Jim Armitage: Mandarins may have been outwitted on the probation service deal

Outlook Justice secretary Chris Grayling used emotive language to demand G4S and Serco "purge themselves" after the electronic-tagging scandal. The companies should, he declared, undergo "corporate renewal" before being considered for new government contracts.

Quite what he meant in yesterday's Financial Times beyond the existing government review into the duo remains unclear. Was he saying these two titans of outsourcing be banned from bidding for any tenders in Whitehall until this spiritual purging and renewal is complete? If so, will Serco have to pull out of its bidding for the Ministry of Defence procurement programme? Will G4S have to hand in the keys on its school caretaking gigs, return its immigration staff uniforms to the UK Border Agency? And how can they prove they are suitably cleansed?

Mr Grayling's department was yesterday unable to clarify his, or the Government's position, but it seems most likely he was only referring to contracts under his remit at the Ministry of Justice.

However, this is a big deal in itself, as the department is galloping down the route of privatising the probation service in a series of tenders for which both companies are likely front-runners. And who is among those giving it advice on how to frame the "payment-by-results" model for such a privatised service? Why, Serco and G4S, of course.

After taking soundings from the two firms, among others, the MoJ has proposed a bonus structure which the Social Market Foundation think-tank recently calculated would actually put contractors in danger of losing money if they try to improve levels of reoffending. How? Because the success payments only kick in when the provider can prove reoffending plunged by a whopping 4 per cent. Such an impressive result would, the think-tank calculated, involve so much investment by the contractors in extra monitoring, counselling and the like, that they are likely not to bother.

On the flipside, financial punishments for overseeing a rise in reoffending only kick in when it gets 3 per cent worse. In other words, the system offers the biggest profit to those who cut costs and perform badly.

Performance-related pay is clearly key to government outsourcing, but one wonders whether the mandarins framing the probation service scheme are being outwitted by the private sector once again.