Will we get what we deserve with payment by results?

A one-to-one meeting at the Pertemps office in Hull as part of a work programme session for the long-term unemployed. Photograph: Christopher Thomond

There was a divergent discussion yesterday between a number of us on Twitter about payment by results (PBR): does it work or doesn't it? we asked. My point was that despite it being a hot topic, PBR has been around in one form or another for 20 years. Having said that, PBR today isn't just PBR, it's PBR plus.



Back in the early 1990s, service providers only got paid under the European Social Fund if they could prove output delivery. This process was accompanied by an audit that could be rigorous. I will never forget 1992, when, after just six weeks of becoming CEO at Women's Education in Building, a ground-breaking construction training organisation for women, I was notified that we were to have a full ESF audit. In practice, this meant three officials, two from the government and one from Brussels, sitting in my office for two days going through all our records and cold calling ex-trainees and their employers to check that they had indeed gone on to the jobs we had testified to as a result of the training that the ESF had funded. Of the very many ex-trainees audited, they couldn't get through to three who might have moved or whose employers might have ceased trading and yet we had to refund the cost of those trainees' courses as no proof existed that they had sustained jobs.

Over the years things have become tighter with proof of certification, employer testimonies and external evaluation required before any payment was made. Added to this, government-funded programmes can take up to 18 months from the end of delivery before final payment is made. Payment can also be withheld: recently a fellow training provider told me that he had been notified by a public funder that they no longer fund soap for recipients to wash their hands with, so his organisation must re-audit their financial records from the last three years to ensure they had never invoiced for toilet soap. One wonders at the cost of this exercise offset against the cost of the soap?

So that is why I feel PBR or the idea that government will only pay for the results they get seems like standard operating procedure and any provider that can deliver on the outputs/outcomes agreed in their contract should, on that basis, after a fashion, be able to make ends meet.

What is new is the idea of introducing third-party finance into the equation. We saw it first in the Social Impact Bond in Peterborough when charity One* Service, the innovatory Social Finance (SF) and HMP Peterborough and the Probation Service (PS) have got together to combine PBR with social finance. Essentially it works like this: SF puts together folk willing to invest in a social activity for a return, it puts the money up for One* Service to work with ex-offenders. The charity gets paid for each offender it works with but, working on the basis of average re-offending rates, if One* Service can reduce those who end up back in the penal system, the agreement is that the amount that government pays back through the PS to investors increases proportionately to the provider's success. This is an incentive for the investors to encourage the service providers to maximise their impact and means government only pays for what it gets, which is hopefully, reduced re-offending rates.

All good you would think and I am sure the SIB pilot is going well. And as a social initiative, like the subsequent Department of Works and Pensions (DWP) Social Innovation Fund, it should be applauded. However, there is a but for me which is this: until now the rates of return market investors have required from social investing is competitive. By this I mean expensive. At present banks are struggling to give investors any return at all, but in the world of social finance the cost of brokering and the risk taking means that interest rates of anything up to 16% are not unusual. Given that government is also looking to cut costs means that the provider, which is often a charity or social enterprise, gets squeezed.

I read with interest Amelia Gentleman's piece in the Guardian yesterday on the Work Programme and how it is being implemented in unemployment ravaged Hull with 22.6 people chasing each vacancy. It's a wonderful article and well worth a read. In it Gentleman follows a number of long-term unemployed people trying to find their way back to the labour market in an area of rising unemployment. Here we see PBR in action, with rigorous targets set by government that anticipate that some contractors, or as they are known in the return to work world 'primes', will go bust.

As she says, "A report on the work programme published this week by the National Audit Office was positive about payment by the results model, but concluded that the calculation of the number of people who will find work was 'over-optimistic' and that providers in areas of high unemployment might 'struggle to meet targets'."

Gentleman describes that in the process of working with the vulnerable such as those with alcohol addiction, the prime G4S is benefiting from the support of a local charity. Similarly another of their 'outputs' is a chap called Cristof who was only able to find work because he completed a joinery course provided by yet another charity. Neither of these agencies will be funded through the Work Programme but without their intervention how would the hardest-to-place candidates highlighted in Amelia's article  ever get a job?

My worry, shared by Gentleman, is that charities and social enterprises are, at present, using their depleting resources to do what they do best which, for now, might be propping up results in a programme so finely tuned financially that in effect the government might well be getting much more than they are paying for. As she says, "There's a peculiarity about the payment system here. The government money allocated for helping get people into work was meant to fund whatever external help they needed, but both the course for alcoholics, and the charity which is helping to train Cristof, receive no money from Pertemps [the private sector sub-contractor] or G4S for helping to make him more employable. Once he gets a job, any payment will go to G4S, and Pertemps will get a cut, but the charity will not receive anything."

If you add to this the need to repay investors at competitive rates and the diminishing resources of civil society organisations, I think the chances of us meeting the complex needs of the long-term unemployed, never mind creating the enterprise culture needed to create jobs for them to go to is by no means assured.

My problem is not with PBR. I think it is entirely right that any client should only get what it pays for and all contracts should be honoured in full. In the social sector our honour and commitment is what sets us apart and so should never be lost in the mêlée. But in a scenario where the client group are needy, the investor requires a commercial return and the government is working, often at a glacial pace, on a no-win/no-fee basis. Something is going to give and it might well become harder for those who are truly deserving to get what they need.