Crime reduction policies: a co-ordinated approach ? Interim report on the Government's Transforming Rehabilitation programme - Justice Committee Contents

3  The proposed payment mechanism

The application of payment by results to probation services

66. One of the key tenets of the reforms is that the contracts with providers will include a payment by results (PbR) element, where providers will be paid according to the rehabilitation outcomes they achieve. The Ministry set out the key design features of its proposed payment mechanisms for consultation with potential providers in May 2013. It proposes two elements: an upfront Fee For Service for mandated activities, and a payment by result element based on a series of offender "cohorts".[133] Unlike other large-scale payment by results initiatives, the former will form the bulk of the payment to ensure that new providers can fulfil their statutory functions for the courts. The components of each element are set out in the box below.
Fee for Service

·  Annual price paid in twelve equal payments made monthly in arrears

·  Subject to an annual learning curve discount to drive continuous improvement

·  Providers will bid against a predicted baseline volume range, weighted for sentence type and length

·  At the end of each contract year, the payment would be reconciled to the actual volumes recorded, with a retrospective payment or clawback applied if actual volume is shown to have been outside the predicted range

·  Deductions made for failure to deliver the orders of the court to specified time and quality

Payment by Results

·  Binary and frequency measure with a binary "hurdle"

·  Quarterly cohorts (to reduce the time lag) with annual top-up payment for genuine improvement against annualised targets

·  Monthly 'Foundation Payment' of part of the providers profit component paid upfront for expected achievement of quarterly PbR targets

·  Payment only for achieving demonstrable results, with clawback available for underperforming and higher payments for further improvements over minimum requirement

·  Large financial deductions / termination for increase in re-offending rates

Source: Ibid

67. The Ministry has not provided a full response to this consultation, which it states resulted in "significant feedback", but has summarised some of the key points raised and some of the potential refinements to the model that they are considering.[134] The Ministry strongly advised potential providers not to use any information in the feedback document in any modelling of bids. A final version of the payment mechanism will be produced during the next stage of competition (the Invitation to Negotiate stage).

Potential implications for providers' behaviour

68. Payment by results programmes are very sensitive to design, in particular to ensure the optimum balance between cost and quality. Our witnesses have highlighted a number of potential shortcomings in the proposed model of PbR, both for prime providers and for subcontractors. As we explored in our probation inquiry, there is a risk that providers may be incentivised by the performance metrics included in a payment by results mechanism to 'game' the system and therefore not provide the same level of service to all offenders. Accordingly, getting the choice of metrics right is crucial to the success of these reforms in reducing reoffending, maintaining public protection, and generating the innovations and efficiencies required to plug gaps in the system.


69. One of the key elements of the payment mechanism that is still to be determined is the nature of the "results" component. If the Ministry utilises a simple binary measure of reoffending—which the Secretary of State said in February was his preferred option as it most aligns with his overall aim of ensuring that people stop offending—it would pay a provider when an offender can be proven to have stopped committing crime altogether.[135] In contrast, a frequency metric would measure success in terms of the reduction in the number of times an offender reoffends. The risk of using a simple binary metric would be that providers direct the majority of their resources at those offenders who are most likely to stop reoffending altogether (and indeed might have done so without any intervention). In recognition of the risks of gaming from using solely a binary metric the Ministry initially proposed in its "Straw Man" mechanism a hybrid measure, as set out in the box below.

There will be two measures for re-offending used to calculate the PbR payment:

Binary metric = measures the percentage of offenders that are convicted of an offence within a 12 month period.[136]

Frequency metric = measures the rate of offences committed by offenders within a cohort within a 12 month period.

The MoJ proposed that PbR payments would be allocated on the basis of performance against the binary measure and the frequency measure, with a percentage of the total funding available linked to each. However, to receive any PbR payment, a provider will have to have improved performance on the binary metric to a point of statistical significance within the given CPA, regardless of performance against the frequency metric. This reflects the importance placed on achieving complete desistance from re-offending.

Source: Ministry of Justice, Straw Man Payment Mechanism, May 2013

70. The need for providers to demonstrate statistically significant improvements in reoffending in order to be eligible for payments related to performance against the frequency measure is referred to as the "binary hurdle". Our witnesses were overwhelmingly against the inclusion of this hurdle.[137] They felt its inclusionwould create a likelihood that providers will prioritise this beyond the frequency measure, and not invest adequately in services for the harder-to reach i.e. those with complex and entrenched needs which are likely to be challenging, resource intensive, and require a disproportionate amount of staff time.[138] It was suggested that the mechanism should include a severity metric, or differential or escalated payments.[139]Clinks, a body which supports voluntary and community sector organisations working in the criminal justice sector, questioned how the model would incentivise the provision of services that prioritise intermediate outcomes i.e. those factors which have an impact on the road to desistance, even if they do not immediately lead to reduced reoffending.[140] The Ministry is now testing internally various options for adapting its approach to the metrics for reduced reoffending to mitigate these risks, including abandoning or revising the binary hurdle.[141]


71. Another question is whether the payment by results element will provide a satisfactory return to incentivise providers, and subcontractors, to deliver the innovations and additional services that will be required to accomplish decreases in reoffending. In addition to making efficiencies in existing probation services to fund the extension of statutory support to short-sentenced prisoners post-release, new providers are also expected to offer resettlement services to all offenders coming towards the end of their custodial sentences, and bolster existing rehabilitative services for those on community sentences.[142]Required levels of investment in such provision may well be substantial. During our probation inquiry we heard that there were longstanding gaps in provision which hinder the ability of sentencers to use the full range of requirements that can be attached to community orders to deal with offending behaviour, particularly for alcohol treatment and mental health treatment.[143] The shortage of suitable housing is also an enduring problem hindering rehabilitation.[144]In our report Women offenders: after the Corston Report we raised the question of whether a payment mechanism concentrated on reducing reoffending was the most appropriate to support the commissioning of the services that were required for many female offenders.[145]

72. The Secretary of State told us he wanted to see a "smart innovative approach" from prime providers which would be given the operational freedom and flexibility to innovate, but in return, that they should put some of their own resource on the line, to carry the risk of failure themselves, rather than the taxpayer.[146]For example, he expected that providers would wish to commission housing provision, which was currently difficult to achieve within the constraints of the public sector.[147]

73. A range of witnesses expressed reservations about whether the model and mechanism were calibrated correctly to achieve the Government's aims.[148]The proportion of the overall payment to providers that will constitute the PbR element is unknown, and will depend on the competition process, although there has been speculation that it will be in the region of between five and fifteen percent, at least initially.[149]The public policy experts and one of the former private contractors that gave evidence to us shared the view that there was insufficient potential return in the PbR element of the contract and were sceptical about whether the mechanism could deliver a decrease in re-offending. Toby Eccles of Social Finance observed:

    "The most obvious structural that we will end up with a cost-driven production, with no focus on rehabilitation in anything other than handing out some leaflets and hoping for the best because the cost envelope will not allow it [...] In terms of getting in the way of innovation, change and progress, getting the structure for this wrong from an outcomes point of view will mean that it becomes more difficult to work with those people [that are harder-to-reach] than it is at the moment."[150]

In both Ian Mulheirn's and Richard Johnson's analysis of the situation, this risk was high in light of the way the payment mechanism was initially constructed. Mr Mulheirn observed:

    Currently, the structure of the payment mechanism is completely perverse. It encourages cost cutting, and probably, increases in reoffending, which is the profit-maximising thing to do. At the moment, the incentives are completely topsy-turvy [...] The [MoJ's] market feedback and development considerations that it put out recently it has acknowledged some of those problems. However, it has not yet gone nearly far enough towards addressing them. If we do not get that right, the whole payment by results approach is fundamentally flawed.[151]

Richard Johnson went as far as to say the model was entirely inappropriate for the behaviour that the MoJ were seeking to incentivise. He explained:

    There are two forms essentially of PBR. This form is the simple form of cash on delivery. Instead of paying for a service up front, I am going to make sure that I get the service by paying for it when it is actually delivered. But people think what they are buying here is spend to save. In a spend-to-save model we are tapping into the £5 billion-odd that it costs us with our current rates of reoffending. That is a completely different sort of contract, procurement and service. In that model, you are looking to incentivise risk because there are big rewards, and those rewards come from, effectively, a profit share between the public sector purse in reduced reoffending costs and the provider of that service. What you cannot do in that spend-to-save model is try and introduce the notion of competition on price, because competing on price drives you back to this cash-on-delivery model—how cheaply you can deliver the service for me—rather than how much you can extend the social impact of this service, because an increased social impact delivers an increased saving to the public purse.[152]

The other former private contractor we spoke to, Max Chambers, explained that the notion that payments must be attributed to changes of statistical significance could theoretically result in a situation where providers could allow reoffending to drift up within that margin. On the other hand he doubted that this would be the case in practice.[153]

74. It is no exaggeration to say that the efficacy of the payment by results mechanism which is finally adopted will be crucial to the prospects for success of the Government's ambitious plans for a reduction in reoffending through a rehabilitation revolution. Serious question marks hang over the design of the PbR mechanism itself, and the proportion of payment to providers which will depend on the results they achieve. It is likely that any model introduced at the beginning of the new system will need to be modified in the light of experience. We will return to the question of the Ministry's preferred model and other potential models of payment by results in our final report in this inquiry.


75. There is a further risk that poor design of the model will result in contracts that are not financially sustainable. Our witnesses anticipated high reconfiguration costs, in terms of developing new delivery models and assembling complex supply chains, and believed that expectations of financial efficiencies would be likely to drive providers to focus first on maximising their gains from the upfront element of the payment by reducing their cost base.[154] For example, Richard Johnson thought that providers would focus on delivering services at the cheapest possible price.[155]Tom Gash proposed that this would be done "by changing staff terms and conditions or reducing their staffing within the probation services."[156]

76. NCVO had recently commissioned an analysis of some voluntary sector providers' PbR contracts and found that the financial requirements, in terms of the working capital and cash flow needed to fund payment in arrears, have meant that providers have had to: subsidise their PbR work with other income from other sources, including their reserves; limit the amount of other services they can deliver; and seek loans to cover payment delays.[157] Pitching the incentives right will similarly impact on the subcontracting element of service provision. As spending on rehabilitation within these contracts was likely to be limited due to the costs of restructuring, at least within the first few years of delivery, and both Clinks and the NCVO noted that this might impact on the durability of existing providers in the sector.[158]

77. The use of payment by results determines the size of contract package areas, which must be sufficiently large to identify results with confidence.[159] Ian Mulheirn believed that there remained risks that providers might not be able to make a sufficient difference to the numbers to prove to the Department statistically that they have made a difference, and that these risks were particularly big for providers in small areas.[160] We consider in chapter four the potential implications of provider failure.


78. Witnesses expressed appreciation that the Ministry was consulting on the design of the payment mechanism and considering various refinements.[161] NCVO said: "[this] is a promising indication; too often in designing PbR models, the commissioner proceeds without this kind of market engagement, and ends up having to restructure a flawed contract whilst it is operational."[162] Nevertheless, as described in chapter 1, many witnesses were uneasy about the limited evidence that exists on the cost-effectiveness and sustainability of adopting a payment by results approach in this context, and the lack of testing of aspects of the mechanism proposed.[163] Regardless of the final mechanism, DrugScope, among others, urged the Government to tread cautiously: "There is limited evidence on payment by results schemes [...] Gradual implementation would enable cross-governmental coordination of PbR learning and development [including from the drug and alcohol recovery pilots] and adaptation of programmes in the light of emerging evidence."[164]


79. There has been some speculation that there will be a delay in the implementation of the payment by results element of the contract fee. This possibility is signalled in the Ministry's response to the "Straw Man" consultation. The Ministry initially proposed that Tier 1 providers would receive a so-called Foundation Payment for meeting their PbR targets, which it had been planning to pay upfront and then claw back if necessary, to compensate for the "substantial" time lag required to measure outcomes. Clinks supported this concept as they felt it was likely to minimise cashflow problems, especially to VCSE subcontractors for whom delayed payments are particularly problematic.[165]However, consultation responses suggested that the prospect of clawback might have the opposite effect to that intended, by making providers more risk-averse. The Ministry is now instead considering an initial period at the start of the contracts before the PbR element would apply or allowing providers to "sculpt" the fee for service during the bidding process, which presumably means allowing them to negotiate receiving larger amounts upfront.[166]

80. Much of the detail of the final payment mechanism will be determined during the next stage of the bidding process. When we put the possibility of delaying the implementation of the payment by results element to the Minister he appeared to have discounted this prospect. He told us that this would kick in once the cohort of newly sentenced prisoners was large enough to warrant it, which he estimated would take approximately six months.[167] As well as revising the payment mechanism the Minister made it clear that the Ministrywill expect the prospective providers to:demonstrate their ability to deliver a quality service; set out a minimum level of intervention that they will provide for every offender; and state the level of investment they are going to make in rehabilitation. He assured us that they would"not accept a situation where they decide to work with only some offenders and not the rest."[168]

81. The introduction of payment by results marks a major shift in the commissioning of rehabilitative services. Few of our witnessesargued with the premise of providers being rewarded according to their performance, but the approach remains novel, and the limited experience of its application, not only in the criminal justice sector but more widely, suggests that it can be beset with many challenges which the Government will need to overcome if it is to be a success.

82. We note that the Ministry appears receptive to comments on the design of the payment mechanism. In particular Ministers appear to recognise the hazards of providers "parking" the hardest to engage offenders and are considering the most appropriate ways of addressing this. The ultimate design of the mechanism will be vital to the success of the Government's plans, and an ostensibly small change in the payments system could lead to a major change in provider behaviour and hence the outcomes of the programme as whole. In this context, we understand the motivation of Ministers in wishing to seek complete desistance from reoffending as an outcome butthe system has to be one which incentivises providers to work effectively with all the offenders for whom they are responsible. We therefore agree with many of our expert witnesses that the binary hurdle should not be retained in the final payment by results mechanism.

83. We also note with approval that the Ministry has subjected the proposed payment by results metrics to internal testing. It appears to us that officials have appreciated the potential perverse incentives that must be avoided. At the same time, while a "straw man" is of course designed to be knocked down, the degree of criticism encountered by the "straw man" mechanism implies that the extent of restructuring of the mechanism which may be required is extensive, especially taking into account the speed with which the changes are being wrought.

84. It appears to us that the risk of not achieving sufficient savings relates more to the level of savings that providers are able to achieve to reinvest in extending the reach of existing provision, and the quality of services that might prevail as a result, thanthe overall costs of the reforms per se. This, and the proposal to revise the payment mechanism to enable providers to receive more of the fee for service upfront in return for taking more risks later on, also suggests that the length of the contracts is the basis on which the Ministry and Treasury have concluded that the numbers will add up.

85. We consider it important for the overall success of the reshaping of the rehabilitation landscape that the final payment by resultsmechanism, as determined during the contracting process, should be capable of further refinement and modification in the light of experience. The mechanism, and the metrics which it involves, must in addition remain open to parliamentary and public scrutiny, which must not be deflected by the fact that it is private sector providers who are delivering this essentially public service. The Ministry should explain in its response to this report how it will ensure reliable public accountability of the performance of providers of rehabilitative services under the new model.

133   Ministry of Justice, Transforming Rehabilitation Programme - Payment Mechanism: Market Feedback and Development Considerations, October 2013 Back

134   Ministry of Justice, Transforming Rehabilitation Programme - Payment Mechanism: Market Feedback and Development Considerations, October 2013 Back

135   Oral evidence taken on 27 February 2013, HC (2012-13) 964, Q30 Back

136  A proven re-offence will be counted as any offence committed within a one year follow-up period, following an offender's entry into the cohort, which then attracts a court conviction or caution within that one year follow-up period or within a further six month waiting period to allow for cases to work their way through the courts. Back

137   See for example Criminal Justice Alliance (PPC 06); DrugScope (PPC 12); Prison Reform Trust (PPC 13); Magistrates' Association (PPC 17); NCVO (PPC 26); Clinks (PPC 27) Back

138   Criminal Justice Alliance (PPC 06); DrugScope (PPC 12); Prison Reform Trust (PPC 13); Magistrates' Association (PPC 17); NCVO (PPC 26); Clinks (PPC 27); Q150 [Mr Chambers]. See also National Policing Lead for Integrated Offender Management (PPC 08). Back

139   Criminal Justice Alliance (PPC 06); DrugScope (PPC 12); Prison Reform Trust (PPC 13); citing CBI and the Social Market Foundation Back

140   Clinks (PPC 27). They noted that many VCSE organisations have developed services that take account of academic desistance theory, in which primary desistance, meaning any lull or gap in offending, however short-lived, is distinguished from secondary desistance, which refers to a more deep-seated change in an individual where they develop an identity as a 'non-offender'. Back

141   Ministry of Justice, Transforming Rehabilitation Programme - Payment Mechanism: Market Feedback and Development Considerations, October 2013  Back

142   Oral evidence taken on 27 February 2013, HC (2012-13) 964. See Qq 14-16. Back

143  Justice Committee, Eighth Report of Session 2010-2012, The role of the Probation Service, HC519-I, paras 128-131 Back

144   Magistrates' Association (PPC 17) Back

145   Justice Committee, Second Report of Session 2013-14, Women offenders: after the Corston Report. HC 92, para 149. Back

146   Q1; Q242 Back

147   Q194. Longitudinal research has found that prisoners who needed help with finding somewhere to live after release were more likely to be reconvicted (65%) in the first year, than those who did not need this help (45%) (Williams et al., Accommodation, homelessness and reoffending of prisoners: Results from the Surveying Prisoner Crime Reduction (SPCR) survey, Ministry of Justice, 2012). Back

148  Qq20-22 [Mr Oliver; Mr Johnson]; Qq45-46 [Mr Johnson]; Qq113-119 [Mr Eccles; Mr Mulheirn]. Criminal Justice Alliance (PPC 06); Local Government Association(PPC 11) [; DrugScope (PPC 12); Prison Reform Trust (PPC 13); London Councils (PPC 21); NCVO (PPC 26); Clinks (PPC 27); Napo (PPC 31) Back

149   See for example Q114 [Mr Eccles]; Napo (PPC 31). Mr Grayling told us that he hoped to see it higher than 10% and expected organisations to be willing to ratchet up the proportion of the payment that would be put at risk over time as knowledge increases Q250-251. Back

150   Q133  Back

151  Ibid. [Mr Mulheirn] Back

152   Q45 [Mr Johnson] Back

153   Q150 [Mr Chambers] Back

154   See for example Q18 [Mr Johnson]; Q146 [Mr Gash]; Clinks (PPC 27); NCVO (PPC 26) Back

155   Q17 Back

156   Q146 Back

157   NCVO (PPC 26) Back

158  Clinks (PPC 27); NCVO (PPC 26). See also Q18 [Mr Johnson], Q170 [Mr Henman].  Back

159   Q122 [Mr Mulheirn] Back

160  Ibid. Back

161   London Councils (PPC 21); NCVO (PPC 26);Clinks (PPC 27); Q133 [Mr Mulheirn]; Qq149-150 [Mr Chambers] Back

162  BWB and NCVO, Payment by results contracts: a legal analysis of terms and process, October 2013,p 22 Back

163   Criminal Justice Alliance (PPC 06); DrugScope (PPC 12); Mr Allen (PPC 21); Mr Underhill (PPC 23) Back

164   DrugScope (PPC 12); Back

165  NCVO (PPC 26) Back

166   Ministry of Justice, Transforming Rehabilitation Programme - Payment Mechanism: Market Feedback and Development Considerations, October 2013 Back

167   Qq252-259  Back

168   Q242 Back

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Prepared 22 January 2014