Since 2010, the Ministry of Justice (MoJ) has been pressing ahead with plans radically to reform offender management. The first aim of the reforms is to help the Department save money to meet its tough budget settlement, under which it will be spending around one third less in 2015-16 than it was in 2010-11. The second is to introduce a radically new way of commissioning services to improve the productivity of offender management services, and therefore cushion the blow of falling departmental spending.

In May, the MoJ produced the command paper Transforming Rehabilitation: A strategy for reform. The eye-catching part of the proposals is the aim to encourage non-state providers to risk private capital on innovative services to reduce reoffending. To this end, a proportion of the £3.5bn total contract value will be made on a ‘payment by results’ (PbR) basis: payments will depend on the subsequent reoffending rate in each contractor’s area. This is the first time that such an approach to commissioning rehabilitation services has been tried at scale anywhere in the world.

The government has set much store by the capacity for PbR substantially to reduce the level of recidivism. This paper focuses on the payment mechanism proposed by MoJ in its May document Payment Mechanism – Straw Man, and explores whether it will in fact give providers incentives to cut reoffending.

We begin by briefly outlining the case for PbR in principle, and why the approach is seen as such an important policy innovation for boosting the stagnant productivity of public services more broadly. We go on to assess how far the current MoJ proposals fulfill these goals in practice, using financial simulation to analyse the risk-adjusted returns that investors might expect.

The results of our simulations show that, far from creating incentives to cut reoffending, the proposed regime will encourage providers to cut costs and allow reconviction rates to drift upwards. As a consequence, on current plans the scheme will do nothing to encourage innovation and improved value for taxpayers’ money. This threatens to derail an important new approach to commissioning that could have wider applicability in the delivery of public services, both here and abroad. The paper concludes by offering some solutions.

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