Public sector commissioners should consider offering up-front payments for voluntary organisations to make it easier for them to take on payment-by-results contracts, according to a new report published by the National Council for Voluntary Organisations.
The paper, Payment by Results and the Voluntary Sector, published today, warns that innovation in public services could be getting stifled by PBR contracts because it is creating instability for providers and making them more risk-averse.
The report says that cash-flow problems associated with PBR contracts can be a major barrier to voluntary sector organisations taking up contracts, even in areas where they could be highly successful.
The report says that implementation of PBR contracts has been "deeply flawed" and "has in many cases resulted in unsustainable risks to voluntary organisations".
It says: "As a result, many voluntary sector providers are extremely cautious about taking on payment-by-results contracts.
"Results from a survey of providers in the Supporting People payment-by-results pilots, for example, suggested that the payment-by-results terms in contracts had made many organisations more cautious when considering whether to bid.
"Although the number of bidders did not decrease with the introduction of payment by results, commissioners suggested that interest only remained strong because providers felt that payment by results was inevitable, rather than because they felt it presented sustainable incentives."
The report says that because many voluntary organisations are mission-led, the option of walking away from a contract would be problematic, particularly if the contract was the only way of continuing to work with their beneficiaries.
It suggests that commissioners should introduce more differential pricing to reward work with more challenging beneficiaries, and they should develop evidence bases for creating such structures.
Voluntary sector providers that want to bid for payment-by-results contracts should review their capabilities for managing the risks that they would be required to bear, says the report.
They should also ensure that they fully understand the contract and payment terms they are signing up to and negotiate balanced terms with sufficient break clauses to reduce liabilities, it says.
The NCVO report calls on policy-makers to carry out a coordinated evaluation of PBR programmes that have been commissioned both locally and centrally.
Sir Stuart Etherington, chief executive of the NCVO, said: "Charities want to play their part in public service reform and have great potential to develop truly innovative solutions, improving services and reducing costs. But current PBR practice risks excluding the specialist charities we really need to involve in order to develop public services."
He said commissioners and providers should take action to improve their PBR arrangements and to learn from best practice. "We mustn’t let a mechanism designed to drive innovation instead undermine it," said Etherington.