Draft Contracting Out (Functions of Local Authorities: Income-related Benefits) Order 2002

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Mr. Steve Webb (Northavon): May I, too, say what a pleasure it is to serve under your chairmanship, Mr. Butterfill?

The backdrop to the order is a housing benefit system that remains inefficient. Claimants typically have to wait two months to receive their money, despite the target of 14 days from the date on which they supply all the relevant information. In some of the worst offending authorities, people can wait three, four, five or six months.

The order relates primarily to those authorities that have contracted out their administration of housing benefit and those that use agency staff. A minority of authorities contract out. The last list that I saw showed that only around 27 local authorities out of the 400 that administer housing benefit had contracted out their provision to an external provider. That immediately starts to sow questions in our minds about contracting out in principle.

The order aims to sort out a mess that arises when half a service is contracted out. In effect, it testifies to the fact that to a large extent previous Governments, and to some extent this Government, took the doctrinaire approach that the private sector was innately preferable. This Government might say that the private sector was worth a fair crack of the whip. As a result, the 400 local authorities were presumably invited to consider contracting out to external providers, but only 27 did so: intriguingly, 373 presumably decided that an external provider was not more efficient. The order is therefore an attempt to sort out the mess that was created by contracting out a service that I am inclined to think should never have been contracted out in the first place.

The local authorities under discussion are all council tax authorities that issue council tax bills to local residents. They already have the databases and processing systems, and therefore the information about the house, circumstances and addresses of all the people who receive housing benefit, which a separate body administrates. It is therefore inherently less efficient for someone else to take all that on.

A private contractor who is required to provide the service at a lower cost must be cutting a corner somewhere else, which is germane to the issue at stake. If the order facilitates a greater use of contracting out, we are encouraging a form of provision that relies on people who have to cut costs somewhere, and on less trained staff. Presumably, the point of the order is to make it cheaper and more efficient for local authorities to contract out. If we pass the order and facilitate greater contracting out, how confident can we be that the service will be undertaken by people who are at least as well trained as local authority officers in house?

I understand that the Minister said in a recent speech that one thing that the Department for Work and Pensions could do for local authorities and their administration of housing benefit was to assist with training. I believe that there was no explicit reference to training of contractors who provide such services. Will the Minister clarify whether his Department plans to ensure that the people to whom the services are contracted out are trained to at least as high a level as those who take the decisions in local authorities? An obvious way to save money is to use less trained staff, to pay them less and probably to have a higher staff turnover. The nub of my argument is that the order appears to be about making contracting out cheaper and more efficient. However, contracting out, which will be the consequence of the order, is the wrong direction for us to be going in.

The Minister hinted at some of the failures of contracting out housing benefit administration, and Hackney is a classic case. ITNET took over the contract under arrangements that this order is changing and ended up with 40,000 unprocessed housing benefit claims, which is a staggering number. The situation clearly varies from authority to authority, but considering the size of the local authority in Hackney, that must be almost all of them. In 2001, the work was brought back in house. Had the order been in place and the price been a little lower for the local authority, one wonders whether the balance between contracting out and contracting in might have changed. Would other London authorities have thought that they could save a few thousand pounds at the margin? They might have been pushed down the wrong direction.

The Minister tried to reassure us about the proposed checking regime and, as a social scientist, added some random sampling, which I heartily endorse. I would imagine that there could be plenty of research projects on that. It seems that the regime will feature random samples of 10 per cent. of cases, enhanced benefit fraud inspections and the Audit Commission. Although each claim will not be checked three times, 10 per cent. of all claims will be checked twice. I appreciate that the Minister would say that they are all checked at the moment, but he is clearly so concerned about the process that he requires the fraud inspectorate to step up its inspections. Why will the fraud inspectorate have to do more? In the Minister's letter to the Social Security Advisory Committee and in the explanatory notes, he envisages a tougher role for the benefit inspectorate when local authorities have contracted out housing benefit administration. Why is he more worried about private contractors than in-house teams?

There is another paradox in the order, which is that local authorities will still retain some powers. Some of the work will be deemed to be too sensitive for contractors to deal with, including aspects that relate to subsidy or have fraud implications. We will be asking the contractors to work out and to make discretionary decisions about people's housing benefit, but not to work on anything that has a subsidy or fraud implication because we cannot trust them. I put it in those stark terms because that is the only way in which I can understand the order's scope. We are happy for them to do the sums and to make decisions, even when discretion is involved, but we do not trust them when subsidy or fraud implications might arise. It worries me that we are pushing powers in the direction of people whom we implicitly do not trust. That is an extreme way of putting it, but the Minister believes that they will need greater inspection by the fraud inspectorate and should not be given other powers that are too sensitive. Should we be going down that avenue?

I am also unclear about the order's anti-fraud implications. One criticism of the Government's approach to housing benefit fraud is that local authorities have an incentive to let a fraudulent claim be made and then detect it. There is no reward for stopping the fraudulent claim in the first place—it would not be easy to design a system to do that—but there is one for allowing it into the system and then stopping it. However, what would happen if a contractor spots something that looks a bit fishy? What is the incentive for the contractor to detect and to prevent the fraud?

The incentive structure for local authorities to do the work in house is weak and wishy-washy enough. For example, I recently spoke at a conference of people who are concerned with benefit fraud in local authorities, where I was told that the Government money that they receive as an in-house provider for prosecuting someone does not match the costs. The incentives that they receive as in-house providers for cracking down on fraud are weak. How will that work for contractors? Will Joe Bloggs, who works for ITNET and is just trying to churn through thousands of bits of paper per week, have any incentive to deal with fraud? If the anti-fraud incentives for contractors are weaker than for in-house workers, any order such as this, which pushes local authorities further down the contracting-out route, is likely to undermine the battle against fraud, about which the Government make so much play.

I am not ideologically opposed to contracting out in all cases and circumstances, but I am concerned that we are talking about a bolt-on activity. Local authorities already have to send separate bills to all the people whom we are discussing, so there is already a postal dialogue, and they are collecting information about these people. It makes me suspicious. Can an equal service be provided when the service is contracted out, at a lower cost, without a threat to the quality of service?

Our concern is that the order will tip the balance still further in that direction, with implications for service quality, identification of fraud and efficiency. For all those reasons, we have grave reservations about it.

4.55 pm

Malcolm Wicks: Although brief, the debate has been useful. The hon. Member for Somerton and Frome (Mr. Heath) intervened to ask whether the local government ombudsman could still investigate cases. I can confirm that the answer is yes. However, the order does not need to cover the ombudsman, because those provisions exist elsewhere. The ombudsman can and does investigate cases relating to local authorities that have contracted out their administration. I hope that that reassures the hon. Gentleman.

The hon. Member for Hertsmere (Mr. Clappison), while welcoming the order, asked a number of important questions. We will keep the quality control that the order introduces—the 10 per cent. random sample—under review. As I have said, the order provides that the contractor must pass to the local council for checking 10 per cent. of all decisions made in a day. We will make it clear that those checks must be carried out by the local authority, not contracted out to another supplier. As I have said, guidance will be issued to impress on local councils the need to do a proper check of those cases. Delays are caused by the current system, all other things being equal, so we are confident that the service will improve if the order is passed.

The hon. Members for Northavon (Mr. Webb) and for Hertsmere touched on fraud investigations. It is vital that we crack down increasingly on housing benefit fraud in the weeks, months and years to come. I would not commend the order to the Committee if I thought that it in any way undermined that, and we shall produce guidance for local authorities to pass on to contractors to make that clear. The 10 per cent. sample check and the management of the housing benefit operation by the local authority—the service might be contracted out, but the authority is still accountable—will enable us to keep a close eye on fraud issues.

I know that it is not the subject of the order, but when colleagues have had a chance to read today's spending review documentation, they will see that we are introducing for the first time a housing benefit fraud target: a 25 per cent. reduction in coming years. It is a demanding target, and we would hardly have introduced it if we thought that we were making fraud more possible. We are also undertaking a research exercise to ascertain the amount of fraud in housing benefit, but we thought it important to put the new target in place with the spending review.

The hon. Member for Northavon says that he is not against contracting out, but he seemed to be. Most of us in this Room would be rather more liberal about the issue. The order does not make a value judgment about contracting out, but our experience is that some contracting-out exercises have gone badly wrong, some have been downright poor and some have been rather more successful. We support the approach of the Audit Commission, which said that, in the right circumstances, contracting out can help some authorities.

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