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.

Grant Shapps on the campaign trail. Photo: Getty
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Grant Shapps resigns over Tory youth wing bullying scandal

The minister, formerly party chairman, has resigned over allegations of bullying and blackmail made against a Tory activist. 

Grant Shapps, who was a key figure in the Tory general election campaign, has resigned following allegations about a bullying scandal among Conservative activists.

Shapps was formerly party chairman, but was demoted to international development minister after May. His formal statement is expected shortly.

The resignation follows lurid claims about bullying and blackmail among Tory activists. One, Mark Clarke, has been accused of putting pressure on a fellow activist who complained about his behaviour to withdraw the allegation. The complainant, Elliot Johnson, later killed himself.

The junior Treasury minister Robert Halfon also revealed that he had an affair with a young activist after being warned that Clarke planned to blackmail him over the relationship. Former Tory chair Sayeedi Warsi says that she was targeted by Clarke on Twitter, where he tried to portray her as an anti-semite. 

Shapps appointed Mark Clarke to run RoadTrip 2015, where young Tory activists toured key marginals on a bus before the general election. 

Today, the Guardian published an emotional interview with the parents of 21-year-old Elliot Johnson, the activist who killed himself, in which they called for Shapps to consider his position. Ray Johnson also spoke to BBC's Newsnight:


The Johnson family claimed that Shapps and co-chair Andrew Feldman had failed to act on complaints made against Clarke. Feldman says he did not hear of the bullying claims until August. 

Asked about the case at a conference in Malta, David Cameron pointedly refused to offer Shapps his full backing, saying a statement would be released. “I think it is important that on the tragic case that took place that the coroner’s inquiry is allowed to proceed properly," he added. “I feel deeply for his parents, It is an appalling loss to suffer and that is why it is so important there is a proper coroner’s inquiry. In terms of what the Conservative party should do, there should be and there is a proper inquiry that asks all the questions as people come forward. That will take place. It is a tragic loss of a talented young life and it is not something any parent should go through and I feel for them deeply.” 

Mark Clarke denies any wrongdoing.

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.