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

4  The creation of the market

Opening of competition

86. On 19 September 2013 the first stage of the competition was launched. This took the form of an invitation to potential lead contractors (Tier 1 providers) to submit Pre-Qualification Questionnaires by 14 November 2013 to enable the Ministry to establish which organisations are suitable to bid at this level. In addition to the Target Operating Model, the Ministry also produced a document which sets out the principles that will govern the delivery of the competition and their expectations for the conduct of prospective bidders in developing their supply chain.
The Government has identified three tiers of provider, each bearing different levels of financial risk:

·  Tier 1 Providers:Organisations, consortia or mutuals able to bear a significant amount of financial risk who will take over the running of the Community Rehabilitation Companies (CRCs) as "going concerns". Tier 1 providers will contract directly with the MoJ.

·  Tier 2 Providers: This tier could encompass larger VCSE organisations, mutuals or other private sector organisations providing services at scale to Tier 1 providers on a subcontractor basis.Organisations within this tier are still likely to have a sizeable annual turnover and be required to bear an element of PbR risk.

·  Tier 3 Providers:Organisations delivering small scale specialist services and interventions to Tier I and II providers, with limited, or no requirement to bear PbR risk.

Developing a varied market

87. The 21 contract areas available through the competition are valued at between £5bn and £20bn over 10 years. The Ministry has been clear from the outset that it aims to have these contracts—which will be for 7 to10 years with an option to extend for a further 3 years—delivered by a wide range of lead providers.[169] The Government's agenda for this programme has been to design it with a view to increasing the diversity of the market for rehabilitation and resettlement services including the voluntary, community and social enterprise (VCSE) sector. The Secretary of State told us in February that he did not "automatically want to see a prime contractor, subcontractor model" but wanted to see "partnerships of equals as well"—for example, partnerships between voluntary sector organisations or voluntary sector and private organisations and mutuals--and had sought to encourage the social investment sector to become involved.[170]


88. The majority of large justice sector contracts are currently being delivered by a few large private sector firms. Two of these firms, G4S and Serco, have withdrawn from the competition to operate as lead providers of rehabilitative services in the light of issues which have arisen in relation to other criminal justice contracts they hold: we consider this further in paragraphs 107 to 110 below. The market for contracted-out community-based offender services is also immature, which may restrict the number of organisations willing to bid as lead providers. By comparison, according to the Secretary of State, the competition for the Department for Work and Pensions' Work Programme built on 15 years' experience of what did and did not work in the welfare to work sector.[171] This Programme therefore operated in a mature market with a number of the successful providers having already been established to compete and bid for previous Welfare to Work schemes.[172]


89. We encountered some scepticism as to whether there was a sufficient margin in the delivery of probation services and the configuration of the programme to allow a broader diversity of providers. In particular, it has been a matter of concern that the new contracts would only be within the reach of larger, often multi-national, organisations with significant financial reserves to draw upon, which have considerable experience in bidding for and securing similar contracts for provision of public services, and are able to support themselves pending the outcomes, and that this would operate to the detriment of the voluntary and community sector and existing state sector providers wishing to spin off to form mutuals.

90. The Government expects that existing Probation Trusts, which cannot bid in their own right, will form alternative delivery vehicles and mutuals designed by staff groups if they wish to continue to provide services to low and medium risk offenders. The Cabinet Office agreed to make available some funding from its £10 million Mutuals Support Programme to help ensure potential mutuals can compete effectively in the competition. There is also the prospect that social investors may be able to provide financial backing to support some voluntary sector and small and medium enterprise organisations to bid to become a lead provider.

91. The Institute for Government has recommended that the MoJ must 'steward the market' to prevent domination by a small number of players and ensure access to new providers.[173] The Ministry has taken a number of steps to diversify the supply base, including: facilitating access to Cabinet Office expertise and funding to build the capacity of prospective mutuals and voluntary sector prime contractors and subcontractors; reducing the size of some contract areas; making the bulk of the payment a fee for service and taking steps in the design of the payment mechanism to mitigate problems with cashflow (as discussed in the previous chapter); and limiting the amount of capital required for prime providers.

92. Our witnesses praised the efforts that the Government had made in this regard.For example, Tom Gash welcomed the fact that that they had capped the value and volume of work going to an individual provider, and the level of financial risk they would be required to bear.[174] Max Chambers believed that the need for both financial standing and direct experience of working with offenders would force partnerships.[175] Sue Hall said that eight potential mutuals had been very positive about the financial support they had received from the Cabinet Office to enable them to purchase consultancy.[176] NCVO and Clinks welcomed the support that had been given to voluntary sector potential primes via the Cabinet Office, the market stewardship principles, standardised contracts and the commitment to a mix of funding mechanisms for lower tiered providers.[177] On the other hand there was a desire on the part of some witnesses to see more detail, in particular about the payment mechanism and the nature of the contracts.

93. The Secretary of State was "encouraged" by the "very good mix of private and voluntary sector" organisations, often in partnership, and with a good geographical spread. Expressions of interest had been received from 35 lead bidders, representing more than 50 organisations. He observed that this included some "very good and substantial voluntary sector organisations" and "staff teams", and stated that "a good proportion of the most substantial and attractive potential providers were partnerships".[178]On 19 December the Ministry announced that thirty of these bidders had passed the pre-qualification questionnaire stage of the process. A further 800 organisations had expressed an interest in being involved at second tier level.[179] Clinks observed that of the 1700 organisations estimated to be currently working with offenders, fewer than 400 registered an interest in providing services under the programme; if indicative of the final number this would represent a considerable narrowing of the market.[180]We consider the wider value of the voluntary sector's contribution to criminal justice services in paragraphs 33 and 48.

94. We would be extremely concerned if the bidding process for prime providers were to be dominated by the very small number of large businesses which currently hold most of the major outsourcing contracts in the criminal justice system. Thirty bidders have gone throughthe first stage of the competition process and will be invited to tender. It remains to be seen if this will prove a sufficient number to provide satisfactory bids for a viable service in all 21 contract areas.

Confidence in the tender process

95. We have in the past repeatedly raised concerns about the capacity of the MoJ, and NOMS in particular, to manage contracts for outsourced services.[181] For example, we concluded in our probation inquiry that "[t]he experience of national contracts currently in place has not inspired confidence that NOMS understands its business sufficiently well to draw up robust contracts that meet the needs of future stakeholders."[182] Parallels have been drawn, including by the Secretary of State himself, with the Work Programme. He told us in February that concerns about the outcomes of the Work Programme were "clearly misplaced" but acknowledged that there were lessons that could be learnt about the contracting process, particularly related to the frustrations of the voluntary sector—which he believed needed to be "more commercial"—and that the Government needed to do more to help them "form partnerships and access financial support".[183]

96. A crucial aspect of trust in any competitive process is the level of transparency with which it is conducted. As we noted in the previous chapter, several elements of the programme are yet to be determined, including the payment by results mechanism and the proportion of contract value that will be performance related. Toby Eccles felt that there was an "inherent incumbency bias" related to the lack of information and knowledge about whether it would be worth bidding, which favours those who have been through lots of procurement processes before.[184]Tom Gash similarly believed that some of the smaller providers and the mutuals would struggle to get up and running and operational, while also putting in a bid in a process they have never gone through before at national level.[185] He described the benefits of a phased approach to competing services in overcoming this issue:

    In any market creation reform you are much better off phasing these things. You would do an area of the country at one point; meanwhile, mutuals can start to develop and get themselves on to a sound footing. Then they can bid for the next round that comes out in a year's time. It has been the standard received wisdom that this is what you do when you are doing a major national outsourcing programme, but there has been a decision not to do it in this case.[186]

97. The Secretary of State assured us that the number one criterion for assessing the bids will be quality. He said he will be looking for "credible, innovative plans to bring down reoffending" but acknowledged that they must also come within his as yet undisclosed budget.[187]

98. The Ministry of Justice has a questionable track record in procuring quality services when seeking better value for money, most strikingly in relation to the language services contract. It appears that every effort has been made to learn from this but the assessment of quality during a bidding process is notoriously difficult, particularly where new providers are seeking to enter the market. Although the Minister wishes to ensure a balanced consideration of potential bids, an unavoidable consequence of the way this programme is designed is that one element of the competition will be about how cheaply providers can deliver the residual service to enable the maximum resource to be unlocked to "reinvest" in rehabilitative provision for short-sentenced prisoners and others in prison and after their release.


99. Most voluntary, community and social enterprise sector involvement is likely to be at Tiers 2 and 3 of the new supply chains. To ensure that sub-contractors are protected from unfair levels of risk being passed down from the prime provider, the Ministry initially stated that it would require prime providers to commit themselves to principles laid out in the Merlin Standard which was created as a means of providing stewardship of the supply chain in the welfare to work sector.[188] However, there have been criticisms from the voluntary and community sector that despite this safeguard the Work Programme created problems for their organisations, in particular around the amount of cash flow sub-contractors received from prime providers, and the level of referrals. Mr Grayling rejected suggestions that providers from the sector had been treated as "bid candy" and said that this had not been reflected in any formal complaints from the sector about the commercial behaviour of prime providers.[189] Nevertheless, he indicated strongly that he would be prepared to take action if he felt there was such mistreatment under this programme.[190]

100. The Ministry has identified the following core market stewardship principles related to the supply chain: appropriate management of risk, including not passing financial risk down "disproportionately"; alignment of ethos of providers in the supply chain through contractual agreement to support sustainable relationships and build trust; visibility of participation; reward and recognition of good performance across the supply chain; and application of the principles of the Compact—a code of conduct that the Government has agreed to adopt in work with Third Sector organisations—by providers and their supply chain. They also intend to devise industry standard contracts for lower tiered providers.[191]

101. The key voluntary sector stakeholders that we heard from—Clinks, NCVO and 3SC—welcomed the Ministry's efforts to provide greater transparency in the contractual arrangements, but felt that further detail was required from the Ministry to give them full confidence that the programme would uphold the fair treatment of voluntary and community sector providers.[192] Oliver Henman of NCVO observed that the lack of clarity around the subcontracting arrangements was "quite alarming" given the pace of reform.[193]Clinks wished to see: "clear stipulations on matters such as risk transfer, fluctuations in referral volumes, support for organisations that work towards longer-term desistance from crime, and services for equalities groups."[194]The NVCO and Clinks shared the belief that some grant funding or up-front funding would be required to deliver more specialised community-based services to counter the risk that the use of PbR throughout supply chains would restrict the diversity of the market.[195]

102. The Secretary of State was heartened by the level of positive responses the Ministry itself had received about itsengagement with the voluntary sector.[196] When we asked him to elaborate on what would constitute a disproportionate level of risk, he anticipated that some financial risk could be passed down but emphasised that it would need to be done transparently.[197]He also said that he "would have absolutely no compunction about terminating the contract immediately and re-letting it" if he felt that primes were not treating their counterparts, or subcontractors, appropriately.[198]

103. The Ministry of Justice's market stewardship principles are designed to enable smaller organisations to have the confidence to take part in the contracting process so that their skills can be brought to bear in rehabilitation. We will be interested to see how these principles, in particular those related to the level of risk that will be passed down to lower tier providers, will be integrated into the contract management processes as well as the industry standard sub-contracts. It remains to be seen whether prime providers will agree to these as contractual obligations as the competition progresses, and how the Ministry will respond if they do not. It is also not clear to us whether, once the contracts have been let, there will be sufficient incentive for the Department to take appropriate action against the misuse of market power against partner providers or subcontractors.

104. Witnesses from a range of different perspectives felt thatthere is a risk that rehabilitation will be lost in the process of change and restructuring. A key question for the Government is how the focus on reducing reoffending will be maintained while the restructuring in the market that is necessary to create efficiencies takes place. There is insufficient detail about the final payment mechanism to determine whether there will be sufficient incentive for new providers to offer initial upfront investment or to reinvest their resources in rehabilitative services.

Safeguarding against post-implementation issues

105. As we have noted throughout our report, the ambitious nature of the Government's programme of reform poses a variety of risks. Tom Gash observed:

    The interrelationships for probation and other parts of the public sector are enormously complex. Adding into that a particular additional separation between an in-house provider of probation services for higher-risk offenders and a contracted provider for other offenders is a type of complexity that is clearly different by an order of magnitude from that which we see in other areas. The provider market is extraordinarily immature. You are bringing in providers to manage these services that have not done it before, admittedly with a work force who are experienced and have experience of operating in this environment. To me, lots of the signals suggest that this is an incredibly complex programme, on a timeline that has not been achieved before.[199]

106. The Secretary of State set out what he considered to be some of the risks involved in the implementation of the programme:

    The first is if we stopped supervising offenders during the transition process. That is not happening. We have been very clear about it to trust chiefs. Our probation officers are continuing to do a professional job with the people they are supervising. The second would be that we made an inappropriately hurried transition of case load. I have been very clear in setting the policy very early on. We will not do that; we will migrate people over an extended period. […] The third point would be if we did a sudden transition from one organisation to another, so a different group of people took over the job one day from the ones doing it the previous day. […] We are migrating a team of people who are already bedded in in the public sector, who have made the transition to the new arrangements within the public sector and who will continue to look after the same offenders the day after ownership changes as the day before. It will be an evolution, not a revolution. The fourth is the transition of information within the new system. We have specified that the same systems for risk assessment and case management will be used by everybody in the probation service. Finally, we ensure that senior management teams are sufficiently equipped to manage the transition…We have put in place additional resource, through the expertise of the team who worked on the health service transition […] to make sure there is additional resource to help the trusts with the transition.[200]

Jeremy Wright recognised that in relation to risk, at every stage of the project, the Ministry must make sure it does everything it can to smooth the transition process.[201]


107. During our inquirysignificant irregularities came to light in the electronic monitoring contracts held by G4S and Serco. Criminal investigations ensued and the Ministry has discontinued the contracts. Both companies involved hold many contracts in the justice sector. The Ministry made it clear that they would not be awarded probation services contracts if evidence of criminality is found.[202]Subsequently, both withdrew from bidding for these contracts as lead providers. The Secretary of State explained to the House that this did not necessarily preclude them from being involved in delivering rehabilitative services under the reforms:

    […] the Government has left open the possibility of either supplier, as part of their corporate renewal, playing a supporting role, working with smaller businesses or voluntary sector providers in order to support our objective of achieving a diverse market. Any proposals will be considered as part of a rigorous evaluation process, and will take account of the Government's wider assessment of the companies' progress in achieving corporate renewal.[203]

108. The fact that the Ministry finds itself in this unhappy position raises wider issues for the probation competition. The Ministry must satisfy itself that it has done as much as it can to prevent a similar episode from occurring. This will be necessary both in terms of anticipating and minimising opportunities for overcharging to occur under new contracts, and being confident that those organisations that hold such contracts will not countenance comparable mistakes.

109. Our evidence suggests that the Ministry has made it a priority to address these issues. The Secretary of State told the Financial Times that he expected to see both companies going through a process of "corporate renewal" if they wished to work with Government in the future.[204] Both organisations have replaced their senior management and are undergoing internal review.[205] We asked the Secretary of State to explain what, in his view, would constitute satisfactory 'corporate renewal' but he was reluctant to do so while the criminal investigations were ongoing.[206] He was confident that the level of interest from prospective providers was sufficiently broad for the Transforming Rehabilitation competition to proceed should the two organisations in question be precluded, if indeed they wish to bid.[207] In terms of getting the Ministry's own house in order, the Secretary of State commissioned an internal review of contract management, by one of its non-executive directors, "to make sure that it is absolutely fit for purpose".[208]The report of this review was published on 19 December 2013, as was that of a Cabinet Office review of existing contracts held by the two companies in question.

110. In the field of rehabilitation services, the MoJ proposes that new providers and the National Probation Service will be regulated through a combination of independent inspection by HM Inspectorate of Probation, internal audit, and the potential to involve the National Audit Office, as well as through NOMS' account management of CRCs and SLA oversight. They note that:

    "Operational contract management will differentiate between the need for NOMS to have higher levels of assurance about delivery of sentences of the court and public protection, where there will be specific minimum standards and metrics, compared to the substantial freedom providers will be given to determine how they rehabilitate offenders and reduce reoffending."[209]

We welcome the Ministry's endeavours to strengthen its contract management and oversight in the light of the electronic monitoring debacle. We will study the report of the internal review, which will assist us to hold the Ministry to account on this aspect of its administration. We also recommend that prior to the next stage of competition under the Transforming Rehabilitation programme the Ministry should publish a statement setting out its expectations of the integrity of prospective providers and the steps it will take in holding bidders to account for the probity of their activities. In our view, this should include greater transparency in their publication of financial and performance data, than has hitherto been the case. We shall return to the question of corporate renewal with the Secretary of State once criminal investigations and any subsequent legal proceedings have concluded.


111. We encountered some concerns that the introduction of new providers seeking to outperform each other in reducing levels of reoffending might hinder the dissemination of effective practice, which the programme has the potential to add great value to. Our witnesses proposed that unlike in other payment by results programmes where best practice was not necessarily shared because of issues of commercial confidentiality, providers would need to be incentivised or contractually obliged to exchange information on good initiatives.[210]


112. According to a report in The Guardian, the initial risk register, which this Committee has not seen, warned that there was a more than 80% risk that the programmewould lead to "an unacceptable drop in operational performance" triggering "delivery failures and reputational damage".[211] Our witnesses gave us various observations about how the level of complexity and uncertainty within the programme could best be managed. Toby Eccles argued that with the Peterborough pilot, they had recognised the need to build flexibility into the contracts to enable the model to be tested and adapted over time.[212] Tom Gash believed that given the lack of certainty about how well different providers would hold up, either financially, or in terms of their service quality and service standards, there needed to be flexibility to shift who is providing over time to replace underperforming providers. He was therefore concerned that the length of contracts that the Ministry was intending to give was "excessively long" and would hinder this, and proposed that in the absence of a phased approach attention must be paid to "what service standards could trigger a change of provider and […] how you would change a provider if they failed financially. Stress-testing and running some scenarios on that is vitally important before this begins. All scrutinisers should probably be thinking about getting assurances that that process has been gone through."[213]

113. Our witnesses speculated further about what would happen where there was evidence of under-performance. Max Chambers questioned whether the contract in question could go to a neighbouring provider or another provider, or to the national probation service.[214] Richard Johnson queried how quickly a drop in operational performance could be recovered, given the likely contraction of the service, and what the implications would be for public protection.[215]


114. We asked Ministers how they would deal with the possibility that no suitable bids are received for a particular geographical area. The Secretary of State believed that the strength of the market would not result in such an eventuality, but conceded that in that scenario there were several options. These included the possibility of a "slightly staggered transition" or the "ultimate fallback" of the public sector continuing to provide the service, providing it would be financially viable for them to take on the extra short-sentenced prisoners cohort.[216] Jeremy Wright MP explained that the most feasible way to fund the extension of statutory support was by releasing the savings through competition. He envisaged "formidable practical challenges" in having some parts of the system running and others not, in particular in creating difficulties for the courts if mandatory supervision for short-sentenced prisoners was not universally operational.[217]It is unclear whether supervision of short-sentenced prisoners for the whole of England and Wales would have to await the successful conclusion of bidding for all areas, and it is unclear what would happen to the programme for supervision of short-sentenced prisoners if one or more areas subsequently had to suspend operation of the contract. This issue must be clarified.

115. Once a process of contracting out public services has been undertaken, there can be a strong predisposition towards inertia in the sponsoring Department in the face of underperformance by the contractor. This predisposition could be even greater if the continuance of short-sentenced supervision is dependent on contracts remaining in place in all areas. The Work and Pensions Committee made the following observation on the DWP's approach to the cessation of contracts under the Work Programme: "DWP has asserted that it is prepared to use the ultimate sanction against poorly performing primes of terminating prime contracts. However, we are not convinced that this could be achieved without significant disruption to services. DWP needs to do more to explain how this sanction could be applied effectively, and any negative impacts mitigated."[218]While the Secretary of State was clear that he would exercise his power to withdraw contracts if lead providers were not behaving appropriately towards each other or their subcontractors, he did not specify the circumstances in which he would use this power. Jeremy Wright explained however that inadequate performance would be managed through contractual arrangements.[219]

116. The Ministry has high expectations of what can be achieved in the way of efficiency savings and extension of services through contracting out the management of low and medium risk offenders within existing resources. It seems entirely feasible to us that as the competition progresses and details are refined, the attractiveness of these contracts might wane, resulting in incomplete or inadequate provision in certain areas or types of service. None of the possible contingency plans proposed by the Ministry were very clear to us.

117. We received evidence about the risk of operational failure during the implementation of the programme.We note the Government's efforts to test the model with shadow state-run companies before contracting these new arrangements out to new providers, but these are regarded by some as artificial conditions. If the Ministry proceeds as planned it must be able to make modifications to all aspects of the system in the light of experience. For example, in drawing up contracts with new providers, we recommend it should ensure the payment by results metrics are open to modification in the event that unforeseen gaming by providers occurs.We also wish the Ministry to provide us, and potential providers, before the next stage of competition, with clarity about what service standards could trigger a change of provider and how a provider would be changed if they failed financially.

169   Oral evidence taken on 27 February 2013, HC (2012-13) 964, Q3 Back

170   Oral evidence taken on 27 February 2013, HC (2012-13) 964, Q3; Q216 Back

171   Q250 Back

172   Q114 [Mr Gash] Back

173   Institute for Government, Making Public Service Markets Work, July 2013 Back

174   Q121 Back

175  Ibid. Back

176   Q169 Back

177   NVCO (PPC 26); Clinks (PPC 27); Q169 [Mr Henman] Back

178   Qq220-221 Back

179   Qq211, 219 Back

180  Clinks (PPC 27) Back

181  See Justice Committee, Second Report of Session 2012-2013,The budget and structure of the Ministry of Justice, HC97-I and Justice Committee, Sixth Report of Session 2012-2013, Interpreting and translation services and the Applied Language Solutions contract, HC 645 Back

182  Justice Committee, Eighth Report of Session 2010-2012, The role of the Probation Service, HC519-I Back

183   Oral evidence taken on 27 February 2013, HC (2012-13) 964, Q3 Back

184   Q120 Back

185   Q121 Back

186   Q121 Back

187   Qq187-188, Q214-215 Back

188   Merlin Standard website, About Merlin, downloaded November 2013 Back

189   Q255 Back

190  Ibid. Back

191   Ministry of Justice, Principles of Competition: Transforming Rehabilitation Programme, September 2013 Back

192  Clinks (PPC 27)welcomed in particular the stated commitments to 'not passing risk down supply chains disproportionately', the acknowledgement that alignment of ethos is vital in building relationships of trust, and the explicit obligation on the new providers to adhere to the Compact principles when working with the Sector. Back

193   Q175 Back

194  Clinks (PPC 27) Back

195   NCVO (PPC 26);Clinks (PPC 27); Q171 [Mr Henman] Back

196   Q222 Back

197   Qq216, 225-6 Back

198   Q249 Back

199   Q114 Back

200   Q241 Back

201   Q239 Back

202  Investigated Serco and G4S can bid for new contracts, says Chris Grayling, The Guardian,15 September 2013 Back

203  Written Ministerial Statement, Ministry of Justice Contracts Update, 19 December 2013 Back

204  Grayling calls for G4S and Serco revamps, The Financial Times, 20 August 2013  Back

205   See for example Serco press release, Serco announces the key elements of its corporate renewal programme, 25 October 2013; and G4S investors news, EM contract update, 19 November 2013 Back

206   Qq217-219 Back

207   Q219 Back

208   Q218 Back

209   Ministry of Justice, Target Operating Model: Rehabilitation Programme, September 2013, p 39 Back

210   Q124ff [Mr Eccles, Mr Chambers, Mr Gash] Back

211  Privatising probation service will put public at risk, officials tell Grayling, The Guardian, 24 June 2013 Back

212   Q114 Back

213   Q123 Back

214  Ibid. Back

215   Q55 Back

216   Qq213-215, 246 Back

217   Q212 Back

218   Work and Pensions Committee, First Report of Session 2013-14, Can the Work Programme work for all user groups?, HC 162, p 5  Back

219   Q247 Back

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