A system of payment by results was “not well suited” for Ministry of Justice (MoJ) probation service contracts, according to the National Audit Office (NAO).
In a report the NAO said the MoJ’s contracts with Community Rehabilitation Companies (CRCs) were designed to encourage innovation, but they transferred risks that “CRCs were not well placed to manage”.
The NAO said activity levels fell over the course of the contract, meaning CRC income from the MoJ fell, and the MoJ “overestimated CRCs’ ability to reduce their costs as their income fell”.
The report said activity levels fell by 15-48% two years into the contracts, which began in 2015, against a modelled 2%. The decline was partly the result of changing sentencing practices, where community sentences are in long-term decline.
“The scale of the fall in activity volumes and the consequential financial impact has put CRCs under financial pressure and affected their willingness to invest in probation services and implement their transformation plans,” said the report.
The MoJ expected to pay CRCs up to £3.7bn over the life of the contracts, which were originally set to run to 2021-22. But by August 2018 it forecast it would pay £2.3bn to December 2020, when the contracts will now end after being cancelled.
The NAO said in March 2017 there was a 2.5 percentage point reduction in the proportion of reoffenders since 2011, but there was a 22% overall increase in the number of reoffences per reoffender.
The MoJ expected CRCs to cut reoffending by 3.7 percentage points over the life of the contracts, resulting in £10.bn of economic benefits, but by March 2017 just six of the 21 CRCs consistently achieved significant reductions.
In 2013 the MoJ began reforming probation services, creating CRCs to manage low or medium-risk offenders and the National Probation Service to manage those posing higher risks. Contracts were amended in 2017 to increase CRC income and stabilise failing services but last year the MoJ announced it would terminate the contracts 14 months early.
“In transferring volume risk the ministry had a poor understanding of CRCs’ cost bases,” said the report. “Both it and bidders had overestimated CRCs’ ability to reduce their costs as income fell. The ministry’s original assumption was that 20% of CRCs’ costs were fixed, but in June 2017 it amended the contracts to allow for average fixed costs reported by CRCs of 77%.
“The use of payment by results was intended to transfer the risk of successfully reducing reoffending to CRCs. But many of the steps necessary to achieve this outcome are not fully within their control. Offenders’ likelihood of reoffending is influenced by wider public services, such as support with housing, employment, mental health, and substance misuse.”
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