Capital raising
We have had feedback that suggests the scale of The Work Programme will require higher financial investment from providers than the current back to work programmes.
We expect that our providers will be able to demonstrate the capital strength and resources required to take on the risks involved in delivering heavily outcome based programmes. This may mean seeking external financing to raise working capital.
Will delivering a programme with a heavily outcome based approach cause difficulties in raising working capital? If so, please tell us about them.
Would this cause other challenges or finance risk for providers? If so please outline these.
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Starting on Monday 2nd August there will be 3 more themes for you to discuss and give views on. As before, these have been chosen from areas already raised by you.
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Capital raising will be as difficult as the quantifiable risks. If the Government can assist in reducing the risk it will assist in the levering of loans. Risks could be mitigated through a Social Activation Fee that requires providers to demonstrate measureable progress for those moving towards the open labour market as well as payment for job outcomes. Risks could also be reduced through enabling Welfare to Work providers to bid for market facilitation activities that lead directly to job creation e.g. establishing Social Firms.Risks could further be mitigated through support with cash flow payments in the period that the person obtains work and the cut off date for retention.
Finally risks could also be mitigated by allowing specialist providers access to all their clients so that they could recycle the dividend from getting the easiest into work into helping those further from the open labour market to progress to a position where they could actually benefit from a job brokerage service. In other words for some categories stop worrying about deadweight because for some disability conditions there are few close enough to the open labour market to make it on their own e.g. learning difficulties.
Finally risk could also be mitigated if the Government could facilitate low cost loans and provide us with an answer to the banker who says why should a bank provide a loan to an enterprise that the Government wouldn’t do?
We know, from our experience with FND, how risky outcome based contracts are – and so do the banks. Without an alternative source of capital, the impact will be that organisations without security to offer are excluded unless the prime contrators are prepared to fund the whole supply chain by making significant on-programme payments. If they do this it will be at a cost, and the third sector and other smaller enterprises should be ready to work very hard for the privilege of being a supplier. This is not a criticism of the prime contractors – they are commercial organisations and they need to reward their investors for taking the very significant financial risk that this represents.
DWP’s own research in into the effects of a ‘heavily outcome based approach’ (Report No. 638 The influence of outcome-based contracting on Provider-led Pathways to Work) concludes that outcome based contracting ‘can lead to perverse incentives.’
In a nutshell, large primes are incentivised to cream and park customers, and focus on finding operational efficiencies, to maximise revenue: ‘The common prime provider strategy was, broadly speaking, to focus on job ready clients and encourage supply chain focus on clients requiring more intensive support and assistance to return to work.’
As a result, their most vulnerable customers receive a bare minimum of support, and smaller providers risk being forced out of the market because to work with the hardest help clients a outcome based contracting environment carries enormous risk, especially to groups with very little in the way of cash reserves or access to finance.
To remind you of some of the recommendations in that report:
· stronger client feedback mechanisms must be developed, given the concerns about outcome-based contracts and parking,
· greater resources need to be made available for organisations working with clients with more complex needs, and
· DWP should consider paying providers on the basis of a wider range of outcomes and deploying differentiated outcomes for groups of clients, recognising the complexity of work orientations and job readiness. For example, outcomes achieved by clients who are some way off from getting a job might include completion of a training course, entering voluntary work or completing a work trial.
These findings have since been backed up by a wider ranging report on DWP commission by the House of Commons Work and Pensions Committee (Management and Administration of Contracted Employment Programmes) and a House of Lords European Union Committee which looked among other things at the impact of competitive bidding and outcome based contracting on the ESF programme (Making it Work: the European Social Fund)
The Work and Pensions Committee report concludes that ‘every help needs to be offered to ensure that small providers can participate in the market’ and that ‘the Department cannot rely on market pressure alone to ensure that sub-contractors remain involved.’
Similarly, the House of Lords European Union Committee recommends funding for milestones on the journey to work for those furthest from the labour market, not a strict…[truncated by the system]
The scale of the contract will mean that local providers such as colleges in the public sector will be excluded as they will not be able to ‘take the risk’ of taking on staff and waiting six months for payment…..With all the other cuts that are ongoing.
It would be much better if the Government re-thought their model to include ’start up capital’ and providers who didn’t perform would have their money clawed back – as was the case with Train to Gain. And maybe looking at lessons learnt with this initiative would enable the work programme to be a greater success with employers.
I would further agree that organisations such as college etc. should be able to recruit candidates direct as a high number of their students in areas of deprivation are unemployed – a vast number 18 year olds go straight from college to unemployment benefit as they can’t find employer who will ‘take a chance on them.’
I also think as the DWP have stated they would like smaller provider, colleges and voluntary sector to be involved they should be holding information days to enable feedback…..Rather than on sites such as this….As there is lots of confusion re. the Work Programme.
We suggest that the government should provide clarification on what sources of support from the government are available for third sector providers (e.g. Big Society Bank loans) and what terms would be required.
As investment from financial institutions is likely to be necessary to fund these contracts and we therefore suggest that the government consults with potential investors to determine what terms they would require in order to invest.
We believe that a situation whereby DWP controls referrals to the Work Programme, but will not guarantee any minimum volume of client referral, will present an unreasonable risk for Providers. If referrals are to be controlled by DWP/JCP, we suggest that the fairest way to rebalance this would be if the DWP issued penalty payments in the event of volumes falling significantly below predicted levels. If this is unpalatable to DWP, they should not “control” the referral process and permit Providers to recruit direct in addition to receiving referrals from JCP. In this situation we suggest that those directly referred individuals should not be required to visit their Jobcentre prior to commencement, but should instead have some electronic method of authorisation.
A further way to assist Providers would be to provide advance funding to help with cash flow in the event of volumes being significantly increased.
Where possible, measures should be implemented to help ensure that prime contractors offer subcontractors terms that do not require the subcontractors to have large amounts of working capital. We also believe that there should be sufficient funds provided overall to enable subcontractors to engage those individuals who are furthest away from the labour market, as this will be necessary if there is truly to be a step change in performance and an end to the issue of “parking and creaming”.
Papworth Trust assumes that the new Work Programme will have a lower service fee combined with an outcome fee that is paid over a longer sustained period of time by comparison with FND. There are many challenges facing providers in raising working capital, and the first of these hurdles will be for providers to invest in a programme that currently has no track record. Undoubtedly, there will be a larger upfront requirement for cash under the Work Programme – the smaller the provider, the harder that will be. Providers with a shareholding will have the option of whether to leverage funding through their shareholders. Providers operating in the Third Sector do not have that option.
The need to raise working capital will heavily depend on your ability to prove your track record in this area. However, this is difficult considering there is no track record for delivering the Work Programme. In particular, supporting long term incapacity benefit claimants and long term cyclists to remain in sustainable employment are currently unknowns.
The uncertain circumstances surrounding the new political era will also pose great challenges. As has been proven by the ending of FND under this Coalition Government, a change in Government can lead to a change in programme, its conditions and referral rates. Even through the lifetime of a Government, what appears to be a small change in contract terms can lead to huge fluctuations in referral rates as has been shown through Pathways to Work. Unless the Government is able to step away from the norm of providing indicative client numbers and start contracting with minimum client referrals guarantees, there will always be a risk in trying to secure capital investment.
Capital raising poses significant difficulties for VCS organisations keen to engage in DWP programmes. These are often organisations that are in a very strong position to engage with DWP target groups, however, this integral step in the process of getting the long-term unemployed back into work is overlooked by the payment models on offer. Most of our costs are incurred at the front end of delivery, raising aspirations and motivating people to choose to return to work or join the labour market for the first time.
Even where these barriers are overcome, most primes pass risk down the supply chain, limiting the level at which many VCS organisations can deliver. We are simply not in a position to raise the millions needed to make a significant contribution to this work.
DWP payment models can make it very dificualt to obtain full cost recovery, meaning we could effectively be in the position of supporting the profit making activities of primes. This could place our other (usually voluntary) income at risk and has already been raised as an issue by our trustees. One of the voluntary sector’s great strengths is its ability to leverage both private and public money – these programmes may have the inverse impact of limiting such opportunities.
I would like to put this Capital Raising proposal into the Dragon’s Den:
I am asking for £50m to set up a Recruitment service for people many of whom need intensive training and support in order to place into work.
I have start up capital of premises and staff and limited cash reserves for 6 months.
My income for first year will be nil, thereafter I can expect approximately 1% return paid on a monthly basis on production of validated documents from unwilling employers, many of whom do not wish to sign anything, which increases my staff costs as they have to chase these employers relentlessly in order to ensure we can get this payment.
In our 3rd year, we expect a greater return but there is a possibility that our major client , a central govt body with whom we have a contract, which was originally signed for 7 years may be terminated if the Government changes or if they change their mind. So unfortunately we cannot guarantee any return on investment if this happens. This would of course mean that you would make a considerable loss on your investment. Please note that most of the money is required as working capital, any takers?
Please let’s get serious here
If I was an investor presented with this model I don’t see how anyone could make a genuinely plausible business case to me for it.
If primes are generally delivering 20% – 30% success I would be wanting to know what it is that they will be doing differently to increase this.
Unless I’ve missed something, their answer would be putting their subcontractors under even more pressure to deliver with even less support and resources.
Being a diligent investor, I would then investigate this with subcontractors. No matter how hard they work, I would discover, their impact is limited in too many cases through no fault of their own.
Whilst the adage “you buy cheap, you buy twice” may be unfair at times and “you only get what you pay for” sounds almost cruel in some instances it is also true in many cases.
In continuing my research around this investment I would then speak to employers who would tell me horror stories of bureaucracy, the problems caused due to fallout of poorly prepared people joining their organisation with so many issues which so obviously need addressing before they can focus on work.
Finally I would pick up with those left “holding the baby” or picking up the “tab” for failure. The local authorities, prisons and other organisations including the voluntary sector who carry the can under Total Place. I would see the huge cost to the public purse and the merry go round that has been going for years, to very little or no avail.
The conclusion I would draw as an investor and have drawn in reality having done all of the above is that this is not an investment opportunity as it currently stands. It’s a fantasy and an unrealistic one at that.
My organisation currently leads a small consortium (16 third sector providers) delivering w2w under area based grant. We are keen to continue to work together through the work programme and have to look at either scaling up or working with a prime – with all the issues about security, top slicing etc …
What is missing (but would have been good to see given the aspirations around the Big Society) are a willingness to explore some geographically smaller lots backed up by a Social Impact Bond. The capital requirements remain the biggest barrier to smaller organisations creating a consortium to bid, especially if most payments will be against outcomes.
While we applaud the Big Society’s plan to redistribute power, we are concerned that many charities, like New Deal of the Mind that have a track record of placing hard to reach, young unemployed adults into work in the creative industries, will be prevented from participating in the Government’s new work programme because we are deemed too small. Indeed, it seems we are not alone. If potential providers must demonstrate they have a track record of running large and complex contracts, the capacity to work across the region(s) they bid for and the financial strength to run contracts that will be paid primarily on results, only a very small number of organisations will be able to bid for these contracts. We are concerned that such plans will lock out the voluntary sector. We also worry that, as only a small number of organisations will be able to participate in the new work programme, competition will be stifled and potential monopolies could be created.
The framework and the qualifying criteria will reduce competition, e.g. by increasing the gap between large and small firms within a market, or by forcing some firms to leave the market altogether. A rule of thumb is that more bidders make for more intense competition, resulting in lower prices and better quality. Even though the incremental benefits from having more participants in a tender may become smaller as the number of bidders increases, in most circumstances adding bidders increases the level of competition. This suggests that any feature of public procurement processes that limits participation has a detrimental impact on competition, which, in turn could increase costs for the public purse.
I suggest that the whole premise of the framework and the work programme be reviewed in the light of its possible contravention of procurement legislation and the negative impact this would have on the market
I agree with most of the comments above, my ears are still ringing with the laughter of some associates in the banking sector when it was suggested that capital can be raised to support Welfare to work providers. No bank or venture capitalist would touch businesses or organisations in the sector with a bargepole for reasons which are clear and have been so articulately enunciated by previous commentators not least of all when financial forecasts are impossible to prepare in the current climate, there are simply too many uncertainties. If the Govt itself is not prepared to take the risk by providing upfront payments why would an investor?
If we want providers to be able to access capital then DWP must be able to provide guarantees’ upon which business plans and projections can be drawn up and there must be some effort made to ensure that contracts are worth more than the paper they are written on and a commitment from the Govt not to arbitrarily terminate contracts which would provide some assurances from any would-be investors if any can be found.
In addition, the legality of the qualification criteria for the framework should be questioned; as it may, as currently constituted, be non compliant with EU and UK non-discriminatory regulations on public sector procurement. Public sector procurement must comply with all applicable EU and UK procurement legislation, in particular the principle of non-discrimination, and apply the rules to all potential tenderers in a fair and transparent manner.
Competition effects from procurement can be both positive and negative. The public sector, by virtue of its overall demand in certain markets, may be in a position to protect and promote competition, for example by maintaining a competitive market structure through deliberately sourcing its requirements from a range of suppliers, by providing incentives to suppliers to invest and innovate, or by helping firms to overcome barriers to entry. It may, however, also restrict and distort competition, e.g. by adopting procurement practices that have the effect of restricting participation in public tenders and that might even discriminate against particular types of firms. The current qualifying criteria for the framework as it now stands eliminates at least 90% of the market and could even be seen to promote collusion and create cartels, all these go against anti-competition laws.
The framework and the qualifying criteria will reduce competition, e.g. by…[truncated by the system]
Structures such as the Social Impact Bond maybe appropriate. See our website article http://www.socialfinance.org.uk/services/index.php?page_ID=15
Social Impact Bonds allow money to raised to fund preventative and other services with the repayment of investors on the delivery of the results. They also enable small providers to be involved as service providers.It is recognised that a single service or service provider may not have the coverage or services to deliver the outcome for all participants.
Granting contracts to a small number of Prime Contractors will reduce the administrative burden for DWP staff but will not necessarily deliver the desired outcome. I agree that payment by results is the right way forward. It could be possible for SMEs to raise funding depending on the quality of their proposal supported by the provision of matched “set up” funding by DWP. All of this is of course dependent on the value of the results payment and the conditions attached.
I don’t think Primes will hav a difficulty in rasising working capital, the issue will come further down the line as the high level of risk is passed along the supply chain.
Capital loans for Primes may mean that interest costs on these loans are passed along the supply chain. This may effectively mean a higher management fee and lower payments for Subcontractors.
Further to this, at a DWP roundtable, the DWP themselves admitted that the jobs market is ‘loose’ or ‘weak’ meaning that achieving these outcomes will be very tricky. Consequently Prime’s performance offers must toe the line between the risk of underperformance and a competetive offer to the DWP.
Personally i feel that this could form a sucesfull W2W coalition,Primes (like it or not) have the capital…..but do not have the national coverage !. One can no longer work without the other…and primes do realise that…putting smaller companies in a “prime” position !.DWP need to consider fairness & equality ensuring smaller companies are paid their due with clear guidelines for subcontracting
as a social entrepreneur our aim is to Create, attract, develop and retain skills in the West Midland region: The availability of people with relevant skills has a major impact on the decision of businesses to invest in a particular region. Research has indicated there are critical skill shortages in a number of sectors in WM including: Engineering, Trades, Business and Administrative Services and Information and Communication Technology. There is also a need to create opportunities for, and support, young people seeking employment in West Midlands, and to explore initiatives to reduce obstacles when travelling to potential work sites and training facilities. The skills mix is not currently well matched with business growth. In particular, there is difficulty in attracting professionals and other high-tech workers. Reasons for this include perceived livability issues as minimum living wage, travel times and transport constraints. As a SE we are read address long-term unemployed and Graduates who qualified from WM region universities by creative jobs in these field. We need support for infrastructure development as our previous proposals have cost us our times money energy. The propose pay model would not be able to fill this gap within most of 3rd sector and Social enterprising providers: therefore DWP must look at a way to aligning infrastructure needs with population and business growth needs. Opportunities for development contributions needs to be enable the provision of infrastructure necessary to respond to changing demands. High priority and high impact strategies to address barriers to business investment assistants should be focus on expanding Social and Ethical businesses to take-up Work Programme, time saving technologies, and techniques investments. Develop new initiatives to bring skills to the region and to retrain the existing workforce. WE would not be able to work on this agenda simply infrastructure (capital gaining) has been hindered due to ongoing disputes within the cuts within the budget. Currently WM region is experiencing a shortage of skilled and qualified people in many occupations, in particular in health and Social care, building and construction, planning and engineering. We need financial assistant to commercialise Phoenix Work Programme as creative innovative and affordable Ethical model of social business opportunity.
On a case by case basis, DWP needs to consider shared infrastructure for business to accommodate…[truncated by the system]
This model is so against the Big Society model as to make me question the new Government’s real commitment to it. Of course there is huge financial risk to sub contractor providers. I’m quite astonished that the question is even being asked. The big Prime Contractors who will inevitably win these contracts are mostly profit making, they have share holders to pay dividends to, and are often multi-national. Their owners/CEOs make big bucks. They will be rubbing their hands with glee at the lack of competition they face. The rich become richer and the poor poorer in the welfare to work business as well as in society. Let’s not forget, that this is a business to big prime contracting companies, it is about making enough money to keep themselves employed. In a true Big Society, communities would me managing this a chunk of this money and spending an awful lot more of it on the unemployed than lining the pockets of share holders and senior staff at Prime Contractors. The outcomes would be much higher, but so would the risk and cost to DWP. Come on. Don’t take us for fools. If this model is to be taken forward, then PCs should be required to have a minimum ratio of delivery by SMEs and the third sector and monitored as such, and the management fee capped. The risk for them of course increases, and with it the ablity to raise capital. Big Society – Big Red Herring.
Anyone in business will know that the ability to raise finance is based on a concept that the borrower has the ability to pay back. To raise finance for any venture requires the production of a viable business plan with clear projections of when and how one will realise rewards to reduce the risk of the finance to the financier.
The current model of a heavily outcome based approach with a clear clause of “no guarantee of business” weighs heavily on any potential borrower of capital. Clearly this means the providers who take on this risky approach will have to find excess capital from somewhere else in their business to keep afloat in the short term, with the hope that they will secure enough outcome payments later on to provide a trend and business case to raise further capital to run the programmes. This rules out many SMEs and limits the potential primes to very large organisations who can provide the excess capital from their own current agreed borrowing requirements.
Having said this, it is quite clear that the current department agenda is to use only organisations such as these as primes and limit the majority of smaller organisations and SMEs to life of subcontracting at sometimes very poor rates. If the intention of the department is to really limit the number of primes then they are on the right track and there is no need for further debate, if on the other hand they want to increase the number of primes, increase competition, and increase the potential of smaller organisations to have the ability to raise capital to participate as primes, then a clearly defined payment model, with clearly laid out payment amounts and shorter time scales is the answer. This will enable business plans to be written and more accurate forecasts set in order to raise further finance to embark on more intensive engagement and a better level of investment to assist more individuals into work irrespective of their barriers.
The new Work Programme seems to require more capitalisation and risks than previous programmes – how is this attractive to any provider? Providers have been in the main working under changing goalposts for public funding for years, and latterly only seem to manage to make money (if you are successful at writing bids which allow you a greater share of the pie) at the expense of results (see the abysmal record of these large primes in getting people back into work). I work for a small specialist provider whereby we gave people the tools to get work – less than 2 hours worth of support, but the quality of it was such that we had a 52% success rate of people placing themselves into jobs.
We need a bigger picture, we need a better understanding of how skills and employment relate to each other at grass roots level. The danger is always there when you have a “hands off” approach – people change the rules according to what they can get away with – hence management fees of 55%, and all the risk driven down to those who can least afford them.
Having worked in this environment for over 20 years i know that funding drives behaviour but having no funding will also drive behaviour. Providers will not want to tackle this issue unless employers get on board too. Where is the employer voice in all this?
Interestingly the two main areas of debate are on funding and not on models that work.
I like the Dutch programme whereby the private sector works with jobseekers and gets them into employment, perhaps not the employment they had previously, but its a case of job first, benefits second. Benefits were then topped up according to need and paid through their employer. This meant that employers shared the issues, problems and successes too. I think there is a need to look at other models and not just focus the debate with providers simply on funding.
As a relatively small third sector organisation based in one of London’s most deprived wards, I believe the outcome heavy payment model disadvantages us the most.
It takes years for small organisations to establish a positive identity – and maintaining the funding to achieve this is extremely difficult. The Work programme model means that even when we are able to secure a funding contract, our flow of income will inevitably be stuttering and delayed, which is something that we, and many others in our position, simply don’t have the finances to sustain.
From past experience, providing an effective service and getting people into work is very different from acquiring outcome evidence. Evidence collection can be and often is delayed. Putting too much financial onus on the outcomes will delay the largest proportion of our payments.
It is important to place a proportion of the contract value on outcomes to ensure targets are met. But it is even more important to ensure that services can be delivered consistently by providers with the benefit of some secure funding that will allow us to plan ahead.
A heavily outcome-based payment model will certainly lead to more small organisation failing to sustain their costs and lead to more of the perceived fly-by-night organisations that have so disillusioned our service users.
I’m also afraid that the outcome heavy model will put small organisation like ours at a disadvantage in working with larger partners. How can we encourage larger organisations who can weather the cost implications to partner with us, when we are unable to provide similar guarantees?
For smaller organisations, there must be a secure flow of guaranteed funding – with effective milestones and performance targets to ensure delivery – as well as a small proportion of the contract value paid up front to enable us to set-up the delivery team.
A large proportion of the economic strength of the UK is based in the small business sector where there are a considerable number of small innovative w2w and training providers who have a high quality product and very high achievement rates. The capital issue puts them at a significant disadvantage as they are at the bottom of the ‘Food Chain’ with this provision. Over the past year with the drying up of some funding streams many small providers have used their working capital to survive or indeed gone into liquidation. If this provision is to be effective and provide the outcomes expected by DWP the programme needs the innovation provided by SME’s. However the reliance on organisations who have large working capital will preclude them from taking part, placing many more at risk and preventing them increasing their own staffing levels. There must be some protection built in to enable SME’s to take part and add value to the programme.
I find it very strange that we are being asked to find the answer to the problem, yet if we do it costs us either as a Sub Contractor or a Prime to get on and deliver, the service. Also I think the answer is PSV rather than Prime lead, however then it comes down to cost for set up.
I see Ian your thoughts but I have suffered years of colleges wanting providers to bail them out and charge very high costs for giving us the privilege of the work.
Surely anyone putting up the capital to fund the Work Programme will need to be confident that they’ll get a return on their capital and the risk is worthwhile. Based on the current market, convincing any external financer that welfare to work is a good investment is going to be a real struggle, particularly when all of the funding information isn’t available. If you look at the track record of existing prime contracts and the SUSTAINED job outcomes being achieved you have to say that you wouldn’t touch welfare to work with a barge pole. Full funding models will be needed to secure the finance and at the moment this information isn’t available.
The Work Programme WILL require “higher financial investment”. Current nterventions offered are dictated by the funding a programme attracts and the contractual outcomes to be achieved. Many customers don’t get what they need as it isn’t part of the programme/funding, hence low job outcomes (and the fact we’re in a recession). A model that requires providers to do anything and everything required for as long as is necessary to get an individual back to work, will undoubtedly require immeasurable levels of investment. There isn’t any historic comparison to indicate what these levels of investment could be.
For example if someone needs the Sainsburys course (Alex Ford) to get a job I’m assuming DWP will expect the provider to pay for this, irrespective of cost. People need skills to gain/sustain employment so the skills gap will need to be plugged as part of the Work Programme. Or will the Work Programme customers be able to access other funded provision ala FND?
It’s vital to recognise that the jobs required to place every single person who comes into the Work Programme into sustained employment don’t actually exist. So which clients will a provider focus on? Will the higher incentive for placing a “harder to help” customer into sustained employment really reflect the level of investment required to get them there eg by any means necessary?
It isn’t the outcome based approach itself that causes an issue, it’s the fact that there are too many unknowns in the contract requirements, outcome funding etc. Investors are obviously not risk averse and may see the risk as being worthwhile, but based on the current information available … they’d have to be mad!
The model proposed whilst delivering a relatively risk free model for DWP it also leaves the vast majority of the voluntary sector out in the cold. The Primes will do as they have always done and promise the world and deliver very little. (Please don’t bother coming back with oh no we don’t because oh yes you do?) Only today David Cameron has talked about devolving power to the man on the street using the local VC sector to assist in doing so. Well David Cameron here was a fantastic opportunity for you to do so. Result based is fantastic as the VC sector always worked this way. The problem is front ending this and raising capital. The huge problem is that the VC sector simply in many cases does not have the ability to raise the sort of capital required. The answer of sub contracting is one answer but this needs to be real and the primes need to be capped on the management fees they can take, anything over 10% should be justified stringently. I will admit that many in the VC sector have had ample opportunity to get their houses in order. Local authorities could perhaps assist local vc sector to submit prime bids. Perhaps the Government could give capital loans via a umberella body VCS or NCVO or similar. Perhaps the redundant bank accounts fund could be used to front load these contracts on the basis that it is paid back of course the vc sector should be the same as any other business and noyt expect grants alone.
…DWP sharing more of this risk thereby encouraging investment sooner rather than later.
Finally & controversially,
The wider sector needs to be aware that not ALL providers can or should try to be PRIMES so the fact that the setting of high financial requirements will exclude some providers should be perfectly understandable. This then provides an opportunity to ensure that the supply chain is tangible and robust.
Capital raising
Although it is an important consideration, delivering programmes which are heavily outcomes based will not –in and of itself – pose insurmountable barriers to raising working capital. There are two reasons for this.
• Firstly, raising and securing capital from corporate bodies is not substantively dependent on whether the contracts sort or held are primarily outcome based. Primary considerations will be around track record, business model, pricing structure and the fluidity and consistency of the market.
• Secondly, historically, public funding has not been accepted by banks and many investors as viable leverage to raise capital. The levels of working capital that we are talking about will make this doubly difficult,
• Thirdly, investors will be more exercised about the breadth and depth of competition and the degree to which the pricing structures and the outcomes synthesise with their business model. For example is the 80/20 model more relevant to a demand-led or a supply-side market.
• Fourthly, Outcome facing contracts become problematic to providers and investors in the context of the wider economic and market conditions as juxtaposed against the challenging cohort of the long-term unemployed whose ranks will be swelled by the movement of more claimants unto JSA and ESA. The pricing therefore has got to be right: Clarity is needed on the unit cost and sustained payments. Note: the unit costs for PEP were unrealistic and unsustainable)
• Fifthly, DWP needs to ensure that its performance expectation is realistic and that it really does align this to current provider performance,
On a positive note
The Coalition government is committed to this programme and by extension it will support and aggressively ensure that its commitments are realised. Hence the commitment to invest more and to push through with the DEL/AME switch will be a positive sign for investors.
However investors will need reassurance, as they may feel overly susceptible to the political process. There is an awareness that once the Work Programme goes ‘live’ in 2011 that there will be approximately 3 ½ years left of the Coalition. The fear is that contracts could quite easily be ripped up: Again! With this in mind investors will/may hold fire and wait to see which horses look promising in terms of, pricing, performance & investment maximisation. Providers have spoken to us and would welcome DWP sharing more of this risk thereby…[truncated by the system]
To all intents & purposes the capital issue on former programmes has been a red herring. DWP were keen to emphasise the necessity of large working capital requirements (effectively precluding all but the largest of providers from holding contracts) yet then proceeded to hand over monthly service payments in excess of 50% of the annual contract value to successful bidders.
This aside, I echo Alex Ford’s experience where Prime Contractors have been entering into contracts where risk was cascaded down the supply chain while reward very clearly wasn’t. To illustrate: One specialist ESF contract in London was subcontracted in it’s entirety to one large VCS organisation (specilaising in working with the target group) for approximately 55% of the contract value. The Prime did little more than write a successful bid & provide a “first jobber” contract manager who managed to patronise & alienate the front line managers at his sub-contractor. This is a harsh example but is indicative of the pitfalls that arise when DWP are clear they want no involvement with the workings of the supply chain.
The Code of Conduct was ineffectual & moves were made to give it “teeth”. There remains, at grass roots level in the VCS, a widespread distrust of private sector prime contractors. If the regime is going to be the same (i.e. the same primes); some of the prime contractors really do need to consider cleaning up their act & detoxifying their own brands as well as those of DWP & welfare-to-work services by association.
Returning to the topic, a heavier capital investment from a provider will, in my view, maintain the status quo amongst contract holders who could seek to pass higher levels of risk to their sub-contractors while witholding higher levels of reward.
Setting high financial requirements precludes SMEs from acting as prime contractors, and potentially reduces them to subcontract roles only. This funding barrier cancels any ‘incubator’ effect for new and innovative solutions, which traditionally have come from smaller organisations (who are then often acquired by larger firms).
SMES are traditionally willing to take risks, able to move faster and to create and test new approaches better than corporates: however banks are unwilling and reluctant to support SME growth at present for wholly-results-based contracts of any sort, and especially with funding for cash-flow. SMEs also increase jobs and build capacity – skills and systems – at greater rates than corporates.
Without an SME support consideration – which should not simply be the DWP suggesting subcontracting for a corporate – then The Work Programme will receive only low-risk and mainstream proposals from established large suppliers. There will be lower end user value delivered, and a lack of innovation.
Some form of positive SME treatment – such as stage payments, or metered measurements, can support best value solutions. They can be quickly scaled-up as successes are achieved. Once a track record of payments can be shown to banks, then funding can be secured for that growth, and for the creation of jobs in those SMEs.
Peter,
I am very encouraged by your response in supporting SMEs. We are hoping to become part of the Work Programme and as an SME we believe we have a lot of innovation to offer the DWP.
David
As a provider of old New Deal and other DWP contracts, we experienced two Prime providers go into administration (Carter Carter and Instant Muscle). On each occasion we lost approximately 10% of our turnover. Luckily, we survived. Numerous subcontractors did not.
A move to 80-100% outcome payments would significantly increase the likelihood of this happening again, as would the prohibitive lending rates of banks. When Instant Muscle and Carter Carter went into administration, DWP had no support mechanism and no way of refunding us for work delivered and no way of giving us a contract to continue delivering directly for DWP in order to generate income. Instant Muscle’s New Deal contract was ‘novated’ to A4e and fortunately we were able to convince them to work with us, had they chosen to not to we would have entered administration ourselves.
Subcontractors need greater reassurance about the financial stability of Primes in the new market and Primes need to secure a level of borrowing currently unavailable within the finance market, as per Vince Cable’s announcement about “banks ripping off customers” today.
The other issue with heavy outcome based funding is that skills will disappear from the DWP provision. A local college is charging £1000 for a 4 week Pre Employment Training course with a guaranteed interview at Sainsburys – this sort of activity is currently being spurned by FND providers in the current funding model as it is simply unaffordable, it is totally impossible with outcome-based funding as Primes will not offer subcontractors superior financial terms to their own.
Finally, transparency around management fees is essential. We went from being the largest and most successful New Deal provider in the area, to not delivering any FND due to the Prime ‘management fees’ in excess of 55%. Local Primes chose to use subcontractors to mitigate risk as opposed to sharing it. We would have been delivering the same programme as the primes, for less than 50% of the funding, with the same targets, working with the most disadvantaged customers and we would have gone out of business in 6 months.
In the past there have been many companies who have integrated employment and skills. In the future I forsee a clear split between DWP providers and BIS providers with catastrophic consequences for customers with few or no qualifications in a rapidly changing skills economy.
Maybe Ian would like to answer the question being posed rather than just continuing the rants posted on other welfare to work forums.