A Social Contract for Government

One of the most important innovations in government in recent years emerged from one of the most mundane aspects of public administration: the procurement of goods and services. Changes in the standard models of public procurement have transformed Western liberal democracies in the last generation by introducing public-private partnerships that have brought governments new sources of funding and expertise. These partnerships are the cornerstone of the contract state.

The contract state first emerged when governments, eager to reduce or defer borrowing requirements for infrastructure projects, forged partnerships with private-sector players to build toll roads, ports, transit systems, and other complex, big-ticket projects. Under these arrangements, the private-sector partner was assigned a long-term flow of funds (sometimes from users, often directly from taxpayers)—as well as the risk. To make the arrangement attractive to private investors, governments often agreed to tax breaks and guaranteed annual revenues or taxpayer subsidies. Now the contract state has evolved to another level, with partnerships formed for the delivery of social and human services, though in this instance the partner is usually a not-for-profit (NFP) organization.

In many developed democracies, and at all tiers of government, NFPs are now routinely contracted to deliver public services. The welfare goals of the state are increasingly delivered through market mechanisms on the basis of competitive tendering and service agreements. Both secular and faith-based nongovernmental organizations are paid to deliver government activity. They deliver support in areas such as health, aged care, disability, social housing, out-of-home child care, unemployment services, and education. In large measure, these outsourced arrangements have been driven by economics. There is no doubt that delivery through NFPs has generally been more cost-effective than provision by public servants. In part this is because salaries are generally lower for community workers than public servants. A second advantage of outsourcing is that service quality—or “customer service”—has been enhanced. NFPs offer value for money. This is to some degree a result of community workers having a natural empathy for the people to whom they deliver services.

There are challenges, however, that governments need to address if they are to realize the full potential of the new contract state. NFPs are able to deliver services more cheaply than governments partially because their social mission attracts charitable donations of time (volunteering or assistance) and money (philanthropy or social investment). Too often that means that the commitment and goodwill of community organizations are negotiated into service agreements that do not represent the full cost of delivery. In effect, although it is rarely transparent, NFPs subsidize the delivery of government services, which is an inherently unstable and unsustainable proposition.

Finally, governments need to find new vehicles to bring together the private and NFP sectors in ways that reduce the rising costs of publicly funded human services. Governments can encourage private-sector social investments by providing a supportive tax and regulatory regime for NFPs. Better still, they can facilitate the creation of private capital to support social enterprises that can deliver public benefit. The new financial instruments variously called Social Impact Bonds (United Kingdom), Pay-for-Success Bonds (United States), or Social Benefit Bonds (Australia) are good examples of the kinds of innovation that are required. In these cases, the government enters into an agreement with an NFP to deliver public services in a manner that reduces overall expenditure, for example, by lowering the rate of prisoner recidivism. The NFP can offer bonds to investors in which returns consist of government payments based on the extent to which the venture meets agreed-upon government targets.

Properly structured, bonds offer a win-win-win solution. Governments benefit from an injection of private capital into human-services programs and are able to transfer risk to the NFP ventures. The NFP is able to attract sufficient funding for it to scale up its mission-driven activities and to deliver services without public micromanagement. Finally, the socially responsible investor has a means for seeking both social and financial returns. If governments and their public services can move from contract managers to innovation facilitators, bold new forms of democratic governance will become possible.


Executive Editor

Ms Anna Sullivan

Ms Anna Sullivan