Whatever works, by Judy Hirst

13 Mar 08
Benefits reform is back centre stage, with new get-tough policies for a part-privatised jobs service. The welfare czar talks to Judy Hirst about breaking the dependency habit

14 March 2008

Benefits reform is back centre stage, with new get-tough policies for a part-privatised jobs service. The welfare czar talks to Judy Hirst about breaking the dependency habit

David Freud, the government's newly appointed welfare adviser, freely admits that until recently he knew next to nothing about his subject.

'I could barely spell the word “welfare”,' he jokes. 'Like a lot of people, I was somewhat puzzled about why I'd been picked to review the system.'

He – and everyone else – understands a lot better now. 'As I quickly found out, the people in the industry were just too close to the issues. They were kind of stuck,' he says. 'No one was taking an overview of this huge system. I had the advantage of my disadvantage.'

It took Freud three weeks (he's a fast learner) to mug up on the literature and come up with the core concepts for the Freud Review: a hard-hitting report for the Department for Work and Pensions that recommends hiving off large chunks of the department's jobless services to the private sector, on a payment-by-results basis.

The full review, published in March 2007, has had something of a chequered history. Gordon Brown, when still chancellor, reportedly rubbished its costings, and former DWP secretary Peter Hain said Freud's approach was not his 'preferred option'. For a while it looked as if the report had been parked.

But with Hain's resignation, and his replacement by James Purnell, the Freud Review is very much back on the agenda. The day after Purnell took over, he rang Freud to ask if he would become his adviser. Now, with his feet firmly under the table at the department, they're already calling Freud the 'welfare czar'.

Two weeks ago, the essentials of his review became official policy, in the form of a new DWP commissioning strategy. It is targeted at getting 1 million hard-to-reach claimants off benefits and into work. Multinational business service companies are already queuing up for the outcome-based, five-year contracts in what Freud predicts will become a multi-billion pound industry.

Launched by Purnell at a CBI welfare-to-work breakfast, the Freud-inspired strategy was accompanied by quite a bit of razzmatazz about 'major milestones' and 'radical visions', and has been hailed as the biggest shake-up to the welfare system since Beveridge. Not bad for a former City boy with spelling issues.

Freud, of course, is not just Sigmund's great-grandson. His personal claim to fame is as a former Financial Times journalist turned investment banker, who made his fortune on the back of the 1980s' Big Bang finance revolution.

Now 58, he played a pivotal role in numerous stock market flotations, including Eurotunnel and Railtrack, and in the financial restructuring of the national air traffic control system. Selling off the state silver, cutting enormously complex deals and – as he makes clear in his autobiography, Freud in the City – shamelessly winging it a lot of the time; this was what Freud did for 20 years. It taught him a fair bit about tackling vested interests, both inside and outside government.

No wonder then that thinking the hitherto unthinkable on welfare reform – and fending off Treasury critics of his plans to part-privatise Jobcentre Plus – seems, relatively speaking, like a walk in the park.

'For me, it's like pitching for any other deal,' he says. 'It's the same skill set. Identifying the problems, coming up with the conceptual solutions, testing them out – it's not rocket science.' Freud's conversation is peppered with motivational, can-do language. Every obstacle has a solution, every difficulty is an opportunity. The unfathomable problems of our welfare system can be resolved, he insists, if you view them like any other commercial challenge: with markets, risks, outcomes and incentives to take into account.

This, it turns out, is what he was hired for. Ministers, he says, were in a serious hurry to 'do something for Blair's economic legacy'. John Hutton, the then work and pensions secretary, decided rather late in the day to come up with something eye-catching on welfare. 'But they looked at the timetable, and realised they had only a matter of months to produce anything interesting.' Freud's name cropped up, primarily as a fixer and problem-solver; someone already well known in government circles, who could help sort out some unfinished welfare reform business.

And if it was useful to have someone like him on board then, how much more so now, with the Brown government – post-Northern Rock, capital gains tax and 'non-doms' – badly in need of some business-friendly initiatives to repair its tarnished image with the City.

No wonder Purnell is reported to be 'hugely enthusiastic' about the new commissioning strategy and, according to Freud, delivering it 'with gusto' – even to the extent of cheekily claiming that Brown is now 'the heir to Blair'.

Freud, it should be said, takes more than a passing interest in all this kind of thing – in 'what makes people tick'. He tells me: 'I do think that understanding the psychology of people is pretty damn important.' When he was growing up he was 'imbued' with his great- grandfather's psychoanalytical theories, and 'read all his stuff'. The insights he gained have helped him in his financial career, and 'may yet do so in my welfare one'.

But unlike great-grandad, who spent most of his time subjecting his patients to lengthy analysis on a couch, Freud Jnr seems more interested in the quick fix, at least when it comes to benefit claimants. More cognitive therapy than talking cure.

And judging from his recent robust comments in the Daily Telegraph and elsewhere, he is keener on getting people off their couches than on to them.

He was reported as saying that the incapacity benefit system puts 2.64 million people under a form of 'economic house arrest', and encourages them to 'stay at home and watch daytime TV'. Fewer than a third of those signed off by 'ludicrous' disability tests are really too ill to get a job, he claimed.

These views have been criticised by poverty and welfare organisations, such as the Child Poverty Action Group, which are becoming increasingly alarmed at the government's get-tough message on benefits.

Whether it's Health Secretary Alan Johnson demanding 'well notes', not sick notes; housing minister Caroline Flint threatening (a little over-eagerly) to withdraw housing from workshy claimants; or the calls for drug users to get treatment or lose benefits, a collective line is emerging on welfare 'conditionality', including tougher incapacity benefit medical tests.

Meanwhile, the Conservatives have further raised the dog-whistle stakes, with proposals for a US-style 'workfare' system, and shadow chancellor George Osborne's pledge to squeeze the welfare budget.

Freud, for his part, claims his views have been misrepresented: it's the system, not benefit claimants that he is attacking. 'What I'm saying is something much more subtle. I'm not blaming claimants for being signed off for life. That's how the system works. But having established that it's good for people to work, we need to find the resources to help them do it.' Like Purnell, he is 'ideologically neutral' about how that is done.

Freud's radical therapy is directed not so much at the individual claimant as at the mechanisms for providing employment services. Like former welfare minister Frank Field, he is clearly sympathetic to some form of time-limiting or 'slicing' of benefits. The government already plans to implement his recommendation that lone parents should seek work once their children reach the age of 12, gradually reducing the cut-off age to seven.

But unlike Field, he is much more concerned with the commercial side; in getting service delivery problems sorted out first. The precise model of conditionality and benefit payments can be 'retrofitted' later, he says.

Freud's diagnosis of what's ailing the welfare system goes roughly like this. Jobcentre Plus does a 'pretty good job' at 'normal mass-market provision'; in other words, helping the short-term unemployed. The government's New Deals have been 'enormously successful', contributing to one of the highest overall employment rates – 74.7% – in the industrial world.

The problems lie deeper, with the 2.6 million on incapacity benefits, the 760,000 lone parents on benefits, and the long-term unemployed with low skills and multiple disadvantages. Here, says Freud, the state-run system has been much less successful, and the numbers of claimants have remained stubbornly high, even in the boom years.

With an economic slowdown and rising benefits bill on the way – and the DWP looking to make 5% spending cuts, and to lose 12,000 staff – urgent action is needed if the government is to meet its 80% employment target, let alone its child poverty ones.

Freud's solution is simple: hand over entire responsibility for hard-to-reach claimants to the private and voluntary sectors which, he says, are much better at assessing and dealing with complex needs. Substance abuse, language issues, learning difficulties – the market will provide high-quality, personalised services, so long as there are adequate incentives.

Freud argues that it is 'entirely rational' for the Exchequer to pay private providers about £62,000 for each long-term claimant moved into employment, given what it costs to keep them on benefit for, typically, eight or nine years. But if the programme is not successful, the providers should get nothing.

The business community is excited by the new payment-by-results procurement model, due to be rolled out initially with the launch of Flexible New Deal. The contracts on offer in the commissioning strategy are less than the seven years proposed by Freud, but still enough to tempt the likes of Serco, Work Directions, A4e, America Works and other home-grown, US, Australian and Dutch employment service providers, many of which already run contracts for the department's Pathways to Work service.

Other modifications have been made to the original model: a larger number of prime contractors than Freud proposed, in response to concerns about regional monopolies; and measures to discourage cherry-picking the claimants who are easiest to place.

Tom Moran, the CBI's principal policy adviser on welfare, says his organisation is 'really pleased with the progress and the government's recognition. But at present it's still just a strategy.' With an eye to the Australian welfare model, he suggests that the CBI would like the DWP to go a lot further than just part-privatising Jobcentre Plus. 'The evidence for letting the private sector do this kind of work is really unanswerable.'

But first, there are some serious objections to overcome. Some of them come, naturally enough, from the civil service unions, which argue that the Freud/Purnell direction of travel is entirely cost-driven. PCS general secretary Mark Serwotka told Public Finance: 'This is being badged as welfare reform. But it's simply about cutting the benefits bill, and stigmatising the unemployed.' It's also a 'very dogmatic approach', he argues, which ignores the recent successes of Jobcentre-Plus programmes with long-term claimants.

Employment programme expert Dan Finn, professor of social policy at the University of Portsmouth, declares himself to be agnostic on who delivers these out-of-work services. But he doesn't believe there is any evidence that for-profit organisations can do the job any better than public or third-sector ones. And he does have concerns about the government's 'signalling' messages on idle claimants swinging the lead.

As for all the 'policy noise' on the new welfare market, 'there's a risk that only the largest prime contractors will have the money to put up-front, which is why the third sector is very nervous about the size of these contracts.' So is the Local Government Association. Its chair, Sir Simon Milton, says they will make for 'confused and costly sub-contracting' and not be flexible enough to link up with local services for the unemployed.

But all this is small beer compared with the bigger stumbling block – the opposition from within the Treasury to Freud's 'debt financed' contracting model. This challenges the way the DWP's Departmental Expenditure Limit and its Annually Managed Expenditure are currently handled.

Freud argues for a more 'open architecture' that would allow the department to get its hands on revenue streams for private sector contracts, in anticipation of the savings to be made from getting more claimants 'job ready'. Officials fear it could be a step too far, with the Treasury left holding the economic legacy if Freud's 'fiscal prize' doesn't materialise. But the chancellor has agreed to explore the matter further through some pilots.

I ask Freud how robust – and recession-proof – his figures are. 'That's a very good question,' he says, politician-style. 'What you're really asking is, does the market match what the government is willing to pay? Who knows?' he shrugs. In practice, the figures are 'much less pure' than the way he's described them. And yes, in the tough economic environment we're heading for, it will be that much harder to get people into work.

But Freud, you will appreciate, has seen it all before. In the meantime – when he's not swimming, cycling, skiing, running the Portland Trust and, just occasionally, spending time with his grown-up family – he's getting on with the new day job of 'building the industry'.

'This is at least as important as anything I've ever done,' he says earnestly. 'Well, maybe not Eurotunnel.' Sigmund, surely, would have had something to say about that.


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