Buying Quality Performance

As the rioters circle parliament in Athens and national strikes bring Italy, Spain and Portugal to a standstill, the same glaring gap exists in Europe as Jane identified in her blog’s recent challenge to the US presidential candidates.  Belt-tightening may well be necessary, but where is the plan for jobs? Commissioning may hold the key.

Without jobs, there will be no economic recovery. Without jobs there will be a vicious cycle of worklessness feeding social disintegration. Without work, there is a rapid deterioration of wellbeing and not just for the unemployed individual and their immediate family but for the wider community and beyond.

The challenges at a national level are vividly evident in the microcosm of local Councils in the UK and ‘The Council Catch 22’.

A typical Council spends 50% of its money on 4% of the population. This needy core is, however, growing, as the levels and scale of deprivation/unemployment increase – and as they increase, they drag in more resources. At the same time, the Council has to drive through austerity plans, probably amounting to 40% of its total budget over the next five years.

An infamous ‘Graph of Doom’ was modeled by the Local Government Association, and widely ‘promoted’ by the outgoing CEO of Barnet Council, Nick Walkley. This graph shows that by 2020, given the austerity drive and with an aging population, a Council will have sufficient funds to pay for: social care (principally aged care); statutory children’s services; and bin emptying once a fortnight. Nothing else.

There is a growing demand for local interventions to stem the tide of rising unemployment – bringing to a halt the loss of a generation to worklessness (unemployment among young people is over 50% in many parts of southern Europe now, is over 40% in some parts of Belgium, over 20% in the UK and not far behind in the US). But local services aimed at addressing the causes and consequences of deprivation are being cut. These cuts, in turn, increase the demand.

How do we escape this cycling Catch 22?

It is necessary first to understand why it appears so inevitable.

It is the direct result of how budgets are set, how spending is controlled, and how we frequently demand a time-bound relationship between investment and return.

All budgeting is often, particularly at a local Council level, trapped within annual plans. Each year, a set amount is allocated and this is an absolute envelope. As the year nears its end, people may even be encouraged to spend more to ensure the allocation is exhausted, because nothing can be carried over.

If one of the UK’s regional Directors of Offender Management is successful in reducing crime in his/her area one year, next year his/her budget will be cut. There is a perverse incentive actually to maintain levels of crime to protect crime prevention services, because of annual budgeting.

It is impossible to bring money forward from next year in order to invest in something this year that might:

a) create reduced future demand/expenditure, such as through reducing hospital admissions or children being taken into care; or

b) generate future additional income, such as through increased tax revenues or a more productive workforce.

I would suggest it is this timing constraint/mindset that leads to the lack of any plan for jobs in the US and in Europe right now. The policy makers cannot see how they can justify or account for investment in job creation or workforce development as long as there is a need, right NOW in this time period, for rapid cuts in expenditure. In this context, their caution is perfectly understandable.

The Private Finance Initiatives (PFIs) were used as an attempt to sidestep the need for time-bound budgeting. Private sector borrowing could sit off the public balance sheet and so the cost this year of the new school could actually appear to fall across the next thirty years. Unfortunately, such ‘borrowing’ came at a high price with the school being paid for many times over.

If the constraints of such time-bound budgeting are removed, the public sector do not have a good track record of responding with service improvements that deliver: a) savings or b) increased returns. Between 1997 and 2007 the core funding per pupil in our schools rose by 48% in real terms (£1,450 per pupil per year). An additional 35,000 teachers and 172,000 teaching assistants were employed. There has been some improvement in qualifications achieved in schools, but one in five children still leave primary school unable to read and write properly.

The Work Programme may fail in its attempt because of errors in the procurement of the contracts, as discussed at length in other blogs on this site. It is, however, predicated on a possible key to unlocking this Catch 22.

If the PFI for the school had been repaid on the basis of increased educational attainment for the children at the school, then the upfront investment could have been tied to long-term returns as opposed to just long-term interest payments. If an outsourced prison was paid for on the basis of reduced reoffending rates (almost 46% of adults jailed in 2011 had at least 15 previous convictions or cautions) then the contractor could be incentivised to bring forward investment in a different sort of prison regime in order to generate a long-term return (and deliver a long-term social impact). If a Council could pay long-term rewards based on an area’s improved social and economic wellbeing (measured in real terms as increased tax revenues and decreased spend on services demanded by deprivation), then a contractor seeking such rewards would invest in labour stimulation, enterprise creation, unemployment reduction and vocational rehabilitation.

The prime contractor incentivised to take risks in such investments, need not be the service provider. In the Serco model for welfare to work, the prime contractor has no direct delivery role but sits over localised networks of providers – a mixture of private, public and third sector organisations. The prime contractor carries the long-term financial risk, brings together the delivery network and manages performance.

This model could be applied at a city or state or even national level. Welfare-to-work contractors could be incentivised to invest now in the creation of a welfare-to-work system in Greece. Their incentive would be the potential rewards of long-term outcome payments linked to increased employment rates and increased tax revenues. If the rewards were set at the right level, it would incentivise the appropriate inward investment, at the same time that austerity measures pushed through by the state would maintain pressure on people to seek employment. If a long enough view were taken, investment would be made in education and training. If tax revenues were used as a key outcome measure, contractors would also seek systemic change with wider benefits.

Such a Greek welfare-to-work response would have to have ‘learning contracts’, with outcome payments shifted overtime to maintain incentivisation without allowing for undue profits. They would require an element, at least, of open book accounting with careful oversight by the troika (the European Union, European Central Bank and International Monetary Fund), who would also need to underwrite some of the initial risks taken by the investors. A plan for jobs is more than possible.