A Risky Business

Government policy involves the transfer of risk to the Third Sector – can they cope?

No one who is aware of Comprehensive Spending Review – ‘The Cuts’ – can be in any doubt that local authority services will never be the same again. A good thing, some might say, they needed a shake-up; others will pray in aid the Big Society in which people power, the resources and consciences of our communities, will provide a new generation of localised and nuanced grass roots services.

And so it might. But the most optimistic time scale for this, accelerated as it may be by a dose of political will from on high, cannot avoid creating mayhem between now and the day we can say that the Big Society has arrived. In the short term money will be withdrawn, jobs lost, lines of communication broken, confidence shattered; people of goodwill will be traumatised as they survey a landscape containing little immediate hope or certainty.

In a remarkably hard hitting and perceptive report, Zurich Municipal – the insurer of choice of both local government and the third sector – and Ipsos MORI together have outlined the ‘Tough Choices’ ahead for public services. Their conclusions can be distilled to just three:

  • rushed short term spending decisions will produce long term consequences, anticipated or otherwise, at such a pace that proper planning is unlikely;
  • neither the third sector nor the public sector have ever experienced a level of risk of this size and nature before, with little evidence that this is being addressed;
  • such seismic changes will lead to problems of staff morale and disillusion; downsizing could prompt industrial unrest and service failure followed by possible social unrest.

It is said that the characters of our three sectors are reflected in their approach to risk. The private sector thrives on it, risk being at the heart of the capitalist ethos. The public sector is uneasy about it but, hey, if at all goes wrong I’ve still got a job tomorrow. To the third sector (especially smaller, community-based organisations) risk is anathema; the rules say we can’t put charitable funds at risk, full stop.

It is this second conclusion that is the most interesting because risk transfer is not only a function of The Cuts but is found in other policy areas too.

Building Schools for the Future, Foundation Hospitals and Academy schools all involved the transfer of risk away from the public sector, either to the private sector (the essence of Public Private Partnerships) or to a body designed for that purpose. Where “We, the local authority, retain the responsibility for providing this service but you, the charity or community organisation, will help us deliver it,” the current commissioning model, there is no risk transfer: it stays with the public body. But if we now say to that charity “We will give you the responsibility for delivering this service without us” there is a risk transfer which the charity maybe cannot cope with, either psychologically or physically.

The increasing trend in Government policy towards payment by results (PBR) is another way of saying “Your payment will be both end-loaded and dependent on outcomes.” It is a process of risk transfer. Perhaps right up to the day a job is complete the charity will have to meet interim costs ‘up front’ with no guarantee that they will be covered; a repudiation of the long fought-for principle of full cost recovery in service contracts.

The market has actually spotted this flaw and started to address it, but so far there is only one Social Impact Bond in operation. In an SIB, a charity delivers a PBR service backed by a private financial institution or investor upon whose shoulders the risk lies. The first such structure is now in operation, charged with reducing reoffending amongst prisoners released from a single jail. This perhaps suggests that PBR SIBs are best kept for projects with readily quantifiable outcomes and low volatility and subject to a relatively short time scale. Very welcome as they are, it is difficult to see how SIBs could work on less tangible outcomes aimed at generational change.

The very first paragraph of the Zurich report uses the words ‘unprecedented’, ‘drastic’ and ‘dramatic’ in relation to local authority, health, fire, police and third sector services. The first page says that, cuts and risk transfer aside, difficult choices will be made so much tougher by the economic downturn, demographic change and structural reform within those services.

In short, any provider who manages or takes on responsibility for public services at any level should read this report – urgently.


Link to ‘Tough Choices’, the Zurich / Ipsos MORI report