The hidden dangers of outsourcing welfare reform

The scale of both the opportunities and the dangers facing the government in implementing its much-heralded welfare reforms was laid bare last week.

Research commissioned by the Policy Exchange think-tank found that the government’s favoured model – contracting out employment services – could cut the UK’s benefits bill by more than £1bn, as well as providing millions of extra workers for the labour market.

But the Paying for Success report also found that where other countries had implemented similar welfare reforms, their experiences had been mixed. It uncovered abuse of the system, with private providers defrauding government departments and deliberately keeping unemployed people out of work until they became worth more money to place in a job.

“Potential difficulties arise from the design of the contracting-out regimes,” the report said. “There have been cases of ‘creaming’ and ‘parking’, where service providers concentrated on those jobseekers that were the easiest to deal with or delayed and sometimes even ignored the most challenging cases.

“In Australia, success fees were fraudulently paid to employers taking on jobseekers for a limited period.”

Unemployment and incapacity benefit rates in the UK have been largely static for a decade, with unemployment ranging from 1.4 million and 1.7 million between 1999 and 2007, while incapacity benefit claimant numbers have been stuck between 2.3 million and 2.5 million over the same period.

The positive aspects of using the private sector to get people from long-term unemployment into meaningful work was highlighted by former investment banker David Freud in his seminal report last March.

Work and pensions secretary James Purnell promised a more employer-friendly system for getting people from welfare to work when he revealed new-look contracts in February. He signalled an expanded role for private and voluntary welfare-to-work providers as he unveiled the government’s new commissioning strategy.

The potential benefits to UK employers, jobseekers and taxpayers of the reforms were also made clear in the Policy Exchange report. The US state of Wisconsin managed to slash its welfare payments by 80% in just three years, it said, and the UK could save £1bn by achieving just a quarter of this result. In Germany, meanwhile, unemployment fell by one million in two years after similar reforms were introduced.

“The overall experience was that this was a very positive thing to do,” said Oliver Marc Hartwich, report author and Policy Exchange chief economist. “It introduces competition and that is always good. But the problem is that the customers do not behave as you would expect, they have to be directed to providers, which reduces the benefits of competition.”

The UK risks falling into this trap, according to Hartwich, as the government seems to be leaning towards one provider in each of seven or eight large regions.

“We need a degree of competition between providers and Jobcentre Plus,” he said. “With just one provider per region there is no benchmark and you cannot tell if it is being successful.”

Private welfare-to-work provider A4e admitted it was watching nervously as the government finalised the details of how contracts would operate. The firm secured jobs for 11,000 people in the UK last year as well as working in Germany and other countries.

A4e executive chairman Mark Lovell said: “The model [of getting people into work] is vitally important. Looking at the US and Australia, in many ways they have engaged the private and voluntary sector, but not incentivised operators to help those people that are harder to reach.

“It is vital that the Department for Work and Pensions (DWP) tests the integrity of the model. We have suggested that all operators should have to provide [positive] outcomes across the system, helping both genders, different races and the long-term unemployed. There is a risk that the government will open the market up to all kinds of companies.”

Lovell is pushing for a system where specialists are paid according to how much they save the government in tax credits, the wages of the people they place in jobs, or overall benefit reductions. The firm is also willing to be paid for keeping people in jobs for up to 24 months, rather than the six months being suggested at present.

The government insisted it was addressing all the issues raised in the report with its commissioning process. Although this is well under way, it will be another 12 months before a contract is handed out under the new system.

A DWP spokesman said: “This report is very encouraging and shows that contracting out works. The private and voluntary sector already plays a role in delivering our back-to-work programmes, and our message is clear – their involvement is here to stay and set to grow.

“Providers will be rewarded not just for getting people into a job, but for getting people into a sustainable work that lasts.”

Lessons the UK should learn

  • Welfare-to-work markets evolve rapidly so policy makers should be prepared to change regulations and incentives.
  • Creaming – where providers concentrating on the easiest to help – and parking – where they ignore the hardest – can be significant problems.
  • The state needs to be shrewd and may have to bring negotiating skills in from outside when drawing up contracts
  • The conditions and sanctions faced by benefit recipients are central to their participation in welfare-to-work schemes

Source: Paying for Success report

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