PAC hearing, here is what was said.

As promised and with massive thanks to Kath Falcon here at Falcon Road here is a summary of the key exchanges from last weeks hearing of the PAC which I mentioned in my last posting. This will provide Napo with substantial information to take forward in our continuing parliamentary and campaigning work with politicians as well as in our exchanges with the CRC owners. My aim is to bring maximum exposure to bear on the  problems that are clearly identifiable, ensure that our members' interests are protected in the event that any CRC goes out of business and to ensure that an incoming Labour administration is able to tap into the expertise of Napo members as it sets about restoring probation back into public control.

Your views please?

Further observations from Napo Branches and members to these exchanges are welcomed as is up to date intelligence about the current activities of CRCs against the claims made by the PAC witnesses. These should be forwarded to Gensec@napo and copied in to your Napo Link Official or in the case of NPS issues, your Napo Link Officer.

The hearing was chaired by Gareth Snell MP in the absence of Meg Hillier 

Witnesses were Richard Heaton (Accounting Officer MoJ) and Michael Spurr (Chief Executive HMPPS)

The Chair explained the context of the inquiry. PAC had last considered TR in July 2016 and had concluded that the ‘reforms’ were not working as well as anticipated and called for action to address various issues, not least the commercial difficulties which had been subject to NAO investigation. The current inquiry was to question how far progress had been made in addressing them.

The Committee started by asking about the impact of the Carillion liquidation on the Prison and Probation contracts. What discussions had taken place following Carillions Profit Warning and what plans were in place to manage the contracts now and ensure a stable future for the contract.

• RH/MS set out the situation. The major exposure to Carillion was that they were FM provider for half the public prisons (55 prisons). They also held the contract for FM provision at a handful of courts and there was a small impact through the contract for the legal aid hotline (signposting callers).
• Plans were in place to ensure the work of vital services in the prisons was maintained, Carillion staff were continuing to work, and talks with the Official Receiver about the shape of the contract going forward were in their final stages.
• Work was also in hand on the future management of the contracts. RH said he was reluctant to give more details of longer term plans as these were subject to consultation with the trade unions and discussion with the Receiver.
• The costs were being carefully assessed, financial information was being gathered etc.

Caroline Flint MP asked detailed and probing questions about discussions in the department following the profit warning and the whether the impact of a poor quality service had contributed to prison unrest. 

• RH and MS said that discussions had taken place; that services from Carillion  were not perfect and that the department had already been working with the company to improve these.
• There was a general rise in violence and vandalism in prisons. This was added to by poor FM – but it also meant that reactive maintenance increased to the detriment of preventative maintenance, with a result that more cells were going ‘off line for longer’ resulting in issues about getting basic jobs done, as highlighted by the Prison Inspectorate. 
• The department had recognised the need for more staff on site and had been working with Carillion to address this. 
• They were confident they could manage the situation going forward.

The CRCs

The Chair asked for a progress report on addressing the problems with TR reforms highlighted by the PAC in 2016. 

• RH replied that they were ‘not at the end state’. The department had been working to address the problems arising from the discrepancy in volumes between those anticipated when the contracts were drawn up and what had happened, and to stabilise the contracts in the light of this and improve revenue from the contracts for the providers. 

The Committee questioned whether the TR process had frozen out the 3^rd sector providers. as one of the aims of TR was to increase diversity in provision!

• RH/MS replied that the situation varied across CRCs. Some had good and creative relationships with the  3^rd sector and one CRC is a joint venture. However they agreed that  many charitable organisations would say they feel more squeezed and smaller 3^rd sector providers would say they haven’t been able to progress as they wanted to do. It was ironic that one of aims was to ensure diverse supply and a wide range of providers, but one of consequences of having less funding was that CRCs were working with fewer 3^rd sector providers than anticipated.
• It was Interesting that expanding the service to provide statutory support to 40,000 short term prisoners on release meant that now everyone got some support but the very good voluntary organisations that had provided excellent support had been lost. Previously some prisoners got very good support but now everyone got some support even if not as good as expected. The loss of some long standing charitable organisation providers is something which he was looking in to in terms of how the contracts are delivered

The Committee questioned whether TR was working in terms of ‘Through the Gate’ and the aim of reducing reoffending among short sentence prisoners on release. They also asked specifically about whether the probation providers were able to provide the service when it was dependent on so many other agencies – health and local government – outside their control.

• RH and MS responded that offenders need a multiplicity of support from services such as health, drug services, etc. So it is not the CRCs alone but the laudable idea was to give the responsibility to an agency that worked with offenders already so they could marshall support from other agencies.
• It was too early to say if TR was working in terms of reducing reoffending. The first set of data – the binary (YES/NO has an offender continued into reoffending) data – showed a 2.1% fall across the whole of the cohort and 13 of the 21 CRCS showed a statistically significant reduction. However they were waiting for the data on frequency of offences committed by those reoffending, which was due at the end of the month. The interim data in this area was not as good. 

The PAC asked probing questions about the £278 million provided for the CRCs. What were the ‘unforeseen circumstances’ necessitating this?

• RH responded:

1. First and obvious one that the number of cases sent from the courts to the CRCs was higher than expected – i.e. a shift in volume. When they made assumptions about volume they didn’t purport to be making a forecast. They drew a flat line and it was for all parties, including the CRCs, to challenge this if they didn’t agree or thought it would work differently. So it was a working assumption with no guarantee from the MoJ.
2. The working about the flexibility of the CRCs cost base had been wrong. The assumption was that the CRCs  could vary (bring down) their costs much more flexibly than had proved to be the case. The assumption, taking as its base line how the Probation Trusts were arranged, had concluded that 80% of costs were likely to be flexible. This turned out not to be the case with a good 15% of this 80% being fixed. It was thought that the comparison with Probation Trust was a decent starting point but it turned out not to be a good model.
3. Sentencing behaviour had changed. Courts were tending to make fewer conditional orders i.e. with programmes attached. It was these orders that attracted greater remuneration – therefore there was a shift in the volume. The drop off in specialist orders goes to sentencing behaviours and there may be different reasons for it – greater speed and quicker disposals and possibly lack of confidence by sentencers.

The PAC specifically questioned whether there was a lack of confidence in the CRCs among sentencers and what the Department and the CRCs were doing to address this.

• RH/MS agreed this was a factor as ‘everyone knows some CRCs are not working well in some areas’. They said they needed to work through to a period of stability to restore confidence. Part of this was the work to get the contracts working better so the CRCs would have more money to invest and to provide more programmes. 

The PAC questioned how, given that from the start of TR the Ministry had way underestimated on a number of aspects of the contract, there can be confidence that the reforms will actually work? In 2016 the PAC had asked for the provision of more reliable performance data. Is this now reliable?

• RH/MS said that the divergence was not as great as suggested. The point of the adjustments made now was to increase the fee for service element against the Payment by Results element which should make it easier for the providers and make the contracts less volatile. 
• They believed the data was now more reliable and said the MoJ was holding the CRC’s to account. MS admitted performance was not where they would want it to be. Some of this was about the service and some about the funding position the CRCs are in, which is what was being looked at. 
• The issue of the variance in the proportion of fixed and variable costs became very important because that was genuinely miscalculated. Variable costs were assessed as costs that could be changed in less than 3 months, partly-variable as costs that could be changed in between 3 and 12 months and fixed costs as those that could not be changed in less than 12 months. Staffing costs were originally put in the partly variable category. In reality though, as the volume of orders changed it was found that staffing costs could not be adjusted in less than 12 months. So making the adjustment to change staffing costs to fixed costs was correct, which is why this was done. It was not ‘bailing anyone out’ it was a case of adjusting the first set of contracts to reflect the real situation. The NAO report had found there was a rationale to the changes.

The Chair and Chris Evans MP asked a series of question about why performance was so bad. They also asked about performance targets. For example one of the targets is housing, an area not in the CRCs control and a target not being met by any of the CRCs.  Do the targets need looking at to make sure they are fit for purpose?

• MS noted that performance was variable between the CRCs. The Department had implemented a range of improvement plans requiring CRCs to demonstrate how they will improve to hit targets. There were 67 separate improvement plans. 38 had been discharged. 29 were still live. Some of the problems were because the CRCs were not investing to the extent anticipated when the contracts were let. That was why the contracts had been adjusted.
• With regard to targets he said that the main driver was to reduce reoffending and this was not to be driven by targets but by payment by results. So the targets are process based rather than performance based. But it might be reasonable to reassess how much onus should be placed on the individual to galvanise others and it was legitimate to keep them under review.
• RH said that the contracts were complicated. If they were to start again they would make them less so. One of the changes made was to remove some of the service level requirements to simplify the contracts.

The Committee asked about ICT issues. Lack of investment by the CRCs in this affects productivity and data reliability and puts added pressure on hard pressed staff. How confident were they that the contract changes will address  this and in what time scale?

• RH said that greater investment on the part of the providers had been anticipated. 
• There had been a delay in getting the Strategic Partner Gateway up and running. This had been projected to be available by June 2015 but was not in place until autumn 2016. Also none of the CRCs had linked in to it yet and 3 had decided they were not going to. The first CRC was due to switch in April 2018, subject to testing. It is expected a number will move over in the course of the year, but it is their decision. If they use their own systems they must be compatible – so it was a business choice. But investment is a big factor as in the variance in different IT systems, so it was a complicated area.
• MS said that the contract changes will address the imbalance in the way fixed and variable costs are assessed. This will provide greater revenue from fee for service payments. The adjustment would mean the income to the CRCs more accurately reflected the appropriate costs putting them in a more stable position so they can invest, but this will also depend on what their expectations are as the PBR element is geared to increase into the life of the contracts. 
• RH said the Ministry’s delay in implementing the Gateway (delayed by a year) had been a problem. Since then they had lent the CRCs a group of MoJ IT people to make sure they can build their systems – but would not venture to estimate the timescale in terms of how many months.
• The CRCs had not been given a cheque for £278 million. The additional £278 m was the estimate of the amount which would be spent by 2022.

Evans asked further questions on Through the Gate and the impact on reoffending. The NAO report says that most CRCs are struggling financially and have invested little more than the minimum contract expectation. 

• MS admitted this was one of the areas of most concern as had been identified in the department’s own reviews and by the Probation Inspectorate. It was variable across the CRCs but more investment support needs to be provided because if the CRCs are successful with TTG and the 40,000 short term sentence cases per annum receive better support they will make more money through PbR. The expectation was that this was where most of the investment would take place. 

Chris Evans questioned if there had been progress on the PAC recommendation in 2016 that there be more sharing of good practice and examples of what works. Also he noted that the NAO report says that links aren’t being made with other agencies e.g. police and other providers and asked what could be done to address this.

• MS said that the Department does share examples of good practice but the providers can decide their own models. This was part of the aim of TR to increase diversity of provision.
• They were doing more with NPS to enable it to act as a conduit for links with sentencers and the police and had created provider forums. However because this was one of the areas in which the CRCs are not required to engage it was not given priority by them in the face of squeezed finances. They had been looking at ways to encourage the CRCs to look outward and work with others. They needed to look at the contracts going forward to decide how much to specify for this activity in the contract. He explained that at present the contracts were deliberately light on specifics because they were geared towards flexibility and based on PbR.

The PAC asked detailed questions asked about the overpayments that had been made to the CRCs because of their under performance. The MoJ had indicated that they had not decided whether to take back all or part of that. They also questioned whether the lack of performance against targets also indicated that the performance of the CRCs was getting worse?

• RH said the reason for this decision was so as to keep £9 million in reserve for use in the continuing negotiations with the CRCs. 
• MS explained that in some cases they had taken service credits from CRCs when they had failed to deliver; in some cases they had accepted that the reasons for the failures were reasonable; and in other cases rather than taking service credits they had required the CRCs to invest the money to improve services.
• Targets had been ‘rationalised’ and reduced from 17 to 12 in July 2017 and overall performance against targets was improving, however the quality of work was still not where they would want it to be and was still a significant issue. The Inspectorate would be inspecting each of the CRCs over the course of the next 12 months. 

Shabena Mahmood MP closely questioned RH and MS on why the problems outlined with the contracts had not been foreseen as all these matters were in the purview of the Ministry so could have been anticipated. The caseload was increasing by 20% as a result of the policy decision on statutory provision for under 12 month sentences. She could have told them that this would happen given the problems of working with this group. She said she was worried that all the expertise and all common sense seemed to desert officials at the point of setting up contracts.

• MS said the contracts had recognised they would be volume change but the extent to which the more profitable orders i.e. accredited programmes had fallen against less well paid activities had not been i.e. the shift of fee for service provision against TTG PbR had not been.
• The department had deliberately given all the information available to all the providers and the data lab had been set up to share all the historical data, so it was not only the MoJ that had underestimated the extent of change but also the providers.
• RH said the costing of the new cohort of offenders had been clear from the outset. Also the higher caseload of people coming out of prison – TTG work –is less well paid because it is based on PbR  with the expectation that if the CRCs were successful they would get more reward. What they didn’t anticipate was the change in sentences i.e. the drop in orders with activities and programmes (the better paid work).
• RH said he thought it demonstrated the complexity of trying to deliver 1^st generation contracts in a service which is subject to volatility from other factors.

The PAC questioned whether if, as indicated in the NAO report, the situation will be worse next year, how would they manage to operate? She further asked why TR  was not piloted.

• RH said it will be mitigated by the changes put in place which lifts some of the low level work up against the weighted annual volume range – i.e. they will pay more for the lesser activities. But it is hoped this won’t continue and they were working with sentencers to revive the use of programmes etc. so they hope this will improve matters.

Shabeena Mahmood further questioned therefore if TR was the right model then, why did their seem to still be a high risk to the public if things go wrong? She further asked if TR should not have been piloted. There was reference to the Doncaster and Peterborough PbR pilots, which showed PbR didn’t work well and asked given this data why was it decided to go down this road?

• MS stated again that 40,000 offenders who had received no support or supervision now get some on release. 
• Also he said it is still early to say if it is working as just one set of binary data is available at the moment. 
• RH said this was getting into political decisions. The JSC was looking in to this and the arrangements. It was the officials’ job to make the arrangement work and the contracts to deliver as well as they can.
• Under further questioning on pilots he admitted ‘we might have learned some things from pilots, but they would not have been able to deliver to the timetable set to start TTG supervison.
• MS said there was some benefit in pilots and there was a pilot of PBR – but there was also the sentencing change and piloting this would have needed to be carefully worked through.
• The Doncaster and Peterborough were different as it wasn’t based on a statutory requirement and it was a different approach.
• It was a valid point about piloting but the political ambition was to move forward fast.

Caroline Flint MP pursued this pointing to the failings in terms of custodial rehabilitation, and asking if it wouldn’t have been better to work at improving that area before moving on to a far more challenging area. Were they over ambitions?

• RH said the timescale was ‘pretty brave’ and it would have been nice to see the Peterborough Social Impact Bond pilot through to fruition. But he wouldn’t come down on one side or the other – it was for members of the Committee to decide.

SM returned to the ‘bail out’ and asked was he certain that the financial problems of the CRCs were solely related to volume of work and not other problems e.g. incompetence or issues of poor performance on the part of the companies.

• RH said they wouldn’t have put the money in to the CRCs if we didn’t think they were good companies. 
• MS said they had identified poor performance and addressed that. You wouldn’t expect a new service with new providers not to have problems and it would have been inappropriate not to address the real disconnect in the contracts.

SM pressed them further and said would he not accept that might be a concern among the public in the light of Carillion?

• RH said that even if all of the £278 allowed for the contractual variations it would still be under the original budget.

Sir Geoffrey Clifton-Brown MP asked was not the reason they were spending less because of the reduced volume?

• MS said it was not less work just different work i.e. more lower paid work. It was his responsibility to run an effective service and to look at what the service was providing and how much it was providing in terms of income.

The PAC noted that despite the additional £278m going into the CRCs but they were still projecting a loss of £443m. 

• MS said this did not mean they were losing more. This was projected losses based on outcomes from PbR. The £278m is to stabilise the current level of income i.e. fee by service payments, but the projected loss will be based on PbR.

Caroline Flint pursued this further asking if the adjustment was made because administration had to be moved into fixed costs to make it fairer; can they provide a breakdown by CRC of fixed costs, because there is a huge variation across CRC’s? She also asked was he assured that some of this money isn’t going back to the parent companies.She cited Cheshire and Greater Manchester (Interserve) as an example of high admin costs and asked were they looking at whether some of the admin costs are going back into debt laden parent companies.

• MS said the staffing adjustments in probation staff to address variance in volume and the change in activity is what can’t be done in under 12 months. The variation across CRCs reflects geographical location and cities versus country areas.
• RH  promised he would write and share as much as he could with the Committee in terms of financial information from the CRCs. The fixed staffing costs are not admin they are frontline probation staff. 
• RH said they had an open book relationship with CRCS through external auditors. He was confident they were not paying for Head Office staff under the guise of probation, but would look at the two cases she had raised.

Shabeena Mahmood returned to the level of service and the service credits. She quoted the MoJ had allowed £3.3m of reinvestment in lieu of service credits, waived £2.2m and only taken £2m of the £7.7m due in service credits. She asked where is the ‘hard hitting penalty for poor performance’? They waived £2.2m of service credits for not good quality work – how bad do they have to be? She said all the risk seemed to be taken by the taxpayer. The department had just accepted ‘we got this wrong in the first place’ and kept paying out. 

• RH said they were experienced contract managers. It was in no ones interest to push the contracting partner until they fell over. They were robust and rigorous; they had waived some service credits but not others.
• It was necessary to take account of the whole position. The aim was to get the best quality of service for the public. The contracts were light on specifics with regard to performance because of PbR, so where they waived service credits they made it clear they wanted to see improvements outside of contractual requirements. 
• MS pointed out that the CRCs were still projecting losses and overall the Department was still paying less than budgeted for. He was clear they were not paying for a service they weren’t getting but it was necessary to be fair and realistic about what the costs to the CRCs were.
• RH said the department was not a push over but was involved in tough negotiations. However the CRCs continue to be loss making and it was about keeping the services going not increasing the CRCs profits. 

Caroline Flint said that if the CRCs are loss making how can it be certain the services they provide to reduce reoffending will work?

• RH said there was another round of negotiations to come. They did not want to pay more than they had to but they did want to ensure the services continue.

The PAC asked when this would be?

• RH said the key date would be when the PbR reoffending statistics come out later in January.

Shabeena Mahmood said as one of aims of the Reoffending Revolution was to produce innovations in reducing reoffending, could they outline the top 3 truly innovative initiatives to come from the CRCs.

The PAC questioned if the projected income from PbR would be sufficient incentivisation for the CRCs?  

It seemed that the rate of reoffending was falling but the frequency rate of serial reoffenders was going up.

• MS protested that it was unfair to expect him to provide these unprepared. Different models were being applied by the CRCs and there were some very different approaches e.g. engaging with those released following short term sentences in the community rather than bringing them in to the office and handing over direct engagement with offenders to mentors, etc. 
• The focus was on making the system work and some CRCs would say they couldn’t do as much as they would want to.
• MS said this was a key question to discuss with the CRCs when the frequency results were available. There was no comparison data for the under 12 month cohort because this was new – so they would need to see what it meant in reality in terms of profit and loss. 

The PAC questioned whether the matrix for PbR and not assessing results for payment until 2 years was fair on some CRCs who may have more prolific offenders.

• MS said the aim is to incentivise CRC to work with ‘hard to work with’ people as they are the most difficult to stop reoffending. The next review based on outcomes should be in the public domain.

The Chair asked how long the next review would take i.e. when should the PAC look at this again?

• MS said the results would be available at the end of January but they then need to discuss them with providers and engage with Ministers. They have stabilised the current provision. PbR comes in over the life of the contract and they will continue to look at it over the next 6 months. 

Chair asked them to keep in contact and report to the PAC.

Caroline Flint asked if there had been discussions about what the position would be if a CRC goes bust in terms of staff pensions and the fact that the government is responsible for the pension bonds.

• RH promised to write to the PAC about this.

Final quick questions

Q – was there competitive bidding for all the contracts?

MS – Yes

Q – Might some of the bidders have foreseen the problems and therefore put in higher bids based on a different way of operating? 

MS – 5 of the CRCs were left with only one compliant bid at the end of the process.

Q – The risk of rewriting contracts after they had been let was that there might have been other and different bidders and bids if the contract had been like that from the start.

RH – assured the committee that they had taken legal advice and complied with EU procurement rules.

Q – given the reluctance to allow CRCs to fail is this the right model?

RH – provision of public services was the driving factor rather than not allowing CRCs to fail.