Rough justice and topsy-turvy incentives

The Ministry of Justice is engaged in a radical overhaul of the probation service. The big idea is to pay non state providers according to how much they cut reoffending levels in their area. Backing the reforms with financial incentives to innovate and rehabilitate offenders could be just what’s needed to cushion the blow of a shrinking Justice budget, which will be over one third smaller by 2015 than it was in 2010. But do the detailed plans stack up? In a new analysis the SMF has published today, we argue that they don’t and that providers have no incentive to cut reoffending.

Earlier in the summer the Department produced a consultation document outlining how the all-important payment mechanism would work. In its determination to avoid paying providers for any apparent results that may just be a statistical blip, the Department proposes to keep provider payments unchanged unless they achieve a more than three percentage point reduction in reoffending. But they’ll also pay providers the same if reoffending rises by up to three percentage points. Since providers will have to spend large amounts of their own cash to cut reoffending, this effectively means they’ll have to aim for around a four percentage point reduction in order for it to be more likely than not that they’ll be rewarded.

That’s a big ask. In fact it looks all but impossible. What limited and uncertain evidence there is about the pilots at Peterborough and Doncaster will give investors no reassurance that this scale of improvement is achievable. And Peterborough deployed far greater resources than are likely to be on offer to providers of the new national scheme.

Given the likelihood of losing any money one ventures on cutting reoffending, the payment scheme has the perverse effect of encouraging providers to shave costs, cut corners and let reoffending drift upwards. After all, they’ll get paid the same unless the results get really bad. This is an atrocious set of incentives. The result would be bad for taxpayers, victims and offenders.

In the paper, we make several proposals for how to avoid these pitfalls and straighten out the incentives on providers. One is for the Department to abandon the ‘flat payment zone’ and just pay for results as they appear. That would give the unambiguous message to providers that the more they invest in cutting re-offending, the higher their payments will be.

Responding to this proposal, the Prisons Minister today said that “the report seems to recommend giving providers an easy ride and handing over taxpayers’ money for negligible improvements.” Our proposal offers unambiguously better value for money, mainly because providers who allow reoffending to rise will be penalised. Under the Government’s plans, by contrast, failing providers get to walk away with the same money as providers who’ve spent and worked hard to find new solutions. It’s baffling to see how that represents judicious use of taxpayers’ money.

The report also proposes a separate solution to the problem of statistical uncertainty problem that’s at the heart of the disagreement. Rather than paying for results measured on the basis of small annual cohorts of offenders, where the statistical uncertainty is large, the government should instead go on adjusting payments over the full, five year, period of the contracts. By the end of the period, the number of outcomes would be large enough to have all but banished any statistical doubts, and the taxpayer would have paid or penalised only for real results or failure.

The direction of the Ministry of Justice reform plan is the right one, but unless the payment mechanism is revised, a good plan will be undone by topsy-turvy incentives.

This article originally appeared on Public Finance’s Blog.


Related items:

Page 1 of 1