David Cameron was asked in today’s prime minister’s questions about the critical report from the government’s auditors on the government’s flagship back to work scheme.
The National Audit Office warned that providers of the £5bn Work Programme are working to overly-ambitious targets which they might not meet. They believe that out of the group of people who are easiest to get into work, only just over a quarter will be successfully placed. That compares to government estimates of 40 per cent.
The prime minister tried to brush off the problem during PMQs, sayign the risk was not to the taxpayer, but to the providers themselves:
The basic point is the Work Programme is not putting the taxpayers at risk, it is putting providers at risk. It is about payment by results, it is about getting things the previous government never did.
He is right that the Work Programme’s system of paying by results (more so than Labour’s predecessor, the Flexible New Deal), means the government, and therefore the taxpayer, is less directly exposed to any potential missed targets.
In fact, providers are exposed to very significant financial risks, as this table, drawn up by the NAO and annotated by the excellent Ian Mulheirn at the Social Market Foundation shows:
This is a chart showing profit estimates for WP providers. On the left hand side is how much profit they make if they spend the minimum expected by the department on getting people into work; on the right is how much they will make if they spend what they said they will.
The top line is what providers think they will make and the next one down is what the department thinks they will make. These figures are both highly respectable – somewhere between a 5 and 15 per cent profit margin would be great.
The problems come once you start factoring in the real world. First of all, factor in the fact that providers agreed to take less money that the department offered in order to win the contracts. This lowers margins by five percentage points. Then, is we assume the NAO is right and only a quarter of people in the easiest-to-help group get work, the margins drop again. According to Mulheirn’s analysis, they could be looking at loss margins of 40-50 per cent.
So why should we care? There are two reasons: firstly, if providers really struggle, they might end up coming to the government for top-up payments. Cameron and Iain Duncan Smith insist this isn’t going to happen: they will leave providers to suffer the consequences. But if the biggest providers all demand extra cash to keep the programme running, the government won’t have much option.
Secondly (this scenario is both more likely and more serious), if providers are squeezed, the most likely response will be to stop spending so much. They are more likely to help only those easiest to help, and will be looking to spend less helping them.
All of which is likely to mean more people out of work, and higher benefits bills. Either way, the taxpayer ends up paying.
PS – This is Mulheirn’s take on his own chart:
The average provider might have to slash their spending by something like a third before that red line goes positive. The alternative is to go bust. What impact an effective one-third cut in funding will do to service quality is anyone’s guess, but the impact on sub-contractors won’t be pretty either.
One way or the other, it’s clear that the Government needs to have an urgent rethink on the Work Programme.
Jim Pickard
Kiran Stacey