A INNOVATIVE APPROACH TO TRANSFORMING THE PUBLIC SECTOR concept paper oct 09 v1.1

Concept Paper
A Innovative Approach To
Transforming The Public Sector
National Party
Maori Policy Advisory Group
Oct 2009
Travis O’Keefe
0212 434430
travis@imtv.co.nz
Barry Soutar
021 459854
barry@piata.co.nz

HUB FOR MAORI SOCIAL INNOVATION Oct 2009
New Approaches To Transforming The Public sector Page 2 of 11
1.0 Executive Summary
This paper describes a field of opportunity and a new approach to transforming the public
sector called Social Innovation. Social Innovation describes the entire area of initiatives focused
on progressing and improving social wellbeing, particularly measured by the 41 social indicators
published by MSD. Social Innovation encompasses a spectrum of activity from: the generation
of ideas; prototyping; piloting; scaling up; learning; and the application of maturing
technologies. This field is led internationally by the Nesta and the principles expounded by
Geoff Mulgan in the UK, from which most of the following information is drawn.
We identify the core problem facing Maori who lead negatively in 37 of the 41 social indicators
in NZ and New Zealand which impacts our ability to leverage the full benefits of Social
Innovations. It is “scaling” or the ability to finance innovations beyond their critical mass for
sustainability and transformational change in the social indicators. We emphasise that the
current recession is an opportunity to apply new ways of thinking to the issue. We offer a
solution through an international development called Social Impact Bonds and other financial
tools.
Finally, we discuss some of the issues associated with implementing such a set of solutions and
make a set of recommendations to mitigate the risks.
2.0 Introduction
To talk of the current economic crisis creating ‘opportunities’ for innovation – while thousands
of our people are losing their jobs and the public sector face massive cuts – might appear crass
and naive. Instead, the recession makes radical innovation in our public sector a necessity,
because without bold new approaches our public sector will be over-stretched by the short-
term demands of the downturn and overwhelmed by the long-term challenges of the future.
The public services we require will have to deliver significantly better performance at
significantly lower cost. The choice before us is simple in form but complex in reality. We can
emerge from the recession having deferred imaginative responses to the major economic and
social challenges we face and with a weaker collective capacity for innovation – or we can
respond by putting innovation to work to meet these challenges now, supported by a more
systematic and robust approach to innovation in the public sector.
To achieve the latter, we need a new way of innovating in our public sector – a rigorous
experimentation which encourages and embraces local solutions. We need to bring together
the range of innovators who are already at the forefront of finding new solutions, across the
public sector, private companies, social enterprises and Maoridom. Most crucially, we need to
put Maori, users, consumers and citizens at the heart of innovation in the public sector as never
before, as a force for change and as partners in designing and delivering services. And we need
to strengthen the methods by which we discover, develop, and diffuse innovations – including a
greater capacity outside of existing organisations to support great ideas from inspiration to
implementation.

2.1 Why radical innovation is needed to reinvent the public sector for the
recession and beyond.
We all anticipate, in the wake of the credit crunch and its impact on public finances, which our
public sector will be asked to do more with (much) less. At the same time, we recognise that we
can't delay concerted responses to major social challenges such as an ageing society and a rise
in long-term health conditions. The collective scale of these challenges is almost too large to
comprehend.
One implication of the recession is to increase the scale of these challenges - for example, the
erosion of retirement incomes or the effects of losing a job on health and wellbeing - while at
the same time stripping away the resources available to the public sector, charities and social
enterprises to respond to these increasing needs.
But this also clarifies the choice before us. Eking out small efficiencies from our public sector
won't fix public finances, let alone establish services on the new foundations that ensure they
are ready for the future. In this way - without wishing to sound naive about the difficulties
involved - we are forced to confront the need for bold new approaches in our public sector.
2.2 The challenges we face
We face seemingly intractable long-term economic and social challenges, which are being
exacerbated by the recession. Despite the current constraints, radical innovation is needed in
the public sector to respond effectively to these challenges.
Consider the following:
– Tobacco in NZ alone costs our social system $22.5b per annum (adjusted for mortality,
morbidity, loss of productivity, fires & tax). The Maori rate of daily tobacco consumption
is disproportionately high at 49.8% of those over 15yrs old versus 21.5% for non-Maori.
This means that Maori constitute 33% of national consumption, but fail to gain equal
access to social services.
– Among the population aged 15 years and over in 2006/2007, Maori had an age-
standardised obesity rate of 43% versus European/Other at 23%. Obesity fundamentally
underpins poor long-term health conditions or disability. Comparably in the U.K. on
present trends, obesity could cost half of the current national health budget by 2050 as
a factor of aging. While Maori will remain a relatively youthful population in that period,
the implications still apply here.
– We are edging ever-closer to a crucial tipping point at which global climate change as a
result of rising levels of greenhouse gases could become irreversible, possibly costing
our economy up to a third of our GDP in lost output.
2.3 We can’t postpone facing these challenges any longer
The cost of deferring action to confront these challenges is beginning to rise – and could easily
outpace our ability to respond. Imagine the following scenarios:
– An aged society, with bankrupt and decrepit social care services and empty private
pension funds, causing tensions between generations and a crisis of legitimacy for the
state.

– A society in which millions of people are incapacitated by long-term health conditions
due to increasing obesity, alcohol and drug abuse, and stress
– placing an ever-greater burden on overwhelmed and rationed Health and Social Service
systems.
2.4 We need to respond with radical new approaches
Our existing approaches and institutions are inadequate for these challenges. We need bold
new services and programmes which are better targeted at root causes and which are better
designed to resolve or at least ameliorate them. This is the only route to significantly better
outcomes at significantly lower cost.
2.5 Yet the recession will also constrain our ability to develop new approaches
Developing new approaches to these challenges would be tough enough in easier times, but the
recession will make it much more difficult. Firstly, the recession is exacerbating many of these
major challenges, increasing the demand on existing services. For example:
– Rising joblessness is impacting negatively on health and wellbeing, causing greater rates
of family breakdown and depression.
– Crime and anti-social behaviour is rising.
– The recession is wiping hundreds of billions of dollars from retirement funds.
Secondly, the pressure on public finances caused by the recession is already leading to
significantly reduced funding in the next few years, which will impact on the charities, voluntary
groups and private sector companies that deliver public sector, as well as the public sector
itself. Philanthropic organisations in NZ are reporting almost a halving of available funds this
year for distribution.
2.6 Instead, we need to recognise that the recession demands radical new
approaches
In one sense, the deeper the ‘crisis’, the more we are forced to recognise the necessity of
radical approaches. Reducing budgets for public sector by a few per cent here or there won’t
restore public finances to a more stable condition, let alone reinvent public sector in ways that
will enable them to respond to the challenges we face. Crisis has often spurred change in the
past; we need to ensure that it does so again.
2.7 We need a new way of innovating in public sector
Government should ensure that innovation in public sector is central to our response to the
recession and beyond. But this should not mean simply continuing the important but somewhat
incremental progress that has been made so far. Many of our current approaches to innovation
are no longer fit-for-purpose; they are often too costly; they exclude the wider community of
innovators (including professionals and frontline workers within existing services); they lack a
disciplined set of methods; and they are insufficiently focused on the major challenges we face.
Further, as is widely recognised, some of the mechanisms that we have relied on to drive
improvement in public sector, such as inspection and audits of performance, require reform so
that they are better designed to support rather than subdue innovation.
Instead, we need a rigorous experimentation for innovation in public sector – focused on major
challenges – which also encourages and embraces local solutions. We need to bring together

the innovators who are already at the forefront of finding new solutions in the public sector,
private companies and social enterprises. We need to strengthen the voice of citizens, and
engage them in service design and delivery. And we need to strengthen the methods by which
we discover, develop, and diffuse innovations – including a greater capacity outside of existing
organisations to support great ideas from inspiration to implementation.
2.8 The rise of public and social innovation
Radical new approaches require radical new actors. We need to combine the ingenuity and
initiative of a diverse group of innovators – from the public sector, private companies and third
sector, alongside users and communities – to find new solutions to pressing economic and
social problems. This requires policies to nurture and facilitate a Social innovation environment.
3.0 Social Innovation
Social innovation is about developing new ideas to tackle social problems or meet social needs.
It may be a new product, service, initiative, organisational model or approach to the delivery of
public sector. Some social innovations are modest and incremental; others are systemic and
fundamental
3.1 New Zealand has an immature social innovation system
New Zealand suffers from a lack of capacity for scaling social innovations
 New Zealand‘s collective capacity for social innovation is currently limited. In particular,
there is a lack of the necessary capacity to design, test and evaluate, and then
‘accelerate’ social innovations to maximise their impact. Very little evidence-based
learning currently exists. Further, the social challenges still remain.
Insufficient understanding of the drivers of innovation
 Social innovation has lacked systematic or strategic support and evaluation, unlike
advanced technology, or other areas of innovation. There is limited evidence on the
drivers of social innovation, although some have been identified (for example,
charismatic leadership and an organisational culture that encourages creativity and
experimentation). However, to date, the field has largely remained on the ‘fashionable
margins’ of serious research.
A lack of intermediary bodies to facilitate the growth and dissemination of innovation
 There are currently too few intermediary bodies connecting the pull and push of the
social innovation system. Correctly established, they can facilitate flows of knowledge,
resources and best practice and support organisational growth – for example in
mobilising important allies. Broker agencies in the U.K. like the Young Foundation, UnLtd
or NESTA can cultivate and nurture social innovation. Their flexibility creates space for
creativity, experimentation and innovation, but they cannot substitute for the
involvement of organisations with more power and resources (often governments)
when the time comes for full-scale policy development and implementation.

Fragile markets for the results of social innovation
 Social innovation, particularly in public sector provision, does not offer profit-led
investors the potential returns associated with other innovative areas like advanced
technology. Until recently, this has meant a lack of capital to fund growth in social
organisations, underdeveloped capital markets to provide finance for social
entrepreneurs, and fragile markets for the results of social innovation. Even the most
successful innovations are not guaranteed reliable funders and purchasers.
Local social innovation is hidden in traditional metrics and policy
 Much social innovation starts locally (grassroots, practitioner, local authority leadership,
local champions). As a result, it can be hidden from policymakers and researchers.
Traditional innovation metrics, rooted in the Frascati and Oslo manuals, were developed
to measure scientific and technological innovation in hi-tech firms. The many intangible
gains from social innovation make such metrics largely unsuitable measurement tools.
Because these metrics are so important in setting and evaluating traditional innovation
policy, social innovation is often excluded from mainstream policy development
Government is often perceived as stifling innovation
 Although hard evidence is limited, governments are generally perceived to be risk-
averse, and inherently more at ease with bureaucracy, rules and regulations than an
open culture of experimentation, creativity and innovation. Central policies can further
inhibit innovation. Specific targets may provide pressure to innovate but they may also
squeeze out creativity; and risk may be discouraged in a culture where few people are
promoted for successful risk taking, but failures are quickly punished. Public sector
practices, such as audit controls, budget criteria and recruitment policies, are not
designed to foster social innovation. For example, public sector commissioners have
little incentive to adopt more innovative procurement models.
3.2 Scaling up social innovations requires action by government, entrepreneurs
and investors
3.2.1 Four conditions for scaling up social innovation
Four conditions are essential for non-govermental bodies to develop sustainable and socially
innovative products, services and models on a large scale:
• Demand for innovation generated by real social needs – the ‘pull’.
• A supply of workable (and communicable) ideas – the ‘push’.
• Connecting the two with the right organisational form.
• Ongoing organisational ability to learn and adapt to the evolving external
environment.
3.2.2 Six drivers and enablers make some localities more socially innovative
When a public service is failing or in crisis, recognition of underperformance is a primary driver
of innovation. External agencies like the Office of the Auditor-General can force this on a
locality. Pressure may also come from the public, media or business. This then legitimises action
by internal and external stakeholders. Pressure to change is not a sufficient condition alone for
innovation. Strong leadership is required to initiate change and encourage a responsive
organisational culture that supports risk taking and creativity from senior management and

frontline staff. Networks collaborate to facilitate innovation. The capacity to mobilise resources
reinforces change. Reflective learning and public feedback help maintain momentum. Visibly
creating results for the public builds legitimacy. In each phase, these factors interact differently
and require different emphases from would-be leaders of social innovation.
3.2.3 Towards a Socially Innovative New Zealand
The mechanisms for stimulating social innovation – and especially how to support scaling in
ways that enable local ownership – need to be investigated in a systematic way through a
programme of practice-based research. An effective programme of support for social
innovation would stimulate the creation of more social innovations and develop guidelines, best
practice and tools that appropriately scale successful ones. Effectively scaling social innovations
requires intelligently designed resources (for example, locally adaptable toolkits, support for
networks, and so on) as well as direct development funding. Typically, these resources are not
immediately available to social innovators and entrepreneurs. The effect of supplying such
resources of both types should be to reduce the cost, complexity and timescales involved in
scaling.
3.3.4 Social innovation may require different incentives from commercial
innovation
The incentive structures that drive traditional innovation – financial rewards, market share, and
so on – are frequently less applicable in social innovation. In the public sector there may also be
more (often legitimate) risk-aversion due to the responsibility inherent in the stewardship of
public funds. For instance, in most cases, intellectual property rights (IPR) do not provide a
sufficient incentive for social innovation. Normally the required innovation is not a ‘product’
that IPR can reward (e.g. it might be a campaign to change behaviour). Potential social
innovators are also frequently motivated by incentives other than financial reward.
3.3.5 Alternative methods need to be used to stimulate social innovation
Create ‘venture capital’ for innovation in public sector
 Innovation involves risk. Taking risks with public money presents ethical and political
problems that have been institutionalised over time in over-zealous audit procedures.
Pre-identified and ring-fenced ‘venture capital’ funds within public budgets would
overcome this. These funds would permit greater risks to be taken. But because they
would be relatively small, contained and advertised in advance, their purpose (as part of
a balanced portfolio of expenditure) would be apparent to Office of the Auditor-General.
The value of these experiments should be judged by the lessons that resulted – from
success or failure. Public officials should be judged on their ability to encourage regular
innovations through judicious expenditure of this risk capital.
There is a need to identify and scale-up social innovations
 Invention is only one part of innovation. Invention is the process of creating
something new, whereas innovation is the process of invention combined with the
diffusion and adoption of that invention. Efficient innovation avoids invention if a
potential solution already exists. A greater emphasis on dissemination and adoption is
particularly important in social innovation because the ‘invention’ may be relatively easy
(or even cost-free) to develop (for example, the idea that homeless people might be re-

integrated into society by selling newspapers on the street). Greater difficulty lies in
moving from ‘invention’ to innovation: in finding development partners, convincing
major funders and securing institutional buy-in (where appropriate). In their initial
stages, successful social innovations frequently rely on highly-skilled individual
‘champions’ and the enthusiastic support of a small but dedicated or influential
community. The absence or loss of either of these can prove a significant setback. More
obviously, a lack of follow-on funding can prevent social innovations growing. Finally, at
a specific point in development, almost all social enterprises need to engage with local,
regional or national governments. The challenges of dealing with large bureaucracies
unsuited to adopting ideas from outside may stymie growth and instigate decline.
Scaling social innovations requires resources that are beyond the ‘inventor’
 In the terminology of the Young Foundation, successful social innovation requires the
‘bees’ – small organisations, individuals and groups who have the new ideas, and are
mobile, quick and able to cross-pollinate – to find receptive ‘trees’ – the big
organisations such as governments, companies or non-governmental organisations,
which are generally poor at creativity but good at implementation, and which have the
resilience, roots and scale to make things happen. Much social change is a result of a
combination of the two. However, ensuring that innovation is adopted in the public
sector can be very difficult. The average public sector innovation in the U.K. takes 24
months to deliver and costs $2million, with a minority of projects being much bigger and
taking longer. The process of innovation in central government tends to be top-down
and dominated by senior management (typically driven by political pressures), while
contributions from lower-level staff are often not considered.
4.0 Social Impact Bonds and Social Value
Social Impact Bonds are a financial tool being developed in the UK (by the Young Foundation
(UK) and Social Finance (UK)) to provide a new way to invest money in social outcomes. Their
key innovation is to link three elements:
• Investments - by commercial investors or foundations;
• Programmes - of actions to improve the prospects of a group (for example 14-16 yr
olds in a particular area at risk of crime or unemployment); and
• Commitment - by national government to make payments linked to outcomes
achieved in improving the lives of the group (for example, lower numbers in prison, and
lower benefits payments).
Various versions of social impact bonds have been developed in the past by a number of people
associated with the Young Foundation (UK). More recently work has been done as part of the
UK Innovation, Justice and Youth programmes, building on concepts associated with ‘UK justice
reinvestment'. The concept is now being developed in collaboration with national and local UK
government as well as foundations and we hope that a version of the model will be piloted
shortly.

4.1 Finance for social outcomes
Many forms of finance go towards achieving social outcomes. These include mainstream public
spending of all kinds, grants, loans, equity investments by RDAs and convertible grants. There is
growing interest in more innovative approaches to finance ranging from advance market
commitments (AMCs) for purchasing of pharmaceuticals to local bonds (for example in
Sheffield), to the burgeoning field of social investment. Some UK tax tools - such as Tax
Increment Financing, and Development Taxes, have also sought to capture value in novel ways.
4.2 Misaligned incentives
In the UK there has long been particular interest in designing new financial tools to address
misaligned incentives in social policy, for example:
• that local authorities or NGOs responsible for providing services to young people do not share
the benefits from reductions in prison numbers or benefits bills;
• that there are few incentives for agencies to invest heavily in early years support, despite
strong evidence on the long-term social gains;
• that health prevention often involves action by agencies such as schools which have
inadequate incentives to act
4.3 Past experiments
These misalignments prompted many of the experiments with joined-up government in the
1990s and 2000s (such as the Rough Sleepers Unit (UK) which pooled budgets), and there have
been many innovative approaches designed to both map and realign the costs and benefits
associated with actions. A recent example of an attempt to do this was a revised ‘Green Book'
for investment developed by the UK government in the early 2000s to compare investments in
programmes like Surestart, training for teenagers and higher education in terms of a Net
Present Value. The aim was to capture the full range of potential costs and benefits, and to
provide an equivalent guide to those which already exist for capital investment in such things as
roads and railways. In practice however the range of uncertainties was too wide to make this
useable. Other simpler approaches to the same problem have involved contracting, including
the many examples of outcomes-based budgeting in Scandinavia and around the world. A
notable UK example has been the Employment Zones which directly incentivised contractors to
achieve outcomes in helping long-term unemployed people back to work, and more recently
outcome based budgeting has been used in contracts around offending. For a survey of some of
the issues involved in managing and capturing value see chapters 10 and 13 of Geoff Mulgan's
new book ‘The Art of Public Strategy' (Oxford University Press, 2009).
4.4 The Three Models
Drawing on these lessons work has been underway to investigate the potential for new financial
devices to better align incentives. This has pointed to three categories of approach which we
loosely label Social Impact Bonds, in that they involve some borrowing with repayment linked to
success in achieving social impacts.

4.4.1 Local authority Social Impact Bonds
In the first model a local authority or LSP would borrow on existing markets for a package of
investment in a social impact programme (e.g. for teenagers at risk status) and would receive a
series of payments in the future from national government if particular milestones are achieved
associated with lower costs for national government. For example a city would borrow $5m for
an intensive programme of work with teenagers at risk or potential young offenders, and would
be repaid according to the numbers who achieved educational qualifications relative to an
agreed baseline of similar local authorities. The repayments would represent a proportion of
the lifetime savings to national government (primarily through tax and benefits). Models of this
kind are relatively easy to design and implement, involve relatively few players and transaction
costs, though they require clear protocols on design, establishment of baselines, success
measures etc.
4.4.2 Commissioning for social outcomes
A second model aims to directly incentivise a service provider or group of providers to take
responsibility for part of an age cohort in a particular area, e.g. 5% of 14 year olds, with direct
incentives to achieve educational and other goals by 19. This would extend the Employment
Zone model, and again is relatively easy to design. Contractors would raise their own capital
either through social investment sources (in which case they might be described as Social
Impact Bonds, with tax treatment equivalent) or on the market. In the latter case there might
be some risk sharing with an investor (e.g. a foundation). In all of these cases there are some
important issues around risk transfer (and important lessons to be learned from the problems
associated with PFIs, UK private prisons etc) as well as issues of accountability (in particular the
local authority's responsibility for children).
4.4.3 Full Social Impact Bonds
A third alternative would share the risk for a bundle of interventions, with:
• finance raised from the market, with investors taking some of the risk for non-
achievement of social outcomes
• action through a special purpose vehicle (potentially combining public sector, private
and third sector) to manage a series of interventions with a target group
• and, again, payments based on results against benchmarks.
This model is somewhat more complex, with more handovers and transaction costs, but opens
up a radical new avenue for bringing in new sources of finance. Several fields have been
proposed for bonds of this kind. These include: investment in early years programmes (based on
the evidence from Abercedarian, HiScope (UK) etc for fairly large long-term paybacks); NEETs
(UK) (focused on life time earnings) and youth or young adult offending; care leavers; and
investments in health prevention and improvement. Another potential field for action is in
employment creation during the downturn.
In principle the model is likely to work best in the short to medium term where:
- there is a reasonably short gap between interventions and measurable results.
- there are very tangible financial gains, for example the very high costs associated with
prison places, as well as with crime

- the numbers of players are small, i.e. one primary national department, a local
authority, finance body and other agencies working on contract.
All models bring some common challenges:
• Measurement - agreed baselines and metrics that are not vulnerable to economic
downturns, national policy changes (e.g. new crimes being legislated), and shared
analysis of lifetime costs and benefits associated with different actions and client
groups.
• Action - all depend on there being a credible menu of actions to implement which
significantly outperforms existing ones, and they also depend on the presence of an
implementation capacity. In most cases this is likely to involve a mix of public, private
and voluntary organisations - in none of these fields does any one sector have a clear
advantage in terms of performance.
• Risk - handling downside risks, including not only the risk of failing to achieve targets
but also other risks, e.g. political risk (if some of the interventions are overruled by
elected politicians).

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