Over the last 12 months, the private sector has been waiting to see what PPP might look like in the new age of austerity and Francis Maude’s planned “re-configuration of public services”.

The recent announcement of a new “payment by results” pilot contract being awarded to Serco for HM Prison and Young Offender Institution in Doncaster is an example of PPPs to come. A similar payment incentive mechanism was used in the Department of Work and Pensions Work Programme PPP contracts.

Payment by results has been used in the NHS since 2003 as part of a drive to improve efficiency, facilitate innovation and increase competition. After four years the Audit Commission’s conclusion was that “overall payment by results has demonstrated its worth, even if it is yet to have a significant impact on activity and efficiency1”.

The Conservative manifesto was more enthusiastic and included a specific promise to introduce payment by results to reduce re-offending. They planned to reward organisations reducing re-offending from savings made in the criminal justice system resulting from lower levels of crime.

According to journalist Neil O’Brien, writing in The Telegraph (April 14, 2010), too many prisoners leave jail with no home to go to, no job, and no money. As a result, 60% of short-sentenced prisoners go on to offend again within 12 months. This failure costs UK taxpayers around £10bn a year. Individuals sentenced to less than 12 months behind bars do not come under the jurisdiction of the Probation Service and are given only £40 on leaving jail.

In the USA, schemes such as “America Works” (which was financed on a payment-by-results basis) succeeded in driving down the re-offending rate among ex-prisoners from 66% to between 2% and 5% – an amazing transformation. In the UK, schemes run by the charity St Giles Trust, aimed at those serving short prison terms, have been shown to reduce re-offending by 40% and return £10 to the tax payer for every £1 spent2. St Giles Trust has recently been funded through the first ever Social Impact Bonds to run a similar scheme in Peterborough prison.

The idea of payment by results was further trumpeted by the Treasury in October’s Comprehensive Spending Review, where it indicated more services would be put out to tender based on payment by results. In addition to welfare to work, mental health and offender rehabilitation services, the mechanism is to be considered for use in areas such as community health services, processing services, probation and children’s centres.

In the CSR, payment by results is repeatedly referred to in the context of opening up more public services to the private sector and combating the public sector being seen as the “default provider” of certain services. No doubt from the Government’s perspective, the beauty of this payment mechanism is that public services can be opened up to competition and potentially improved without any cost to the taxpayer.

Under the HMP Doncaster contract, which runs for 15 years, 10% of the contract price will only be payable if Serco reduces the reconviction rates of offenders discharged by the prison by five percentage points. Additional incentive payments are paid for up to 10 percentage points further improvement.

As part of the contract, management and staff at the prison will be working with Serco’s voluntary sector partners Turning Point and Catch 22 to pilot a rehabilitation programme. This work will extend beyond the prison, so that Serco and its partners will continue working with offenders after they are released. The programme will: deliver employment training and education; maintain family links; secure appropriate accommodation on release; and provide access to a network of trained volunteer mentors.