Interested in 20 billion euros?
The coronavirus pandemic is driving us deeper and deeper into a situation where we need to focus much of our attention and resources on addressing existing problems. Obviously, our current problems must be addressed, but at the same time we need to introduce new practices and combine tax revenue and private capital to build the new normal, increase wellbeing and ensure economic growth.
Even before the coronavirus outbreak, there were many preventable problems and diseases, that put a strain on our society. Calculations by various experts reveal the unpleasant truth: The annual costs to municipalities of children and young people in custody care are amount to nearly EUR 1.5 billion, and the overall costs of type 2 diabetes to society are about the same, or higher. Cautiously estimated, these types of costs amount to some EUR 20 billion per year. It is clear that proactive and preventive work could generate significant benefits for people and the economy.
Outcomes contracting offers the public sector a great opportunity to change direction and provides the practical tools needed to do so. In this model, the public sector determines the desired outcomes, not the method of service provision. Furthermore, private investors bear most of the risks, at least, associated with producing the desired outcomes. The public sector will repay the capital invested in the activities as well as an agreed return, but only for verifiably produced outcomes. This method helps public sector to benefit from the best innovations of different service providers, thereby promoting employment, and, most importantly, it ensures that tax revenue is spent only on the desired outcomes.
Outcomes contracting almost automatically steers actions in the right direction: toward preventing harms, problems and diseases. There is no doubt, that any municipal health and social services director would rather buy wellbeing for families than band-aid solutions, and environmental directors would prefer clean waters to solutions for problems caused by water contamination.
Outcomes contracting is based on the modelling of societal benefits, which, in turn, is based on an analysis of the root causes and opportunities behind the desired changes and of the qualitative and economic impacts that could be generated. The resulting model shows what kind of benefits can be achieved by redirecting actions and activities. The organisation responsible for overseeing the use of tax revenue can use this model also to determine the bonus payable for achieving results. While doing this, the organisation should bear in mind, that return may be paid on the investments that enable the activities, and that the return-to-risk ratio must be reasonable and acceptable to the investors.
The key task of the Centre of Expertise for Impact Investing is to assist public sector actors in outcomes contracting. It is part of the administrative organisation of the Ministry of Economic Affairs and Employment, but serves the entire public sector. The Centre wants to cooperate with other key actors involved in impact investing, such as investors and service providers, to expand the whole impact investing market.
Mika Pyykkö, Director
Centre of Expertise for Impact Investing