Rodney Schwartz: The next step in payment by results

Politicians have been too cautious in how payment by results schemes have been implemented, argues the chief executive

Rodney Schwartz
Rodney Schwartz

the chief executiveWhatever one thinks about social impact bonds, the payment-by-results mechanisms they have helped to facilitate have massively transformed our approach to public service commissioning. There is still much potential ahead for utilising these tools. They are almost impossible to find fault with, if done properly, as it is outcomes, rather than inputs, that matter to voters.

Public debate centres on spending in priority areas, such as health and education, because we believe that spending and outcomes are positively correlated. If we could have exactly the same outcomes in a way that is cheaper, thereby requiring less taxation, who could possibly object? In the ridiculous case that root beer was found to cure dementia, few would suggest we find a costlier route to demonstrate the seriousness with how we feel about dementia. The money saved could be spent on other priorities or permit lower taxation or debt repayment.

The beauty of such schemes is that everyone seems to win. Society is better off, by virtue of the societal intervention, but the taxpayer also wins because money is saved by the public purse, as only effective interventions are rewarded. In this way, ineffective methodologies are weeded out and those with better ideas, skills, or both, will replace incompetent, expensive and inefficient providers. Politicians also win because scarce resources are diverted towards achieving outcomes citizens desire, which in theory should lead to happier voters—a good thing for vote-seeking politicians.

Bureaucrats and politicians in all parties, in my opinion, have been far too cautious, perhaps irresponsibly so, in the pace with which such PbR schemes have been implemented. They tend, for example, in many of the SIB structures, to cap investor returns or share out only a portion of the savings. Why not be more generous and encourage far greater investment? There is also bureaucratic resistance to the new and a preoccupation with precise monitoring, which can be very costly to implement—on many occasions, this undermines the process and creates deadweight loss. Might there not be opportunities for considering less costly and maybe somewhat less rigorous oversight? I sometimes feel our search for the perfect is undermining the good.

The area that worries me the most is where measurement is hard or even impossible and where there is no direct spending that is reduced, but societal need is great. HCT, for example, is involved in projects that assist disabled young people to use public transport. There can be cost savings in that local authorities are thereby freed of the responsibility to have these young people driven, but what if there were no cost savings to be achieved? Would not the sense of self-actualisation and independence these youngsters achieve because of this training be worth the investment? Would not society be better off, even if there were no financial savings to the Treasury?

I am certainly not arguing that programmes, which save the Exchequer funding, should not continue. Far from it, they should be accelerated. In these cases, society’s improvement is bettered directly, through the impact and outcome, and indirectly through cost savings, which can presumably achieve impact elsewhere. However, the focus on such areas alone is suboptimal. I recognise that our national accounts mind-set makes this a challenge, but many have developed more all-encompassing metrics and some countries, such as Bhutan or Costa Rica, already use them in policy implementation. Also, just because something is hard to measure, does not mean we should not try to do so, especially where the welfare of the nation is at stake.

Rodney Schwartz is chief executive of ClearlySo, which helps bring impact to all investment

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