City asked to invest in work schemes

Lord Freud, the former investment banker who is minister for welfare reform, goes to the City on Tuesday to sell what he believes is the next big money spinner to follow privatisation and the private finance initiative.

He wants – needs – banks and financiers to provide hundreds of millions of pounds of risk capital to put 2m people on disability benefits and in long-term unemployment through welfare-to-work schemes.

The catch is that the providers will be paid little or nothing for processing those on the schemes. They will be paid largely on outcome – on whether they get people into work and keep them there. The government plans to pay private and voluntary sector providers out of the benefit savings made.

The risk financiers and providers face is that they will get too few people into sustained work for the contracts to be profitable.

As a banker, Lord Freud was involved in privatising British Steel and the water authorities, and in raising financing for Eurotunnel and rescuing the Channel Tunnel rail link. He once said of Eurotunnel he had “sold the market a pup”.

“This is not a pup,” he told the Financial Times on Monday. For Eurotunnel, “both the demand and the cost forecasts were wrong”. For the government’s welfare-to-work drive, “it is for the market to work out what those two things are”. The contracts for the project would be simpler, the operational freedoms greater and the market large – potentially £2bn to £3bn a year.

The City had got behind privatisations “that everyone thought were impossible” in the 1980s and had made PFI and public-private partnerships work. Putting the money upfront into government programmes while being paid from the savings made to the public purse as the outcomes were achieved would simply be “a progression”.

Lord Freud said once this had been seen to work for welfare, similar outcome payments could be applied to rehabilitating offenders; in education and training; and in health and social care. He conceded that City backing was vital for the greatly expanded welfare-to-work programme to succeed – “otherwise we can’t do it on the scale we want”.

When he wrote his original report advocating such an approach for the Labour government, Lord Freud judged it impossible for the Treasury, “even at the tail end of a bubble”, to find the money for such a huge programme. Now that there was clearly no money available, “looking to the outside world [the City] to provide the finance is frankly the only way this revolution will happen”.