This page is part of our successful commissioning toolkit.

Grant is an extremely useful way for a public body to fund a third sector organisation (TSO) for activity that is in line with one or more of the public body’s objectives. For example, a council that is concerned about the poor wellbeing of one of the communities in its area may give a grant to a TSO that is dedicated to raising the wellbeing of that community.

There is some confusion about when grant can and cannot be used. Here we explain the main considerations.

You can use grant if the following three pre-conditions are met:

Legal Power

You need to make sure that you have the legal power to make a grant for the purpose you envisage. This type of power is one of the types of powers discussed earlier under Clarifying your ability to intervene: Legal power. The power to make grants may be in specific terms, such as ‘a council may make grants for the improvement of its local environment’. Or it may be more general, such as ‘the agency may make grants for the improvement of well being’. If you’re unsure, check with your legal manager that you have the power you seek.

State Aid

European Union (EU) rules do not permit any member state to provide government funding (‘state aid’) that distorts, or threatens to distort, market competition within the EU, except in certain permitted circumstances. Any grant you propose to make should not contravene EU rules on state aid. To be classed as a state aid, a grant would need to satisfy all of the following four criteria:

  • It is granted by the state or through state resources;
  • It favours certain undertakings or the production of certain goods;
  • It distorts, or threatens to distort, competition;
  • It has the potential to affect trade within the EU.

There are exceptions. For example, aid to certain industries, aid for small and medium sized enterprises (SMEs), and aid for ‘services of general economic interest’ (SGEI) that cover some public services. The Department for Business, Innovation & Skills has produced guidance on how state aid rules impact on funding for the delivery of public services including SGEI. [Note]. There are financial limits below which funding does not count as state aid.

It is uncommon for grants to TSOs to be affected by state aid rules. But you do need to check. However, take a sensible approach to this, based on managed risk not risk avoidance.  If in doubt, consult the state aid adviser or legal manager in your organisation.

Right ‘kind’ of money

In ‘Assessing needs’, we refer to the need to be clear about your ability to intervene. In particular, whether the block of money you intend to use is the ‘right’ kind of money for the activity you envisage.  For many organisations in the public sector, one of those blocks is the grant block. If you wish to make a grant, your money must be in the grant block. If it is not, your organisation can normally move money from other blocks in your budget into the grant block. You must do this with your finance manager.

Practical example: Preconditions of grant

Ministers ask your public sector organisation to establish a scheme to help people with getting out of debt owed to ‘loan sharks’. The Government wants the scheme up and running quickly to help those affected by the recession.

At a board meeting, one of your non-executive directors suggests a grant-funded scheme. She has seen a similar scheme set up quickly and successfully by another public body that she works with.

A project manager is appointed. He works through the three preconditions of grant. It is clear from the law that set up your organisation that it has the power to make such grants. The legal manager confirms this.

There is an association of small lenders. These are not ‘loan sharks’ as identified by the Government and public. But the association is concerned that any public intervention to deal with loan sharks could inadvertently distort the whole small loans market. They have claimed this would amount to state aid.

Your organisation has not previously had a lot to do with state aid so you seek advice from the Department for Business, Innovation and Skills. From this, it appears that your scheme will not constitute state aid because:

  • it qualifies as a service of general economic interest;
  • although the grant has been awarded without competition, it only compensates the receiving organisation for its reasonable costs in operating the scheme;
  • the value of the grant over three years is less than the maximum threshold allowed.

You seek legal advice that confirms this interpretation.  Although this satisfies the association of small lenders you will keep them involved as a key stakeholder.

It is the budget block the money is in that causes more problems. Your colleagues in finance explain that your organisation has never paid grants. Looking at the ‘Main Estimates’ (the tables showing the amount and blocks in which Parliament has allocated money to your organisation), there is nothing in the column marked ‘Grants’. This seems like a ‘show stopper’ for a while.  But your finance manager and the finance manager from your parent department arrange a meeting with the Treasury. Treasury officials agree to seek to have your organisation’s budget amended (through a ‘Supplementary Estimate’), not by increasing the overall amount but by moving money into the Grants column from elsewhere in the budget.

You may therefore proceed with a grant-making process.


Note: Department for Business, Innovation & Skills: State Aid – Advice

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