responses to monitoring the impact of the pandemic on government services across the world. In seven sessions, more than 85 participants from six continents shared their lessons and their challenges, giving us unprecedented insight into how government contracts, particularly impact bonds and outcomes-based contracts, have been affected by and are responding to the current crisis.
What Can We Learn From How Outcomes-Based Contracts Have Responded?
No contracts were designed to react to such a profound shock as that of the COVID-19 pandemic, of course. Along with significant operational constraints around service delivery and social outcomes, the pandemic has also affected the ability to collect data and verify contractual outcomes metrics.
However, the mechanisms for rapid adaptation that were built into many of these contracts, have enabled them to shift their operations to provide continued support to vulnerable populations in this time of crisis.
1. Where service delivery could continue in some form outcomes-based contracts have allowed projects to adapt well. Outcomes-based contracts are flexible by design since they specify the desired outcomes without prescribing ways to achieve those outcomes. During the pandemic, this flexibility has been an asset, particularly in low- and middle-income countries many of which experienced considerable instability even before. Argentina launched its social impact bond (SIB) on youth employment (Proyecta Tu Futuro) in the midst of a macroeconomic crisis which was shortly followed by a change in government; as Maria Laura Tinelli, the director of Acrux Partners, put it, “The SIB has been adapting its strategy and presenting solutions to the issues that were coming up ever since it started.”
In responding to the challenges posed by COVID-19, many service providers working under SIB contracts have been able to shift quickly to remote service delivery, at times with unexpectedly positive results. In the UK, for instance, Family Psychology Mutual was able to engage in online family support sessions with parents during their working day; one father, a long-distance lorry driver, who had never participated before, was able to dial-in from a lay-by.
The flexibility of outcomes contracts has also enabled service providers to rapidly shift focus to deliver outcomes. This has been particularly evident in Impact Bonds focused on employment for vulnerable groups, in countries as diverse as the UK, West Bank & Gaza, Argentina, and Colombia. Many of these programs not only shifted their services online, but also shifted their focus from jobs in retail and tourism to healthcare, logistics, and other high demand sectors.
2. COVID-19 restrictions are driving a shift to remote data collection and outcomes verification. Paying for outcomes allows operational flexibility, but poses a burden in terms of verifying that contractual outcomes have been achieved. The pandemic has created additional challenges to data collection for the purpose of outcome validation.
Several members of the ERGO community spoke of how independent outcomes evaluations have transitioned, at least temporarily, to use online and telephone-based methods. In Cameroon, for instance, the evaluation of the Kangaroo Mother Care Neonatal Health DIB has been adapted to allow for remote data collection.
Contracts based around government data sets, particularly when measured against a control group, were considered to be more resilient to contextual shocks than those requiring bespoke data collection or those that are calibrated against a historic outcomes baseline. In Belgium, for instance, the BeCode youth employment SIB was designed to use routinely collected government employment data, which has only been marginally affected by the crisis.
Participants also reported increasing government interest in investing in data systems and data integration as a mechanism for targeting and monitoring the impact of government spending during this period of fiscal strain. One contributor from Instiglio, noted that in Colombia the government is investing in pooling data from different ministries to track impact and support better decision making.
3. Where continuation within original contractual terms has not been possible, contractual parties have been quick to make amendments. ERGO contributors from around the world reported that, with very few exceptions, contractual parties have prioritized the continuation of services during this time, since target populations are generally vulnerable and hence at risk of being significantly affected by COVID-19.
Some contributors were concerned that contractual parties might all default back to fee-for-service contracts during the crisis, but as conversations continued through May and June, many reported efforts to retain the focus and drive of outcomes-based payments during this time, even where some adaptation was necessary. Contractual amendments have taken a number of forms including contract extensions of duration and value where the pace in achieving outcomes has slowed; advances on outcomes payments to avoid cashflow problems where outcomes evaluation has been delayed; revaluation of outcomes payments to acknowledge increased delivery costs, lower outcomes volumes and inflation; and preparations for time-limited transitions to service-based payments if outcomes delivery and/or evaluation becomes severely constrained in future.
4. Strong stakeholder relationships and active governance have underpinned rapid adaptation of services, outcomes evaluation and contracts. All ERGO contributors noted the critical importance of the relationships between outcome funders, providers and investors to driving adaptation. The fact that contractual stakeholders tend to view these contracts as partnerships, working to deliver a shared objective, has made contractual renegotiations significantly less tense than many expected. However, contributors also noted that the legal documents underpinning many existing outcomes contracts do not adequately capture their relational nature. Contractual force majeure clauses had not supported adaptation in the face of COVID-19, as these terms were designed for service- rather than outcomes-based contracts.
What Does This Mean for COVID-19 Recovery?
In a context of ongoing radical uncertainty, COVID-19 recovery programs could be strengthened by applying three principles from outcomes-based contracts:
1. Align cross-sector partnerships around a shared definition of success and drive accountability through strong relationships and effective governance. Now more than ever, public, private, and non-profit stakeholders need to work together to support vulnerable communities, rebuild economies and build back better by reducing structural inequities. Lessons from impact bonds and outcomes-based contracts demonstrate the value of centering cross-sector partnerships around a shared vision of success, grounded by relationships—perhaps formalized into multi-stakeholder governance processes—that enable accountability, shared learning and rapid course correction.
2. Use real-time data to measure progress and course correct. In contexts of economic constraint, ensuring that every dollar spent has maximum impact is critically important. Stakeholders in all sectors—public, private and non-profit—should be encouraged to move beyond anti-corruption measures (“keeping the receipts”), towards systems that create genuine accountability for the impact of spending. Such accountability needs to be grounded in data: who was reached, how did it help them, who is being left behind? While data collection is too often regarded as non-essential in times of plenty, robust data systems and reliable data collection should be prioritized and funded to inform, support, and drive post-COVID recovery efforts.
3. Issue flexible contracts that allow service providers to respond to uncertainty and pivot to meet emerging needs. Until the pandemic’s radical uncertainty subsides, service delivery contracts that specify a fixed set of inputs and activities are unlikely to be fit for purpose. Education, healthcare, employment services, even retail, may need to flit between online and face-to-face delivery modalities; domestic and international travel disruptions may be hard to predict; supply chains may be unreliable. In such contexts, any contract issued will necessarily be incomplete. As Frydlinger, Hart, and Vitasek have argued “the remedy is to adopt a totally different kind of arrangement: a formal relational contract that specifies mutual goals and establishes governance structures to keep the parties’ expectations and interests aligned over the long term.”
Beyond these three broader principles, outcomes-based contracts themselves may have a role to play. We know from the 2008 financial shock that in contexts of crisis governments tend to cut spending on important, but non-urgent sectors, like education. This can, in turn, prolong the negative impact of the shock for both countries and individuals. One feature of impact bonds, as a sub-set of outcomes-based contracts, is that they defer public spending by harnessing private capital to pre-finance service delivery. This could allow governments to focus their spending on short-term priorities today, without cutting investment in services that play a critical long-term role in their development, like education.
Outcomes-based contracts could also play a role in ensuring value for public spending when budgets are tight. Payments for services, for reskilling and employment, or vaccine deployment, for example, could be tightly tied to demonstrable results. Such contracts need not involve private capital if government is willing to pre-fund an initial period of service delivery, but contract extension—in both time and scope—could be based on demonstrated results.
Whatever else we know about the coming years, we can be certain that the road will not be straight. Lessons from outcomes-based contracts may support us when we come to bends. Structures that foster trust and collaboration will be key.
Read more stories by Louise Savell & Mara Airoldi.