House of Commons - Home Affairs

Select Committee on Home Affairs Written Evidence

Attachment

PARTIAL REGULATORY IMPACT ASSESSMENT RESTRUCTURING PROBATION TO REDUCE RE-OFFENDING COST ASSUMPTIONS TECHNICAL NOTE

COSTS AND BENEFITS

Option 1: Do Nothing

1. Access to alternative providers would be possible only at the discretion of individual probation boards which would need to take the decision to contract out services. Currently some £45 million of probation business is contracted out. This includes training contracts, provision of some interventions and the operation of some approved premises. These figures were extract from the activity costing returns produced by probation board for the financial year 2005-06.There is no power for the Secretary of State to compel boards to subcontract or market test core services. A relatively rapid increase in the rate of contracting out could see boards increase this, say by up to 50% over five years. Without direct intervention it was felt that this was a realistic maximum expansion of contracting out. To deliver more than £23 million of contracting out would require significant areas of activity either currently or planned to be undertaken my core probation staff to be contracted out and it considered unlikely that Probation Boards would be willing to embark on major revision of recently agreed staffing strucutures.

2. Assuming efficiency savings within the range of 3% to 8.5% the estimated annual savings of contracting out a further £23 million of probation business would be in the range of £0.5 to £1.7 million per annum. The basis for modelling assumption within this range is the experience gained from contracting out within the Prison Service. The upper estimate of 8.5% annual efficiency was achieved in a number of large establishments, where there was greater scope for efficiencies. The 3% was the minimum level of efficiency improvement delivered through contracting out Prison Service activity (the Prisoner Escort Custody Service). A high proportion of Prison Service costs are fixed infrastructure costs with over £450 million of resource cost being required for the maintenance and capital charges on the estate alone. The probation service has proportionately higher levels of staff related costs and the scope for medium term efficiencies is therefore at least comparable and probably far higher that in the Prison Service where the nature of the estate imposes severe constraints on restructuring.

3. The minimum cost of contracting out this level of business is estimated at £20k per board, a total of £840k. This figure was estimated to the full costs of one member of staff for four months writing tender specifications, reviewing bids and letting contracts. The minimum cost of managing these contracts is estimated at 0.9% of contract value. This is based on the average contract management costs on the major contracts (including Prisoner Escort and Custody Service and the various electronic monitoring contracts) already let within the NOMS area and includes the staff costs and associated overheads of the directly employed contract management staff, Discounted over 25 years at 3.5% to allow for costs inflation, this option would have a positive net present value (ie net savings) of £22 million at 2005-06 prices. The costs and benefits are summarised in Table 1 below. The DCF rates are the standard Treasury rates for analysis. The undiscounted cash figures are attached at Appendix 1.

Table 1

OPTION 1 DISCOUNTED CASH FLOW (DCF) ANALYSIS


Costs £M	2005-06	2006-07	2007-08	2008-09	2009-10	2010-11	2011-12	2012-13	2013-14

Tendering Costs	—	0.10	0.19	0.49	—	—	—	—	—
Contract Management Costs	—	—	0.02	0.06	0.18	0.17	0.16	0.16	0.15
Released resources @8.5%	—	—	0.21	0.61	1.66	1.60	1.54	1.49	1.44
NET DCF resources released	—	-0.1	0.0	0.1	1.5	1.4	1.4	1.3	1.3


Costs £M	2014-15	2015-16	2016-17	2017-18	2018-19	2019-20	2020-21	2021-22	2022-23

Tendering Costs	—	—	—	—	—	—	—	—	—
Contract Management Costs	0.15	0.14	0.14	0.13	0.13	0.12	0.12	0.11	0.11
Released resources @8.5%	1.39	1.34	1.29	1.25	1.20	1.16	1.12	1.08	1.04
NET DCF resources released	1.2	1.2	1.2	1.1	1.1	1.0	1.0	1.0	0.9


Costs £M	2023-24	2024-25	2025-26	2026-27	2027-28	2028-29	2029-30	TOTAL

Tendering Costs	—	—	—	—	—	—	—	0.77
Contract Management Costs	0.11	0.10	0.10	0.10	0.09	0.09	0.09	2.73
Released resources @8.5%	1.01	0.97	0.94	0.91	0.87	0.84	0.81	25.79
NET DCF resources released	0.9	0.9	0.8	0.8	0.8	0.8	0.7	22.3

Notes

1. Assumes £23 million of newly contracted business, of which 12% is contracted in year 1, 24% in year 2, 64% in year 3 and the balance in year 4.

2. Contract management costs of 0.9% of contract value.

3. Assumes savings occurs in the year following tendering.

Option 2: Transfer the statutory responsibility for provision of probation services from boards to the Secretary of State.

4. Benefits are expected to arise as follows:

— to help NOMS achieve its aim of reducing reoffending, by getting more out of existing resources and freeing up resources to reinvest, by enabling ROMs as commissioners to insist (in service specifications) on common approaches and seamless delivery across prisons and probation institutional boundaries, and by allowing providers with new and better ways of doing things, including synergies with their existing operations, to provide services.

5. Some of these benefits can be evidenced from the example of competition for the operation of prisons over the past decade. Some benefits can be costed, others cannot.

REDUCTION IN REOFFENDING

6. Together with the introduction of offender management within NOMS, the creation of a purchaser provider model and the introduction of increased competitive forces in to the market for the provision of correctional service is a core enabling measure designed to deliver an additional reduction in crime through a further 5% reduction in reoffending, which is estimated to deliver wider social and economic benefits amounting to £625 million over the period 2005-06—2008-09. This figure was taken from the Home Office's internal Research and Development Services estimate of the benefits of crime reduction and was used as the basis for the SR 2004 spending review negotiations with the Treasury.

PERFORMANCE ENHANCEMENTS

7. In addition to the tangible and costed benefits from contestability, there is widespread acceptance that introduction of competition for custodial services has had a positive impact on the decency agenda which aims to treat offenders with decency in a caring and secure environment. This helps develop positive relationships with prisoners and increase the probability that they will be more likely to go on to live useful and law-abiding lives that will benefit them as individuals and society as a whole.

8. There is also evidence that competition has helped provide the impetus for improved performance in prisons across a wide spectrum of measures. Prisons are rated on a 1 to 4 performance scale on the basis of a weighted scorecard of measures: level 4 is awarded to excellent establishments that are delivering exceptionally high performance and level 1 indicates a poor performer. Currently 18% of contracted prisons are rated at performance level 4, compared to 15% of public sector prisons.[1]

DELIVERING FINANCIAL EFFICIENCY IN A COMPETITIVE MARKET: EVIDENCE FROM CUSTODIAL SECTOR

9. The custodial Sector Provides the Following Examples of Delivering Financial Efficiencies in a Competitive Market:

— a number of prisons have been market tested. As a consequence of this the annual cost of providing those prisons has reduced from £82 million to £75 million, a saving of 8.5%;

— the outsourcing of the Prisoner Escort Service has delivered savings of £3.8 million per annum, equivalent to 3% of the cost of providing the service;

— a small number of prisons have been privately built and are privately managed. The estimated savings are £15.9 million equivalent to about 6% on a base of about £250 million;

— performance testing of prisons has generated savings of £2.8 million, equivalent to 3% on those prisons where performance testing has been carried out; and

— this evidence from the Prison Service suggests that further market testing of services within the National Probation Service could deliver savings within the range of 3% to 8.5%.

10. Estimates of the net present value of the benefits fall within the range of £220 million-£571 million over 25 years years as set out in Tables 2 and 3 below:

Table 2

OPTION 2 STANDARD ESTIMATE (USING DISCOUNTED CASH FLOWS)


Costs £M	2005-06	2006-07	2007-08	2008-09	2009-10	2010-11	2011-12	2012-13	2013-14

Central Market Testing costs	—	0.4	1.1	1.6	1.4	1.3	1.2	1.1	1.0
In House Bid costs	—	0.3	0.9	1.4	1.3	1.1	1.0	0.9	0.9
In House Contract Compliance Costs	—	—	0.0	0.2	0.4	0.6	0.8	0.9	1.1
Contract Management Costs	—	—	0.3	1.3	2.8	4.2	5.5	6.6	7.7
Released Resources	—	—	21.0	26.8	32.0	32.7	34.1	35.3	36.5
NET DCF resources released	—	0.7	18.6	22.4	26.1	25.5	25.7	25.8	25.8


Costs £M	2014-15	2015-16	2016-17	2017-18	2018-19	2019-20	2020-21	2021-22	2022-23

Central Market Testing costs	0.9	0.5	—	—	—	—	—	—	—
In House Bid costs	0.8	0.4	—	—	—	—	—	—	—
In House Contract Compliance Costs	1.2	1.4	1.4	1.4	1.3	1.3	1.2	1.2	1.1
Contract Management Costs	8.8	9.7	10.1	9.7	9.4	9.1	8.7	8.4	8.1
Released Resources	37.5	38.3	39.6	40.7	40.1	38.7	37.4	36.1	34.8
NET DCF resources released	25.8	26.4	28.1	29.6	29.4	28.4	27.4	26.4	25.5


Costs £M	2023-24	2024-25	2025-26	2026-27	2027-28	2028-29	2029-30	TOTAL

Central Market Testing costs	—	—	—	—	—	—	—	10.4
In House Bid costs	—	—	—	—	—	—	—	9.1
In House Contract Compliance Costs	1.1	1.1	1.0	1.0	1.0	0.9	0.9	22.5
Contract Management Costs	7.9	7.6	7.3	7.1	6.8	6.6	6.3	160.0
Released Resources	33.6	32.4	31.3	30.2	29.1	28.1	27.1	773.2
NET DCF resources released	24.6	23.7	22.9	22.1	21.3	20.6	19.9	571.2

Table 3

OPTION 2 LOW ESTIMATE (USING DISCOUNTED CASH FLOWS)


Costs £M	2005-06	2006-07	2007-08	2008-09	2009-10	2010-11	2011-12	2012-13	2013-14

Central Market Testing costs	—	0.5	1.3	2.0	1.8	1.6	1.5	1.3	1.2
In House Bid costs	—	0.3	0.9	1.4	1.3	1.1	1.0	0.9	0.9
In House Contract Compliance Costs	—	—	0.0	0.2	0.4	0.6	0.8	0.9	1.1
Contract Management Costs	—	—	0.4	1.7	3.7	5.5	7.3	8.9	10.3
Released Resources	—	—	21.0	20.4	20.3	20.8	21.5	22.1	22.7
NET DCF resources released	—	0.8	18.2	15.1	13.1	11.9	10.9	10.0	9.2


Costs £M	2014-15	2015-16	2016-17	2017-18	2018-19	2019-20	2020-21	2021-22	2022-23

Central Market Testing costs	1.1	0.6	—	—	—	—	—	—	—
In House Bid costs	0.8	0.4	—	—	—	—	—	—	—
In House Contract Compliance Costs	1.2	1.4	1.4	1.4	1.3	1.3	1.2	1.2	1.1
Contract Management Costs	11.7	12.9	13.4	13.0	12.5	12.1	11.7	11.3	10.9
Released Resources	23.2	23.6	24.0	24.1	23.6	22.8	22.0	21.2	20.5
NET DCF resources released	8.4	8.3	9.2	9.8	9.8	9.4	9.1	8.8	8.5


Costs £M	2023-24	2024-25	2025-26	2026-27	2027-28	2028-29	2029-30	TOTAL

Central Market Testing costs	—	—	—	—	—	—	—	13.0
In House Bid costs	—	—	—	—	—	—	—	9.1
In House Contract Compliance Costs	1.1	1.1	1.0	1.0	1.0	0.9	0.9	22.5
Contract Management Costs	10.5	10.1	9.8	9.4	9.1	8.8	8.5	213.3
Released Resources	19.7	19.1	18.4	17.7	17.1	16.5	15.9	478.2
NET DCF resources released	8.2	7.9	7.6	7.3	7.1	6.8	6.6	220.3

11. The assumptions that have been made in modelling the costs and benefits are explained in the following paragraphs.

RELEASED RESOURCES

12. In the standard estimate it is assumed that work that has been subject to a formal market test process will generate efficiencies equivalent to 3% of the value of the work tested within the first year after testing, rising to 6% in the second year and to a maximum of 8.5% after three years. In the low estimate the figures are 3%, 4% and 5% respectively. The rational for the rising profile is that structural constraints within the organisation, particular staffing levels, make it difficult to drive out short term efficiencies without incurring disproportionate costs in restructuring.

13. It is further assumed that the introduction of a formal market testing programme will have a significant "ripple" effect across the full supplier base as providers seek to improve performance and become better placed to thrive in a competitive marketplace ahead of further market tests. These benefits are modelled at 3% in the first year of the programme, rising to 4% in the second year and to a maximum of 5% by the third year. In the low estimate the figure is a 3% effect.

14. A key assumption is that the process of market testing will deliver efficiencies from suppliers, irrespective of whether the process results in a change of supplier. As part of the testing process, it is envisaged that existing providers will be expected to produce bids that offer better value for money that the existing provision.

15. Although expressed as financial savings for modelling purposes, the expectation is that the benefits will be delivered through a combination of undertaking additional work with offenders within the same level of financial resources. It is further assumed that the process will create additional capacity to generate innovative solutions to address re-offending which will be at least as, and probably more, effective in addressing the rehabilitation needs of offenders and thus deliver a greater impact on reducing re-offending and hence crime.

SPEED OF ROLLOUT

16. The pace of the market testing programme has not been finalised but the modelling here assumes that total probation expenditure will be tested over a 10 year period. There is a practical constraint in the volume of business that can be contested at any one time. This is estimated at around 12% of the value of probation business in any one year. This is the equivalent of the work of five entire probations areas. This has led to the illustrative pace of the market testing programme which is set out in Table 4 below:

Table 4


Year	1	2	3	4	5	6	7	8	9	10

Value of Business market tested	2%	1%	21%	33%	45%	57%	69%	81%	93%	100%

CENTRAL COSTS OF MARKET TESTING REGIMES

Evidence from the custodial sector

17. The evidence from the custodial sector is as follows:

Design, Construct and Manage (DCM) Prisons:

— £120K—Financial advisors

— £360K—Legal advisors

— £40K—Insurance

— £220K—Compliance Engineers

— £340K—Staff

— £20K—Expenses

Market Testing Prisons

— £70K—Financial advisors

— £200K—Legal advisors

— £40K—Insurance

— £300K—Compliance Engineers (condition surveys)

— £100K—Staff

— £10K—Expenses

— Performance Testing Prisons where a prison is required considerably to improve its performance or be subject to market testing/competition. It is estimated that performance testing a prison costs £350K. This is £100K for the staff in the Competitions Unit within NOMS and £250K for the in-house bid team within the Prison Service.

Inferences for Probation Market/Performance Testing

18. The average prison has a budget of about £12 million. This figure is on a par with the average budget for individual probation areas (excluding London). It is estimated that market testing a whole probation area might cost broadly the equivalent to the cost of market testing a prison. Until the market testing approach is agreed, this is the simplest approach to estimating probation market testing costs. If that assumption is valid then the cost would be in the region of £700K. However, it is questionable whether it would be necessary to spend £300K on building condition surveys. All probation buildings have regularly been subjected to condition surveys so this expenditure might not be required, reducing the cost to £400K. It is assumed that a learning curve effect would reduce this to £230K by the end of the testing cycle. Using this benchmark the maximum costs of market testing all 42 probation areas is therefore of the order of £12.5 million. In the low estimate at Table 3 market testing costs are modelled at an initial £500K, again reducing through the learning curve effect to £290K by the end of the cycle.

IN HOUSE BID COSTS

19. There are costs for the supplier in preparing bids. It is estimated that performance testing a prison costs £350K. This is £100K for the staff in the Competitions Unit within NOMS and £250K for the in-house bid team within the Prison Service. It is assumed that a learning curve effect would reduce this to £200K by the end of the testing cycle. Using this as a benchmark, the cost of in-house bid preparation for contracts to the value of expenditure currently committed to the 42 probation areas would total £9.1 million.

IN HOUSE CONTRACT COMPLIANCE COSTS

20. In addition to the existing reporting requirements, it is estimated that the additional costs associated with the move to a contractual relationship are likely to be of the order of £50K per annum per probation area. These are primarily legal costs associated with contract compliance and would be additional to existing financial and performance reporting requirements.

CONTRACT MANAGEMENT COSTS

21. The average annual costs of future probation contract management is estimated at 0.9% of contract value. This assumption is based on evidence of the contracted management costs of the current contracted out prisons, the electronic monitoring contracts and the PECS contracts. These contracts are larger than those anticipated for probation and consequently contract management represents a smaller percentage than assumed above for probation services contracts. The option was modelled with contract management costs of 1.2% and still returned a substantial positive net present value of £220 million (Table 3).

SUMMARY COSTS AND BENEFITS

Table 4


Option	Total Benefit Per Annum: Economic, Environmental, Social	Total Cost Per Annum: -Economic, Environmental, Social -Policy and Administrative
	£M	£M

1	1.7	0.2
2	64.0	17.0

(These figures are full costs at 2005-06 prices)

1 Source: Prison Service Performance Ratings August 2005. Back



© Parliamentary copyright 2006	Prepared 7 March 2006