House of Commons - Public Accounts

Select Committee on Public Accounts Sixty-Eighth Report

THE DISTRIBUTION OF LOTTERY FUNDS BY THE ENGLISH SPORTS COUNCIL

HANDLING APPLICATIONS AND ASSESSING WHICH PROJECTS TO SUPPORT

5. The Sports Council normally require applicants to contribute a minimum of 35 per cent of the total project cost in partnership funding as a way of demonstrating that there is community support for the project. Applicants are required to set out the sources and amounts of partnership funding and provide supporting documentary evidence. This enables the Sports Council to ensure that the level of support claimed is likely to be forthcoming and to reduce the risk of projects not starting or failing through inadequate financing.[2] We asked the Sports Council how many applications had collapsed on the way to fruition because of the inability of the applicants to raise the 35 per cent of the project cost required as partnership funding and whether this was a big hurdle. The Sports Council replied that it was difficult to know as some applicants might not have got as far as contacting the Sports Council. However, they estimated that fewer than ten per cent of projects failed to raise the full amount of partnership funding.[3]

6. We asked the Department for Culture, Media and Sport what more might be done in this area by the Sports Council and other distributors. The Department told us that, in the policy directions which they had issued in June 1998, they had slightly changed the policy direction about applicants to require the Sports Council to have regard to the ability of different kinds of applicants, or applicants in particular areas, to obtain partnership funding. The Department accepted that some applicants would welcome more help in exploiting the opportunities, such as commercial sponsors, which might be around of which they were not aware.[4]

7. The financial directions issued to the Sports Council by the Secretary of State require them to have effective controls to prevent and detect fraud and to have systems in place to deal effectively with cases of fraud.[5] We asked the Sports Council what features they had built into their distribution arrangements to ensure, as far as possible, that concerns about fraud and conflicts of interest did not arise. They told us that they had built in anti-fraud elements into all stages of the process, from the application coming in through to the monitoring systems.[6] They added that the issue of checks and balances in these processes was crucial in making sure that fraud was minimised. They said there was a clear separation of duties by case officers being checked by senior case officers and they in turn by finance officers.[7]

8. We asked why the detection and prevention of fraud had been operated in such a piecemeal fashion, in that it had taken until September 1995 to segregate duties in the finance area and then until May 1996 before a policy statement on fraud was issued to all staff. The Sports Council told us that the policy statement was a formalisation of what was already in place and that they had been providing fraud awareness seminars for staff all along. The Sports Council stated that, to date, they had experienced no cases of fraud.[8]

9. The Sports Council agreed with the Committee that making applicants aware of these concerns and the fact that they would check up was very important in deterring fraudulent activity. They told us that these issues were clearly set out in the application form and accompanying guidance notes and are followed through in terms of the conditions of grant and monitoring procedures.[9]

10. The policy directions issued by the Secretary of State require the Sports Council to take account of the viability of projects, in particular the availability of revenue for running costs. The application form asks for details of expected income and expenditure before and after completion of the project and how forecast deficits will be funded.[10] However, the National Audit Office's report indicated that the level of financial analysis carried out as part of the application assessment process was not always satisfactory. Questions about the future viability of projects and an applicant's ability to repay loans appeared not to have been asked.[11] The National Audit Office found that in five of the forty one cases that they examined, the Sports Council's case officers had not demonstrated sufficient financial expertise.[12]

11. We therefore asked the Sports Council what they had done to address this weakness. They told us that they had done three things. First, they had, over the last two years, strengthened their training of case officers quite considerably to ensure that they were able and competent to go into the applications in great detail. Secondly, they had put in place a compliance team to make sure that a full financial analysis had been carried out. Thirdly, they had employed consultants to look at the financial viability of larger projects. All three initiatives had addressed issues arising from the National Audit Office's report and had been implemented over the last year or so. The Sports Council confirmed to us that they were satisfied that the financial analysis now undertaken was sufficiently rigorous and that the issues raised by the National Audit Office were being addressed properly.[13] We asked the Sports Council how many accountants they employed. They replied that they had four qualified accountants within the Council as a whole, which employed a total of 435 staff, 145 of whom worked on lottery projects. However, they added that their finance unit was larger than that.[14]

12. Given that capital projects create their own revenue requirements, we asked the Sports Council whether, a few years down the line, people might come back to them and say that they could not afford to do basic repairs to the building and run the facilities. The Sports Council assured us that this was one of the areas they would look very hard at before the capital investment was made. A key part of their assessment procedures was to have discussions with the applicant, local authorities and other organisations to make sure that projects were financially viable. The Sports Council informed us that, from the monitoring reports they had had back, they did not expect to see any problems of this kind.[15]

13. Several of the cases set out in the National Audit Office's report looked set to incur deficits as far as running costs were concerned. We asked the Sports Council who was going to support these organisations and whether they had any policy of limiting the amount of money they would give towards running costs. The Sports Council told us that they had the opportunity, under the financial directions, to provide revenue support for these projects, but in very special circumstances. Any support would be time limited to enable the capital project to be completed. It was the Sports Council's policy not to provide for the running costs of these projects and so far they had not provided revenue support for any of the capital projects they had funded.[16]

14. However, the Sports Council recognised that there may be situations where the organisation they had supported found itself in difficulties. They told us that their experience with grant-in-aid funded projects was that, where this had happened, they had assisted the organisation by providing advice, helped them to attract more members, and may sometimes have suggested changes to the membership of the board of the organisation to make sure they were financially aware. The Sports Council informed us that this had been successful. They said that if they encountered similar circumstances with any of their lottery projects, they would ensure that they provided the same support.[17]

15. The Committee asked the Department for Culture, Media and Sport what policy advice they would give to the Sports Council on this issue and what controls they were going to put in place to ensure that the Sports Council did not start bailing out these projects, with lottery money disappearing in running costs. The Department told us that they would cover this in the regular discussions they had with the Sports Council throughout the year. In their view, it was absolutely critical that the Sports Council should take full account of running costs and future income forecasts before they even considered approving an application for a capital project. The Department further told us that there was nothing in their guidance which provided for the applicant to come back for a revenue grant. Their advice, underlying both their general Accounting Officer stance and the policy and financial directions, was that the Sports Council should respond by giving advice to the organisation on how to enhance their income or reduce their costs, or how to encourage other partners to come in, but that they should not pay any more money. If none of this worked, then closure was the only way forward. The Department confirmed that there was nothing in their guidance or the Accounting Officer rules that would allow the open-ended subsidy of capital projects which fail.[18]

16. Unsuccessful applicants have a right of appeal against the Sports Council's decision if material information contained within the original application was misunderstood, misinterpreted or not taken into account. The appeals process should be well publicised and easily accessible; speedy, with established time limits for action; and keep applicants informed of progress. The National Audit Office found that the Sports Council had removed reference to the appeals procedure from their standard rejection letter because this had resulted in a very high number of appeals, many of which turned out to be groundless, and considerable extra work for the Sports Council.[19] In response to our question as to whether this was fair, the Sports Council stated that referring to the right of appeal in the rejection letter had resulted in a large number of applicants coming back on appeal almost automatically. They considered that providing information on the right to appeal and how to appeal at the application stage was sufficient. The Sports Council added that they gave a full explanation of their reasons for rejecting an application in the rejection letter and that, in their experience, applicants wishing to appeal knew the basis for doing so and what information they must supply.[20]

17. The National Audit Office's report found that the Sports Council's performance in dealing with appeals had not been particularly good; the Sports Council had taken an average of five months to reach a decision and one case had taken almost a year. In August 1997, the Sports Council set a target of eight weeks for dealing with appeals, but this was not met from the beginning. We therefore asked the Sports Council what they were doing to ensure that appeals are dealt with in a timely manner. The Sports Council told us that they had always given priority to the new applications which were coming in rather than those which had gone through the system already; and that they believed that was still the right priority. They acknowledged that they did have some difficulties in meeting the eight week target but told us they were now achieving this.[21]

Conclusions

18. The Sports Council normally require applicants to contribute a minimum of 35 per cent of the total project cost in partnership funding. We recognise the merit of requiring partnership funding, as an indication of community support for the project, but are concerned that projects may collapse because of an inability to raise the required amount. We welcome the Department's change in their policy directions to the Sports Council which now require the Sports Council to have regard to the ability of applicants to obtain partnership funding. We look to the Sports Council to use this extra flexibility to support worthwhile schemes that are struggling to raise the required amount of partnership funding.

19. The National Lottery introduced a substantial new stream of money for the Sports Council and with it the risk of fraud and corruption. It is essential that adequate features are built into the Sports Council's distribution arrangements to ensure, as far as possible, that fraud and conflicts of interest do not arise. Although the Sports Council built anti-fraud measures into each stage of the distribution process, we are concerned that the necessary guidance and training to complement this was introduced in piecemeal fashion over some two years. We recommend that guidance and training on fraud prevention and detection be updated regularly to take account of lessons learned from assessing applications and making grant payments.

20. Making applicants aware of the Sports Council's concerns over fraud would help deter fraudulent activity. We stress the importance of ensuring that the guidelines for applicants and terms and conditions attached to lottery grant offers state categorically that the Sports Council will follow up any cases of suspected fraud.

21. We are concerned that the National Audit Office found that in five of the forty one cases they examined, the Sports Council had not demonstrated sufficient financial expertise. We are deeply concerned that the Sports Council do not possess the expertise required to carry out a rigorous financial appraisal of applications, particularly in connection with the future financial viability of projects. This is fundamental to ensuring that the projects supported by the Sports Council survive to achieve their objectives. We agree with the Department that it is absolutely critical that the Sports Council take full account of running costs and income forecasts before they even consider approving an application for a capital project.

22. We note that the Sports Council have acted to overcome this weakness by providing training for all staff in key financial skills, establishing a compliance team and using consultants to provide financial advice on larger projects. However, we are surprised that the Sports Council employ only four fully qualified accountants within the whole organisation. We look to the Sports Council, and the other bodies responsible for distributing lottery funds, to ensure that they have sufficient financial expertise to carry out a rigorous financial appraisal of applications.

23. We note that several of the projects supported by the Sports Council look set to incur deficits as far as running costs are concerned. In such cases, there is a risk that the applicant may seek revenue funding to finance the running or maintenance of the project. We are thus concerned that lottery funds might in the future be used to bail out projects that are experiencing serious financial difficulties. We welcome the Department's assurance that there is nothing in the policy or financial directions that would allow lottery funds to be used as an open-ended subsidy. We recommend that the Sports Council make this message absolutely clear to organisations applying for a lottery grant.

24. We note that the Sports Council removed reference to the right of appeal from their standard rejection letter and have been slow in dealing with appeals, allowing one case to drag on for almost a year. We recommend that in future the Sports Council closely monitor their performance against their target of eight weeks for dealing with appeals.

2 C&AG's report (HC 617 of Session 1997-98), para 3.19 Back

3 Qs 24, 30 Back

4 Q25 Back

5 C&AG's report (HC 617 of Session 1997-98), para 2.19 Back

6 Q9 Back

7 Q59 Back

8 Qs 97-99 Back

9 Qs 63-64 Back

10 C&AG's report (HC 617 of Session 1997-98), para 3.18, 3.21 Back

11 Q1 Back

12 C&AG's report (HC 617 of Session 1997-98), para 3.21 Back

13 Qs 1-3 Back