Ex-offenders trying to turn their lives around face a bleak future, a probation inspector has warned, as ambitious government plans to boost the role of charities and volunteers in the probation service have failed to materialise.

Dame Glenys Stacey, the chief inspector of probation, described the low involvement of non-profits, charities and voluntary groups in the rehabilitation and supervision of ex-offenders as “an exasperating situation”.

The probation sector in England and Wales was overhauled in 2014 by the then justice secretary, Chris Grayling, who broke up existing probation trusts and replaced them with a public sector service dealing with high-risk offenders and 21 privately run companies that manage low-to-medium risk offenders.

In a report on “probation supply chains”, or the outsourcing of services to a range of providers, the Inspectorate of Probation said Ministry of Justice (MoJ) press releases around 2013 to 2014 “gave the impression” that there would be a wide array of organisations involved in the delivery of probation services. But the inspectorate found that “almost four years on, this expectation has not been realised”.

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“It seems that the third sector is less involved than ever in probation services, despite its best efforts,” Stacey said.

Grayling’s hopes that third-sector organisations would wholly run some of the community rehabilitation companies (CRCs) were disappointed when the charities and voluntary groups were unable to bid because of the financial guarantees demanded by the government. However, it was still expected that third-sector organisations would provide specialist support – such as bespoke services for women, drug and alcohol abuse or gang membership – through sub-contracts.

But most CRCs have not sub-contracted services to the third-sector owing to their own “financial instability”, the inspectorate found, and many of the contracts in place before the reforms were not renewed.

The CRCs told inspectors that the payment-by-results model pushed by Grayling, by which companies are paid depending on whether or not they hit re-offending targets and also face penalties when contract targets are not met, was at the root of their financial insecurity.

Among the specialist services lacking are those relating to gang membership, financial management, discriminatory attitudes and accommodation, the inspectorate found.

And when a specialist service is provided, the feedback from ex-offenders was positive, with the assistance making a difference in the lives of two-thirds of offenders, the report said.

“It is an exasperating situation. Third-sector providers remain eager to work in the sector, and we found the quality of their work reasonable overall,” Stacey said. “As things stand, the future looks bleak for some organisations, and particularly for those individuals who could benefit so much from the services they can provide.”

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The reforms were a cornerstone of Grayling’s time heading the MoJ.

An employee of a charity that works with ex-offenders, speaking anonymously, told the Guardian: “The findings in this report are not surprising. While there was undoubtedly a genuine desire for diverse supply chains at the design phase of Transforming Rehabilitation, innovation has been hamstrung by overly prescriptive contract targets which carry heavy penalties but do little to promote desistance [reducing offending], if anything diverting resources away from it.

“A healthy supply chain with the specialist expertise to support a wide spectrum of needs will invariably cost more than doing everything ‘in house’, yet the drive for efficiencies that underpins Transforming Rehabilitation drastically limits CRCs’ capacity to commission the range of services that their clients require.”

The prisons and probation minister, Rory Stewart, said: “As Dame Glenys highlights in this insightful report, there have been challenges facing CRCs and involving the voluntary sector in the delivery of probation services.

“We now have a more diverse range of probation providers than ever before, and I want to see the voluntary sector play a key role in this. The expertise and commitment of third sector organisations has a crucial part to play in reforming offenders and ultimately keeping the public safe.

“I have been absolutely clear that I want probation to work better and there is much more to be done – particularly on getting the basics right – and we are working closely with providers to make sure this happens.”