Pay up (The Economist)

IT WAS supposed to be one of the coalition government’s most radical policies. In 2012 David Cameron, the prime minister, promised to put “rocket-boosters” under a scheme of public-service provision called “payment-by-results” (PBR). Under the scheme, the government pays a provider to deliver a public service, but only if it achieves a successful outcome. With £1 ($1.44) in every £3 the government spends on services going to a private firm, putting in the right incentives makes a big difference. There is, however, a groundswell of opposition to the move.

Such schemes are not new—in the Napoleonic wars sailors were remunerated if they captured an enemy ship—but the government is now using them more widely, including in welfare, housing and criminal justice. A report in 2015 by the National Audit Office (NAO), an independent watchdog, identified 52 programmes worth about £15 billion.

IT WAS supposed to be one of the coalition government’s most radical policies. In 2012 David Cameron, the prime minister, promised to put “rocket-boosters” under a scheme of public-service provision called “payment-by-results” (PBR). Under the scheme, the government pays a provider to deliver a public service, but only if it achieves a successful outcome. With £1 ($1.44) in every £3 the government spends on services going to a private firm, putting in the right incentives makes a big difference. There is, however, a groundswell of opposition to the move.

Such schemes are not new—in the Napoleonic wars sailors were remunerated if they captured an enemy ship—but the government is now using them more widely, including in welfare, housing and criminal justice. A report in 2015 by the National Audit Office (NAO), an independent watchdog, identified 52 programmes worth about £15 billion.

In 2011-15 a third of 18- to 24-year-olds in the programme moved into work for a “sustained” period (at least three or six months, depending on the person), compared with a quarter of 25- to 49-year-olds.

In addition, the economics of PBR can work against innovation. Providers of public services must pay their employees and suppliers. It is difficult, especially for small firms, to wait around for a payment based on how they have done. Over 80% of providers report concerns about financial risk from PBR, according to the Institute for Government (IFG), a think-tank, which says such firms are unwilling to take on further risks by doing things differently.

Toby Lowe of Newcastle University Business School argues that all this means that payment-by-results is “doomed to fail”. Yet, in spite of its problems, PBR shows promise. A report by the NAO found performance in the work programme was similar to past schemes, but cost 2% less. Performance has improved further since. In 2015 the government claimed that, thanks to its “troubled families” programme, where households with complex needs are supported by local authorities, 100,000 had been “turned around”. That is a self-serving and vague claim, but those who work on the programme tend to view it positively. The NAO noted that the “outcomes focus” of the programme led to more integrated local services (eg, police and social services) for helping families.

In a criminal-justice programme known as “transforming rehabilitation”, in which ex-prisoners are supervised, users of the service were generally positive about the help they received compared with what they had been offered before, according to the NAO. Another scheme is the “new-homes bonus”, under which the government rewards councils with a payment equivalent to six years’ council tax for each additional new home they build. An independent report found that it was “perceived to have helped push housing up the policy agenda” of planning officers.

The question, then, is not whether to get rid of PBR, but how to make it work better. It is not inevitable that it should create odd incentives, but this is made more likely by poor contracting between the government and the provider, says Julian McCrae of the IFG. The NAO has complained that public-sector bodies that commission PBR projects, lacking a common source of shared expertise, have had to “reinvent the wheel” with each new project. It is small wonder that mistakes have been made.

Happily, that is changing. New Economy, an organisation which works with Manchester’s local government, published data last year for a range of costs within government (the average cost of an ambulance call-out, for instance, is £223). With these data to hand, deciding the level of payouts for projects that reduce such expenses gets easier. Meanwhile, the Cabinet Office, which is responsible for making PBR work, has teamed up with Oxford University to form a research centre to generate data on PBR projects. The centre will also offer training to local-government staff, helping them to strike better deals with the private sector.

To alleviate the big-business bias of PBR, the government is also pushing “social-impact bonds”. SIBs work by using private investors to fund social programmes, with the investors paid back from public funds, plus a return on top, if targets are met. With investors funding programmes for longer, providers struggle less with cashflow. There are now 32 social-impact bonds in Britain, according to the Cabinet Office. The most famous, a scheme in Peterborough where ex-prisoners are given support, seems promising: reoffending fell by 8%, according to preliminary analysis. At the spending review in November the government pledged £105m towards developing SIBs. Payment-by-results may not be the revolutionary force that Mr Cameron had hoped, but it is helping the state gradually to become leaner.