Nick Harvey's leaked letter highlights concerns over funding and fears that private sector will 'cherry pick' charities
A funding crisis has developed in the government's main welfare-to-work initiative which demands an urgent review of its organisation and supply chain, the defence minister Nick Harvey has written in a leaked letter to the employment minister Chris Grayling.
The letter reveals ministerial unease about whether the flagship work programme has been structured properly for a deteriorating labour market.
Harvey, a Liberal Democrat, expresses concerns that large private-sector firms working on the scheme, which is directed mainly at finding work for anyone unemployed for more than 12 months, will be able to take advantage of small local charities struggling with cash flow.
"Clearly the funding model is in deep trouble," Harvey wrote in the letter to Grayling on 7 February after hearing the concerns of small providers in his North Devon constituency.
He added: "The real concern is that the private sector will cherry pick the ruins of the charities concerned."
Harvey's criticism of large providers is directed at the likes of A4e, the company established by Downing Street's former family tsar, Emma Harrison, which is paid millions of pounds a year by the government for finding work for long-term unemployed people. Harrison resigned from her No 10 role and as chairman of A4e after it emerged that her business was the subject of a series of fraud investigations. There is no suggestion that Harrison has done anything wrong.
Harvey's stark criticism, in a private letter that was copied to the Lib Dem pensions minister, Steve Webb, follows meetings with some of the local providers of the work programme in his constituency who are having to shut offices.
Westward Pathfinder, which finds work for the long-term unemployed in the south-west, has warned Harvey that it faces potential bankruptcy because it is only paid by the government if it secures employment for an individual for at least six months.
In the letter to Grayling, Harvey writes that the funding mechanism should be reviewed: "In low-income rural areas such as Devon which will be the last to pick their way out of the economic crisis, only the locally focused third sector such as Pathfinder can really deliver.
"I would urge a review of the supply chain and reconsideration of the tail-end funding model."
Harvey told the Guardian that small companies and voluntary groups cannot wait to be paid, unlike large companies such as A4e.
"The small guys can't possibly carry the risk," Harvey said. "Round here they are usually not-for-profit social enterprises who don't have access to big pools of capital. They need paying as they go because they just haven't got the cash flow to cope otherwise."
"It is in everybody's interests that the Work Programme should succeed. But they risk undermining the delivery of it if making the payments after the event causes the small frontline providers to go out of business. The prime contractors are chosen on the basis that they are big enough to have access to capital and have a viable business model. They wouldn't be able to deliver it, certainly in rural areas, themselves. So they need the locally based frontline providers and risk driving them out of business if they don't carry this risk instead of passing it onto the small providers."
Liam Byrne, the shadow work and pensions secretary, who will seek to raise the state of the work programme in the Commons on Monday, released figures showing the proportion of people coming off welfare and into work has halved in the last year.
He said: "The Work Programme is now in serious trouble. It is getting just half as many long-term unemployed people into work as last year. There are now allegations of fraud and now we learn there are concerns about the contracts at the highest levels of government.
"The DWP [Department for Work and Pensions] cannot keep its information about its contractors' performance secret any longer. These contracts are worth billions of pounds of public money and worries about what is going on are now widespread."
Byrne said the figures also suggested that unemployed people designated as difficult to place are not being referred by the Work Programme as much as expected. Employment and support allowance and ex-incapacity benefit referrals are at 6.5% of the total as opposed to 34 % expected under the government's estimates.
He said he will be asking the government to publish information on the contractor's performance, and ask the public accounts committee to investigate the nature of the Work Programme contracts. He also said he would be convening a meeting of charities and businesses to get to the bottom of what is going on with the programme.
The DWP has persistently said the work programme funding model is effective and will not disadvantage smaller welfare-to-work providers – often charities – that are given contracts by the large prime contractors.
The scheme has seen the DWP engage a group of 30 prime contractors to find work for the unemployed. They are paid under a system of payments by results with the government handing over fees when the unemployed person has been in work for six months or more. The fee is gradated according to how long the person has been unemployed, or if they have a disability, making them more difficult to find work for. The prime contractors are also expected by the DWP to subcontract some of the work to smaller social enterprises or charities.
The work programme is separate from the much smaller work experience programme that has attracted controversy over whether it is compulsory. Grayling is mounting a sustained counterattack against the work experience programme's critics, including against the leftwing activists leading the criticism of the scheme.