NAO investigation into changes to Community Rehabilitation Company contracts

In June 2014, the Ministry of Justice (the Ministry) introduced its Transforming Rehabilitation reforms to probation services by dissolving 35 self-governing probation trusts into a public sector National Probation Service and 21 Community Rehabilitation Companies (CRCs). The Ministry let contracts from February 2015 for the CRCs to provide rehabilitation services supervising offenders presenting a low or medium risk of harm. The 21 CRCs are run by eight, primarily private sector, parent organisations. 

In 2017, the Ministry took action to ensure continuity of probation services in England and Wales by amending its contracts with CRCs from 2017-18 to improve their financial stability. The Secretary of State for Justice announced in July 2017 that the probation system had "encountered unforeseen challenges" and that the Ministry had "adjusted the CRCs' contracts to reflect more accurately the cost of providing critical frontline services". The contract changes took effect from 1 August 2017 for most CRCs.

The National Audit Office investigation focused on why the Ministry adjusted CRCs' contracts; how the Ministry adjusted the contracts; and the financial and other implications of the adjustments to the CRCs' contracts.

The key findings of the investigation are:              

• ·         The volumes of activity CRCs are paid for are well below the levels expected when the contracts were let, while the number of offenders supervised has increased. The CRC contracts specify different payment bands for providing different types of rehabilitation services. CRCs are paid on the basis of weighted volumes that reflect these differences.  In the first quarter of 2017-18 the volumes of activity were between 16% and 48% less than originally anticipated. At the same time between the first quarters of 2015-16 and 2017-18, the number of offenders supervised by CRCs increased by 20%.
• ·         The Ministry projected that the maximum it would pay CRCs for rehabilitation services over the duration of the contracts had decreased from £3.7 billion to £2.1 billion. The reduced volumes of activity CRCs are paid for led the Ministry to project in 2016-17 that, if the terms of the contracts were applied, the maximum fee for service it would pay CRCs would be £2.1 billion. By the end of 2016-17, the Ministry had paid £956 million to CRCs in fees for service, £42 million more than it would have done had it applied the terms of the contract. CRCs told the Ministry, however, that they could not maintain existing levels of service if they were paid at lower rates.
• ·         By the end of June 2017, CRCs had met one third of the performance targets set by the Ministry although the Ministry expected CRCs to be meeting 24 targets from the end of February 2017. By this point, the Ministry had raised service credits with an overall value of £7.7 million, and it had applied £2 million of these in deductions from its payments to CRCs. The remaining service credits were reinvested by CRCs back into services, waived or are subject to ongoing negotiations.  In June 2017, HM Inspectorate of Probation and HM Inspectorate of Prisons reported that CRCs are struggling financially and most have "invested little" in services beyond minimum contractual expectations.

• ·         Between October and December 2016, the Ministry sought to stabilise the CRC contracts and improve operational performance. In July 2016, the Ministry concluded that adjusting the payment mechanism in the CRC contracts should be an immediate priority. The Ministry developed a range of options to change the contracts. It considered their likely impact on the performance and continuity of the contracts, value for money and other factors such as having to instigate a new procurement, affordability and the risk of legal challenge. It chose to adjust the payment mechanism to allow it to alter the way in which its fee for service payments to CRCs changed in relation to CRCs' costs, and to maintain the continuity of probation services.
• ·         Throughout February 2017, the Ministry commissioned external assurance work to better understand the financial positions of the CRCs. CRCs’ financial returns reported: total projected losses of £443 million from 2016-17 to 2021-22 across all CRCs if the contracts continued without any changes; higher average levels of fixed costs (77%) than the 20% the Ministry originally assumed; and a large variation in fixed costs between CRCs (44% to 99.8%).
• ·         The Ministry concluded it and bidders had overestimated CRCs' ability to reduce their costs, and amended the contracts to recognise this. The Ministry amended its payment mechanism to take account of the higher than expected fixed costs reported by the CRCs. It made this decision so that, if CRCs' payment bands fell further due to lower weighted activity volumes, the amount the Ministry paid to CRCs would fall at a slower rate.
• ·         While it was negotiating the contract change, the Ministry paid 14 CRCs additional fees of £22 million for the period 1 April 2017 to 31 July 2017. These payments reflected a weighted volume of activity that was higher than the CRCs actual positions.
• ·         Following the contract adjustments, the Ministry's maximum projected payment for fee for service to CRCs increased by £278 million. Combining this with the additional payments of £42 million and £22 million gives total additional projected payments of £342 million. The Ministry estimates the maximum fee for service payments will increase to £2.5 billion. This is below the £3.7 billion projected in 2016, but covers much lower volumes of activity than projected at that time.
• ·         The impact of the contract change affects different CRCs to different degrees. The Ministry applied its payment mechanism change equally to all CRCs, but its impact will depend on the financial position of individual CRCs. 
• ·         As the contracts progress the level of income CRCs receive will increasingly depend on their success at reducing reoffending. The Ministry included payment by results arrangements to incentivise innovative approaches to reducing reoffending. Its maximum projected payments to CRCs through payment by results is £567 million over the life of the contracts, representing 18% of total projected payments. This proportion increases from 6% in 2015-16 to 28% in 2020-21. Initial reoffending data for England and Wales since the Transforming Rehabilitation reforms show a 2.2% reduction from the rate in January to March 2011. However, the frequency of reoffences per reoffender appears to be increasing. Initial results show that 13 of the 21 CRCs have made statistically significant reductions in the reoffending rate in the first quarterly cohort when compared to 2011 baseline reoffending rates. The first performance payments to CRCs informed by reoffending data are due in January 2018, when the data on frequency of reoffending are published.

Key Facts

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Meg Hillier MP, Chair of the Committee of Public Accounts, said:

“The Committee raised concerns in 2016 about dismal ‘through the gate’ services failing to help offenders find employment and accommodation on release.

“What today’s report from the NAO shows is that the government set these services up to fail when it massively under-estimated how much it would cost to deliver them. 

“Hundreds of millions of pounds of additional taxpayers’ money is now being directed at CRCs, but it remains to be seen if the changes are enough to fix the government’s broken system, and help reduce reoffending.”