Session 2010-11
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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 519-iii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Justice Committee

The Role of the Probation Service

Tuesday 8 March 2011

Professor Martin Chalkley, Genevieve Knight, Jen Byrne and Toby Eccles

Helen Edwards CBE, Luke EdwarDs and Ian PorÉe

Evidence heard in Public Questions 214 - 290

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Oral Evidence

Taken before the Justice Committee

on Tuesday 8 March 2011

Members present:

Sir Alan Beith (Chair)

Chris Evans

Ben Gummer

Mr Elfyn Llwyd

Claire Perry

Yasmin Qureshi

________________

Examination of Witnesses

Witnesses: Professor Martin Chalkley, University of Dundee, Genevieve Knight, Policy Studies Institute, Jen Byrne, A4E, and Toby Eccles, Social Finance, gave evidence.

Q214 Chair: Welcome, Ms Byrne from A4E, Professor Chalkley from the University of Dundee, Mr Eccles from Social Finance and Dr Knight from the Policy Studies Institute. We are very pleased to have you with us as we try to understand how payment by results works. From the range of experience that you have in either participating in such schemes or studying and analysing them, I think you will be able to help us a great deal and we very much appreciate it.

Perhaps I can start in general terms, although without wanting to encourage a particularly long answer, to establish what you see the key characteristics of payment by results schemes to be if they are to work successfully. Any offers?

Professor Chalkley: I will start in relation to what payment by results means in the context of health care, which is something quite different from what is implied in the consultation paper as being payment by results for probation services. In the realm of health care, payment by results is a system in which hospitals are paid according to the number of patients they treat, pure and simple. It is a kind of system that replaced-and has replaced across the world-payment according to expenditure on treating patients. I think the term "payment by results" in the context of health care is perhaps slightly misleading. The results being talked about are the number of treatments being conducted, not the success of those treatments.

Ben Gummer: Payment by output.

Professor Chalkley: Yes. It is payment by output, payment by activity, rather than payment by outcome, whether the treatment is successful or whether people get better or not. That is an important point to bear in mind. When you ask questions about payment by results it is natural to try and answer those questions in relation to those kinds of payment by output systems rather than payment by results systems in the sense of outcomes.

Q215 Chair: If it was really an outcome-based system, would it have to change very radically from the kind of system-

Professor Chalkley: That is right. There has been big literature in health care about the practicality of paying according to genuine outcome, as in whether the treatment is successful. That literature emphasises the difficulties that would be involved in doing that: the difficulties in establishing whether it is the actions of the hospital or the actions of health carers that have given rise to the outcome rather than just chance and good or bad luck.

Q216 Chair: Or pre-existing factors: lifestyle or propensity to be cured.

Professor Chalkley: Yes, or pre-existing factors: the characteristics of the patient and so on and so forth. There has been a big movement in terms of the literature talking about the outcomes in health. I don’t believe that it is practically implemented anywhere at the moment. It is all in terms of payment by activity.

Q217 Chair: Is it different in relation to the Department for Work and Pensions contracts?

Genevieve Knight: Yes, it is. The evidence that we have definitely shows that it is. In theory, and in practice, these are outcome-based as defined. They are an outcome where it is the person entering work or not. It does have issues related to the characteristics of the customer, so there are some similarities to health. It is definitely outcome-based for Department for Work and Pensions-style contracts.

Q218 Chair: How is an appropriate price for the desired outcome determined?

Genevieve Knight: In the case of Pathways to Work and the subsequent contracting that was carried out for the commissioning, and is also currently occurring for the Work programme which will start in the summer, the contracting price is determined through a competitive tendering system where tenders are submitted and defined by those who are tendering, and then assessed as part of the competitive process. For Pathways to Work, this had some effect on how those contracts then worked in practice, as to whether they are financially viable, and so on. If you want to ask about specific aspects of that, I can say more.

Q219 Chair: What about the experience of A4E, because you have been a bidder for these?

Jen Byrne: The only thing I would add to Genevieve’s point is that, in the instance particularly of the Work programme, we have differentiated payments which are commensurate with the perceived difficulty that the provider may be faced with in placing that person into work. So there is a higher premium payment for different customer cohort groups.

Q220 Chair: Are they grouped in categories?

Jen Byrne: They are.

Q221 Chair: You don’t have to have it for every single case, do you?

Jen Byrne: No. There are eight categories for Work programme, which range from type of customer, which includes lone parent, ex-offender, young person, and then there are some which are linked to the duration of a person’s unemployment, so the longer that somebody has been unemployed, the higher the weighted payment for them. That applies on a service fee basis. A small amount in Work programme is attached to the start on the programme. It is called an attachment fee in this case. There are also then weighted payments on a pure outcome basis that are differentiated again by a customer cohort basis. They incentivise providers. It avoids the typical criticism around creaming and parking, where a provider has a contractual incentive to invest more in those customers that are perceived as having the greatest barriers to work. Equally, then, the payment attached to those customers is in effect commensurate with the idea that you are going to have to invest a greater level of support and possibly provide a greater number of interventions in order to support that person back to work.

Q222 Chair: Dr Knight, do you want to add something to that?

Genevieve Knight: Yes. I would add that the DWP has defined that contractual basis for the Work Programme on the basis of the learning which it went through and the process of discovering problems that it had with the Pathways contracts and other contracts it has had in the past, where there was the issue of the providers not delivering services to those potentially who most needed them or were further away from the work outcome but instead focusing their services on those who would achieve the financial outcome.

Chair: Cherry-picking.

Genevieve Knight: It is another word for it. It is called creaming. It was referred to earlier.

Q223 Chair: Are you saying that, with experience, they developed a system to try to overcome that?

Genevieve Knight: That is correct. We don’t have any evidence yet since the programme hasn’t yet started, but that is definitely the basis for the new contracts in order to achieve a better design.

Q224 Chair: To what extent does the Department specify the methods by which you are to achieve the objective: the actual nature of the service to be provided? Are there parameters for that, or is it left to you to meet the outcomes?

Jen Byrne: The introduction of payment by results methodologies around welfare contracts has led to something that is commonly within the industry known as "the black box" approach, whereby the commissioning department defines very clearly the high-level outcomes it wants to achieve. In the case of Work Programme, it is long-term sustained employment. With that transfer of risk and responsibility over to the provider, it then negates the need to be as heavily prescriptive about the "how". In effect what they are saying is they define what they want, but they leave it up to a provider to then determine how they are going to find a solution to that.

What that leads to, I suppose, is a requirement for possibly larger and longer-term contracting. You have to invest far more heavily in intelligent systems and in staff training, whereby you are imposing quite a lot of responsibility on to front-line workers, to design highly personalised programmes for support because that is where the risk is lying; it is about your ability to secure that long-term outcome. That means that as a provider, to hold that risk, you have to indemnify yourself around that, to collect evidence that enables you to refine your delivery solution and attune your service provision around the individuals, allowing you to differentiate what you do by customer cohort group or by typical characteristics.

Q225 Chair: Is there a political reputational risk, and, if so, how is it handled? I think I might refer to it, if I may, as the "Jack Straw problem", where the prisoners’ Christmas party suddenly becomes a tabloid press political issue so the Minister says, "That’s got to stop." That response to political risk is incompatible with handing over responsibility for determining how programmes are carried out to the provider and tends to create an overhang of departmental involvements in the precise programmes used. Dr Knight, do you want to come in?

Genevieve Knight: There does definitely have to be a minimum prescription of services, which is the minimum that is in the design of the contract and is stated in the contract.

Q226 Chair: It may be something seemingly harsh that you do; it may be something seemingly soft, if I can put it that way, that you do in the course of a programme, even in relation to unemployment, never mind dealing with offenders, which just attracts a lot of attention. I wondered whether that attention can stay with the provider or whether ministerial interference just comes with the risk.

Toby Eccles: I think there is a risk, to take two different versions of the same thing. One is that one is dealing with a vulnerable population in the case of ex-offenders or offenders. There should be, and in our service specification there are, a set of principles over which we can’t step. We can’t be involved in trying to inculcate them into a certain religion or cultish group, for example, or pay them not to reoffend, both of which would seem very reasonable from our point of view and would work within our service model.

But there is also a risk that, if you have an evidence base for something which a random newspaper-take either The Guardian or The Daily Mail-doesn’t like but which happens to be highly effective, then political intervention at that point is risking the service provider’s ability to deliver the service and the outcomes on which they are getting paid. At that point I think the Government would expose itself to a liability the other way. "If you do want to stop me doing that, then actually you are going to have to pay for the fact that I can’t do it."

In some ways there is a benefit to Government in passing responsibility. Our role governmentally is to define the outcomes that society is looking for and what it is willing to pay for them. How you get there, providing you are treating these people with respect and dignity, is up to you. If you find that playing two hours of PlayStation every day-to take a random example, which again is not in the service model, I hasten to add-and that gets picked up by The Daily Mail as being appalling, then that is part of the benefit of having somebody else doing it.

Q227 Mr Llwyd: How influenced are you by the tabloid agenda, which are the drumbeats against which we all try to implement a fair justice system?

Toby Eccles: One of the benefits of working on an outcomes basis is that one has to be very rational about what one does. Just to pull back and answer some of the earlier questions about how you define successful payment by results, the first thing one has to define is what you are trying to do your payment by results for. Are you taking a present set of work and services and wanting to move it to more of an outcomes basis because at the moment you don’t believe that you are getting good value for money out of the money that you are spending? The outcomes one is achieving with quite a lot of public money aren’t sufficient. Therefore, moving progressively, so that a higher proportion of the income to the service providers is on the basis of the outcomes they generate, should incentivise people to work more effectively and also help sort the wheat from the chaff.

The next bit is that when one is working in new areas, and everything that the Ministry of Justice is doing is really new areas, the contracts need to be built in partnership. I don’t see the fact that the Work programme changed its contracting following feedback from the service providers is a poor thing. I think it demonstrates that they are doing exactly the right thing of working with the marketplace to figure it out. I am very glad that these early ones on probation and so on are pilots because one is generating the information and the data to be able to build a larger market in the future.

The third element is around the service specification point and the difficulty of the tabloid press. The Peterborough model is probably at the most extreme end, in the sense that the vast majority of money flowing through the system is purely on the basis of outcomes. In order to make that work, we wanted to do something very specific. We weren’t taking a present set of services. We were saying, "We actually want to demonstrate to Government a hypothesis that it is better to invest in reducing people’s reoffending behaviour than in merely locking them up and paying for the consequences." As we know, the Government can’t afford to do both: to pay for it and then fail, and then lock them up afterwards. We are happy to be contracted only on the basis of the outcomes that are generated because we can find socially motivated investors who also want to test the hypothesis, who also want to demonstrate that it would be better done that way. Therefore, we will take the contract, we will raise money off the back of it, pay for the set-up services, evidence those services, and that evidence base will then be a great platform for Government and an investment proposition that this is a better way of working. How you then choose to contract that in the future may be rather more similar to the Work programme, where there is a proportion on service provision and then a proportion on outcomes.

In answer to the tabloid point, one has to be working on the basis of evidence and build that evidence so that we are tracking everybody who comes in and everything that happens to them. Everyone is inputting information on to the same database. So slowly we are making more and more decisions on the basis of data and not on the basis of anecdote or tabloid whim. That is how we will end up producing better results.

Chair: Dr Knight is keen to come in on this point.

Genevieve Knight: I thought that your query was about bad press and the politics of the fact that, once the contract is in place, what you do about it. As a result you would, to avoid the risk, specify so many aspects of the contract that there might not be too much room for innovation because the theoretical basis for outcome-based contracting being a useful tool is that it can provide innovation and cost reductions through the delivery of some new form of service, which is that type of "black box". If you pre-specify too much in the contract, that might be a difficult thing to achieve.

We have evidence from the Pathways to Work-the early evidence of outcome-based contracting for Department for Work and Pensions-that the providers certainly felt that they had little room to innovate. The one characteristic of this research is that it did occur during the start of the recession. Costs are being squeezed. Financial viability is a much more precarious area. When they were tendering, the process occurred slightly before that was going to be the case, and also the market conditions were different at the time they were predicting what they could achieve. The evidence we have from Pathways to Work, private sector led, did show that there was limited innovation in the services potentially-that is the evidence-but that there was some innovation in cost reductions and such areas.

Q228 Ben Gummer: Mr Eccles, you have hit on perhaps the key perennial paradox of the criminal justice system, which is that there appear to be two opposing forces. One is the very limited amount of evidence that there is suggesting that the policy should follow in one direction and then the politics pulling it in the other. You make a very interesting point about the fact that, quickly, an evidential basis built up through a PbR model. One of our challenges on this Committee is the complete lack of evidence in sentencing and in outcomes. In previous experience in health and welfare , how quickly i s that evidential base built up , and how robust is it?

Toby Eccles: I think there are two separate sets of evidence. If you look at the evidence based, say, in Australian work programmes-and I am sure Dr Knight will have thoughts on it-one can build up quite a large scale set of evidence quite quickly. The question is how valuable that is over time. Our focus has been on looking at it in a commercial sense; one builds up data which you then mine to work out how to improve what you are doing. We are not addressing this population particularly well. What do we do about it? This organisation is working well, but these individuals within it seem to be much better than these individuals. What training differences are there and how do we support those to become more effective? It is a constant learning by doing and using data to drive better decision making.

That is slightly different from trying to build up an evidence base in the traditional sense of trying to have a randomised control trial or you try to have longitudinal studies for long periods of time on populations. The question then is how open you can try and make that knowledge base that one is developing. One of the things I would advocate for this work is that, in criminal justice, you ask your pilot providers to be providing that information base as they are learning, to become part of the public goods to enable this payment by results model to be moved out at greater scale.

Q229 Ben Gummer: Can I just pick you up on that point? Surely the other benefit or the other evidential base is being able to price the outcomes more accurately. Surely you would want, therefore, to have a more open source format on the outcomes, thereby allowing the efficiencies to be gained in pricing.

Toby Eccles: Pricing is one of those areas where people have still got their heads on the wrong way round, if you will pardon my expression.

Chair: I think it is a rather good expression.

Toby Eccles: In other words, they are still looking at it and saying, "How much does this cost to produce? What is the rate of failure? How do I multiply that up? What is your capital requirement? There is your price." That is instead of saying, "What is the value to society? What is the value in terms of the reduction in other costs in the system?"

If, for the sake of argument, we set it so that one had a differential set of pricing working up to that point, then those that presently it was not economic to work with would be economic to work with and you would try and figure out how to deal with them. It is worth thinking from the value side as well as trying to minimise costs early on. I also think there is a danger, by the way, in all this process because people are keen to get involved with paying by results. There is the potential for a number of these early pilots falling flat on their faces. That will make the investment case in the future very, very difficult. It would be a little bit like one of the first one or two privatisations going wrong. We wouldn’t have had a very successful privatisation programme if one had gone down that route. I think it was quite sensible that the first ones were very successful, which meant that one was able to shift an awful lot more.

Q230 Ben Gummer: I am sure my colleagues will come on to the issue of cross-departmental savings shortly, but Dr Knight wants to add something.

Genevieve Knight: On efficiency and value for money in pricing, internally, the Justice Department would be able to conduct an analysis through a cost-benefit analysis which would provide them with some evidence of the costs. They could just do a simple cost analysis of their own costs which would give them an idea of some sort of price. If you do a pilot you can gather robust evidence on the actual impacts, on the outcome, as well as the costs of those and combine them to provide what is generally accepted as a cost-benefit analysis and provides the value for money information. So it is possible to do that.

Obviously, the time required to get the head round the wrong way, to be facing both directions and to be Janus, then you would need to have had time for that pilot to have occurred for the evidence. "In what sort of time period does the outcome have to occur in the contract for a payment to be made?" would be the minimum, etcetera. It is quite a long time before that evidence basis turns up. That is why, often, in rapid evidence reviews, they looked at other countries to provide the evidence because they might not yet have enough evidence in the country that you are looking at.

Jen Byrne: To pick up particularly on Toby’s point, we see the evidence gap as being probably the initial and largest inhibitor to an immediate roll-out of a full PbR model around justice services and probation services in particular, principally because in a welfare environment it has taken at least 15 years for the Department for Work and Pensions to be reasonably confident that they have a fairly accurate calibration of cost and dead weight of risk threshold.

A proposed solution to that would be to have an interim phase, which the pathfinders should help us achieve, which must be an entirely collaborative venture between providers and the commissioners and done on a very open-book basis, saying that nobody has a firm idea and that, if you took a particular sub-group or cohort of offenders and you applied a particular configuration of interventions delivered in a particular sequence, you would absolutely definitely get that outcome or that percentage reduction in reoffending. Without that certainty, it becomes incredibly difficult in any near-term capacity to be able to go and talk sensibly to an investor and provide them with a reasonable outline of their potential risk.

Q231 Ben Gummer: Can I draw your two comments together, because the MoJ and NOMS claim to have unit costs at the moment and no doubt the DWP did when you started out on PbR for welfare? How accurate did you find those initial costings from internal departmental studies? Have they changed radically through the process of learning?

Jen Byrne: I would say in a welfare capacity they have changed rapidly over probably the last 10 years, radically even.

Q232 Ben Gummer: Could I ask a couple more questions, because the area of pitfalls is one that my colleague is going to come on to and I just want to bottom out one or two things? In terms of stimulating the market, what is the experience that you would bring to bear in this new round of PbR from what has happened so far?

Toby Eccles: There are two markets to stimulate. There is effectively one, but the first is a service provider market and, for that, you need clearer quality data, clearer knowledge of what works and what doesn’t and that demonstration. But that also then applies to the investment market which sits behind that. We have been very focused on building a social investment market and building a set of potential investors who are also invested in the idea of a social change that is occurring. We are doing that for two reasons. One is because it enables pilots like Peterborough, and the enthusiasm that that has generated has been quite outside of the scale of the pilot itself, which is marvellous, but which also means that there is now a larger pool of potential investment capital that we can draw upon. If we do five, six, seven, eight, or others do more of these, that will build a track record for a much broader range of potential socially motivated investors.

Q233 Ben Gummer: Are you seeing these as being mainstream investors as part of a portfolio?

Toby Eccles: I am seeing the future of the Co-op, for example, providing a pension and saying, "3% of your pension assets are going to support and improve society." Would that be attractive to people? I think that would be extremely attractive. We are already seeing private bankers and others coming to us, saying, "We are getting demand from our clients for these kinds of products. We have no understanding of them and we don’t know how to get them to them."

Q234 Chair: Is it part of the ethical investment picture?

Toby Eccles: Ethical investment has always been a rather passive thing such as, "I’m not going to invest in guns and fags or stuff." You cross them out and hope that the rest is all right. The idea of actively making investments that you are proud of, that you talk about at dinner parties, in the same way that people talk about what charity they are doing, is something that people find very exciting.

Q235 Ben Gummer: But if the return is sufficient, it could be a mainstream, vanilla investment, couldn’t it?

Toby Eccles: Absolutely. I think there are parts of this market that will become mainstream, vanilla investments. There is always that piece in one’s mind. One has to have trust and faith in doing these kinds of contracts because there are ways of making perverse incentives a lot of the time, and there are the creaming and parking problems and so on. I think there are some in the private sector who are similarly motivated by the outcome as anybody else. If one does increase that socially motivated pool of capital, then that gives one a greater flexibility. Then one has a choice as to how the market develops in the future.

Genevieve Knight: Toby mentioned that you are potentially committing to developing a market. The DWP has had to do that and sustain that market development process through difficult times towards better times in the hope that they can develop a better market. That has generally been successful. It has improved over time. However, I can definitely say with regard to the Pathways to Work provider sector led, certainly in other Committee meetings at Parliament, it has been reflected that there were difficulties in financial viability for some aspects of the market. That had to be stabilised and supported. It is a commitment. It is a time-consuming process. I think 15 years was mentioned. That is probably a good estimate of how long it has been worked on.

Q236 Chris Evans: What are the key lessons that those seeking to apply payment by results to criminal justice should learn from the experiences in doing so in health care and in employment?

Professor Chalkley: This relates to a number of the issues that have already been raised. One of the critical things is to focus on the notion of delegation of decisions. The point about there being a risk of political intervention cuts across what might be perceived as being one of the biggest routes to benefits of a payment by results type of system. That is that you are delegating the decisions; you are delegating the choices that need to be made in order to produce a service to the providers of that service. If you start interfering with that process, if you start engaging with that, then probably some of what have been observed in practice as the biggest gains to be had will be wasted. The biggest gains come from giving the providers of services a real interest in finding the best way, finding the cheapest way and so on and so forth. That is one crucial element to take away from this. If the system gets run in such a way that that freedom of choice at the provider level is lost, then you will not get the benefit from a payment by results type of system.

Genevieve Knight: I would agree with that. Generally, where you have a requirement by law to deliver a minimum service, that will need to be stipulated in the contract. That design of the contract is then the minimum service that will get delivered, potentially. You need to be very careful in designing. I generally support Professor Chalkley’s assessment that it is the design you have to get right.

Q237 Chris Evans: Is payment by results about value for money then?

Genevieve Knight: Potentially it can be. Dan Finn of the University of Portsmouth did a review for the Department for Work and Pensions. Theoretically, economically, it can provide innovative service delivery and value for money. One of the innovations can be cost reductions in that service that you specify.

Q238 Chris Evans: Why do you think the use of payment by results by the DWP and the Department of Health resulted in increased administrative costs then?

Genevieve Knight: Administrative costs borne by the Department?

Chris Evans: Yes. It says here that the additional expenditure was due to recruitment of additional staff, higher costs of data collection, higher monitoring cost, etcetera. If it is value for money, don’t you think that defeats the object of the exercise somewhat?

Genevieve Knight: When they started out, I don’t think it was the primary objective of the exercise. Certainly, they had to set up administrative processes that would support the contracting and the monitoring of that in order to ensure that it was carried out. I would say it is not clear that the ideal model has yet been achieved and there is a process of learning. I am not sure when that period refers to, for example, or which programme, but that would be very important to define in order to see whether that is a problem with the value for money aspect of it.

Q239 Chris Evans: In a brief we have been given, we are told that the costs increased by £100k to £180k in hospital trusts, and £90k to £190k in primary care trusts. That is quite a lot of money.

Toby Eccles: If I could just come in on this, there is a nervousness I have in terms of focusing on the central administrative costs rather than the costs of the overall system and also the objectives of the overall system. What we are talking about very often is contracting processes that, historically, and over a long period of time have not generated the outcomes for society that society is looking for. At that point we need better ones. If they happen to cost a bit more in the centre to deliver, I think that should be something with which the Committee is very comfortable. If it generates the better outcomes for society, then that is something with which the Committee should be delighted.

Focusing on the value for money argument is a very modest proportion of it, but when we developed the social impact bond model we were not focused on value for money; we were focused on the fact that many third sector organisations that we interacted with had contracts that failed to pay them for the value they delivered and, instead, kept slicing and dicing and reducing their costs so that they would provide less and less service until they weren’t actually providing anything that was effective at all. Moving the situation instead to paying for the outcomes that they are generating and working out what the value of those outcomes is meant that they were starting to be freed up to do what they were meant to do, which was to provide a good quality service to their users, which is what society was looking for them to do in the first place.

Genevieve Knight: I would support Toby on that. Effectively, what you are doing is concentrating only on the costs. Value for money is about costs against the outcomes.

Chris Evans: Everybody is concentrating on the costs these days.

Genevieve Knight: Sure, but the cost analysis is only part of the value for money analysis. It is one half of it. The other half is the benefits. You haven’t valued the benefits in that. The cost analysis always comes up with the costs and they may or may not be higher, but what you want to find out in order to get the value for money analysis and the cost benefit correct is what were the benefits, what was the value of that benefit and then compare them. It may still be that the value of the benefits is higher than that increased cost, in which case that makes sense.

Ben Gummer: The cost is the potential saving to the public purse plus margin plus capital interest. In that initial estimation, if you can get close to understanding what the cost to the public is of any given crime, then you are close to an understanding of what the value is. It is not difficult.

Q240 Yasmin Qureshi: I was going to go on to the point about the cost. One of the main reasons that payment by results has come into being is to save money, and therefore to say that the cost doesn’t matter defeats the argument, doesn’t it?

Toby Eccles: There are two elements to this. If you are looking at these large-scale systems where you are not generating the outcomes that you are wanting for society, then there is going to be, within that, a host of service that is provided that is ineffective. The question is which part that is, so, if one pays on the basis of outcomes, one removes that cost.

If, in doing that, you are having a procurement process for £200 million worth of services and it means you have to spend an extra £108,000 in the process of procuring those services, that might be money extraordinarily well spent because you will save £10 million on the other side of it. I don’t know what the figures are, but one has to be very careful, and I think this is actually happening across local government at the moment. People are potentially losing commissioning and procurement expertise, but that may be where the expertise is needed to drive costs out of other places. One has to be very careful not to rob Peter in order to spend a lot of money on Paul.

Chair: We have quite a lot of ground to cover in the next 15 minutes. That is not a criticism of Mr Evans: quite the contrary.

Q241 Chris Evans: If you don’t get the outcome you want, you have still wasted money then. Following your logic, if you don’t get the outcome you want for society, you have still wasted that money.

Toby Eccles: No, you haven’t, because you were only paying for the outcome. The difficulty at the moment is that you are not specifying the outcome. You are paying for the process and then not getting the outcome.

Genevieve Knight: I would support Toby on that, because it is definitely value for money then.

Jen Byrne: If I may just add one more thing on that, the payment by results and outcome-based commissioning is a contracting mechanism. It is a commissioning mechanism which should aim to increase the level of transparency or to increase the direct link between the cost of an intervention and the positive social outcome. Again, not knowing the background to the figures that you have mentioned, the very first generation of outcome-based contracts around welfare were employment zones back in about 2000. There was a demonstrable performance increase between what had been in-house delivery by Jobcentre Plus against the then provider-led equivalent, which was employment zones. Even if there had been an £100,000 additional burden centrally by DWP, there was a significant enough performance increase by providers that absolutely made the case for that being a worthwhile exercise. With Work Programme, I know that DWP has done a significant amount of modelling with KPMG, which in effect becomes the same as the dead weight issue. The Department must provide itself with confidence that it is worthwhile going through the exercise of commissioning through PbR in order to achieve the cashable savings to the system thereafter.

Q242 Chair: Can I just check how large contracts have to be? Do they have to be so large that they effectively preclude small providers?

Genevieve Knight: How large is a good question. The Department for Work and Pensions’ system has moved to having two tiers, where they have a prime provider and then the smaller providers who couldn’t possible cover such a large area because they specialise in either a particular area locally or are focused on a particular type of client or customer characteristic. They can then be subcontracted or have service level agreements with that prime provider. The prime provider’s areas are often quite large areas of the country.

Q243 Chair: So subcontracting is the answer to the large contract problem.

Toby Eccles: Not entirely. We built the model that we have implemented-the social impact bond model-in order to enable smaller-scale organisations to participate in payment by results. Before that, they would have too much of a working capital problem. We also felt that, if we wanted to test these models in areas where there isn’t present Government service provision, the wish to pay only on the basis of outcomes would mean the working capital problem was particularly large. The minimum size for a social impact bond model is dependent on what is statistically significant for your target population. We have target populations of around 1,000 in each cohort. It is about the smallest one can do. They are coming out over two years, which is pretty awkward. We would much prefer it over one. We have a five million quid project. Would we prefer an eight or nine million quid project? Yes. But does that mean that smaller-scale service providers can get engaged with that? Absolutely. In fact, it is only by knitting together local organisations that one is going to get the integration back into the local community for the ex-offender population.

Jen Byrne: Can I just add two pieces of, admittedly, a priori based evidence? For our Work programme bid process, we submitted 12 bids as a prime contractor. We had about 1,200 applications to work with us in a subcontracted capacity. So we have three tiers of subcontracting arrangement whereby we are the prime provider and then we have a number of what are called end-to-end providers beneath us that may cover an entire geographical patch within the contract package area. Beneath those again you have something called a specialist intervention provider. Of those, 700 were selected to be formal delivery partners. Significant evidence needs to accompany our bids. We have to have a formal letter of intent that is signed by the chief executive of that charity and that is submitted as part of our bid response. Of those 700, 49% are from small, local and third sector organisations-I know you have another question around statutory partners-and 18% of them are statutory partners, primarily PCTs and local authorities. There are mechanisms for significant involvement of smaller parties.

DWP, in case we don’t get on to it, have a very useful framework for managing the supply chain process, particularly around protecting small third sector organisations, which is called the Merlin standard.

Chair: That is another project-Project Merlin.

Jen Byrne: We are more than happy to provide some information on that remotely if you would like it.

Q244 Mr Llwyd: This may be a question for Mr Eccles. What are the relative merits of social impact bonds versus outcome-based contracting models used by the DWP and the Department of Health as a means of delivering PbR in criminal justice?

Toby Eccles: They are useful for different things. In designing one’s payment by results model, one needs to determine what outcome one is looking for and then develop the right contracting model for it. Where you have a large present service provision area and one wants to move that to a more outcomes basis, then, for example, saying that we are going to pay on a greater proportion on outcomes over the next five or 10 years you don’t then create an enormous working capital problem for your service providers, but they are certainly focused much more on outcomes than they were before. One can do that in a very different way.

Where social impact bonds are very relevant is where you are working in a new area and there will be the need for services that are not presently envisaged and not presently part of the public sector. It is also an area where socially motivated investors would like to test the hypothesis and would like to see that, if we invest in this way, we produce better outcomes for society for the individuals concerned and lower long-term cost. When you have that situation-and we are finding a lot of them around looked-after children, potentially around drug rehabilitation and certainly further in criminal justice, in health around care of long-term conditions in the community-around those areas, one can create a package of new work on an outcomes basis, raise capital and do a social impact bond -type model.

Genevieve Knight: I am not sure they are terribly different. To be honest, innovation is part of what theoretically can occur with an outcome-based model. It is specifying it and getting it right that matters and that experience develops on that. I would say that, in order to get a social impact bond market started, the first thing an economist would have to do is an ex ante cost-benefit analysis that there is some benefit that is higher than the cost, otherwise there is no profit in it.

Q245 Ben Gummer: On the back of that, it would seem to suggest that it would be appropriate to think that the most suitable pilots to start with are probably some of the more difficult customers, if I can put it that way, because the potential margin is that much greater. It would therefore be appropriate if the MoJ started with some of the more intractable cases-people with personality disorders, for instance, or violent offenders-and not the vanilla six-month cases, if I can use that phrase again.

Genevieve Knight: I think you would have to mix your clients a bit more than that. To be honest, you have to identify them very carefully. One of the difficulties will be in agreeing who is defining them and how they are defined. The evidence from the contracting for Pathways to Work shows that they need a balance of clients. Getting that balance wrong in the design, where people are bidding for it and they think that they are going to get more of the vanilla cream type customers, really just means they won’t get the profit margin or cost recovery that is needed to make it work.

Toby Eccles: I also think there is a real public safety piece to pick up on on this which is very specific.

Genevieve Knight: It is unique.

Toby Eccles: With regard to the plain vanilla, as we call it here, we have a 60% reoffending rate for 70% of the population coming out of prisons every year of those who are coming out from short sentence offences. They leave with £47 in their pocket, and not very much happens to them. We have plenty of exciting things to do there before moving and thinking about those where even one going wrong is going to create such a public backlash. The public safety aspects would mean you would want to specify what people were doing with those individuals much more clearly. At that point, as soon as you want to specify everything because of your legal and public safety concerns, you are no longer working on outcomes, are you?

Q246 Mr Llwyd: How would payment by results contracts reduce the demand on the criminal justice system? How would they differ from the existing contracts of delivering services to offenders?

Toby Eccles: Do you mean the outcome-based contracts?

Mr Llwyd: Yes.

Toby Eccles: To take two or three examples, in the contract that we have, while anyone going into the prison needs to be agreed and is accepted by the prison governor, there is still considerable flexibility. If we find our service providers are not delivering, we can change them in discussion. Outside of the prison gates we have a great deal of flexibility about what services are provided. There is a lot of specification taken out of the process. I think that is the primary point.

Q247 Mr Llwyd: What role do you envisage for probation trusts in the delivery of these services? In other words, is it feasible for trusts to act as lead providers to cover a particular geographical area?

Toby Eccles: Yes. I think a partnership probation trust is going to be the most likely way of implementing these initial pilots for community-based solutions. They are still very much a work-in-progress, but I would think that a partnership with probation trusts would be an essential element of making it work.

Q248 Yasmin Qureshi: One of the main reasons for having payment by results is to deal with the issue of reoffending. It is accepted to some extent, though not completely, that the current system of integrated involvement of different agencies in the criminal justice system has not been completely successful. How would payment by results improve that?

Toby Eccles: One of the things that we have found in our work is that we have an individual who runs the three organisations providing the background of the services in Peterborough, but that individual, in a certain sense, is gaining enormous knowledge about what is happening in the community with short-sentence offenders, which is a gap in the overall knowledge base. He is, therefore, not advocating on their behalf but saying, "Well, actually, if services were different here, they would be better at accessing them." Having somebody to act as a link between services, for a group that is not being very successful in engaging broader public services and the wider community, is proving to be a significant part of the value. Is that also linking up NOMS and the different bits of criminal justice? I think it is too early to say, but that leadership is an important element of a lot of these models.

Q249 Yasmin Qureshi: But that is suggesting somehow that, if you have people who are being paid by results, they are effectively going to do a better job and are much more knowledgeable about what needs to be done. Are you suggesting that those who are currently involved in this system are not good enough or not doing their job properly?

Toby Eccles: No. They are being asked to provide all sorts of process-oriented elements which they might be heartily sick of and which they don’t think are producing very much value. When one is developing an outcome-based model, it certainly incentivises everybody to focus on the individual objectives. If you have someone who is now reoffending massively having come out of Peterborough Prison, that person is probably going to be phoning up round prisons finding out where they’ve got to to be able to try and get in touch with them. No one would have done that before. They would not even have known. They would not have had the data.

Q250 Yasmin Qureshi: Can’t that just be part of better practices? Does it have to be payment by results?

Toby Eccles: I think it focuses the mind in a very different way.

Professor Chalkley: It is a question of focus. If you take health care, we have lots of evidence that, if you pay health professionals for carrying out treatments, they carry out lots of treatments. If you pay them according to the turnover of their patients, they will become more focused upon getting people in and out of the door. Incentive systems do work, but the problem is that often they work in a way you don’t intend them to work. The concern is that, by causing people to focus on what you think ostensibly is the right thing, you actually get them to focus on something that is not desirable. But that is a question of implementation, I think.

Q251 Yasmin Qureshi: That is not perhaps the right example to use in a system of reoffending where what happens to a person, whether they stop reoffending or go back inside, is very much an individual thing. It has a lot to do with their own particular mental state, how they have been brought up, family support and lack of education. There are so many different variable factors, whereas in the NHS it is different. You can say, "This unit is able to do 10 cataract operations a day. Why is this one only doing five?" It is easy to work out and to incentivise people.

Professor Chalkley: As somebody who doesn’t know about the offending profile, I must admit that, standing from a distance looking at this and trying to think by analogy with other areas, the task of identifying what the drivers of reoffending are is a very challenging one. Until you understand that, paying for an outcome without knowing to what extent the provision of the service is impacting upon that outcome is very difficult. It is very problematic. We have heard of mechanisms that are in place and that could be adopted to improve the evidence base to establish better what that relationship between the process and the outcome is, but, yes, sitting where I sit, it seems like a very difficult job.

Jen Byrne: Just to add to that and to build on Martin’s and Toby’s points, I think payment by results-not at all to insult the current providers of that service-does have a real potential to refocus activity and to have people not focused on the inputs but on to a broad, positive social outcome, which is to reduce reoffending and which is preventing the next victim. It has the potential to refocus activity around the co-commissioning services and getting probation officers and offender managers to work actively with local partners to leverage existing funds, whereas I would suggest that in many cases their activity tends to be quite inhibited and quite inward in focus.

Payment by results has the potential to change the scope of work so that it is much more a collaborative partnership approach to dealing with the old underlying criminogenic factors, which you have clearly pointed out. The desistance from crime is largely going to be because of somebody’s mental health, their unemployment or their substance misuse, not because they are an inherently bad person. So much of it will be about the relationship that they have built with that probation service provider. It is a wonderful opportunity to change the focus of activity.

Genevieve Knight: The economics is that there is efficiency and there is equity. You need to consider both of those. Efficiency is where you are making cost savings in the value for money bid. The other side is the equity. Are the difficult-to-help customers getting served in the outcome-based model, for example? Professor Martin Chalkley’s definition of outcome is where you really have to start. If you don’t get the outcome right, you may not be getting the equity right. The experience of the Department for Work and Pensions has been that they are not necessarily getting equal or equitable outcomes for all. They may get more efficient outcomes where those are focused on particular groups.

Chair: We are running quite short of time, because we have to hear some other witnesses this morning.

Q252 Yasmin Qureshi: It is accepted that some offenders will require much more specialised and expensive services: for example, people with learning difficulties or those who may need an interpreter. What safeguards do you think can be put into the system to ensure that the providers don’t go for the easy option offenders-the ones who are easier to deal with-as opposed to the more difficult and challenging cases?

Toby Eccles: Can I agree with Dr Knight and then add to it a little bit? It is getting the metric right. It is what you measure, and in criminal justice there is a series of choices. One of them is whether you choose a measure on the basis of the frequency of offending or on the basis of the binary piece of whether someone reoffends or not. If you have someone who has a history of 14 previous convictions, six in the previous year, and you are then testing binary whether they reoffend or not, and you compare them to someone else in the cohort, you may choose to work with someone else. We are being measured on the basis of frequency, taking the total cohort, the number of conviction events that they achieve in the year after they leave prison. We have a very strong incentive to work with those frequent flyers in the system, as they were described to me by Peterborough recently.

Genevieve Knight: We should have safeguards.

Toby Eccles: That is a really important element of it. On safeguarding, there are principles around working with vulnerable individuals and treating people with dignity and respect. That is a set of principles that one puts into the contracting process rather than a specific set of service.

Genevieve Knight: Jen mentioned that the most recent DWP safeguards are in the design of escalator funding, where you pay higher amounts for what you categorise as those difficult groups compared to the easier to help groups. That escalator funding model is still difficult because who defines who is hard to help or how they are hard to help, and how much to pay extra for those who are hard to help? It is unclear and the evidence isn’t fully in.

Chair: I really am going to have to curtail this conversation, or we won’t hear our other witnesses at all. I did promise Claire Perry that I would give her the chance to ask a couple of questions, so I am going to do so.

Q253 Claire Perry: Isn’t the whole point of this model that we already have masses of data in our criminal justice system that helps to predict reoffending and that, indeed, the existing providers are using to assess all sorts of things, whether it is sentencing or treatment programmes? We are drowning in data that helps us predict reoffending rates, and the whole point of the PbR is that for the first time it is being linked to a very specific outcome, which is whether or not somebody reoffends. I do take your point, Professor Chalkley, that there are areas of health care. Ultimately, the outcome in health care will be, "Is this person healthy or not?" and not, "Have you paid for a series of processes?" The beauty of PbR in the criminal justice system is that clearly somebody is back in prison or not within a certain specified period of time.

That brings me to my point, which is, how have you set the current targets in the PbR model that we have up and running in criminal justice? Was the payment and outcome relationship done by negotiation or was that imposed by the MoJ in setting up the contract?

Toby Eccles: We were very clear that we wanted a payment mechanism that incentivised us to find and get as many people involved with the programme as possible. Therefore, it is across the whole population that leaves Peterborough Prison and not just those that engage with the programme. There were a lot of issues around statistical significance because there is quite a lot of variation in the numbers anyway. We needed to have 1,000 people going through and we needed to achieve a 10% reduction in the number of conviction events. Then the question was whether you take a reoffending rate-did they reoffend or not-and then pay more for more difficult cases, or do we take a cohort-based approach and take the number of conviction events from the total cohort, in other words a frequency measure, and compare that against a comparison group taken off the Police National Computer? We chose the latter because we thought that would provide a much richer data set and would potentially enable more effective pricing in the future, but we didn’t think the data was available for that pricing. While there is a lot of data available to predict whether people will reoffend or not, there is less data available on interventions that will work to stop them.

Q254 Claire Perry: Just to clarify, you have taken the whole population of the prison. You have not cherry-picked or top-sliced or decided who to help.

Toby Eccles: We have not.

Q255 Claire Perry: You have based your results definition on how much we are reducing reoffending for this cohort over a statistically identical population coming out of national prisons.

Toby Eccles: Yes.

Q256 Claire Perry: We should take comfort from that that you are not trying to cherry-pick and you are indeed working with the entire complexity of the prison population as it is passing through.

Toby Eccles: Absolutely, and we were careful to ensure that it was so.

Genevieve Knight: I would just caution that my understanding is that somebody is assessing that statistical significance-that number. That person has been contracted to do that. They have to make an individual decision about whether that is statistically significant or not. There is a lot of room for manoeuvre in statistical examination and analysis about these things.

Q257 Claire Perry: But indeed, we spend millions of pounds as a justice system on all sorts of interventions with, frankly, not having a clue whether most of them work or not. Indeed, we assess the statistical significance of those interventions already. At least in this case we are trying to tie it to a very specific group of interventions with a population.

Genevieve Knight: It sounds like it could only be an improvement, potentially, if you have evidence.

Chair: Thank you very much indeed. We are very grateful to you. If you feel that there is some point you wanted to make but that you missed, by all means get in touch with us. Drop us a line and we would be very glad to know that. It has been extremely helpful to have such a range of experience of this kind of system analysed in such detail. Thank you very much indeed.

Examination of Witnesses

Witnesses: Helen Edwards CBE, Luke Edwards, Ministry of Justice, and Ian Porée, National Offender Management Service, gave evidence.

Q258 Chair: Ms Edwards and Mr Edwards from the Ministry of Justice and Mr Porée from the National Offender Management Service, welcome. I think you were present for at least some of the earlier part of the proceedings so you will have heard the very interesting analysis that we had. We are very grateful to you for giving evidence to us this morning. You are the people who are involved in preparing and planning pilot projects. How do you determine what offender groups to place within pilots? What funding methodologies do you use? What is the basis on which you are proceeding?

Helen Edwards: As you know, we work with different pilots. It is important for us to be clear about that because we are interested in trying a number of different approaches, both to working with different groups of offenders but in different settings. As you know, we have the Peterborough pilot up and running already with the Social Finance Initiative focusing on under 12-month prisoners. We are going to have two community-based pilots, with community sentences, based in prisons, where again we are looking at under 12 months. Then there are the rather different kinds of pilots in terms of the local financial incentives for both youth and adult offenders.

We are trying out a number of different ways of approaching this, because, although there is a good deal of agreement, or certainly we feel there is, around the payment by results approach and the concept, it is complicated and getting it right will be quite difficult. The idea of pilots is really important to us. The idea of different pilots targeting different groups of offenders or working in different contexts really matters. That is our broad approach to trying out different things under the broad banner of payment by results. Obviously, we are happy to go into more detail as you wish.

Q259 Chair: What is the time scale? The Peterborough project is itself a six-year project.

Helen Edwards: It is.

Chair: There is obviously a desire to see things happening much more widely as part of Government policy. So what is the time scale?

Helen Edwards: The time scales vary. For the local financial incentives the period is two years, and after one year we should be assessing whether there has been any change in demand for our services and if we are going to make any savings. Obviously, if we are, we have agreed that we are prepared to share those with the organisations that are getting involved in the local financial incentive schemes. We think the community-based schemes and the prison schemes will run over approximately a four-year period. There, we have to measure whether people are reoffending or not and being reconvicted, and that takes some time.

Q260 Chair: You have to give them time to do so or not to do so.

Helen Edwards: We do, and then for us to be able to assess as they come before the courts and everything else. The Peterborough pilot is taking slightly longer because the numbers involved are quite small. There are only about 500 people who leave the prison each year. We think the minimum viable size for a cohort is 1,000 offenders. It is running for a longer period because there is a relatively small number of offenders leaving prison annually and we need to be able to test the approach thoroughly. There are different time scales according to the different kind of pilot we are running.

Q261 Chair: Are there any categories of offenders whom you would want to exclude from the process?

Helen Edwards: Our current thinking is that we would not want to include some of the most serious offenders: the kind of offenders where there is a public protection issue and where MAPPA arrangements are likely to be most appropriate. Obviously, we are looking at this as we have our discussions with potential providers and our colleagues in NOMS.

Q262 Chair: I don’t know whether you heard the earlier exchanges that I had with the previous witnesses about ministerial intervention and what happens if something appears to be politically embarrassing, even though it might be well justified in a programme, and attracts press attention. There might be a temptation for Ministers to intervene and thereby curtail, even before it has ever happened, the discretion of providers to achieve the results they are being paid on. Have you given thought to that?

Helen Edwards: We have. I think it is fair to say that the approach that this Administration, the coalition Government, is taking is rather different in that there is a conscious wish to devolve responsibility to local areas, to professionals in the system more and to give them more discretion, and for Ministers not to feel that they are as directly accountable for so many things. Of course, this will be tested and we shall see how Ministers respond. The whole idea is to give people more responsibility for delivery and more discretion to use their professional judgment and expertise in order to make the right decisions. We will still have responsibility overall for standards. In the way we put contracts together, we will want to be clear about the parameters and who is responsible for what. We have yet to work out the detail of that, but I think, overall, the broad approach is for more discretion to be exercised by those who provide services, and with that goes increased responsibility for what is done.

Q263 Chair: Is there a problem that providers might treat some of what they do as intellectual property which could not be shared without a cost arising to the person buying it?

Helen Edwards: I recognise the issue. We have been trying to take forward quite a collaborative approach. As I said at the beginning, these are quite complex pilots and we want to feel that we can work with those who might be providing services to look at the design. Of course, I recognise that once you go into a competitive process it gets more difficult. We would like to be as collaborative as possible. Of course, in the Ministry we will have responsibility for evaluating the pilots. As part of that, I hope that we can pick up on good practice and it will be our responsibility, as in the youth justice system at the moment. The YJB has responsibility for trying to disseminate good practice.

Q264 Chair: There is a point about costs. The PbR systems in the Department for Work and Pensions and in Health have increased administrative costs within the Departments. What the impact of that is on the total cost is less clear, as one of the witnesses earlier stated. Have you had to budget for that and how much have you budgeted for it?

Helen Edwards: On administrative costs overall, as you know, we, like other Government Departments, are required to reduce our administrative costs by about 30%- certainly our headquarters costs-over the spending review period. That is set for us and we have no choice about that. We certainly won’t have the luxury of spending large amounts. I am sorry, but what was the second part of your question again?

Chair: It was whether you have budgeted for the kind of increased costs which arise from the contracting process which the two Departments already doing this kind of thing have found arise.

Helen Edwards: We have not budgeted for increased admin costs as such, but we have identified an amount of up to £10 million to £15 million-the others will correct me if I am wrong-to help get some of the pilots up and running. But we really don’t want that to go into our administrative costs. We want those to be as lean as possible. Can I just ask Luke if he wants to add anything to that?

Luke Edwards: The budget for the pilot process is £15 million for the first two years, but we would look to recoup a significant amount of that in terms of savings from reduced demand on our systems, so a reduction in the flow of offenders into our system, should they prove successful, thereby making the pilots and the process broadly cost neutral on the Department. There will be some additional costs around evaluation. As I know the Committee heard earlier, the development of evidence bases is clearly critical to the success of these projects.

Q265 Claire Perry: I am confused as to why there is up-front cost if it is a payment by results model. Surely the cost would be happening when you actually achieve the outcome. What is driving this £15 million of up-front costs?

Luke Edwards: Broadly speaking, they break down around policy development costs, transition costs in particular, and an early budget for managing the design and process. In practice, we hope not to spend the entirety of the £15 million.

Ian Porée: Your assumption that we should only pay if providers have successfully delivered the outcome is entirely correct. The core budgets for the pilots will be paid on results. Clearly, there is an organisational requirement to run a competitive process, to design the pilot and of course to do evaluations in an objective way that we can share that learning across the system.

Helen Edwards: We would be very happy if we don’t have to spend that money, but we thought it was prudent to make provision up front. We are listening to organisations who say that getting working capital is very difficult and getting things off the ground can be difficult. The Youth Justice Board has been looking at putting some money into a reinvestment grant. It is fairly small, but they would it make available to local areas. If they didn’t reduce the demand for youth custody, then they would have to pay that back. We didn’t want to be caught on the back foot because we hadn’t anticipated any costs, but, as I say, we would be very happy not to spend that amount if we don’t have to.

Q266 Claire Perry: So this is your provision?

Chair: It is an up-front payment in the youth justice sector; payment on account, as it were?

Helen Edwards: It is, sort of. As I say, we are trying to get the incentives to flow the right way. As you know, at the moment in the youth justice system-and it could be argued for the adult system-because there are particular responsibilities on local authorities for young people, which they pay for, if they come into our system, the cost of paying for custody transfers to us. In effect, you could argue that it is a saving to the local authority. We are trying to get those incentives to work the other way, but we have to be realistic about where local authorities are at the moment. We are saying that, if we put in a reinvestment grant, because it is based on justice reinvestment principles, to enable them to make sure that they have in place the options in the community that would mean the sentencers don’t need to impose a custodial sentence, then, obviously, if they do reduce custody, in effect we recoup that because we save money. If they don’t, we are trying to negotiate arrangements whereby they would pay that back to us.

Q267 Claire Perry: I am sorry to stick on this, Chairman, but I think it is a very important point. These are not costs associated with any additional spending with the programme. This is you prudently provisioning against a change in your contracting methodology, effectively.

Helen Edwards: Yes.

Q268 Ben Gummer: You have brought us neatly on to local authorities. It seems to be universally appreciated among the potential providers of PbR that they can do most if they can range widest around the different areas of treatment, being health and mental health, drug rehabilitation, family intervention and all the things which will help to promote a decline in recidivism. Mr Porée, how do you see that mapping locally on to local service provision?

Ian Por é e: The two local financial incentive pilots, which, as has been said, are designed using the justice reinvestment principles with which this Committee will be very familiar, are designed to try and create a change in how the incentives work in our system. Historically, there has been a disconnect between local incentives and centrally funded financial incentives, where, for example, the prison budgets are running centrally as opposed to devolved to locally. If these local incentive pilots work effectively-the two examples which we plan to initiate from April of this year-the local partners will be working much more collaboratively in order to reduce the impact on the criminal justice system. That local responsibility, with the devolved freedom that will come with that and with the more outcome-focused performance framework that we would use, for example, for the probation trust in that local area, enables them to make a different set of choices about how they would effectively reduce demand on the criminal justice system.

In order for that to roll out, having evaluated some of the pilots, we think it is essential that those local incentives work in alignment with what our objectives are and some of those local objectives. You are quite right to point out that the complex journey an individual makes out of a life of offending, out of a life of crime, will require a lot of those local services to be more joined up in terms of finding some accommodation, getting some support and skills and then into employment and staying in employment with the right relationships with their local community. We would argue that that has been one of the long-held ambitions we have: that we get that better, joined-up local service provision on behalf of each one of those individuals. The incentives at the moment, as Helen mentioned, don’t necessarily incentivise locally to enlist in preventative services. We are looking to see if we can change their model.

Q269 Ben Gummer: How are you looking at doing that? We were discussing in the previous session about the value that PbR brings to being focused on outcomes rather than just a general willingness to co-operate. For instance, has the Department looked at the impact of spending cuts on local authorities, the end of ring-fencing and the particular difficulty you might have where it is not a political priority for some local authorities to engage in innovative cross-departmental projects and the effect that might have on national Government priorities?

Helen Edwards: Obviously, that is a concern for us, but it is fair to say that we have been impressed by the extent to which local authorities have approached us to take forward these initiatives. That is partly because they are building on some of the work that has been done around integrated offender management, where local authorities, the police, probation and others have been working together to try and grip the most prolific offenders. They know only too well how much damage that does in local communities. The police themselves know how demotivating it is for their officers if they are constantly arresting people, seeing them go off for a short time and then coming back into the community.

Local partners have a statutory responsibility to deal with crime and reoffending. Our experience to date is that they take that very seriously and see it as a core part of their activity. Yes, we were slightly worried that some of the initial enthusiasm might fade away quite quickly, but we haven’t seen that to date. We hope the incentive is that, if they can save us money in the criminal justice system, we will share those savings with those local partners. They are doing it at risk, but they feel reasonably confident in these areas that they can make a difference. Particularly with people who serve very short prison sentences-the under 12-month period-we know that their reconviction rates are very high. They have been getting higher, but, through some of the work that they have been doing with prolific offenders, they think that this is a do-able task. We are not unaware of some of the pressures on them, but to date we have seen no waning in their enthusiasm for working with us.

Q270 Mr Llwyd: Does the phrase "do-able task" presume that there are sufficient alcohol and drug services out there? I was at a homeless centre down in Victoria recently for veterans. One individual was trying to get hold of a drugs course for an ex-service person who was sleeping rough. It took him about 40 phone calls to get a placement up in the north-east of England from Victoria. I am just wondering whether that back-up is there.

Helen Edwards: We are very dependent on the work that the Department of Health is doing. As you know, they are taking a payment by results approach to drug dependency. We hope that by working with them we won’t just get people off drugs but we will get a reduce in reoffending outcome as well.

Q271 Mr Llwyd: But many of the people you refer to-the short-term prison sentence people-are people who are dependent on drugs and alcohol, aren’t they?

Helen Edwards: They are, absolutely.

Q272 Mr Llwyd: I am just making the point-I hope I am wrong-that there is sufficient capacity out there to be able to address their problems, otherwise you are not going to turn them around at all.

Helen Edwards: No. I agree with that. Our own figures show that about half of all people who come in to prison have a significant drugs problem. We would not be complacent about this. More resources have gone into drug dependency in recent years than alcohol. We are very keen to work with the Department of Health to try and see whether their payment by results approach to drug dependency can be extended to deal with alcohol as well. It is inconsistent around the country and that is another problem. We are interested in the arrangements that the Department of Health is putting in place through things like the National Commissioning Board to see how these services will roll out. My colleague Luke has probably been involved more directly in the negotiations than I have.

Luke Edwards: We have been working with local authorities for a number of years on these problems. One of the things that the local authorities themselves found was that a number of different agencies were targeting drug assessments, in particular, multiple times at the same individual in a very short space of time. One of the things we hope to get out of the local financial incentives pilot is a much more rationalised use of the existing resources which should drive more effective service provision.

Q273 Ben Gummer: May I just ask two linked questions after what Mr Llwyd has said? First of all, returning to a theme I know we have dealt with before, Ms Edwards, about the interactions between Departments, what success are you having in tying up the various different PbR pilots that are going on? When you have an offender who would also take on the Welfare to Work PbR at the moment and also the mental health PbR pilot, how are those being linked together and what is the prime contractual position?

The second one is again about local provision. Certainly, in Ipswich, there is a great deal of concern amongst the deliverers of family intervention projects and antisocial behaviour projects about the time between now and two or three years’ time when you start getting the PbR models rolled out, about the provision of services in that interim and the survivability of those services until the point where they can start delivering services on a PbR basis.

Helen Edwards: In terms of other Government Departments, at the centre of Government there is an overarching interest in how these things are linked together. For example, Oliver Letwin has been taking a keen interest in seeing how the different pilots sit side by side. Associated with that, we have been having discussions with the two key Departments. There is Health on the one hand, where we have pooled the money that is available for dealing with drug dependency. We think that that removes some of the kind of interfaces which weren’t being very helpful. We are discussing with them how we get the outcomes we need alongside the outcomes that they need.

We are also having discussions with DWP around the Work programme. Again, DWP is very interested in getting people into work. We know that if they are able to do that then that should have an impact on reoffending, but we want to see if there is more that we can do to incentivise their providers in terms of how they work with offenders to ensure that we get our outcomes as well and that we get as early access to the Work Programme as we can get. Particularly for prisoners coming out of prison, it is those first few days and weeks when they come out that they are most at risk of committing further offences. I can’t say that we are there yet, but certainly we are having those discussions and there is an agreement across Government that we have to get these different initiatives working in the right kind of way for offenders as well as the workless and people with health problems. Getting the boundaries right and who pays for what is an integral part of that.

In terms of the local authority landscape, part of the reason that we are pleased that local authorities want to work with us in this arena is that they will have the overview of resources that are available locally, which will have an impact on offending. In a way, they have very difficult decisions to make in terms of balancing spending decisions. Given their enthusiasm, as I say, on both the adult and the youth side to drive down reoffending and drive down crime, the hope from our point of view is that they won’t want to see services disappear that have an important part to play in that. In a sense, within a very devolved system, apart from the funding that we have put in for YOTs, which we will continue to put in directly, the leverage we have there is necessarily rather limited.

Q274 Chris Evans: What I want to look at now are the conditions required for payment by results to be rolled out nationally. What conditions are required to create a market in which payment by results is possible?

Helen Edwards: I think probably Ian and Luke have more to say on this than I have. In general, what we have said is that we want the principles of PbR to apply right across the offender management by the end of the spending review period. Part of that is a shift that we are making anyway to a focus on outcomes rather than inputs. We have had rather complex-if I can say that, Ian-performance management arrangements for people providing services in the offender management system up till now, which has been very much focused on inputs and volumes of people who participate in certain things, not on outcomes. Trying to focus on outcomes across the system is one of the things that we will do to embed this approach as well as building on the pilots as far as we can. Do you want to say a bit more?

Ian Poré e: That move in principle to get the whole system run much more on an outcome-based focus, with more devolved discretion to professionals in the system, is clearly something which we have begun already. There will be a significant change to those requirements as from April of this year, and again next year. We will continue that, and the "by results" component of that clearly gives us a nice clean expression of an outcome for which we could then pay.

Your second point was about building a market. In one sense, Helen has described the enthusiasm we have already seen from providers in the market from all sectors. We have an ambition to include a broad and more diverse array of providers from the voluntary, private and public sectors in this process. We have certainly seen the market properly engaged. We are just about closing a consultation on the Green Paper and we have had a lot of market engagement and enthusiasm. In the end, markets are invested because there is a return on investment. Part of the process we are going through to carefully pilot and evaluate this work is, is there sustainable return on investment which will sustain the vibrant market that we are seeing now? The market is definitely ready to engage. We have some work to do over the next few years to be able to build the evidence base that it is a sustainable market. I certainly think there are plenty of people who are willing to enter and have a go at the front end.

Q275 Chris Evans: What is the average size of the providers in that market? Is it larger providers or is it a mixture of small and large? What would you say the average size of a provider would be? What I am trying to drive at is this. I have a fear that the smaller provider might be bumped out completely from this process. I don’t think anybody would want to see that happen. How do we guard against that smaller provider being completely eaten up by the larger providers?

Ian Poré e: The reality is that we have the full range of very big national providers all the way down to very small local organisations. Effectively, by devolving the responsibility down to a local level and then just paying for an outcome, we are certainly confident that we can get the benefit of scale of some of the larger providers as well as that local engagement. Effectively, as part of the process of engaging with the market, we have been clear with any of the large providers that we would fully expect them to steward and sustain local market provision. If you think about the local financial incentive pilots we are running, essentially you are not going to be able to deliver the very locally attuned services to help a particular offender re-engage in their local community if you are doing it from a distance as a big national provider. The partners you need to deliver successfully are going to be the very small local providers.

I think there is an alignment of our ambition that even big providers nurture and steward those local markets. They themselves are telling us, "If we are going to succeed locally, we are going to have to find a way of doing that." While there will still be a need for some big, large-scale providers, because some of what we do carries significant risk and they are going to need to be able to carry some of that load, we have the opportunity to sustain some of that local service provision and, as you say, some very small local organisations.

Helen Edwards: We are very conscious of the risk. To underline that, we had a seminar last week for a range of organisations who might want to be part of taking forward payment by results. The Justice Secretary spoke and he was very clear on this point. He expected to see a range of different sized organisations involved. He wanted voluntary sector organisations involved and not just the big ones, and he wanted us to devise a way of contracting which would make sure that the terms on which any subcontractors might be operating were fair and viable terms for them. I think we have been given a very clear steer by our Ministers that they expect us to put in place a framework which doesn’t penalise the smaller providers.

Q276 Chris Evans: The major worry at the moment is that this has to be done now. So mechanisms have to be put in place to make sure that small providers can come in. If we don’t do that, do you envisage a scenario where the larger providers have some sort of monopoly and it makes it very hard for smaller providers to get into the market three or four years further down the line?

Helen Edwards: We are thinking more in terms of consortia. As Ian said, the large organisations would not be able to deliver everything that we want. We want different organisations to come together. There are some examples of that already where some of the large private sector organisations have joined forces with some parts of the voluntary sector. That is more the model that we envisage.

Luke Edwards: I was just going to say, as you heard earlier, that the Peterborough social impact bond is an example of the sort of innovation we want to see in this sector going forward, with, effectively, a service integrator with social finance who will take the risk through social investments. Then the providers, who are St Giles Trust and the YMCA, bear no risk of failure in the contracts directly and in financial terms will receive their working capital from social finance. That is quite a good, early example of how we are trying to manage this process.

Q277 Chris Evans: That brings me on to my question about the Big Society Bank. What role do you see the bank playing in supporting these payments by result programmes?

Helen Edwards: To a certain extent it is a bit early for us to be able to say, but we are very interested, as you would imagine, in things like the Big Society Bank and also other forms of social investment. Ideally, it is bringing money into our world that can be used up front to try and get the kind of results that we want. We will be looking at it with great interest. In fact, again we have had a number of approaches from a range of organisations looking at different ways in which working capital can be obtained to finance the payment by results work that we want to do. I am not sure there is a huge amount more we can say yet, or am I wrong on that?

Luke Edwards: Obviously the Big Society Bank is developing, although it hasn’t been announced.

Q278 Chris Evans: We had the Minister in last weekend. We did quite a comprehensive audit review of where we are at the moment with him.

Luke Edwards: I know the Committee heard this discussion earlier around the developing market, particularly for social investment. One of the key things about the Big Society Bank is that it is put in place to enable that market to develop and generate, and enable voluntary organisations to access working capital from standard routes much more easily. We hope that will help sustain our market.

Q279 Chris Evans: You are very supportive of social investment and that is a great thing, but are there any limitations to social investment, particularly in the delivery of criminal justice?

Helen Edwards: One of the risks that we have to manage is that, for example, the Department for Work and Pensions, if they find someone a job, they stop spending money on that person immediately because they don’t have to pay benefit. For us, it is slightly different because we have very big fixed costs in our system. It is possible for someone to stop 45 people from reoffending but that does not take any cost out of our system.

Q280 Chair: It takes it out of legal aid, but it won’t take it out of the prison system.

Helen Edwards: It might take it out of legal aid, but it doesn’t take it out of the prison system, and the prison system is our biggest cost, as you would imagine. We have to be very clear about cashable savings. In a sense, we can only pay people for the results they deliver on any scale if we can make real savings. That is something we have to balance quite carefully, in the interests of being prudent with public finances and not potentially storing up liabilities for ourselves. In theory, it could be possible for a cohort to have their reoffending reduced but for us not seeing any reduction in demand for our services. That is the risk we have to try to manage if we move forward.

Q281 Chris Evans: The Institute for Government points out that the new processes will make considerable demands on the skills of the commissioners. "What is commissioned, how the outcomes are set, what the payment schedules are…" What mechanisms are going to be put in place to support these commissioners? It does seem like a massive job to me, to be honest.

Helen Edwards: As from April, Ian’s job title will change to become Director of Commissioning and Commercial.

Chris Evans: Perhaps I should have focused the question to you then.

Helen Edwards: He has a direct personal interest in this, so maybe he might like to say something about that.

Ian Por é e: The point you raise is absolutely true. This is a more complex commissioning task than we have set ourselves in the past. We used to commission our services against a fairly well-defined set of inputs and outputs. At one level, we will still need to commission for some of those outputs. When the court orders a particular sentence, we are going to need to ensure that we deliver that sentence. If that is a community punishment or community payback order, then clearly there is a certain number of hours the court expects to be delivered. Commissioning for some of those bits of our system, including some of the management of risk, is clearly going to need to continue.

In many ways, one of the reasons we have a real appetite to have a go at some of these new mechanisms is the simplicity of a "by result" mechanism, where effectively we are commissioning to achieve a very clear and simple measure of success against which we pay. We have been talking about the complexity of the cashability of benefits and how you measure those results. When you are commissioning in a more devolved way, where you are clear about the "what", you have set some minimum standards about quality and allocated an amount of resource for that outcome, in some ways the commissioning challenge is then simpler in the ask. The complexity then goes to the delivery system on how it is they are going to assemble a supply chain to deliver that outcome. I accept there is a lot of complexity built into this, but this does feel like a healthy next step in our journey of the maturing of our commissioning system for offender services.

Q282 Chair: Can you clarify for me what the role of the probation trust is intended to be? Will they have any role in commissioning or are they simply potential providers?

Ian Por é e: The probation trusts are clearly providers already. Clearly, they have that responsibility and have trust contracts to deliver a range of offender management services. In the future model, and in particular the two pilots which Helen described earlier-the community-based payment by results pilots-we are working very closely with probation trusts about how to design and develop those because we would expect the expertise they have at their disposal to be key to the success of some of these future mechanisms.

Q283 Chair: But they won’t actually be commissioning.

Ian Poré e: We expect to include them in the process of these two pilots in terms of getting the design right. We certainly need to work our way through how that then turns out in terms of whether they effectively end up as commissioners longer term in the system or they continue as providers. Their ambition, of course, and they have lots of expertise working locally in terms of aligning local partnerships around services for offenders, is something that we want to effectively have in the tent while we design these future pilots.

Helen Edwards: In effect, for the pilots, we are commissioning them from the centre. As Ian says, we have quite a bit of work to do to think, in the future, if you have a much more devolved system, what that looks like and potentially who the commissioners are at the local level. There are different options around that, and probation trusts will need to think about where they want to position themselves at the local level. In terms of financial incentives, they will be involved in that. Potentially, the partnership could commission out some of those services that they need to other organisations at the local level. It is still very much a developing picture.

Q284 Chair: Unresolved as yet.

Helen Edwards: Yes.

Q285 Mr Llwyd: That is quite worrying, just to follow on from what Sir Alan was saying there. There is a possibility that probation trusts could become redundant. We heard earlier on from witnesses saying that they envisaged they would be in partnership with new providers. That is not quite what is being said here now. Given that we are on the cusp of something quite revolutionary in terms of delivery of these services, are we thinking the whole thing through carefully enough to provide for what has to be, in my view, a central role for the probation service?

Helen Edwards: I certainly don’t think we envisage in any way that probation trusts would cease to be there. In fact, they do have statutory responsibilities that they have to deliver on and no one else can deliver. There are reports to the court, for example. In terms of public protection, probation has an incredibly important role there and in other services. The landscape is changing, and our Ministers have been clear that they do want a more mixed market in terms of provision. We are working through what that means and working with probation on that.

Ian Poré e: That language of "in partnership" is key. Essentially, they have the nation’s professional expertise in managing offenders and the complex services around that. However the market evolves, we don’t want to lose that expertise. I would expect them to be working closely in partnership, as many probation trusts already do, and in a number of the arrangements we have put in place over the last few years they have demonstrated very effectively how they can work together in partnerships with others to deliver these services.

Q286 Mr Llwyd: Obviously the main criterion for payment for results will have to be the absence of reconviction. Do you believe that there are sufficiently reliable and robust systems to make this happen? There may be some concern about whether reconvictions are accurately recorded and interpreted. For example, will it be possible to take into account the number and seriousness of any further offences and how will this be weighted in a PbR scheme?

Helen Edwards: At this point I am going to hand over to Luke, if that is all right.

Luke Edwards: In terms of measuring reoffending, as you indicated, we track reconvictions. We do that using the Police National Computer and we are confident that that provides us with a robust data source.

The second part of your question is then precisely how we define reconvictions in this context. In the Green Paper we consulted on this particular issue and we have put forward a number of options. Technically, what counts as a reconviction? Do you just look at reconvictions at the court or are you interested in convictions that happen, i.e. do you build in cautions? We consulted on that element. The other part of this is, do you count the frequency of reconvictions or are you most interested in looking at whether the offender has been reconvicted or not, full stop? The final element, which again you pick out, is the seriousness and the severity of the offence.

In terms of the pilots, what I anticipate we will do is to test a range of different approaches to measuring reconviction rates to ensure that we end up, before rolling out, with the right system. In terms of Peterborough, the methodology we use is the frequency of reconviction event, which means the frequency that the offenders reappear in front of the court. That is one option and we will probably explore other ones, but we are keen to ensure we capture the full value that the provider delivers for the taxpayer.

Q287 Mr Llwyd: "Reconviction" could mean a reconviction for a lesser, unconnected offence as well. Would that be taken into account?

Luke Edwards: Depending on how we set it out, that is right. If you choose just those offences which are convicted at court, you tend to take the very low severity offences out of the picture, but there are different ways of doing that.

Q288 Mr Llwyd: How can payment by results for reducing reoffending work exactly when local policing priorities, and therefore arrest rates for various crimes, will be determined by local police authorities and crime commissioners?

Helen Edwards: In the local financial incentive scheme, the whole idea is that there will be some local prioritisation and local discretion. As I said earlier, we anticipate that there is going to be a lot of focus and interest in the very prolific offenders because of the problems they cause for local communities. It would be surprising if they were not a priority for the police moving forward because of the amount of damage they cause. It is implicit in the system that we are developing that we are giving more discretion to local areas to decide what the priorities are for them but built on the idea of partnerships so that the police won’t go it alone, and we are talking to local authorities and to probation in the round about the things that are of most concern to local communities.

Q289 Mr Llwyd: Offenders of course have marked differences in the probability of reconviction. We know that there are some predictors, for example, age, age at first conviction, the number of previous offences and type of offence, and so on. How will the models of payment accommodate these? How can you ensure that providers won’t cherry-pick? We have heard today that it is not going to happen. Well, I am sorry, but it is human nature. We have all been on this planet long enough, including me, to think it may well happen that people are going for the easier option rather than the more difficult areas. It doesn’t take a genius to work that one out.

Helen Edwards: We are trying to look at different ways of making sure that doesn’t happen. For example, with Peterborough, we take a cohort of 1,000 offenders and in that we measure what happens to the people who don’t participate: for example, the people who choose not to get involved. The provider can’t just say, "We are going to work with you and just be measured on the people that we work with." We are saying, no, we are interested in everybody. It is going to be quite important that we do that. There are a number of different ways that we are looking at it. Do you want to say a bit more?

Luke Edwards: Your earlier point was around the pricing structure. Broadly speaking, there are two different options. First, if we look at a frequency measure, the pricing structure naturally makes those offenders who will be more prolific more valuable to the provider to work with. You get a very natural incentive to focus on those who are most difficult to help.

The other option, which I know you explored earlier in the context of the Department for Work and Pensions Work Programme, is that you construct a series of blocks of offenders and you put different prices on different individuals. Again, we consulted on both those options in the Green Paper and need to do further work around those measures, but we are very alive to the risk of cherry-picking and ensuring that we get the pricing structure right.

Q290 Mr Llwyd: Finally, going back to the Peterborough project which has been referred to many times this morning, results regarding reconviction rates are compared to a national rather than local baseline. Is such an outcome measure appropriate in areas with reoffending rates that deviate from the national average?

Helen Edwards: We are doing a lot of work with our analysts in the Ministry of Justice to see how we might have a better local measure. We recognise, as you say, that national measures are not always the most helpful. We got Peterborough off the ground very fast, I think it is fair to say, and so we had to go with what we had. The idea of the pilots is to give ourselves more time to see what data we can use. The analysts are working very hard on that at the moment and they are also trying to put in some measures so that we can measure more widely what the impact of the pilots is in the local area to try and make sure there are no perverse incentives creeping in. I think we agree with you that there is a real need for a way of assessing outcomes locally and not just relying on the national data.

Chair: Thank you very much indeed. We are very grateful to you. You have some challenging tasks ahead. Thank you very much.