Ian Mulheirn is Director of the Social Market Foundation
Today’s NAO report on the introduction of the Government’s flagship Work Programme scheme to get the people back to work is scathing. While Chris Grayling said that it is based on ‘guesswork’, the NAO report carefully explains how it’s based its assessments of likely provider performance on the most comparable recent programme – the Flexible New Deal. All of which raises further questions about what exotic flavour of guesswork underpinned the overoptimistic projections the Department for Work and Pensions made for the new scheme.
So how big are the discrepancies? The Department said it expected providers to get some 40% of the main client group into work, the NAO say past experience (in a better economic environment) suggests that they’ll only achieve 26%. This backs up a similar analysis that we undertook back in August 2011, estimating that performance would be 27.8%. At the time Chris Grayling tried to brush off our figures on the Today programme and he’s doing the same with the NAO. The NAO figures also imply that performance is likely to be four percentage points lower even than what DWP thought would happen to employment without any employment service whatsoever. All rather embarrassing.
But so what? The DWP is overoptimistic, but why does that matter? The answer is the effect it’ll have on front-line services. In a payment by results programme that has been calibrated to be profitable only for good providers, huge overestimation of what’s doable poses a large risk to the viability of this important, multi-billion pound public service. With long-term unemployment rising, now is not the time to have a dysfunctional employment service, the consequences of which we’ll be paying for socially and economically for a generation. What’s more, with other departments such as the Ministry of Justice seeking to emulate DWP, problems here risk discrediting an important reform agenda.
Let’s look at the likely impact of much lower-than-expected performance with the help of a chart from the NAO’s report (page 28), which I’ve scrawled on. The chart shows how the average provider’s profit margin varies with the cost of providing the service and the number of six month jobs they achieve for their jobseekers. The left hand edge of the chart shows likely average profits if providers spent a minimal amount on the scheme. The right-hand edge represents the amounts that providers said, in their bids, that they would spend on the service. Clearly, since they’re planning to spend 30% more cash on their services than DWP’s low-cost estimate that will reduce profitability for a given level of job outcomes.
Nevertheless, the green line – second one down – shows that if providers hit 40% performance they can still make a profit to the tune of around 5%. Fair enough. But what happens if performance is much worse? The yellow line on the chart shows that at ‘non-intervention performance’ – still fully four percentage points above what the NAO says will happen – at the service cost levels proposed, providers will make a loss of between 30% and 40%.
But it gets worse. As the NAO point out, when bidding the providers were asked to offer DWP discounts on the headline outcome payments. While DWP said it would pay, say £1,200 for a six month job, bidders were encouraged to offer to take a lower amount. The average discount in the end was around 6%, which the NAO estimates will lower profitability by a further 5%. This is shown on the second-to-bottom blue line, which I’ve drawn on for illustration purposes. And if we add on the difference between NAO’s estimated performance (26%) and the ‘non-performance level’ (30% -stay with me), the chart suggests we might see something like a further 10% reduction in profitability. This is represented by my dashed red line drawn on the NAO’s chart. Add it all together and the NAO numbers imply that providers delivering the service they bid under the NAO’s assumptions are staring at a loss of something like 40% to 50%. Ouch. Something has to give.
This massive overestimation of achievable performance has put Work Programme providers and their charity subcontractors in a very perilous position. Assuming that the NAO is right, the only solution is for them to cut services at the front line to save money. But by eyeballing the rough-and-ready illustration below, we can get a rough idea of how much services need to be cut for providers to remain viable. The average provider might have to slash their spending by something like a third before that red line goes positive. The alternative is to go bust. What impact an effective one-third cut in funding will do to service quality is anyone’s guess, but the impact on sub-contractors won’t be pretty either. One way or the other, it’s clear that the Government needs to have an urgent rethink on the Work Programme.