Annex E: Examples of funding models
Annex A | Annex B | Annex C
| Annex D | Annex E
Generic funding model 1: ‘straightforward procurement’
| Key
features |
| Channel |
Procurement |
| Intermediaries |
No |
| Degree of competition |
Open |
| Duration of contract |
Three years |
| Payment formula |
Linked to outputs/outcomes
Mainly in arrears |
| Monitoring and evaluation |
Focus on outputs/outcomes
Inspection (risk-based) |
Illustrative scenario
Strategic decisions
The objectives of your programme are clearly specified as
outcomes or outputs. There are no particular social factors
associated with these objectives but Ministers want the programme
to have demonstrable environmental benefits in addition to its core
purpose. The programme is likely to take around five years to
achieve its objectives. It is a national programme.
You establish that the programme does not qualify as a state
aid. There are many potential providers. Collectively, these
potential providers have a high level of capacity. There is no
particular provider or group of providers with which you have a
relationship that is relevant to the achievement of the purpose of
your programme. You choose procurement as the funding channel.
Suppliers will need to demonstrate they can respond flexibly to
the needs of a diverse customer base – which will include those
from harder-to-reach communities that may be distrustful of
statutory services. You decide the programme will be more
effectively delivered through smaller lots, rather than through an
aggregated programme of national delivery, and work to ensure a
level playing field for all providers, by ensuring local
organisations, that may have particular expertise in this area, are
also fully aware of contract opportunities. Most risks that arise
at the provider level are controlled by the provider and are,
therefore, to be allocated to the provider.
There is no strong case at present for an intermediary.
Tactical decisions
You decide on open competition using the procurement channel.
You make the environmental issues, which are linked to the subject
of the contract, clear in the tender documents. You offer initial
three-year contracts. It is down to the organisations that bid to
include their full costs in their pricings. In selecting the
winning organisations, you will want to check that these pricings
are sustainable. However, this is not a major issue for you because
of the competitive provider market and because you have structured
the contract to prevent your organisation from becoming locked into
the funding relationship if the service fails to deliver.
You explain in the tender documents that payment will be on the
basis of the provider’s achievement of programme outcomes and
outputs. You also explain that you will consider some initial
payments in advance, depending on needs of the provider and the
other criteria for deciding on the funding formula [Footnote 1].
Monitoring will focus on the achievement of agreed outcomes and
outputs, so it can be closely integrated into the payment system.
But you will also carry out risk-based inspections to assess wider
quality issues. In addition, you will require providers to send you
information on the total volumes of clients, analysed by age,
gender, ethnicity, as this is directly linked to the successful
delivery of the programme, and so that you can report to ministers
and Parliament on these issues.
Finally, you decide that you will design a separate funding
model for the national evaluation of the programme.
Generic funding model 2: ‘procurement with demand risk’
| Key
features |
| Channel |
Procurement |
| Intermediaries |
No |
| Degree of competition |
Open |
| Duration of award |
Three years, with annual review |
| Payment formula |
Minimum payment guarantees
Other payments linked to outputs/outcomes |
| Monitoring and evaluation |
Focus on outputs/outcomes
Inspection (risk-based) |
Illustrative scenario
Strategic decisions
The strategic issues in model 2 are the same as those in model
1, with one exception. In the risk meeting, you identify that
overall demand for the programme may fluctuate greatly.
Furthermore, your organisation can strongly influence the flow of
work to individual providers but cannot forecast this with
confidence. This uncertainty could place an unacceptable demand
risk on providers, which could deter good, potential providers from
taking part in the programme and be unfair to providers that did
take part. The risk meeting decides, therefore, that the government
as funder must carry this demand risk.
Tactical decisions
The tactical issues in model 2 are the same as those in model 1,
except for the need to design a mechanism to allocate the demand
risk to the funder. At the risk meeting, you decide to how manage
this risk: you will maintain the element of ‘payment-by-results’
used in model 1; but you will adjust it to give a minimum payment
guarantee to providers. This makes an annual review appropriate,
because the minimum payment guaranteed must be proportionate to
actual demand.
Generic funding model 3: ‘procurement with investment in
capacity’
| Key
features |
| Channel |
Procurement |
| Intermediaries |
No |
| Degree of competition |
Open |
| Duration of award |
Up to 3 years |
| Payment formula |
Payment in stages for development
funding
Payments for services linked to outputs/outcomes |
| Monitoring and evaluation |
Focus on outputs/outcomes
Inspection (risk-based) |
Illustrative scenario
Strategic decisions
The strategic issues in model 3 are the same as those in model 1
with one exception: in the risk meeting, you identify that, to
deliver the programme, many providers will need to commission new
facilities, such as buildings and ICT systems, before they can
start to receive actual clients. Many of the kinds of
potential providers that you have identified as desirable
for the success of the programme do not have the internal capacity
to do this under ‘payment by results’. They would need to be
supported to develop those facilities.
You consider dealing with this by establishing two programmes,
with separate funding models: one for the development of the
facilities, the other for ongoing delivery. You decide that this
would be disproportionate. You therefore decide on a single
programme with a single financial model but with two
elements.
It is important to bear in mind that supplying capacity-building
funding and procuring services from the same organisation may give
rise to conflict with EU state aid rules (see Annex C) and/or procurement rules against
discrimination in favour of particular suppliers. You should seek
specialist advice. In particular, you will need some form of
guarantee that the resource supplied for capacity-building will be
used for your desired objectives rather than other purposes the
recipient may have.
Tactical decisions
The tactical issues in model 3 are the same as those in model 1,
except for the need to design a mechanism to accommodate the
strategic decision about supporting development of facilities. You
explain in the tender documents that the programme has two separate
elements and ask organisations to price these separately in their
bids [Footnote 2].
Payment in the development stage will be on the basis of completion
of agreed stages in the work.
Note
In this scenario, if capital investment is required, the
appropriate model could be a prime contractor providing the
investment, plus either separate contracts for services or
sub-contracting opportunities offered by the prime
contractor.
Generic funding model 4: ‘competitive grant’
| Key
features |
| Channel |
Grant |
| Intermediaries |
No |
| Degree of competition |
Open |
| Duration of award |
Three years, with annual review |
| Payment formula |
Linked to activities or
outputs/outcomes
Advance or arrears as appropriate |
| Monitoring and evaluation |
Activities and outputs/outcomes
Inspection (risk-based) |
Illustrative scenario
Strategic decisions
The objectives of your programme are quite complex but, with
effort, they can be expressed as outcomes or outputs. However, you
would like to test them in delivery. They include social and
environmental factors. The programme is likely to take around 10
years to achieve its objectives. It is a national programme.
You establish that the programme does not qualify as a state
aid. There are a fair number of potential providers within the
third sector and, collectively, these providers have a reasonable
level of capacity. But this is not a fully functioning market. One
of your development objectives is to build the strength of the
supplier base. You choose grant as the financial channel.
In a risk meeting for the programme, the main risk that you
identify at national level is that no providers are well developed
at this stage to deliver your whole programme. You therefore decide
to deliver the programme through a series of local organisations.
Most risks that arise at the provider level are controlled by the
provider and are, therefore, to be allocated to the provider.
There is no obvious intermediary at present, however, you wish
to keep this option open for the future.
Tactical decisions
You decide on a two-stage competition for local awards
among potential providers. This allows any organisation to take
part in a fair process and allows you to identity those with
greatest capacity. You offer initial three-year awards, to be
renewed annually. The costing process is transparent between you
and potential providers, ensuring that both parties are content
that appropriate central administrative costs are covered.
You decide to make payments quarterly in advance, based on
anticipated activities. However, in the grant documents, you
indicate that grant funding on these lines will only be provided
for a maximum of a certain number of years, and that in the long
term you may wish to switch to a procurement model of funding, with
payment by outcomes or outputs, made in arrears.
Monitoring will focus on both the completion of activities and
the achievement of agreed outcomes and outputs. This will allow you
and providers to test the validity of the output and outcome
measures in delivery, and also means that monitoring can be closely
integrated into the payment system. But you will also carry out
risk-based inspections to assess wider quality issues. In addition,
you will require providers to send you information on the total
volumes of clients and on their ethnic origins, so that you can
report to ministers and Parliament on these issues.
Generic funding model 5: ‘allocated grant’
| Key
features |
| Channel |
Grant |
| Intermediaries |
Yes |
| Degree of competition |
Allocation |
| Duration of award |
One year, with indicative figures for
next two years |
| Payment formula |
Linked to related programmes
Linked to activities and outputs/outcomes
Advance or arrears as appropriate |
| Monitoring and evaluation |
Activities and outputs/outcomes
Inspection (risk-based) |
Illustrative scenario
Strategic decisions
The programme has a balance of both service and development
objectives. The service objectives are quite complex, but,
with effort, they can be expressed reasonably precisely as outcomes
or outputs. However, you would like to test these in delivery. They
include social and environmental factors. The development
objectives include extending the range of services for the future
and building other capacity: they are less easy to define in terms
of outputs and outcomes. The programme is likely to take around 10
years to achieve its objectives. It is a national programme.
You establish that the programme does not qualify as a state
aid. This is not a functioning market. Providers are localised and
lack capacity. In any single area, there is either one or a small
number of potential providers. In areas where there is more than
one provider, you would like them to work in partnership to
maximise capacity. Collectively, the sector shares the programme’s
objectives and there is a good level of understanding between the
sector and government about the issues involved. You choose grant
as the funding channel.
In a risk meeting for the programme, the main risk that you
identify is that the sector is underdeveloped at this stage to
deliver your programme. You therefore decide to deliver the
programme through a series of organisations. Those organisations
that have the most capacity will be financed to work to develop the
capacity of other organisations and the sector as a whole. You will
finance this as part of their grant. Most risks that arise at the
provider level are controlled by the provider and are, therefore,
to be allocated to the provider.
You establish that many local authorities finance local
organisations in their area to undertake activities that are
similar to those of your programme. They do this under another
programme that is run by another government funder (the ‘existing
programme’). Those authorities are also well placed to understand
the needs in their area and the capacity of local organisations to
address them. You therefore decide to deliver your programme
through the existing programme. This will also help those local
authorities to join up the delivery of your programme with that of
the existing programme and of other relevant programmes that they
deliver.
This is a substantial change in the design of your programme.
You therefore decide to hold another risk meeting, where you
establish that there is a risk that local authorities will come
under pressure to use your funds for purposes other than the
objectives of your programme. You therefore agree with the
government body that finances the existing programme that it will
adjust the performance management framework of the existing
programme to include the objectives of your programme. You will
receive regular reports on this.
Tactical decisions
Awards will be made annually, with indicative funding for years
two and three.
Monitoring will focus on both the completion of activities and
the achievement of agreed outcomes and outputs. This will allow you
and authorities to test the validity of the output and outcome
measures in delivery. It also means that monitoring can be closely
integrated into the payment system. But you will also carry out
risk-based inspections of the providers to assess wider quality
issues. In addition, you will require local authorities to send you
information on the total volumes of clients and on their ethnic
origins, so that you can report to ministers and Parliament on
these issues.
Generic funding model 6: ‘allocated grant-in-aid’
| Key
features |
| Channel |
Grant-in-aid |
| Intermediaries |
No |
| Degree of competition |
Allocation |
| Duration of award |
Five years, with annual reviews
linked to monitoring |
| Payment formula |
Linked to activities
Advance |
| Monitoring and evaluation |
Annual monitoring of activities
Quinquennial review |
Illustrative scenario
Strategic decisions
The programme has mainly strategic objectives. These can be
expressed reasonably precisely as outcomes or outputs. They include
social and environmental factors. The strategic objectives
will be ongoing but progress on particular fronts can be measured.
It is a national programme.
You establish that the programme does not qualify as a state
aid. This is not a functioning market: there is limited capacity in
the public and third sectors to deliver the programme. You wish to
develop capacity in the third sector for this task. To maximise
economies of scale and the capacity on the provider side to deliver
the objectives, you are seeking only one provider at this stage.
But its strategic role will be to strengthen certain capacity
within the sector as a whole. There is one highly respected
provider in the third sector with which you have a long-standing
and trustful relationship. You choose grant-in-aid as the funding
channel.
In a risk meeting for the programme, the main risk that you
identify at national level is that the provider will be in a
monopoly position and so may become inefficient and lack the
incentive to develop other capacity. You agree that you can take
some comfort from the degree of trust between you and the provider
and from its values. However, you will need to manage the risk
through the monitoring scheme. Most risks that arise at the
provider level are controlled by the provider and are, therefore,
to be allocated to the provider.
There is no case for an intermediary at present. You establish
that the provider receives another grant from another government
funder and you agree with the other government body to align
conditions of the grant as closely as possible.
Tactical decisions
The award process is allocation. You decide to make the award
for five years with annual reviews as part of the monitoring
process.
The costing process is transparent between you and the provider.
This ensures that both parties are content that appropriate central
administrative costs are included.
You decide to pay on the basis of planned activities and three
months in advance.
Monitoring will focus on the completion of activities, the
achievement of agreed outcomes and outputs and on efficiency in the
use of the grant. You ask for and are given observer status on the
board of trustees. You review the provider’s effectiveness, economy
and efficiency in its use of the funding once a year, in a fairly
light touch way. You decide to hold a full quinquennial review at
the end of the first five years of funding.
Notes
- [back from footnote 1] Please see HM
Treasury’s ‘Guidance to funders’ for more
details on payment in advance.
- [back from footnote 2] You could decide
to to make the funding for the development of facilities a grant,
for capacity-building, rather than using procurement
processes.