Is payment by results compatible with the big society?

Small, local charities –  lynchpins of the big society –  could lose lifelines of funding under the government’s payment-by-results plans for solving social problems.

The government wants organisations that work to attain social outcomes, such as reducing re-offending, getting the unemployed into work or delivering recovery from drug addiction, to be paid according to the results they achieve. But if there is enough money to be made from payment-by-results contracts, large companies will sweep the board and many charities could be left without funding.

It’s not going to be David Cameron’s vision of the big society. The big society is based on the idea of small and beautiful local organisations, with people understanding each other within their communities. That’s not what we’re talking about here. We might be moving into an era where small and local really doesn’t work any longer.

Charities will need large amounts of capital to deliver services, before they are paid by the government according to the results they achieve. But charities, especially small local ones, do not have large war chests and face losing bids for contracts, and thus seeing their funding dry up.

In a pilot payment-by-results contract, returns to investors will be based on reductions in re-offending rates among prisoners leaving Peterborough Prison, achieved thorough the work of the St Giles Trust and others. To carry out the work, the charity raised money from charitable foundations and social investors. But if payment-by-results contracts prove profitable, companies with large capital bases will see them as attractive. And charities will find it hard to compete.

Small, local charities could see their main source of funding vanish. Larger, national charities will face the choice of  trying to bid against commercial organisations or working with them. The competition to be faced can be seen in the decision to award a community healthcare services contract in Surrey to the company Assura rather than to Central Surrey Health, a local social enterprise.

I believe that, in this context,  the growing number of established social investors, who seek more than a financial return on their investment, will become more and more important to the sector.

The need for investment will throw service provider charities into thinking about new ways of working. Do they find comparable sources of capital to bid or do they enter into joint ventures? Are they investment-ready? Are they culturally ready to work jointly with commercial organisations?

We are working on all of these issues for service providers and social investors. The ingenuity and dynamism of the sector will find successful ways of delivering this for some. But we could be looking at a radically changed sector in a few years from now – and quite possibly one where big capital benefits more than big society.

Philip Kirkpatrick is a partner at law firm Bates Wells & Braithwaite