This page is part of our decision support tool.
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].
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 orgrant-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.
- 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.
- 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.
- Section 9 of Government Accounting provides more guidance.
- See section 9 of Government Accounting for more on the distinction between grant and grant-in-aid.