Nonprofits and private companies currently compete against each other in tenders to operate welfare and social services, even though they differ in their goals, how they operate, and the constraints that apply to them. A new study by the Yesodot Institute, part of the Arlosoroff Forum, commissioned by the Ministry of Welfare and written by Noy Brint, Liron David, and Shiran Reichenberg, finds that the current tender structure does not take these differences into account and may even give private companies an advantage. The researchers propose considering changes to the procurement system, including giving preference to nonprofits in certain tenders and even restricting private companies’ entry into some areas of social services.
Israel has been undergoing privatization processes since the 1980s in many areas, including social services, foremost among them welfare services, most of which are currently provided through outsourcing. These processes have turned the state into the funding and supervisory body, while transferring substantial knowledge from government ministries to organizations that on the ground provide services.
The welfare sector, alongside other social services, has unique characteristics that do not all fit the structure of classical competition. The ability to measure the quality of services in this field is lower than in other areas where the state uses outsourcing, such as infrastructure. Professional considerations, such as long-term treatment or the interests of the service recipient, may conflict with the economic considerations of a private company, potentially harming the professionals working in the field.
Currently, there is no substantive difference in Israel’s social procurement tenders between the two main types of “competitors”: nonprofits and private companies. The study highlights the differences between them and the importance of nonprofits in this field. In many cases, nonprofits have greater motivation to lead social change. Nonprofits are often based on mechanisms with social significance, such as financial donations and volunteering. These mechanisms can indicate a nonprofit’s success in advancing its social goals, while at the same time strengthening its social commitment.
Volunteers and donors influence nonprofits and shape them according to their own values. There is also a unique aspect to nonprofits in terms of their corporate structure. A nonprofit’s assets are “locked” and legally required to serve the organization’s purpose, and cannot be distributed as profits to its owners. In the event of closure, its assets are required to be transferred to nonprofits with a similar purpose.
The study found conflicts between the structure of the tenders and the interests of social service recipients. Tenders tend to be short-term, which does not provide service recipients with security regarding continuity of care, nor does it provide security for professionals. Social services are required to provide a rapid and tailored response in emergencies, and the rigidity of tenders can sometimes make it difficult to provide the flexibility required in such cases. The tenders also do not incorporate the principle of “Nothing About Us Without Us,” which requires representatives of the populations receiving the services to be involved in the decision-making process. These principles have greater potential to be realized in certain nonprofits.
Beyond the unique nature of the services, the study points to additional problems in social procurement tenders. The market is monopsonistic, meaning it has a single buyer, or at most oligopsonistic, meaning it has a small number of buyers. The state and local authorities are the main, and sometimes the only, buyers of these services, while service recipients do not necessarily influence the price or demand.
In such a situation, the price of the service may be low, and dependence on a small number of large providers may develop. Service recipients often do not choose their service provider, and because they are, for the most part, disadvantaged populations, there are knowledge and power gaps between them and the providers. These gaps make it difficult for them to demand a provider or service tailored to their needs.
According to the study, the structure of the tenders effectively gives private companies an advantage. Nonprofits are subject to various legal restrictions, including limits on executive salaries, investments, and the taking out of loans, as well as stricter accounting requirements than those imposed on private companies. These restrictions are intended to ensure that nonprofits operate solely to fulfill their stated purpose, but they also make it more difficult for them to compete with private companies in tenders.
Europe Is Already Using Procurement to Advance Social Goals
The study also examined public procurement practices in the UK, Sweden, and the Netherlands—three countries with different market structures, including in the welfare sector. In all three countries, as well as in many European Union countries, the state has set additional goals for public procurement beyond the immediate value of goods and services, including social objectives.
The study found that adapting tenders to the structural differences between service providers, for example between a private company and a nonprofit, can advance social, environmental, and economic goals, such as improving the well-being of individuals and communities, strengthening the social fabric, and encouraging mutual support. This approach is known as “strategic procurement”— advancing additional objectives through procurement processes beyond simply obtaining the immediate service.
Profit restrictions are used in Sweden, the Netherlands, and Wales in the UK, and the study recommends considering this approach as well. Power and information gaps between providers and service recipients may lead to excessive profits and increase costs for the state or for the service recipients themselves. The countries examined also have restrictions on leverage, the use of loans to expand operations and profits beyond the use of equity, and on providers’ investments.
The study proposes considering giving preference to nonprofits and restricting private companies from entering certain areas. The UK, for example, has chosen to limit out-of-home placement services for children, as well as adoption services, to nonprofits only. It also recommends strengthening information-request mechanisms and developing additional mechanisms that would enable greater involvement by service recipients and social organizations.