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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I believe only Yvette Cooper has the breadth of support to beat Jeremy Corbyn

All the recent polling suggests Andy Burnham is losing more votes than anyone else to Jeremy Corbyn, says Diana Johnson MP.

Tom Blenkinsop MP on the New Statesman website today says he is giving his second preference to Andy Burnham as he thinks that Andy has the best chance of beating Jeremy.

This is on the basis that if Yvette goes out first all her second preferences will swing behind Andy, whereas if Andy goes out first then his second preferences, due to the broad alliance he has created behind his campaign, will all or largely switch to the other male candidate, Jeremy.

Let's take a deep breath and try and think through what will be the effect of preferential voting in the Labour leadership.

First of all, it is very difficult to know how second preferences will switch. From my telephone canvassing there is some rather interesting voting going on, but I don't accept that Tom’s analysis is correct. I have certainly picked up growing support for Yvette in recent weeks.

In fact you can argue the reverse of Tom’s analysis is true – Andy has moved further away from the centre and, as a result, his pitch to those like Tom who are supporting Liz first is now narrower. As a result, Yvette is more likely to pick up those second preferences.

Stats from the Yvette For Labour team show Yvette picking up the majority of second preferences from all candidates – from the Progress wing supporting Liz to the softer left fans of Jeremy – and Andy's supporters too. Their figures show many undecideds opting for Yvette as their first preference, as well as others choosing to switch their first preference to Yvette from one of the other candidates. It's for this reason I still believe only Yvette has the breadth of support to beat Jeremy and then to go on to win in 2020.

It's interesting that Andy has not been willing to make it clear that second preferences should go to Yvette or Liz. Yvette has been very clear that she would encourage second preferences to be for Andy or Liz.

Having watched Andy on Sky's Murnaghan show this morning, he categorically states that Labour will not get beyond first base with the electorate at a general election if we are not economically credible and that fundamentally Jeremy's economic plans do not add up. So, I am unsure why Andy is so unwilling to be clear on second preferences.

All the recent polling suggests Andy is losing more votes than anyone else to Jeremy. He trails fourth in London – where a huge proportion of our electorate is based.

So I would urge Tom to reflect more widely on who is best placed to provide the strongest opposition to the Tories, appeal to the widest group of voters and reach out to the communities we need to win back. I believe that this has to be Yvette.

The Newsnight focus group a few days ago showed that Yvette is best placed to win back those former Labour voters we will need in 2020.

Labour will pay a massive price if we ignore this.

Diana Johnson is the Labour MP for Hull North.