The dangers of payment-by-results in probation

Grayling's reforms show the coalition hasn't learned from the failure of the Work Programme.

Today the Justice Secretary, Chris Grayling, set out the coalition’s latest payment-by-results (PBR) scheme. Originally developed as a way of contracting out back-to-work employment services, this public services version of ‘no win, no fee’ is going to be extended to the probation service in an attempt to bring down reoffending.

The idea is simple – services once delivered by the state are contracted out to private and voluntary sector providers, but a big chunk of these providers’ fees are only paid if they achieve certain outcomes. So in the Work Programme around 80 per cent of the fee is paid only once an unemployed person has been supported into a sustainable job. In the probation service, the measure of success will be reoffending rates. The state only shells out if private companies do what they promise. What could possibly go wrong?

The answer is, unfortunately, quite a lot, as the Work Programme has shown a couple of years into the original contracts. And none of the lessons it’s thrown up seem to have been taken on board.

First, PBR is essentially a way of the state contracting out risk and uncertainty. In order to come up with the right price tag, the state needs to be able to price that risk. The problem comes when public commissioners have no idea about levels of risk involved in what they’re commissioning – and when contractors themselves have no control over some of the biggest risks like the state of the economy in the Work Programme. This is one reason why Work Programme contractors are likely to find themselves in difficulties – the original contracts built in overly optimistic assumptions about the labour market. So the contracts are too stretching and if they are stuck to, the government in effect will be underpaying for services given the economic backdrop.

Does it really matter? Surely underpayment is no skin off the state’s nose. But this is far too simplistic. There’s too much at stake with unemployment – the Work Programme providers really are too big to fail, which some of them may do if they fail to meet outcomes set out in their contracts. That’s arguably even more true in the case of probation services, where public safety is at stake. This implicit guarantee at least partially erodes the point of PBR as a risk transfer mechanism. And it muddies accountability. If the economy’s doing worse than expected – which affects reoffending as well as unemployment – who’s responsible for contractors not meeting their outcomes?

Second is the impact of payment-by-results on the voluntary sector. These PBR contracts couldn’t be more distant from the notions of "big society" or devolution – the proposals for the probation scheme are for just a handful of contracts covering huge swathes of the country. Only large private companies are able to absorb the risks involved in going for a contract of this size, which is why it is the Sercos and A4Es of this world delivering the Work Programme rather than even the largest charities involved in welfare to work. The idea is that these big contractors subcontract to the voluntary sector. Yet the Work Programme contracts have been structured in such a way that private providers can cream off the ‘safe’ payment not linked to outcomes and pass on more – not less – risk to the small voluntary organisations with whom they subcontract. The result is that far from building up voluntary sector capacity, PBR risks squeezing it at the expense of big companies. No wonder the sector is outraged.

The third fundamental problem with PBR is that it discourages knowledge-sharing of what works – whether that’s getting people back into work, improving kids’ reading or reducing reoffending. Initial data on the Work Programme shows there is big variance in the performance of different companies. What are some doing that’s more effective than others? This is a question of huge public interest. Yet PBR means that companies – far from sharing best practice across the public sector – have a commercial interest in protecting their recipes for success. This is one example of where there is a real tension between the profit motive and public interest, and it needs to be managed.

None of this to suggest that there is anything inherently wrong with private sector delivery of public services. Of course the public sector could stand to gain from intelligently incorporating some learning from the private sector if it’s done in the right way. But it’s just as ridiculous to say the private sector is always better at delivering public services than it is to say it’s always worse.

Unfortunately, the state has a history of making some pretty bad deals with the private sector – from PFI deals gone wrong to the public-private venture capital funds that lost huge amounts of money in the 1990s and 2000s. All of these examples highlight the importance of getting the relationship - and, crucially, the contract that structures that relationship – between the public and private sector right. But unfortunately for those who adopt a ‘private sector good, public sector bad’ mantra, that’s probably trickier to do than delivering efficient services in the first place. It’s a great shame the coalition shows no indication of learning the lessons from the Work Programme – and it means there’s a real risk PBR ends up being the PFI story of the 2010s.

Justice Secretary Chris Grayling speaks at last year's Conservative conference in Birmingham. Photograph: Getty Images.

Sonia Sodha is head of policy and strategy at the Social Research Unit and a former senior policy adviser to Ed Miliband. She tweets @soniasodha.

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The Lib Dems' troubled start doesn't bode well for them

Rows over homosexuality and anti-Semitism are obscuring the party's anti-Brexit stance.

Tim Farron has broken his silence on the question of whether or not gay sex is a sin. (He doesn't.)

Frankly, this isn't the start to the general election campaign that the Liberal Democrats would have wanted. Time that they hoped would be spent talking about how their man was the only one standing up to Brexit has instead been devoted to what Farron thinks about homosexuality.

Now another row may be opening up, this time about anti-Semitism in the Liberal Democrats after David Ward, the controversial former MP who among other things once wrote that "the Jews" were "within a few years of liberation from the death camps...inflicting atrocities on Palestinians" has been re-selected as their candidate in Bradford East. That action, for many, makes a mockery of Farron's promise that his party would be a "warm home" for the community.

Politically, my hunch is that people will largely vote for the Liberal Democrats at this election because of who they're not: a Conservative party that has moved to the right on social issues and is gleefully implementing Brexit, a riven Labour party led by Jeremy Corbyn, etc. But both rows have hobbled Farron's dream that his party would use this election.

More importantly, they've revealed something about the Liberal Democrats and their ability to cope under fire. There's a fierce debate ongoing about whether or not what Farron's beliefs should matter at all. However you come down on that subject, it's been well-known within the Liberal Democrats that there were questions around not only Farron's beliefs but his habit of going missing for votes concerning homosexuality and abortion. It was even an issue, albeit one not covered overmuch by the press, in the 2015 Liberal Democrat leadership election. The leadership really ought to have worked out a line that would hold long ago, just as David Cameron did in opposition over drugs. (Readers with long memories will remember that Cameron had a much more liberal outlook on drugs policy as an MP than he did after he became Conservative leader.)

It's still my expectation that the Liberal Democrats will have a very good set of local elections. At that point, expect the full force of the Conservative machine and their allies in the press to turn its fire on Farron and his party. We've had an early stress test of the Liberal Democrats' strength under fire. It doesn't bode well for what's to come.

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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