A National Audit Office report has criticised the introduction of the government's flagship Work Programme scheme to get people back to work.
The NAO report, released on Wednesday, explains how it has based its assessments of likely provider performance on the most comparable recent programme – the Flexible New Deal.
However Chris Grayling, the work and pensions minister, said the findings were based on "guesswork", which raises questions about what exotic flavour of guesswork underpinned the over-optimistic projections the Department for Work and Pensions (DWP) made for the new scheme.
So how big are the discrepancies? The DWP said it expected providers to get some 40% of the main client group into work, while the NAO says past experience in a better economic environment suggests that they'll only achieve 26%.
This supports estimates from a similar analysis the Social Market Foundation (SMF) undertook back in August 2011 that performance would be 27.8%. Grayling tried to brush off the figures on Radio 4's Today programme at the time and he's doing the same with the latest report.
The NAO figures also imply that performance is likely to be four percentage points lower than what the DWP thought would happen without any employment service whatsoever. All rather embarrassing.
But so what if the DWP has been over-optimistic. Why does that matter? The answer is the effect it will have on frontline services. In a payment-by-results programme that has been calibrated to be profitable only for good providers, the significant overestimate of what's doable poses a substantial risk to the viability of this important, multibillion pound public service.
With long-term unemployment rising, now is not the time to have a dysfunctional employment service, and the social and economic consequences could last a generation. What's more, with other departments such as the Ministry of Justice seeking to emulate the DWP, problems here risk discrediting an important reform agenda.
A chart from the NAO's report, helps to illustrate the impact. It 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 job seekers. If providers hit 40% performance they can still make a profit of around 5% on current plans. If that's doable then fair enough, especially for such outstanding results.
But what happens if performance is much worse than that 40% figure? Even at DWP's "non-intervention performance" of 30% – the number of jobs the department expects would have been found without any service – at the service-cost levels proposed, providers will make a loss of between 30% and 40%. Even that performance level is four percentage points above the 26% success the NAO thinks is achievable.
But it gets worse. As the NAO point out, the providers were asked when bidding 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. Once the contracting was complete, the average discount was around 6%, which the NAO estimates will lower profitability by a further 5%.
And if we add on the difference between the NAO's estimated performance (26%) and the "non-performance level" (30%), the NAO's chart implies that we may see something like a further 10% reduction in profitability at any given level of costs. Add it all together and it's fair to say that the NAO figures imply that providers delivering the service they bid for are staring at a loss of somewhere in the region of 40% to 50%. Something has to give.
This massive overestimate 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 frontline to save money.
Eyeballing the NAO's chart, we can get an idea of how much services need to be cut for providers to remain viable. The average provider may have to slash their spending by something like a third before they become profitable. The alternative is failure for them and their supply chain. What impact an effective one-third cut in funding will do to service quality is anyone's guess, but the impact on subcontractors won't be pretty.
Ian Mulheirn is director of the Social Market Foundation
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