What could be wrong with the humble grant?

Grants are what make the social world go round. They are the standard product of exchange between funders (aka grant makers) and social organisations. But grants have a problem – a feedback problem.

The grant recipient, who might give the feedback, is usually going to be seeking more money from the grant provider. That can get in the way of complete frankness. Grant feedback is usually rose tinted and sometimes becomes a matter of how many times you can fit lovely, wonderful, creative, thoughtful and brilliant into each sentence. I remember being very disconcerted when I was a grant maker for a while. My jokes were suddenly funny, my thoughts pearls of wisdom, and my ideas boundless creativity. I found this uncomfortable. Most grant makers I know do too, and while they generally see through it and work hard to do the right thing, it is sometimes a difficult bubble from which to escape.

So here, with as much honesty as I dare, is a list of grant features and their issues. Thereafter I will put down some thoughts on possible alternatives or improvements.

No. Feature Bug
1

Grantmakers have carefully thought through programmes to which organisations apply. These ensure cohesion and impact

Applicants try to squeeze their work into ill-fitting boxes, refocusing on new measures and creating mission creep. Over time this can create an insidious battle for strategic control with charities playing cynical lip-service to funder wishes and funders becoming more and more controlling.
2

Grants are for a set period of time, up to three years, to avoid dependency

This means that charities have to fill a one third minimum funding void every year, independent of effectiveness or impact. Continuity of funding is effectively completely un-meritocratic.
3

Grants are for a set amount of money, to pay for specific things, and are paid according to a clear schedule to ensure the money is used effectively

This is fine when the plan is clear, but doing anything new one learns on the job and should adjust accordingly. Does business investment tell you exactly how and when to spend the money? In that culture change and adaptation are expected, not cause for concern and negotiation.
4

Applicants should demonstrate that they need the money, as otherwise the grant money could be more effectively used elsewhere

This can create an insidious reverse meritocracy. An effective organisation that looks impressive and organised, with effective financial planning may struggle to get funded. A disorganised one, in clapped out buildings and a handwringing story, may be more successful.
5

Grantees should not use grants for commercial gain or exploitation, results and any intellectual property should be made public

Many social impact ideas can be set up as social enterprises and seek to compete in a commercial market, but with a social product. They can’t get commercial funding, due to their social focus, but they may also struggle to get grant support because someone one day might make some money.
6

Grantmakers want to support innovation

So a charity with a long track record programming excellence can struggle to get its core programme funded. Also the required innovation needs to fit within a pre-defined programmatic area. In other words, we would like to support innovation we have already thought of…
7

Grantmakers want to support the frontline as their money is for saving children, not administration

So charities and social organisations are undermanaged, with poor IT and data systems, and have trouble with senior staff retention as staff leave to do other things if they want to start or support a family.

Put together, these features can:

  • Promote bureaucracy over innovation;
  • Promote mission creep or even fudging;
  • Have unsustainability built in from the start;
  • Are unmeritoctratic and can in fact support the poorer or more needy over the more effective.

Many of these features seem originally designed to fit the needs of foundation trustees or creators, who would like a series of ideas that feel fresh and exciting, that directly affect peoples lives, and that can be cheaply administered. Complicating issues such as commerciality are regarded as too fiddly, and are therefore excluded.

Grants 1.1

Many grantmakers, traditional ones as well as new types such as venture philanthropists, have tried to break at least some of these moulds. For example, many grant makers in the US provide follow-on funding and develop longer term relationships. Esmeé Fairbairn’s social investment fund allows them to be thoughtful around commerciality and social enterprise. The Big Lottery Fund’s Better Start programme aims to provide 10 year funding. Venture philanthropists often allow for more adaptation and provide support to enable the business plan rather than a pre-designed programme. Here are some further experimental grant structures designed to get round some of these issues.

  1. Some grantmakers just accepting that they want to support the strongest organisations in a given area, and then to continue to do so. They can then build long term customer style relationships, developing monitoring and feedback systems to ensure that the charity focuses on the needs of those that it serves and seeks to improve the service it provides. This may sound dull, but it would have a considerable impact.
  2. A success top-up grant. A grant maker provides a three year grant. In the event that the grant applicant is being successful, an additional 50% of the grant value becomes available automatically after say two or two and a half years. The grant maker continues to measure the same impact measures on the new money as on the three year grant, but doesn’t specify how and when the money should be spent. The grant maker can then compare the impact of the follow-on grants it is making with the initial grants. Grant makers should publish the proportion of grants that roll over to set expectations, for example the aim might be say two thirds roll over, or half if feeling more aggressive.
  3. A grant maker could decide an amount of money to tackle a social issue, but then provide a complete mix of different funding, grants, loans, commercial funding, to organisations tackling different aspects of the problem. By doing so, the grant maker learns about the issue from different angles and can add value to those it supports and become a genuine partner. The grant maker can become part of the dialogue around that issue and an agent of change. It could measure itself by the overall impact that it has on the issue, rather than individual grant success, enabling more risk taking and a more holistic strategy.
  4. A grant that converts to equity. To resolve issues of commerciality, grant makers can put the grant in place so that in the event the entity supported receives commercial funding the grant maker can expect to join that first round at the same valuation. They will have taken initial risk, but that is what the grant was for. This idea would need tinkering with, depending on circumstances, but should allay the commerciality concerns.

What are other people’s ideas? I would be grateful for any thoughts on improved grant making structures as I’m not sure I’m being very imaginative here.

Advertisements

First indications from Peterborough – what do they tell us?

Last week was a big week for Social Finance as reoffending data on the Peterborough pilot was published by the Office of National Statistics. This gives the first early sense of how our first Social Impact Bond is doing. In this blog I want to explore the results a little and some of their implications.

So, first, the numbers, or to give it its full title:

Peterborough (and national equivalent) interim re-conviction figures using a partial (19 month) cohort and a 6 month re-conviction period

 Peterborough

National

Discharge Period

Cohort size

Binary

Frequency

Binary

Frequency

 Sep05-Mar07

725

39.70%

72

36.60%

61

 Sep06-Mar08

870

40.30%

81

37.80%

64

 Sep07-Mar09

1031

40.70%

84

38.30%

68

 Sep08-Mar10

981

41.60%

87

37.30%

69

 Sep10-Mar12

844

39.20%

81

39.30%

79

Binary: Reconviction rate over six months
Frequency: Frequency of reconviction events per 100 offenders within six months

Three topics to cover:

–          Is the Peterborough SIB working?

–          What do these numbers tell us about whether investors are likely to get paid?

–          Do they have any implications for developing the national recidivism PbR work?

1.  Is the Peterborough SIB working?

Put simply, it would appear so. The best way to show this is to index the results so that you can see them together and then to plot Peterborough relative to the national data:

Rebased reoffending data

So, the key measure for us is the one that we will be paid on, the percentage change in frequency of reoffending against a comparison group, in this instance the national cohort.

Peterborough relative to national

On that basis Peterborough has shown a 23% relative decline to the national data. On a sample size of 844 this is likely to be statistically significant, so on reoffending within six months, rather than a year, it appears we are making a difference.

Any caveats? A number. This is on the basis of six month reoffending, not 12 months, so one could argue that the impact of our programme may lessen over time. The comparison group, of wider national reoffending, is not as carefully defined as the comparison group that we have developed in the Peterborough model proper, where the reoffending rates of a matched cohort from the police national computer is used. Given this, the comparator group 16% increase over a two year period is something of an outlier, but it is all we have to go on.

So plenty of caveats. But however much these figures are indicative and however tentative and careful we are being; for a programme in its infancy and on its first cohort, this is a great start.

2. What do we know about whether investors will get paid?

So, two completely different numbers to note here:

a) the 23% relative decline discussed above; and

b) the fact that after this change the frequency and binary metric for Peterborough are now in line with the national average.

In other words what we have achieved so far is to move Peterborough from its historically higher rate of recidivism, to the national average. Through one lens we have done tremendously well. Through another lens Peterborough did (almost) exactly the same as the national average. Which lens will be reflected in the comparison group drawn from the police national computer?

If the prisoners in Peterborough are different and thus reoffend more, then this should be picked up in the comparison group as each individual is matched to one as similar as possible.

If the local environment is different, the prison for example, or the courts system, or the police… Then it is much less clear whether that will be picked up by the comparison group. It could be in part, if prisoners going through Peterborough are relatively local (and about 70% are) then those factors could be picked up to some extent in their criminal history and be matched to prisoners from similar environments. For those that are more transient, for example those coming through from London, such effects are unlikely to be picked up.

Locally there has been speculation for a number of years around why Peterborough’s recidivism rate is higher than the national average, and most of that speculation has focused on prisoner mix. But I don’t believe anybody has any evidence to back that up.

So, this all adds up to probably a greater uncertainty as to whether we will be paid for outcomes than we have that the programme is generating outcomes.

3. Any implications for the development of the national PbR programme?

These numbers probably complicate the development of the national PbR programme in one significant way, they give the impression of an increasing trend in reoffending, while the wider crime stats in terms of amount of reported crime and the British Crime Survey has generally been going down.

The key requirement this creates is that the Ministry of Justice needs to be completely transparent with the data and analysis that it is using to develop the counterfactual data. It simply cannot credibly develop it on its own and then tell people the answer. Regional variation needs to be understood, historical variance needs to be understood, a dialogue is needed to develop an acceptable answer.

Secondly, it increases the potential, in my view, for a proportion of outcomes payment to come from a fixed sized pot that is shared out according to relative performance amongst providers. This will resolve some of the uncertainties in bidders minds and show them that, while they may be taking a risk, there is a defined amount of outcomes payments that will be made if they perform better than some of their peers.

For such a pot to work, there should be a requirement to give a minimum spend on rehabilitation in the bidding process. Open book accounting thereafter can ensure that bidders keep to their promises, but the amount that bidders are willing to invest in reducing reoffending can then be used as part of their assessment. This can be used to counter the issue in the Work Programme – that for profit maximising providers the outcomes payments for harder to reach groups are insufficient to invest in trying to get them back into work.

So, the idea that bidders demonstrate a minimum commitment, is vital to maintaining the programmes credibility – that it is about rehabilitation, as opposed to only being about cost cutting and privatisation.

A Step In the Right Direction But Not Enough

This blog was also posted on Social Finance’s blog here

Slowly we are getting to know more about the plans for probation and prisoner rehabilitation reform. We can see that some effort is being made to make the model work better following the consultation but is it enough to allow for a level playfield for all providers to take part? Will it achieve the ultimate goal reducing crime?

The key positive changes are as follows:

  • The whole idea that rehabilitation of prisoners and short sentence prisoners in particular has moved to centre stage and has become a key government policy is terrific and long overdue. Many should feel embarrassed that this has taken so long.
  • The idea of resettlement prisons, which will have a requirement to work with those providing rehabilitation services, and to which prisoners will be transferred at least three months before release. This resolves a key issue that effective rehabilitation needs to start in prison, rather than after.
  • The acceptance that a mix of binary and frequency measurement is required to make this system work. This may sound an esoteric point but is vital. A binary measure only pays in the event that a prisoner stops committing crime for twelve months. A frequency measure pays for reductions in offending across a cohort. Some people go through the prison system 10 or more times a year. If you have only a binary measure as was originally suggested the only correct financial decision when faced with such an individual (and required to give them a service) would be to give them a leaflet and tell them to go away. Further investment would invariably be loss-making as intense effort over a period of time and money is needed both to gain trust and thereafter help to move their lives in the right direction. Being paid on frequency and therefore acknowledging “distance travelled” will make it worthwhile financially.
  • The shift in number of contract areas from 16 to 21, and the different area sizes, are positive changes. This should mean that social organisations acting as primes, or a probation trust mutual, can bid.
  • But the positive impact of other elements in the response is less clear. The idea of standard contracts is interesting, but will they have to be finalised before the last round of bidding? In other words is there wriggle room?
  • The transparency piece sounds like a step in the right direction, but only a step. Input cost data and outcome payments should be transparently available across the market. In the public sector we see how much is spent on what and hopefully also get an idea (not always!) of the outcomes generated from that money. In the circumstances where you are building a new market, this data is even more important, not less. There will be enough benefit to incumbency without letting providers keep hold of this data. This will also make it clearer if a provider is not finding it economic to work with a particular cohort and is parking them.
  • The comments about women in prison were good to see, but they didn’t seem to imply that anything would be done to make the model work for women.

And there are areas where we simply don’t know anything:

  • What are the potential pricing expectations?
  • Will there be significant segmentation of the cohort and the pricing that goes with it?
  • Will men and women be priced the same? Needs and complexity are very different.
  • Is there room for alterations of pricing for specific groups as we learn over time? It seems deeply unlikely that it will be right first time.

So, at the end of this, what are concerns?

1. This is an incredibly complex, risky and ambitious programme of change. Tom Gash at the Institute for Government has written on this issue in his blog, with sensible recommendations for reducing the risk.

2. Bidding process and pace will favour incumbents

I was told by a private sector provider considering bidding for prisons that they had understood they should expect to bid in one round to learn how to possibly win in a later round. In other words, spend £1 million plus on a learning process before you stand a chance. Social organisations or probation trust mutuals don’t have that luxury. Those who know what the MoJ expects in large contracts will score better than those who are learning on the process. So the answer that it’s a level playing field simply doesn’t wash.

If charities are going to invest upwards of £250,000 of charitable funds and a considerable proportion of senior management time on a bidding process, they need more substance from the MoJ that they stand a realistic chance.

In addition, while there are some limited resources available to help test the mutual option, developing such a strategy and capacity takes time. So would developing a social prime and investment for it. The focus on the timetable above all else is in danger of defining the answer.

It should be a strategic imperative for the MoJ to end up with a mixed economy of private and social provision (and not just in the supply chain, at the prime level). There will be more learning, more constructive competitive tension, and probably greater investment in rehabilitation. European law should allow the MoJ to actively manage the market and they should do so, explicitly.

3. There is still room for gaming in the bidding

Gaming bidding is where an entity bids on the basis of having little intention of doing much rehabilitation, and makes money from input revenues without generating very many outcomes. Some seems to have occurred in the work programme, particularly around harder to reach groups. There are a number of ways that the MoJ can avoid this, examples include:

  • Requiring a certain level of investment in rehabilitation and monitoring it.
  • Scoring bidders on how much they say they will invest in rehabilitation and monitoring it.
  • Requiring transparency on input and outcome data and stating that bidders authenticity to what they said they would do will be assessed and those below a certain threshold won’t be allowed to bid again.
  • Without such measures, a sense that a low cost, gaming bid is likely to do better than a higher cost, rehabilitative bid will prevail

4. I’m not convinced the numbers add up

I can’t see into probation numbers, so I don’t know if it works to take out 20% of cost and provide an effective rehabilitation service for a wider community on top. But my instinct is that real rehabilitation will require real money. This money  is presently tied up in prisons. There should be a sense that these contracts can, if very successful, eat into the prison budget. What is fundamentally up for grabs here is what is the right allocation of resources between processing and punishing people, and trying to stop them doing it again. I wrote about this more substantially on another occasion. Read it here. My view is that the allocation that gets the number of future victims of crime to be as low as possible. In other words this is not about being nice to prisoners, or not nice to prisoners. It is about stopping crime and helping avoid further victims.

In conclusion, the MoJ is making some effort to allow this to work for a wider community than simply their incumbent private sector providers but not enough. The perceived need for speed and the inaccurate perception that they are building a level playing field are likely to undermine social sector interest in bidding at the top tier. The rehabilitation revolution should be about creating social value, reducing crime and reducing the costs of justice overall, and not simply about providing a lower cost privatised probation service. It would be a shame if at the end of the process this was how it was perceived.

Would I invest? Part 2 on our arms manufacturing social enterprise

This is the follow up post to this one here.

Thanks for everyone’s input on this – I hope you enjoyed it as much as I enjoyed writing it. People’s answers demonstrated the two basic philosophical approaches to looking at the problem:

a)      A deontological or Kantian ethics approach: that investing in weapons manufacture is intrinsically not social. Therefore neither ethical nor social.

b)      A utilitarian approach: that investing in this weapons manufacturer would overall reduce loss of life and civilian casualties and is therefore a social investment.

In my limited experience when there is an argument between people where one is taking a utilitarian approach and the other a Kantian the best  thing to do is to leave and go to the pub, as they are starting from such different background frameworks they are unlikely to achieve consensus.

A route that combined the two was put forward by Phil Caroe of Allia (thank you Phil), in an ethical investment model: If you believe weapons are unfortunately necessary, and therefore in your universe of acceptable investments, then this investment would score highly on a comparative basis with other potential weapon manufacturer investments. This combines the two by using rules to determine your investment universe and then comparative methods to make a selection. My only concern with this is that it is a passive investment methodology, where your starting point is that you have money to invest and a set of possible investments, which are the best ones?

So where do I come out on this? Well if we apply an active impact investor type model for understanding this investment, one would look at three elements:

a)      Does it have a sensible theory of change or evidence base? In other words do we believe that its actions will lead to the outcome that it is seeking.

b)      Is there a better way to achieve the goals than the way proposed?

c)       What might be the unintended consequences and are they serious enough for us to worry about?

When understanding a) there are a number of attractions. The model has thought through a best angle of intervention, where the pressure points might lie. It has thought through how to be credible to its target audience. It understands the market it is in and the change it is seeking to create. There isn’t any evidence base of course, but this kind of change agent role wouldn’t have an evidence base.

As for b) a much deeper analysis would be required with the team and talking to external experts. Other possibilities might be more grant funded, campaigning or lobbying for example, but we should be able to compare them and then make an assessment rather than allowing our chosen investment methodology to determine our answer.

If I have any concerns, it is around c) unintended consequences… In other words the What Ifs? For example, if they made land mines more acceptable again, would more countries start using them again? One can start getting into quite deep analysis of the value of improving defensive strategies if you aren’t careful. To use a different example, Drones are, some might argue, the ultimate social weapon as they minimise civilian casualties and focus on the bad guys. But their very nature makes them easier to use, more acceptable even. The potential consequences of that ease of use are still playing out. There is quite a good discussion on this on the moral maze, a BBC radio programme. You can download the podcast here (The one thing it does demonstrate is that the last person you want sitting at the other end controlling the drone is Melanie Philips from the Daily Mail).

So I would not be inclined to invest myself. But if someone with real expertise in the area felt they had explored all the other options, and that this was the strategic route to making a difference in this particularly thorny problem then I would be open to them investing and considering it social investment. I don’t think the moral hazard quite puts it out by default in other words.

A few things to highlight from all this.

First, when people try to make ethical decisions they can start from at least two very different starting points. Therefore attempting to reconcile all into a universal answer to impact investment decision making is not going to succeed.

Second, finding answers to complex social issues is not easy. Potential points of leverage and strategies are not straightforward or necessarily comfortable. Many of them transgress traditional red lines for foundations or social investors. They might involve private enterprise. They might be perceived as subsidising government. Someone might make a profit. My fear is that in their struggle to work through what to invest in, organisations start by putting these red lines in place. What this means in practice is that some of the most interesting potential answers will struggle to raise investment.

Taxonomy of Social Enterprise

The difficulty for those thinking of funding or investing in social enterprise is that the concept is wide, some might say baggy; a term that encompasses a range of different organisations with very different needs. This can cause sterile arguments about “what is needed to help social enterprises” where each of the participants is concerned about a different type of organisation.

For a more complete taxonomy of social enterprise, I was delighted to find one on a website called 4lenses. You can access it here. Thank you to Kim Alter and her crew for developing it.

So, let’s consider a quick segmentation of the social enterprise universe, for the purposes of thinking through what types of subsidy might be wanted or required, and therefore help funders choose their area of focus and develop a coherent offer.

a)      Serving disadvantaged populations: social enterprises building business models to bring goods or services to those who cannot afford them as they are presently provided. These may need permanent subsidy, may need subsidy while developing the business model or sufficient scale, or while the actual needs and pricing that is possible in the new market is figured out. Microfinance is a good example of this kind of social enterprise. Initially supported with grant capital, as the risks and potential of the market became clearer and therefore lower a wider variety of capital became available. However as the business model became more commercial so many potential customers started to get left behind again, and regulation started to become necessary as the incentive alignment between providers and beneficiaries became less clear.

b)      Change agents: Many social enterprises are looking to change something, typically behaviour, for the benefit of the service user and wider society. This means there is an element of preaching to the unconverted and as John Kingston formerly of Venturesome puts it “you can’t get the unconverted to pay for the priest”. Will need subsidy during the conversion process, which may be a while if there are always new hordes/ markets to focus on. Government may want to subsidise change agents, if they are seeking a change that is aligned with government’s agenda and spending focus. Otherwise such a subsidy is likely to come from those motivated by the change mission of the organisation.

c)       Supply chain supporters: For example fair trade, where an organisation effectively buys its supplies for more in order to benefit the suppliers or the environment. This may need subsidised availability of investment capital but probably need to be able to make the value of the proposition compelling enough to consumers that they are willing to pay a premium for the product. It is not clear that government necessarily has a role to play in such investment, but in the same way that it is comfortable subsidising charitable giving with a tax subsidy even if it isn’t part of the government’s direct agenda, so investment into fairtrade organisations would have a reasonable case for tax incentives similar to gift aid.

d)      Social ownership structures: mutual, co-operatives or similar employee ownership models may be social enterprises but their services may exist in a normal marketplace (John Lewis for example). For those spinning out of government, they may have issues of being thinly capitalised and therefore needing investment. With all such organisations they struggle raising outside capital so getting scale up without some kind of supportive capital can be difficult. Those in social services therefore should have access to social enterprise investment. Those in more commercial marketplaces, for example an employee owned software company I once worked for, don’t have a particular argument for social investment.

e)      Providers of social services: Not all social service providers are social enterprises, some are from the private sector. So this gets to be a tricky area, what justification would there be for government or other subsidy if others don’t appear to need it. Here the potential value of providing supportive investment is high, but there are issues about how you sort the wheat from the chaff…

This last is in some ways the nub of the problem. What differentiates a commercial company from a social enterprise working in the same space, both competing for government contract? Who needs to differentiate them? Why? I’ve been picking round this topic for a little while. Time to tackle it soon…

Is the government definition of Social Enterprise fit for purpose?

I’m not a big definition guy. I’ve found for most of my work that the adage “you may not be able to define it but you know it when you see it” works quite well. But most debates around social enterprise include some tortured discussion on definition for the simple reason that a number of key stakeholders feel they need a definition in order to allow them to create boundaries around their work. For example if you are running a social enterprise fund your starting point is likely to be “who can I fund?” This is likely to be followed by the equally sensible question “who needs my money and what form should it take?”.

The definition of social enterprise used by government is:

A social enterprise is an organisation ‘with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or community, rather than being driven by the need to maximise profit for shareholders and owners’

At one level this is an elegant solution, it builds on the characteristics of charity that its assets are locked for social good in perpetuity and tries to make it a bit more business-like.

Looked as another way, it makes little sense. It effectively says “We will support any organisation with a social purpose that has structured itself in such a way that it has no access to commercial capital and therefore needs our support.” So if the definition is needed in order to decide who the government provides subsidy to this is simply an abdication of responsibility to think. It says we will consider support only to organisations who structure themselves to require charitable or governmental support.

If you want to make social change you have to make a choice early on, structure your organisation so that it can get social capital but not commercial capital or vice versa. Now social capital and grant money probably makes it easier to start an organisation with an interesting social idea, but it is not generally available to help it grow beyond a certain size. Commercial capital is unlikely to be available in early phases but might be available to scale an interesting proposition, though it might also then pressurize the business model to focus more on return. This feels like an odious choice to me and one that acts as a serious constraint to the development of a sensible social enterprise market.

Subsidised capital or social investment is more necessary in the start-up phase of an organisation if it has a social purpose. Later on such capital can also have a crucial role – constraining the interests of more commercial investors, and making sure that the management maintains an authentic balance between social and commercial concerns. One option might be to provide capital on the basis that, if further investment is raised, the management needs to outline the continued social aspects of its business model and be held to them by their original social capital – or they repay the social capital with a commercial return on the arrival of more commercial money.

This would give social funders an understanding of the careful ethical decisions organisations make when providing social services while sustaining themselves, and social organisations would have to articulate and justify what makes them different, rather than simply “we’re better than those nasty private sector people”, without much further thought.

Another option might be to allow social investment funds to be defined as having a social purpose and to require of them an impact reporting requirement. They would then need to select organisations to invest in and hold them to account according to their impact metrics.

A further option is to allow social enterprise to include all organisations that measurably disadvantage their commercial position in order to achieve social good for a stakeholder in their work. This might be suppliers, for example in fair trade, it may be customers, for example those seeking to give a fairer deal to poorer customers.

All this leads to a sense that for government to support the development of an effective social economy and investment into it, we need a clear understanding of what a social purpose brings to social service provision that is different from private sector alternatives, and therefore what it is seeking to nurture. We also need to consider constraints such as state aid, and conflicts of interest – where the state is both supporting investment and a potential monopsony buyer. Plenty to ponder on further.

Is Chris Grayling missing the revolution?

Chris Grayling yesterday published his consultation on reforming probation, focusing more on rehabilitation and bringing in the private sector. This is double edged for us. It directly builds on our work in Peterborough, but does so very early and before there has been wide testing of PbR in criminal justice. He does on the other hand have a limited political window before the next election and it has put rehabilitation firmly on the political agenda.There is also at least some money available for short sentence offenders which is a break through. Probation is cross, understandably, and most others aren’t commenting in public as the detail isn’t out and they may be bidding. So far so good.
The story bombed out pretty quickly, but you can read about it here. Social Finance issued the statement here.
The issue that I’m interested in is what we alluded to in the paragraph:
“We encourage the Secretary of State for Justice to look beyond the Probation budget to finance this work. The criminal justice system costs the taxpayer £6.3 billion a year. At present we spend 13p in the pound on probation and rehabilitation, and 87p in the pound on locking people up. With more resources, better rehabilitation could cut crime andreduce wider criminal justice costs. The allocation of resources between these two areas should therefore be part of this consultation. This is possible as any new money would be paid on a results only basis. Without adequate resources, it will be difficult to ensure that support for rehabilitation is delivered properly and at scale.”
The probation budget of course overstates the amount going to rehabilitation, as probation does a lot of work around public safety, managing community sentences, advising the court and so on. So I think it is safe to assume 90-95p in the pound goes on processing and punishment and 5-10p max goes into rehabilitation. Now many might argue that is the role of the justice department. The clue, as they say, is in the title. It ain’t the fluffy put people back together department, it is the Ministry of Justice. I can see their point, but effective rehabilitation is in the Ministry’s interests. It cuts crime and should reduce their costs.
So my question is, why is even a discussion of the allocation of resources between punishment and rehabilitation unlikely to be on the agenda, and what can we do about it?
First let’s look at how it could be done.
Payment by results is being used in two different ways at the moment. One way, like the work programme in the UK, is to try to improve the efficiency/effectiveness of a present service area that is perceived to be providing poor results. This is done at scale and typically ratchets up the outcome focus over time, so that providers have time to improve or get taken over if they can’t sort themselves out.
The other way, like the Peterborough SIB, is to try innovation. Government would not pay for the service under normal circumstances, as it is perceived as too risky. But if you only ask them to pay for the outcomes achieved, then with a bit of luck, you can develop a contract and test out a service in a rigorous way and with the government’s blessing.
There is a potential third way(!). Outcome based models can be used to test the appropriate allocation of resources between a preventative spend and an acute one. So an outcome based contract is set up for the preventative spend. It doesn’t have to be entirely outcomes based, in fact it is probably better if it isn’t, but any spend over and above expected preventative spend would need to be on an outcomes basis, as it would be being taken from the potential spending on the acute service. In other words the additional preventative money would only be available if it had successfully shrunk demand for the acute services.
This method is potentially the most radical, as it allows service effectiveness to decide on budget allocation, an unusually rational way of doing things.
So why is this not being done? In all the conversations we have had with government insetting up SIBs of all shapes and sizes, they always have an expectation of an outcomes cap. The fear of excessive success is often significant. To my mind the reasons are as follows:
  • supply in-elasticity  for a lot of acute services, there are high fixed costs and demand has to reduce significantly before supply can be taken out of the system, before a prison can close for example.
  • backfill: many acute services are perceived to have infinite demand in comparison to supply (mental health for example), so any reduction in demand will simply be filled by other people. Or spare capacity will impact on behaviours elsewhere in the system. Judges will sentence more people to prison if prisons aren’t full, social workers might put more children into care if there are places available etc.
  • fear of poor contracting: the concern that they will somehow get legged over in the contract and suppliers will succeed in getting paid without having the wider outcomes impact that would actually reduce acute service demand.
So what can be done about this? All the problems described above are soluble over time.For example, outcome caps can be put in place, but any supplier hitting them has the cap and outcome values raised after a time delay of say a year. This would allow time for supply reduction strategies to be put in place and to ensure that backfill is managed. The detail issue would be managing whether such raises to the cap would be automatic or at the government contract holder’s discretion. The former ensures pressure is maintained in the system to implement supply reduction strategies – a pressure that is typically needed as reducing service levels is hard and unpopular with stakeholders. The latter reduces the risk if the contract was poorly formed in the first place and suppliers are reaching caps but not impacting actual demand.
I’m not sure this is sufficient unfortunately. To do this also requires different accounting rules and ways of managing public expenditure. I’m not an expert, but I imagine a department wanting to retain flexibility between two significant budget line items is not the sort of thing the Treasury likes. I do know that DWP had a significant fight on its hands when it sought to do the DEL/AME switch but succeeded eventually. I’m not sure what the response would be when looking at two departmental budgets as would be the case in Justice.

Where I am sure that Treasury would agree is that a supply reduction strategy needs to be in place alongside any demand reduction if we are to make any real difference to long term numbers and cost.

When faced with Gordian knots such as this, our experience is that a migration path is needed that allows the government to take initial steps without taking on too much risk. In this instance that is about pushing to ensure at least some of the contracts allow for either quite high levels of performance before being capped, or for the caps to be expanded. It is also vital that a range of actors engage with this debate and make relevant contributions to the consultation process.

Please get in touch if you have thoughts, feedback or want to participate in this debate.