The report, Paying for Results, published on Friday, examines the MoJ’s plans to open up probation services to providers from the private and voluntary, community and social enterprise sectors in 21 contract areas across the UK.
Under the draft plans drawn up by the MoJ, a proportion of the contract will be paid on a PbR basis, which is intended to reward reductions in reoffending and encourage providers to innovate and take risks.
But the SMF’s analysis found that, as a result of the government’s proposals to protect itself against statistical "noise" – when the level of variation could be due to chance rather than the provider’s intervention – spending money on reducing reoffending could leave providers worse off than if they had spent nothing at all.
Jeremy Wright, the justice minister, strongly disputed the SMF’s claims, saying it was "utter nonsense" that providers would be penalised for trying to achieve results.
The think tank’s analysis finds that providers would have to seek to achieve a reduction in reoffending of about 4 per cent to make any money at all, and that achieving smaller improvements would result in financial losses. Cutting costs and allowing reoffending to increase by up to 3 per cent would be more profitable. This is because of a "flat payment zone" built into the payment mechanism to protect the government against accusations of paying for apparent reductions in reoffending that are in fact the result of statistical flukes.
Ian Mulheirn, the author of the paper and the SMF’s director, said: "PbR in reoffending makes a lot of sense in principle and many elements of the government’s proposed scheme are good. But the payment proposals look set to wreck the financial incentives that providers and investors need to make this scheme work.
"By designing the system with a flat payment zone, the MoJ has effectively made it all but impossible for providers to achieve results good enough to get paid, without investors taking on impossibly high financial risks. The result will be that they simply won’t try."
But Wright said: "It is utter nonsense that providers will be penalised for trying to achieve results. This report seems to recommend giving providers an easy ride and handing over taxpayers’ money for negligible improvements.
"As the public would rightly expect, our targets are challenging: we want to see providers achieve a real reduction in reoffending, delivering long-term and sustained benefits across England and Wales, and making our communities safer."
Wright pointed to early data from the PbR pilot at HM Prison Peterborough, which has seen an 8 per cent fall in reconvictions among offenders released between September 2010 and June 2012 from the figures for September 2008 to June 2010.