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National Audit Office Conference

Working with the Third Sector – 30 June 2005

Summary of conference themes

The third sector, sometimes known as the voluntary and community sector, has a long history of involvement in UK public services. Sir John Bourn, Comptroller and Auditor General, pointed out in his opening address to the conference that almost every important social development in the 19th century had its origins in the third sector. During parts of the 20th century, the state had been seen as the main provider, but today, successful partnerships between the sector and the state were central to public services and must be based on trust, Sir John added.

Good funding practices promote trust, but improving the funding relationship between the third sector and public funders is a complex task. The sheer number of public funding streams, particularly at local level, is a major barrier to improving funding practices, delegates at the NAO conference heard. Thousands of decision-makers, in local authorities, health trusts, Regional Development Agencies, government departments and many other public bodies, are involved in awarding grants and negotiating contracts with third sector organisations (TSOs). Most of this army of funders need to improve their practices; some have changed their approach in recent years, but not enough have done so to make a significant difference to the third sector.

Barnardo’s is one of the most well-known charities in the UK, and a major organisation with an annual income of £193 million in 2004. It provides a range of services for vulnerable children and young people, including counselling, emergency accommodation for homeless young people and support for young carers. But even such a large and well-known organisation struggles to manage a complex and bureaucratic network of public funding, chief executive Roger Singleton told the conference.

Barnardo’s income includes £60 million from local authorities across the UK and £50 million from 40 different central government sources. Managing these multiple funding streams involves thousands of negotiations and may mean up to 12 separate funds have to be brought together to pay for a single project, Roger Singleton said. "How many pence in each pound is left when the funding gets to the front line?" he asked.

The Barnardo’s experience is one example of widespread problems in third sector funding, which were exposed by the NAO report, ‘Working with the Third Sector’ published at the conference. Statutory funding is vital to third sector organisations; as NCVO chief executive Stuart Etherington pointed out at the conference, it accounted for £7.7 billion or 37 per cent of the sector’s income in the financial year 2001-02 (the most recent year for which figures are available). The government has declared its commitment to increasing third sector organisations’ involvement in public services, recognising their expertise, ability to innovate and their strong connections with difficult client groups. But too often, poor funding practices such as short-term contracting, failure to pay overhead costs – known as ‘full cost recovery’ - and excessive monitoring interfere with their work.

A Treasury review in 2002 examined the relationship between government and the sector. It made a series of recommendations to government and the sector, including 14 related to funding. The NAO report looked at government departments’ progress on implementing these recommendations. It found that despite progress on some aspects of funding – funding information and application processes have been improved, and departments are generally more willing to make payments to third sector organisations in advance of expenditure – much remains to be done. Short-term funding and lack of full cost recovery are particularly knotty problems. At the conference, the chief executive of the Association of Chief Executives of Voluntary Organisations, Stephen Bubb, said more than 90 per cent of his members relied mainly on funding for one year or less, while 36 per cent of ACEVO members had closed services because they had been unable to secure full cost recovery.

The NAO report showed that good funding practice tends to be diluted along the ‘funding chain’ from central government to local funding decisions. Inconsistency in local funding practices is also a problem for the sector. Most third sector organisations draw funds from multiple public sources and have to deal with widely varying approaches to issues such as reimbursing overhead costs. Each funder usually has its own way of monitoring the results of recipients’ work, so a single TSO with multiple funders will have to report back on its work to each funder individually.

Several conference speakers described the difficulties of dealing with multiple funders. Helen Dent, chief executive of the Family Welfare Association, brings together over 300 funding streams to make up her annual budget of £13 million. Each funding stream required separate accountability, she said, calling for government to provide incentives to funders to work together. Elsewhere in the conference programme, British Red Cross strategy director Helen Shirley-Quirk revealed that some public funders did not even provide a written contract. With more than 240 contracts for emergency response, first aid training and care services, Red Cross staff had to spend much time and effort chasing public funding, she said.

However, work is under way to improve funding practices, particularly at local level. The Home Office, responsible for voluntary and community sector strategy in central government, recognizes the need to influence the behaviour of a large number of organisations which are often a long way from Whitehall. The Home Office has brought forward proposals for a new ‘Compact Plus’ scheme (described in the NAO report), described by Active Communities Director Jitinder Kohli, which it hopes will encourage more widespread adoption of good funding practices. The Treasury works with government departments and on local government reform, to identify, spread and celebrate best practice, public services director Anita Charlesworth told the conference.

Meanwhile, the Audit Commission, the NAO’s counterpart for local government audit, plans to examine local authorities’ funding of the third sector in the near future. And some changes to the structure of local government responsibilities could bring improvements in its relationship with the sector. Mike More, chief executive of Suffolk County Council, emphasised the importance of "starting from outcomes rather than funding". Local Area Agreements, a new co-ordinating mechanism which has been pilot-tested in 21 local authority areas, including Suffolk, could help to "pull together the patchwork" of funding streams, he said.

Several speakers acknowledged that despite widespread poor practice, some funders had already made changes for the better. Helen Dent said her funders now recognized that an extra 10 percent to cover overheads should be the norm. There was better advice available when applying for grants, and the Compact was "full of good intentions," she said.

Some speakers called for funding to be integrated into the design of policy. funders should consider the ultimate purpose of contracts or grants to the third sector; funding to build an organisation was not the same as paying for services, independent consultant Julia Unwin said. Government funders should encourage choice and contestability in public services, avoid building a few monolithic organisations" and remember the sector’s independence, she added. The risk of doing otherwise was the development of a "captured" sector, lacking the ability to innovate and "surrounded by massive barriers to entry".

Simon Courage of the Office for Public Management also linked funding and policy intentions, describing a ‘decision support tool’ for funders which OPM is developing under contract to NAO. This framework will help funders to ensure that the design of funding programmes – such as when to make advance payments, how to reimburse overhead costs and how long to supply funding – is in line with the policy’s ultimate objectives.

The upshot of these changes is a changed environment for the third sector, some felt. In a more competitive, higher-risk funding environment, third sector chief executives must be multi-skilled entrepreneurs, Kevin Curley of the National Association of Councils for Voluntary Service (NACVS) told the conference. Charities may even be created specifically to deliver public services, so long as they can demonstrate independence from public authorities, said Rosie Chapman, executive director of policy and effectiveness at the Charity Commission.

NAO plans further work on third sector funding, which will examine in greater detail the issues raised by the report and conference. Further details of this work will be available in the next few months.

 

How to get better funding – further tips from speakers at the NAO conference

Speakers at the NAO conference emphasized the need for both parties in the funding relationship – funders and TSO recipients – to take action to improve. The National Council for Voluntary Organisations (NCVO), which was NAO’s research partner for the Working with the Third Sector report, published its own report, Shared aspirations: the role of the voluntary and community sector in improving funding relationships with government on 30 June. Various speakers said that:

Both TSOs and funders should:

In addition, TSOs should:

Government should: