A blessing in disguise: public tendering for Social Impact Bonds

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The amendments to the Dutch Public Procurement Act (Aanbestedingswet) are scheduled to enter into force on 18 April at the latest. Does this signify the end of the partnership form that makes Social Impact Bonds (SIBs) possible, or will it create opportunities for further successes with these types of public-private partnerships? Read on to find out my thoughts based on seven vital questions.

If used properly, public tendering will help all the parties involved to make SIBs even more effective. Ruben Koekoek Ruben Koekoek Manager Social Impact Bonds

1. What are Social Impact Bonds?

Social Impact Bonds (SIBs) are contracts under which social investors fund interventions to solve social issues – initiatives to reduce youth unemployment, for example, where an independent study at the end of the contract measures how many young people are still claiming benefits. Whether or not the investment is refunded and the investor receives a return depends on the level of success. Four SIBs are currently active in the Netherlands. These contracts are co-creations involving an administrator, an investor, a municipality and in some cases an intermediary. They are long-term partnerships, and large amounts of time and effort are required from each party before the contract can be realised.

2. Why were Social Impact Bonds not previously subject to public tendering?

Initiatives for SIBs often come from investors or the business sector. The initiator and the municipal authorities first put together the contract. The negotiations are based on various questions: ‘precisely what problem are we trying to solve?’, ‘what demographic are we targeting?’ and ‘how should we measure the effectiveness?’ At present, the Public Procurement Act still includes special rules for a limited number of sectors, including social services and healthcare: these ‘category B services’ currently do not carry a public tendering requirement. However, when the amended law enters into force this exemption will no longer be available.

3. Will Social Impact Bonds be subject to mandatory public tendering under the amended law?

A Social Impact Bond is an arrangement in which the authorities announce that they are willing to pay for an intervention that yields a particular result. This constitutes a public contract, which is subject to mandatory public tendering unless any of the following circumstances can be established:

  • The contract is only for funding: funding itself is not subject to the mandatory public tendering rules.

  • The contract involves a concession. If the authorities grant a contract for a concession, the consideration does not comprise (or is not limited exclusively to) a financial return, but rather the right for the contractor to commercially operate a particular service. The concession holder is not paid directly by the authorities, but instead receives a consideration from the users of the service (for example public transport, parking structures and swimming pools). Concessions only require public tendering if the total amount involved is more than €5,225,000.

  • The contract qualifies as a grant and not as a public contract. In practice these situations are quite rare.

SIBs do not satisfy these requirements, and therefore are subject to the mandatory public tendering rules. However, SIBs might qualify for the special regime for ‘social services and other specific services’ of the new Public Procurement Act. This is a simplified regime where public tendering is only required for contracts in excess of €750,000, and which even then is carries less strict requirements.

4. What is public tendering?

In simple terms, public tendering is a process is where a public authority announces that it wishes to commission a contract, and companies can bid on that contract. Various public tendering regimes and procedures exist. TenderNed is the tendering marketplace for the Dutch public sector; any contracts above a particular sum must be posted on TED, the European public tendering platform. Once the contract has been posted, any and all market players may respond. The precise procedure moving forward then depends on the nature and scale of the contract.

5. What does this mean for Social Impact Bonds?

The old way of creating SIBs appears to be consigned to the past. The initiative will now lie with the municipal authorities. The call for tenders outlines the conditions for realising the SIB, and market players can then submit their tenders. This may involve multiple phases: first the financier is selected, who then offers input on the choice of intervention. Alternatively, the municipal authorities might ask financiers and businesses to submit joint tenders.

6. Will public tendering hamper speed and innovation?

In principle the answer is ‘no’. However, various municipal departments will need to work in close liaison to properly place the call for tenders on the market. Luckily possibilities are available for market consultation, for example, allowing the authorities to first talk to market players to find out what conditions should be included in the call for tenders.

Another possibility is to continue negotiations after a contracting party has been selected. Formally, this can be given shape in accordance with the rules for competitive dialogues or innovative partnerships. However, those procedures seem needlessly complicated. The simplified public tendering regime for ‘social services and other specific services’ offers public authorities a range of options for structuring calls for tenders in the manner that they deem most appropriate and continuing the negotiations with market players after the tenders have been submitted. What matters is that the legal public-tendering principles of equal treatment and transparency must be respected.

7. How can the amended Public Procurement Act help municipal authorities make more effective use of Social Impact Bonds?

The advantage that SIB partnerships offer is that municipalities can draw on the market’s creativeness and diligence to tackle social issues. At the same time, designing a Social Impact Bond with market input poses the risk that market players help not only to solve the social problem, but also to define and quantify that problem.

Think of this as a game of football. The job of the players (investors and businesses) is to score. The referee is responsible for deciding whether the ball has crossed the line and whether a foul has been committed. This should be the role of the municipal authorities, with input from an agency that gives an independent measurement of the results. Under the amended Public Procurement Act, municipal authorities must first think carefully about the rules, and then ask market players how best to score under the existing rules, through tackling social challenges. This does not alter the fact that it would be advisable for the authorities to first present the rules to the market and allow market players to express their views on which rules will work and which will not.

Once the municipal authorities have established the rules, they can use public tendering to leverage market forces and realise the best results in the most effective manner. To make optimum use of this new instrument it is vital for the authorities to carefully conduct a consultation round. It is also important to draw on the expertise of public tendering experts. If used properly, public tendering will help all the parties involved to make SIBs even more effective. Initially the run-up to the SIB might take more time, and numerous municipal officers will harbour cherished memories of the old ‘category B’ exemptions. Ultimately, though, the amended Public Procurement Act will emerge as a blessing in disguise.

ABN AMRO: advice based on experience

Over the past three years ABN AMRO has learned a great deal about constructing and investing in SIBs. We are eager to share our expertise in blogs, publications​ (PDF 4 MB) and lectures. ABN AMRO Public Sector Clients actively helps municipal authorities to give shape to their SIBs. We can also put you in touch with public tendering experts, other Dutch municipalities that have already contracted SIBs or colleagues from the UK who have experience with public tendering for SIBs. We look forward to hearing from you.

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