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Who wins at ‘payment by results’? Ask shareholders at Serco, the company running Britain

Serco, the company that inspects Britain’s schools, trains our armed forces, runs our prisons, maintains our nuclear weapons, and is taking over big chunks of our NHS, reported stunning financial results today.

Frances Crook
5 March 2013

What a good year it has been for Serco, the sprawling multinational which today posted bumper profits — up almost 28 per cent to £203 million, on nearly £5 billion of revenue. The group has enjoyed a record-breaking year for winning contracts and this success looks set to continue for a good while longer, with the coalition government seemingly determined to outsource as many public services as it can under so-called payment by results (PbR) deals.

According to chief executive Chris Hyman, Serco shareholders were nervous about entering into their first payment by results contract at Doncaster Prison, fearing it would lead to heavy losses. Clearly those doubts aren’t such an issue now, for the group which brought you Boris Bikes is now involved in the running of overseas prisons under payment by results — not to mention the government’s Work Programme, the success of which is open to question.

We still await details of the outcome of the Doncaster Prison pilot – no figures have ever been released – but more contracts are up for grabs. Serco is widely expected to bid for work under Justice Secretary Chris Grayling’s controversial plans to privatise the majority of the probation service.

Payment by results certainly looks like a good deal for shareholders. Unfortunately, it isn’t so good for taxpayers.

Commissioning via payment by results is inherently bureaucratic. This is particularly true in the context of probation, where there will be a complex and messy split between the public and private sector.

The public sector will retain responsibility for risk assessment, breach and court reports (recognised as the core of probation work which must be carried out by the state in the public interest), as well as all high risk cases. The private and voluntary sectors will be able to bid for medium and low risk cases and will be required to work closely with public probation service so that they can carry out their core functions. This will inevitably result in the overlap of work and require an army of contract managers.

Furthermore, risk levels of the majority of people on the probation caseload vary over the course of their sentence and will have to be passed back and forth between the private and public sector. More and more will therefore be spent on management fees (with a healthy chunk being paid to shareholders) and less and less on services to help stop people offending.

Payment by results also leads to cherry-picking, whereby private providers work only with those motivated to change and most likely to stop reoffending, leaving those who are harder to help without support and services. We saw this happen under the PbR scheme at the Heron Unit in Feltham Young Offenders’ Institution which was criticised for working only with those with the least complex needs. Under this model private companies make profits from taxpayer money for achieving results that probably would have occurred without any intervention at all, leaving either the public sector to work with the most difficult and therefore expensive people, or leaving society to deal with consequences when those with refused support continue to reoffend.

Meanwhile, Serco’s Chris Hyman is getting £1.86 million in remuneration, not counting pensions and long-term incentives. On news today that Serco shareholders are getting a 20 per cent jump in dividend payments and will enjoy an even bigger slice of the company's earnings next year, Serco's share price soared.

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