Jobless multinationals: welfare-to-work is becoming a globalised business

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Walk into a state benefits or employment office almost anywhere in the industrialised world these days and there is a good chance of hearing English spoken.

It will be in a variety of accents – Dutch, Australian, English itself or American. Yet the voices will not be those of the people claiming jobless payments but of people touting for business – the contract to move those very claimants off benefits and into work. In the space of little more than three years, these “welfare-to-work” programmes have become an international business.

Faced with ageing populations, governments are keen to boost the employment rate among those of working age – and evidence has piled up from around the world that they can do something about it.

In the US, Australia, the UK and elsewhere, it has been demonstrated that welfare-to-work does indeed work: that investing in active labour market programmes pays for itself as the benefit bill falls and people, once in a job, pay taxes. There is even some evidence that private and voluntary sector organisations can prove better at running these programmes than state agencies.

So much, then, for the “lump of labour fallacy” – the strongly held belief, particularly in the recessions of the 1970s and early 1980s, that there is only so much work to go around, which would mean that efforts to shift the inactive into work were pointless. A rethink by policymakers as well as economists has brought a big change over the past decade in the way many developed countries think about their welfare states – turning them into active supporters of work rather than passive supporters of inactivity at the taxpayer’s expense.

That is where the private companies come in – as operators in a global market already worth about £3bn ($6bn, €4bn) a year and with the potential to expand rapidly. But as welfare-to-work both privatises and internationalises, can its advantages be sustained, will political support remain adequate and what is the longer-term outlook for the mostly small-scale companies involved?

The Netherlands, Scandinavian countries and the UK can all claim to have pioneered welfare-to-work programmes in the late 1980s. But it was welfare reform in the US in the mid-1990s that really caught the eye of policymakers around the world. Most famously in Wisconsin, and then in other US states, lone mothers on benefit within weeks of having given birth were required to look for work and take it – or face removal of their cash assistance. Time limits were set on how long they could claim.

America’s welfare rolls tumbled 60 per cent from a peak of more than 5m cases to fewer than 2m in less than a decade. Controversy remains over the impact of that. Some former claimants did well. But even advocates of an approach that to European eyes looks decidedly harsh worry about the one in five “floundering families” – lone parents who appear to have no recorded income from either benefits or work.

Whereas European programmes tended to train the unemployed – often expensively and unsuccessfully, for jobs where it turned out there was little real demand – the US approach was “work first”. The important thing was to get people into a job – any job – whether flipping hamburgers, waiting at table or lugging parcels. Dealing often with families where parents and even grandparents had never worked, programmes focused on “soft skills” – getting up and turning up on time, losing weight, looking neat, not swearing at the boss or customers. Skills training could wait.

Many of the US states brought in the private sector to do at least some of the work traditionally carried out by state and county job placement agencies. With that came new forms of contract. While state agencies are funded to process people, private providers such as Maximus, Rescare and America Works could be paid on a “no cure, no pay” basis. The largest payment a company received could be withheld until it had not only got someone into work but also kept them there for a time.

Because they were in the private sector, however, they could take bigger risks over what they did to get people into work: buying them interview clothes or, occasionally, a cheap car so someone could take a job with unsocial hours, for example. If such investments failed, the money spent came off the company’s bottom line rather than being branded a “waste of taxpayers’ money”.

In the US, for all the innovation, the private sector still plays a relatively modest role in welfare to work. But in the wake of the US experiments, Australia and the Netherlands have both contracted out almost their entire welfare-to-work service on similar performance-based contracts, while the UK has taken decidedly more modest steps – about to be expanded – in using the private and voluntary sectors.

Off the back of these experiences, providers from the pioneer countries are taking their expertise to other markets. Australian companies and voluntary providers – Ingeus and Mission Australia – now own or have a stake in welfare-to-work companies in the UK. America’s Maximus has an Australian subsidiary and a contract in Israel.

Rescare, its big US competitor, has just bought Maatwerk, a Dutch company that also operates in Germany, Belgium and Denmark, and has just acquired Biscom, a small British company, as evidence of its desire to enter a UK market where the government advisers are talking of eventually creating a “multi-billion” pound industry.

In turn, British companies such as Work Directions, Working Links and A4e now operate in France, Germany and Israel – as do Agens and Calder, both from the Netherlands. Boosted by European Union structural funds, which require competition for job placement services, companies are advising governments or bidding for work in Poland, Hungary and the Czech Republic. Even some of the not-for-profit enterprises are active abroad, such as the UK’s Shaw Trust in Romania and Australia.

In exporting their model, however, the US operators face some hindrances. “There is a marked difference between the US and much of Europe,” Dan Finn, professor of social policy at Portsmouth University and an employment programme expert, says of the sector. “In the US, the central aim was to reduce the rolls – simply to get the numbers claiming down.” Although the UK, Australia and the Netherlands have moved much more to a work-first approach, much of Europe “still has a stronger sense of social inclusion and the need to build human capital, while the UK, for example, has a strategy to reduce poverty. So it is not enough to claim success simply because lots of people have disappeared and stopped claiming. The sort of outcome seen in the US – where some families appear to have no income – is not one that European countries want.”

But Jason Turner, an architect of the Wisconsin programme and now an international consultant to governments on welfare to work, says the differences between the US and Europe can be overplayed. Many of the techniques needed to get unemployed men and people with disabilities into work – some of the key targets for European programmes – are the same as those needed for the mainly black and Hispanic lone mothers who were the original target in the US, he says. The US operators also now work on placing ex-offenders – “and it doesn’t get much tougher than that”, Mr Turner adds.

As to whether more training is needed to get people into work in some labour markets than others, he says that “is an empirical question” that experience will be able to answer. The question comes more to the fore as the more easily employable leave the benefit rolls and those who remain are harder to help, sometimes because of literacy, mental health or addiction problems.

Indeed, factors other than just taking experience from elsewhere are driving internationalisation. Dick Vink, a Dutch welfare-to-work expert, says that in the countries that have outsourced most – Australia and the Netherlands – the very success of programmes is reducing the numbers to be catered for. In addition, as governments enter a second or third round of contracting, they drive harder bargains. “The margins get tighter, so people look to expand elsewhere,” he says.

But are the private and voluntary sectors so much better at running welfare-to-work than public agencies? “Not necessarily,” Prof Finn says. “Bad contracts lead to bad results, as happened in some parts of the US. So the way the incentives work in the contracts is very important. But government departments are getting better at [specifying their requirements].”

He adds: “Where there has been outsourcing on a really large scale – in Australia and the Netherlands – in the first round the public sector agency was kept as a provider of last resort. After two or three rounds, the performance of the independent sector was such that the public sector agency lost the business.”

Of the private providers, “some of the companies go bust because they don’t do a good job and others grow because they do. These are the ones moving into the international market. It is a market on the cusp. It could be about to get a whole lot bigger.”

Australian pioneers go forth

Entrepreneurs who have made small fortunes from Australia’s welfare-to-work programmes include Therese Rein, the successful working wife of Kevin Rudd, the country’s prime minister, writes Peter Smith.

The former rehabilitation counsellor’s Ingeus group grew into one of Australia’s largest welfare-to-work providers before expanding into the UK, France and Germany. By 2007, Ingeus employed more than 1,300 people from 67 locations and had an annual turnover approaching A$180m (US$169m, £85m, €112m).

Ms Rein (pictured below with her husband) last year sold her Australian operation, which started out specialising in helping people with disabilities, partly to head off accusations of conflicts of interest in the run-up to the general election won by her husband’s Labor party.

Australia became a world leader in the privatisation of welfare-to-work when it began contracting out services just over 10 years ago. The industry initially attracted hundreds of providers, including international groups. Using their experience, Australian companies are now replicating their model overseas.

Michael Hobday, chief executive of MaxNetWork, the Australian wing of Maximus, a US group, says Australia’s reforms have been a huge success. “This industry is strong and viable and that’s why people from the UK and US are knocking on the door. This partnership with the government has moved the employment sector. We have had a lot of success placing the long-term unemployed into work,” he says, noting that Australia’s unemployment rate, which fell to a 30-year low of 4.1 per cent in February, is half what it was 10 years ago.

He describes other countries as years behind Australia. “The US is a hybrid model. It is not centralised, there is no common focus and it is very disjointed. The UK is very behind and I expect them to adopt the Australian system. There is already a lot of interest in our star rating [awarded to providers based on performance and how effectively they find work for the long-term jobless] and our special programmes to assist those with disabilities and from ethnic groups,” he says.

However, Australia has also faced criticism from within, amid allegations of unethical practices inadvertently driven by financial incentives provided by the government and charges that providers were getting rich on the back of the taxpayer.

Changes have been made to discourage providers from making money simply from placing people in short-term jobs. Fees paid by the government have not kept pace with inflation for more than five years. Profitability has dropped and there are complaints that increased oversight of contracts has bogged the system down in bureaucracy.

The original 300 or so providers in a market estimated to be worth some A$2bn a year has shrunk to about 100. “Some small providers are struggling with cash flow and are looking to get out,” Mr Hobday says.

David Thompson, chief executive of Jobs Australia, an industry association, says the business has become much less profitable. Australian groups that have gone abroad, he adds, earn much higher margins from their international operations. “The reform was initially a good one but the system is now choked with regulation. It needs a good working over and the [new] government is looking into it. If it was a car you would take it to the dealer and say you needed a new one.”

But the model, he insists, has been positive. “The idea of setting up a competitive framework that brings providers to account for how they perform, and gives them the flexibility to do what they need to get a result, has been fantastic.”

Britons at the coal face of Ruhr unemployment

Known as “the city of a thousand fires”, Gelsenkirchen in the Ruhr was once Europe’s most important coal-mining centre. It now holds a more melancholy distinction, with its jobless rate of 16 per cent the highest in western Germany, writes Bertrand Benoit.

Yet for A4e, a British company working to place the long-term unemployed in work, the town’s plight has proved an opportunity. What began as a modest pilot project four years ago, with eight staff catering for 220 “clients”, has grown into a fully-fledged business that is spreading across the country.

Last year, A4e opened two offices in the region of Aachen, near the Belgian and Dutch borders, and is about to set up shop in Dortmund. By the end of next month, it should be looking after a total of 1,350 jobseekers. It has also introduced innovations in the world of German job placement, such as its “work-first family” programme, due to kick off next month, which focuses on households whose members have all been unemployed for more than a year.

“The goal remains to go nationwide somewhere down the road,” says Hans-Joachim Elsner, who looks after A4e’s projects in Germany. “Now is the busiest time ever. I basically spend my time preparing tenders and running from labour agency to labour agency.”

Roy Newey, A4e director, thinks the company’s success lies in its core philosophy, which shook some deeply ingrained German beliefs about the causes of long-term unemployment and their remedies. “We are not focusing on the skills training aspect. Training is very expensive and can be a waste of money if the people are not persuaded they can get back to work. Our work-first model focuses instead on supporting people to see themselves back into work.”

The approach, together with A4e’s experience in such markets as Israel and France and its success in placing about half of its clients within six months, made a strong impression on Gelsenkirchen’s labour agency, which refers to the company those jobseekers it fails to place itself.

Despite Germany’s notoriously high rate of long-term unemployment, the country still presents formidable difficulties for private contractors. Mr Elsner says the niche has attracted a large number of competitors, some of them much bigger than A4e. This competition has dragged down the fees the Federal Labour Agency is prepared to pay and there is growing public suspicion about the privatisation of public services.

Paradoxically, Germany’s robust labour market recovery and fast-falling jobless rate may also be having a negative impact on contractors’ success. More long-term jobseekers are placed directly by the labour agency and A4e and its competitors are left to deal with only the most difficult cases.

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