Stage 2: Strategic decisions -
Choose a funding channel
Establish specific purpose
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Choose a funding channel
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Define contract scale
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Join up funding streams
Which channels can you use?
You must choose one of the following three funding channels for
the programme:[Footnote 1]
Procurement: used to acquire goods, works or
services in line with the government’s policy of value for money –
“the optimum combination of whole-life cost and quality (or fitness
for purpose) to meet the user’s requirement” – normally achieved
through competition
Grant: used to fund an activity of a recipient
because that activity is in broad alignment with the government’s
objectives. There is a continuum of uses of grant, although grants
in general are subject to a more detailed level of control than
grant-in-aid. At one end of the continuum, your organisation may
wish to give money to a TSO because it wishes to offer financial
support for specified aspects of the TSO’s expenditure. At the
other, your organisation may wish to give a grant to a TSO in
return for which the TSO must deliver services as specified by your
organisation [Footnote 2] . Project grants of this
kind, which are given to support the provision of specific
services, will need to be treated as a ‘restricted fund’ in the
TSO’s accounts; i.e. may only be used for defined purposes.
Grant-in-aid: a payment by a public sector funder
(normally referred to as the “sponsor department”) to finance all
or part of the costs of the body in receipt of the grant-in-aid.
Grant-in-aid is paid where the government has decided, subject to
parliamentary controls, that the recipient body should operate at
arm's length. The recipient body will have activities which are in
close alignment with the government’s objectives and its
relationship with government will be characterised by a high level
of trust, often over the long term. Funding to a TSO given by way
of grant-in-aid will form income to the unrestricted funds of the
organisation, because it is for the support of the TSO’s overall
activities, not any specific project. The TSO may be committing to
deliver certain outcomes or improved services to qualify for the
funding, but with grant-in-aid you are not imposing restrictions on
how the funds can be spent.
The decision whether to pay a grant or to provide grant-in-aid
depends primarily on the level of detailed control which a
department is required, or wishes, to exercise over the related
expenditure. Grant payments are subject to a more detailed level of
control than grants-in-aid [Footnote
3] . In practice, there is some overlap between the three
funding channels. The following framework is designed to help you
make an appropriate decision.
Procurement or grant/grant-in-aid
The first choice you need to make is between on the one hand
procurement and on the other grant or grant-in-aid. Working through
the following issues – state of the market and funding mode – will
help you to reach a view on this.
State of the market
State of the existing market
There may be an existing market for what you require that is
highly competitive, with many potential providers with high levels
of capacity. At the other extreme, there could be no real market –
perhaps a single organisation with limited capacity, or even no
(known) potential provider. Generally, the more competitive the
existing market, the more likely it is you should use
procurement.
Government’s policy for the future state of the
market
A highly competitive market gives you a choice of provider; this
is likely to lead to greater, economy, efficiency and effectiveness
in your programme. Competition is also important in the achievement
of value for money. In the absence of such a market, you may decide
to adopt financial and other policies designed to encourage a
broader range of better suppliers to enter the relevant market.
This could imply, for example, a grant or grant-in-aid to one or
more organisations to develop their capacity and hence begin to
build the market (‘market making’). However, you would need to be
sure this was not a state aid [see Establish
specific purpose].
Funding mode
Establish which of the following three ‘modes’ your programme is
in:
- Service/project financing: funding a
particular service (ongoing) or project (time limited) that will
contribute to government objectives. Procurement will most often be
appropriate in this mode
- Development funding: developing a new
organisation, or the capacity of an existing organisation, that
will contribute to government objectives. (This may be linked to
the notion of market making, discussed above.) This mode would be
appropriate for the use of grant or grant-in-aid
- Strategic funding: supporting organisations
that are of strategic importance in that they facilitate the
achievement of more specific government objectives. This mode would
be appropriate for the use of grant or grant-in-aid.
The mode should be clear from the objectives for the
programme.
Sometimes, you may find that your programme covers more than one
mode. For example, you may wish to use:
- Development funding: for instance, to enable organisations to
build and equip training facilities to help unemployed people back
into work
- Service/project financing: for instance, to pay the same
organisations to provide those unemployed people with that
training.
In such cases, you need to decide whether you wish to finance
the different modes within the one funding model or whether you
should be running separate programmes for each mode. In
doing so, you must take account of proportionality: if you
establish two separate programmes, you will impose additional
administrative burdens on government and the provider.
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.
Grant or grant-in-aid: the role of trust
If you decide that either grant or
grant-in-aid is appropriate for your programme, you must then
choose between grant and grant-in-aid [Footnote
4]. The main issues are the scale and duration of the funding,
and the level of trust between government and the potential
provider. In some cases, government bodies have strategic
partnerships with a small number of suppliers. For TSOs in this
position, there is often a high degree of longstanding trust
between government and the TSO. This level of trust could imply the
use of grant-in-aid, rather than grant. You would need to be sure
this was not a state aid [see Establish
specific purpose]. However, remember that any grant funding
involves the government giving funds to a TSO which are entrusted
to the trustees or board members of the TSO – it is always a
relationship of trust rather than a contract. The difference is
simply between entrusting the TSO with funding for a specific
project (grant) or towards its overall work (grant-in-aid).
Check the appropriation again
You must check that the money that Parliament has allocated to
your programme is in the accounting category that matches the
channel you have chosen. [see Establish
specific purpose]. For example, if you intend to use the grant
channel, the money should be allocated to the grant category. If
you are unsure about this, consult your organisation’s finance
department.
Notes
- [back from footnote 1] For more
information on the different channels and weighing up which one to
use, see Annex D: Note on channels.
Chapters 9 and 22 of Government
Accounting provides further information on the definitions of
grant, grant-in-aid and procurement.
- [back from footnote 2] In this
situation, the term ?grant? may be used to refer to the funding
agreement, but in legal and practical terms the funding agreement
will be indistinguishable from a contract drawn up following a
procurement process.
- [back from footnote 3] Section 9 of
Government Accounting provides more guidance.
- [back from footnote 4] See section 9 of
Government Accounting for more on the distinction between grant and
grant-in-aid.