Capital Raising
Although it is an important consideration, delivering programmes which are heavily outcomes based will not –in and of itself – pose insurmountable barriers to raising working capital. There are two reasons for this.
- Firstly, raising and securing capital from corporate bodies is not substantively dependent on whether the contracts sort or held are primarily outcome based. Primary considerations will be around track record, business model, pricing structure and the fluidity and consistency of the market.
- Secondly, historically, public funding has not been accepted by banks and many investors as viable leverage to raise capital. The levels of working capital that we are talking about will make this doubly difficult,
- Thirdly, investors will be more exercised about the breadth and depth of competition and the degree to which the pricing structures and the outcomes synthesise with their business model. For example is the 80/20 model more relevant to a demand-led or a supply-side market.
- Fourthly, Outcome facing contracts become problematic to providers and investors in the context of the wider economic and market conditions as juxtaposed against the challenging cohort of the long-term unemployed whose ranks will be swelled by the movement of more claimants unto JSA and ESA. The pricing therefore has got to be right: Clarity is needed on the unit cost and sustained payments. Note: the unit costs for PEP were unrealistic and unsustainable)
- Fifthly, DWP needs to ensure that its performance expectation is realistic and that it really does align this to current provider performance,
On a positive note
The Coalition government is committed to this programme and by extension it will support and aggressively ensure that its commitments are realised. Hence the commitment to invest more and to push through with the DEL/AME switch will be a positive sign for investors.
However investors will need reassurance, as they may feel overly susceptible to the political process. There is an awareness that once the Work Programme goes ‘live’ in 2011 that there will be approximately 3 ½ years left of the Coalition. The fear is that contracts could quite easily be ripped up: Again! With this in mind investors will/may hold fire and wait to see which horses look promising in terms of, pricing, performance & investment maximisation. Providers have spoken to us and would welcome DWP sharing more of this risk thereby encouraging investment sooner rather than later.
Finally & controversially,
The wider sector needs to be aware that not ALL providers can or should try to be PRIMES so the fact that the setting of high financial requirements will exclude some providers should be perfectly understandable. This then provides an opportunity to ensure that the supply chain is tangible and robust.
