House of Commons - Public Administration

Select Committee on Public Administration Eleventh Report

8 THE RISKS OF THIRD SECTOR PROVISION

182. So far in this report we have looked at the means by which the Government can get the best out of third sector organisations as potential deliverers of public services. However, any discussion of the extent to which the sector should be involved in service delivery must also consider the risks inherent in delivering through third sector organisations. There are a significant number of risks, to the extent that some people continue to argue that there should be no place for the third sector in public service delivery at all.

183. There is a trap we need to avoid in this discussion, which is to be too focused on the effects of government policy on the sector as an end in itself. Much of the discussion of the risks of the commissioning agenda centres on what it does to the sector, whether in terms of over-regulation, squeezing grant funding or distorting independence. It is taken as axiomatic that such things are bad; it should not be. In practice many of these things may indeed be harmful, but the job of government is to balance different public policy objectives in the interests not of itself or of service providers but of the service user and of the citizen.

184. Research carried out by the Local Government Association made the salutary point that 'many people often do not know who provides their services and do not care as long as it is of a high quality, meets their needs and is value for money'.[218] The public has an interest in a healthy and thriving third sector, not as an end in itself, but for what it can offer citizens—whether that is improved public services, advocacy of important causes or stronger communities. We will therefore not be asking directly about the risks of the commissioning agenda to the sector or to government. Instead we will look first at the risks to service users, and then at the wider risks to civil society of perceived threats to the third sector.

Risks to the service user

STANDARDS OF SERVICE

185. The first obvious risk to service users is that standards of service will slip. In particular, we have discussed in earlier chapters the risk that use of competition can inexorably lead to a situation where contracts are allocated on price rather than quality. This worry is not merely hypothetical; for example, our predecessor Committee found in 2005 that competitive tendering for hospital cleaning seemed to have resulted in a significant deterioration in standards, with disturbing personal consequences for some patients and considerable diversion of NHS resources to care for them.[219] As that example shows, this is not a worry that is specific to commissioning from the third sector, but if the sector is to have a "transformative" effect on public services then that means a particular emphasis is needed on thinking about factors other than price alone. We considered in the last two chapters some steps that government might take to get the best out of the sector.

186. A particular risk in any contracting relationship is that the State loses the capacity to be an intelligent customer, and is unable to effectively monitor standards of service. By losing its direct contact with service users, the commissioner loses sight of what is happening on the ground, and is in a significantly weakened position when it comes to renegotiating contracts. Will Werry told us that this was exercising him:

220

187. The converse of this risk is the possibility that the State will respond with increasingly burdensome monitoring systems. John Stoker told us his impression that loss of state control was less of an issue than damage done by over-tight specifications which proscribe innovation.[221] The Audit Commission told us that their studies into competition and contestability had indicated that both of these risks were being realised in different places, although there was good practice evident as well.[222] Community Links noted a problem with identifying baselines against which service providers should be measured.[223] These are again essentially not sector-specific issues, and lead us into areas we have considered previously in inquiries into choice in public services and government's use of targets.[224] We do not want to go over this ground again, except to note that we have previously warned that crude targets can encourage perverse practices, such as "cream-skimming", where providers concentrate on improving their statistical performance by helping only those users who can be helped relatively easily.[225] This is a potential effect of targets in any sector, but we did hear at our seminar that it could be a particular problem when providers are not committed to equity of service provision.

188. One sector-specific concern we did have to grapple with was the possibility that third sector service providers might be somehow less professional, perhaps because they made use of volunteers (although as we have mentioned the public sector makes use of volunteers too). However, we did not hear this concern from any of our witnesses. Instead, it was emphasised that service delivery was usually provided by paid staff and rarely by volunteers; Rainer and the British Red Cross told us they were unusual among service delivery organisations in making extensive use of volunteers. Peter Kyle told us that people "should not be ashamed of the professionalisation of the sector":

226

189. We did not find any evidence that standards of service were intrinsically lower (or higher) in third sector organisations. However, this must be at least in part down to the difficulty of assessing performance levels in public services. If the State moves further along the road of commissioning, it needs to manage the competing risks that it may either lose the ability to assess performance or instead be too onerous in its monitoring requirements. This is not a sector-specific concern, but it will always be one of the central challenges of a commissioning relationship.

ACCOUNTABILITY

190. Another set of risks surround the concept of public accountability. There is a basic principle in British democracy that everyone who carries out an executive function must be in some way ultimately accountable, whether to the electorate, to elected representatives, or to some external arbiter of standards. In practice, accountability of the executive is a complex concept and involves a number of different mechanisms, including not just electoral accountability through the ballot box, but regulation, duties to publish information (both proactively and reactively), service user feedback (through mechanisms ranging from consultations to complaints systems), scrutiny and audit.

191. In a contractual relationship, although responsibilities can be determined in a contract, accountability remains within the public sector, usually with the commissioning body. The service provider is accountable to the commissioner through the mechanism of the contract, while the commissioner is then held accountable for getting the contract right or wrong in the first place. Joyce Moseley reflected that when she had worked as a Director of Social Services she had been held to account by her local population and this had made her feel the responsibility to get the best outcome for that population—by outsourcing services.[227] Ed Miliband told us it was very important that accountability remained with the commissioner:

228

192. The risk, though, is that lines of accountability are not clear and not understood by the public. Electoral accountability is not the only facet of accountability, and indeed not all commissioning authorities are electorally accountable—National Health Service commissioners are one obvious example. The issue for this inquiry to consider was not just the impact of contracting out service delivery on accountability for provision , but whether there were specific accountability issues around delivery through the third sector. We heard three particular concerns—around the regulation of service standards, the protection of users' rights, and the provision of complaints mechanisms for service users.

Regulation

193. One facet of accountability is ensuring that services performed by non-governmental organisations, whatever sector they may be in, are effectively regulated. This is an area that exercises the sector a great deal, with the general contention being that the sector is not just adequately regulated, but often over-regulated. Typical was Lord Adebowale's substantiation of his suggestion that Turning Point were "regulated to within an inch of our lives":[229]

230

194. It is clear that charities in particular face a mixture of functional regulation from bodies like CSCI and sectoral regulation from the Charity Commission. There have also been individual instances where public regulators have had overlapping responsibilities, and third sector providers can often prove difficult for functional regulators to deal with as they may provide a range of related services. However, it is difficult to identify too much scope for rationalisation. To take Lord Adebowale's example, one of the bodies he mentioned is an auditor rather than a regulator, while the Charity Commission has a role of looking at all activities carried out by charities and not just service delivery—where, in practice, they will presumably defer to functional regulators for that service. Doubtless, this frustrates a lot of third sector providers, as do the monitoring requirements of commissioners which we have already discussed. Yet short of a general desire to reduce regulatory burdens, we heard no workable proposals for reform. The levels of regulation required in public services are high. We understand that third sector providers feel over-regulated, but they are hardly unique in this: no-one has ever complained to us that they are under-regulated. Government should always look for ways to remove unnecessary regulatory burdens, and information should wherever possible be shared between commissioners, regulators and auditors; but it may be that high levels of regulation may be something third sector providers have to live with. The cost of complying with necessary regulation ought to be factored in to any bid to provide a service delivery contract.

Users' rights

195. Another risk that we recognised during our inquiry was that there appear to be some questions about the human rights of users of services which are contracted out of government. Again, this is not third sector specific, although third sector organisations have mentioned this as part of an overall complaint about regulatory burdens. The issue is in some ways clear-cut; nobody's human rights should be reduced by the outsourcing of a service. There is a question, though, of how those rights are safeguarded, and a risk that users do not know where they can turn. In particular, there has been a debate over whether all organisations delivering public services should be considered to be public authorities for the purposes of the Human Rights Act 1998. The judgement in the landmark Leonard Cheshire case in 2002 found that human rights law in care services brought about the deeply unsatisfactory state of affairs that third sector care homes are not considered public authorities and therefore do not have human rights obligations to users of public services. We note that the Joint Committee on Human Rights found this "problematic" as long ago as 2004. Subsequently, what was understood to be the scope of the Human Rights Act has been further narrowed by a series of court cases, culminating in the judgment by the House of Lords in the YL v. Birmingham City Council and others case in June 2007. The human rights of public service users should not be affected by the identity of the service provider. As the Joint Committee on Human Rights has consistently argued, the original scope of the Human Rights Act needs to be restored so that non-public sector organisations can be considered public authorities for the purposes of the Human Rights Act when they are discharging functions on behalf of the State. We acknowledge that this is complex, but it is essential to achieve.

196. A similar issue needs to be addressed with regard to information rights. Again, bodies outside the public sector have never been considered to be public authorities under the Freedom of Information Act 2000. The test for coverage under the two Acts is different—the Freedom of Information Act lists public authorities, while the Human Rights Act has a generic definition of public authority. We were pleased to see the recent consultation by the Ministry of Justice on extending the Freedom of Information Act to bodies outside the public sector, including to contractors who provide services that are a function of a public authority. In fact, the Act contained provision that it could be extended to achieve this by Order. We hope that the outcome of the consultation is that all contractors are covered by the regime, in respect of those functions they are carrying out on behalf of the State. Given that there are exemptions around commercial confidentiality, we cannot see any legitimate argument why they should not be. Regulatory burdens on providers should be as light as they can be without reducing the rights of service users and citizens—but no lighter.

Complaints procedures

197. One final, perhaps more prosaic element of accountability is the direct accountability to service users encapsulated in a complaints procedure. The availability of redress where things go wrong is one of service users' basic rights. Yet here there appears at least superficially to be not just a risk but a real gap in service provision: a 2006 Charity Commission survey found that 69% of charities reported a lack of complaints procedures, including 40% of those who were delivering public services.[231] Campbell Robb acknowledged that this was an area which needed work:

232

198. However, he also told us that the need for complaints procedures was and had to be decided by the commissioning authority on a case by case basis, as "you would not want the same redress mechanisms for a small £10,000 contract as you would for a £2 million contract to do something else".[233]The Charity Commission's Independent Complaints Reviewer told us that this was a serious gap that needed filling:

In the delivery of social care, if a user is dissatisfied with a service provided by the Local Authority, ultimately they can refer that matter to the Local Government Ombudsman. If problems occur in the interface with the Health service, the Parliamentary and Health Service Ombudsman can step in to help the citizen. There is no similar arrangement for charities.

She called for the establishment of a Charities Ombudsman.[234]

199. Joyce Moseley told us that any commissioner worth their salt would make it part of the contractual terms that provider organisations would provide complaints systems that included provision for redress.[235] Richard Gutch agreed.[236] Phil Hope and Ed Miliband emphasised that they thought it should be possible to complain at source to service providers. But their priority, constitutionally speaking, was ensuring that it was possible for service users who were unhappy about a service to complain to the commissioning authority—whether that was a local authority or part of central government. Ultimately, the Government believed that all service users, whoever provided the service, should and did have the right of recourse to either the Parliamentary and Health Service Ombudsman or a Local Government Ombudsman. We note also that the Local Government Ombudsmen reported in 2007 that they believed they retained responsibility for all services that were for which local authorities had a statutory requirement, regardless of who provided them,[237] and the Parliamentary Ombudsman confirmed with us that she agreed:

238

200. We are concerned by the suggestion that 40% of charities providing public services do not have a complaints mechanism, and wonder if a template clause could be devised for service delivery contracts. But we accept the point that it is ultimately the commissioner's responsibility to make sure that there is an appropriate complaints mechanism, subject to any legal requirements in their area.

201. In terms of the right to complain, however, the most important principle is that the users of services delivered under contract should not lose their ultimate right to complain to an Ombudsman if they do not get satisfaction elsewhere. It appears that this principle is accepted by the Government and applied in practice. With this in mind, we see no need arising from our inquiry for a dedicated Charities Ombudsman. There may, though, be an need to ensure that the users of outsourced public services understand their right to complain to an Ombudsman.

Risks to civil society

202. We have seen that there are some grounds to be optimistic that improved commissioning and procurement processes could see third sector organisations making a more effective contribution to public service improvement. However, we also heard fundamental concerns that procurement—and the competitive approach it requires—damages the ethos and distinctiveness the policy is intended to promote. The primary risk to the citizen is that overemphasis on the commissioning relationship could be to the detriment of the third sector's other relationships with the State—as innovator, as advocate or as conduit of the views of groups perhaps otherwise unrepresented.

203. John Stoker told us that this was a real concern for him as Commissioner for the Compact:

I have a bit of a concern, as well, about a side effect of the trend in financing relationships away from grant and towards procurement, in so far as it risks inculcating in public-sector people the idea that the commissioning relationship is all they have to concentrate on to the exclusion of the wider relationship between the sectors, which is part of the Compact arrangement and which is not disconnected simply because you go into this new relationship.[

239

204. To its credit, there is no doubt that the Government acknowledges that the sector plays a number of other important roles beyond service delivery, and that these must be balanced.[240] The question we have had to address is whether that balance is the correct one, and, if so, whether it appears likely to remain so. We heard three main risks asserted:

A risk that an organisation's nature and mission can be distorted by the pursuit and delivery of contracts;
A risk that the nature of the sector more widely was being significantly changed for the worse, particularly through a disappearance of grant funding; and
A risk that the independence of third sector organisations was being eroded.

These are all related concerns, but we will attempt to take them separately.

DISTORTION OF MISSION

205. We heard from more than one of our witnesses a concern that contracting relationships were effectively incompatible with the nature of third sector organisations. According to this theory, a third sector organisation's distinctive characteristics, including crucially a focus on the needs of users, are threatened by the possibility that focus has to shift to the needs of a contract. Debra Allcock Tyler put this case forcibly:

The nature of contracting changes the nature of your relationship as an organisation with your client. It distorts who the client is and who it is you are existing to serve. There is a lot of evidence that says that organisations which start to engage in contracting relationships begin to satisfy the terms of the contract rather than satisfy the needs of the user.[

241

206. There is also a particular issue for charities, who have to act within their own charitable objectives, and yet may find commissioners have slightly different (or changing) objectives. Tom Levitt, the Member for High Peak, gave an example illustrating this difficulty well:

Picture the scene: a volunteer gets out of a van and takes a piping hot meal to a waiting elderly housebound person. They chat for a few moments and the volunteer, who is perhaps the old person's only visitor of the day, moves on.

The social services department then decrees 'We want you to spend less time delivering meals and more time chatting, helping identify the needs of the most needy clients and identifying what more we can do for them.' If they can cope, the clients are to be given a stack of meals at the start of the week, a freezer to keep them in and a microwave to heat them up, plus training on how to use it.

242

207. The fear of "mission creep" which Tom Levitt identifies was also mentioned to us in the United States, where they have travelled further down the road of commissioning services to the third sector than this country has so far. We heard it too from Selwyn Image of Emmaus, who argued that third sector organisations could lose sight of their missions and become dedicated to keeping themselves going. He gave us an example from his own experience of church-based children's charities:

243

208. Yet what is not clear is whether this risk of mission distortion or mission creep is peculiar to, or even heightened by, a contracting relationship. The risk is clearly there, and there is something about the nature of the contracting relationship that appears to allow commissioners more ability to direct, or at least negotiate over, the way a third sector organisation goes about its business. Yet such a discussion seems almost to assume that third sector organisations have no choice but to take government contracts, even if they are unhappy with the terms. This is absolutely not the case—as Richard Gutch made clear:

244

209. A contract can, in theory, distort the goals of a third sector organisation. However, the onus is surely on third sector organisations themselves to police their own behaviour. As we have noted already, there is no compulsion for organisations to bid for public service contracts, or to accept them if some of the terms will distort their mission. There may also be a role for the Charity Commission in ensuring that the work of charities in particular goes towards meeting their charitable objectives.

210. Dave Prentis believed that the danger went beyond the distortion of individual organisations' goals, to a distortion of the mission of the entire third sector. He cautioned that there was a danger that the sector would become a mirror image of the private sector as they competed with each other for contracts, and that this in turn would be damaging to the promotion of voluntarism:

245

211. The vision of a third sector developing in the image of the private sector is a haunting one. Such a change would indeed be damaging to society, not least in the effect it could have on the spirit of voluntarism which is one of the great values of a healthy third sector to every citizen. However, we are some way off that situation. A small number of third sector organisations may look increasingly similar to private sector counterparts, but there are a huge number who could never be mistaken in method or objective for a profit-making organisation. The Government should bear in mind the risk of fundamentally changing the sector, but this risk is only really likely to become problematic if contractual funding should come to dominate the sector.

THE ROLE OF GRANT FUNDING

212. In our view, an encouragement of third sector organisations to provide more contracted services is unlikely in itself to have a damaging effect on the sector, as long as it is balanced against other ways of involving the sector. We have already cited John Stoker's fear that the government will lose sight of the other elements of the relationship between the two sectors. In particular, his fear was that, as more money poured into service delivery contracts, that would leave less money for grant funding. This posed some special issues for some smaller local bodies that traditionally have been grant financed.[246] Alex Whinnom had similar concerns:

247

213. Grant funding is important for a number of reasons. Without it, for one, many organisations would never reach the size where they could begin to bid for contracts. However, the core strength of grant funding is that, as it is less prescriptive than contracted funding, it allows more flexibility to third sector organisations, and more scope to innovate and to campaign independently. The New Economics Foundation told us that it was grants which had given the sector all the characteristics that the Government now prized and wanted to harness in a commissioning relationship:

248

214. We entirely accept that grants are a vital part of the funding balance. There does, however, seem to be an element of myth in discussions around this area, based on an assumption that an increase in use of contracts must necessarily lead to a squeeze in grant funding. No such thing has happened. In Table 1 on page 12 we saw that grant funding had not decreased in real terms between 2001 and 2006, even as contractual funding soared. It is clear that Government funding of the third sector has increased hugely over the last decade, and that grant funding, even if slightly tailing off, has been a very significant part of that. The Government does understand that protecting distinctiveness sometimes means different forms of funding, and the commitment to Compact principles—including the welcome step of creating a Commissioner for the Compact—is an example of the Government voluntarily committing itself to ensuring a healthy mix of funding.

215. The other myth in this area is the idea that the pursuit of grants was not also a form of competition. In fact, competition was fierce, as Stuart Etherington recalled:

249

216. The final myth is that all third sector organisations necessarily prefer grants. Our evidence suggests a range of reasons why third sector organisations may prefer contracts to grants. Through its research the Audit Commission identified how 'many voluntary organisations saw improved stability of funding streams as an advantage of delivering under contract'.[250] This was echoed by Doncaster Supporting People Provider Forum, which reported recent experience with local public bodies that organisations receiving grants were seen as easy targets for the withdrawal of funding, whereas organisations with contracts were in a more secure position.[251] Frontline mental health group Together reported similar concerns.[252] Peter Kyle told us about Thames Reach, whose staff had been energised by the validation of winning a contract to deliver a service which they had previously provided through income from grants.

217. Many of the arguments about the risks of distorting missions by pursuing contracts could also be applied to grants. Third sector organisations always acquired grants by satisfying funders that they would provide outcomes which the funder believed were desirable. That is no different in principle from a contracting relationship, and could also distort an organisation's purposes or discourage an organisation from speaking out—although contracts do allow commissioners the ability to shape processes as well as outcomes.

218. The real risk if grant funding were to disappear or be significantly squeezed would be that some of the most distinctive and innovative organisations would probably lose out. If the Government is looking for these characteristics in a commissioning environment, then it will want to preserve them. In other words, there is logic to the proposition that getting the best out of commissioning means ensuring more grant funding, not less. This appears from the statistical evidence to be what has happened in the last decade. Nonetheless, most witnesses agreed that over that time there has been an increasing bifurcation between the very large and the very small in the third sector.[253] This is a development which the Government needs to monitor and to understand, if it is to ensure the sector continues to receive the right mix of contractual and grant-based funding.

219. Community Links reminded us that grant giving could be seen as a form of commissioning.[254] It is certainly one of the levers at the disposal of commissioning authorities. We have already cited at paragraph 77 Stuart Etherington's call for "horses for courses". Horses for courses is right. Where service outcomes are clearly defined and their achievement is paramount, then it is unrealistic to expect government to avoid forming contractual relationships with providers who can guarantee that the outcomes will be delivered. If outcomes are less well defined, though, commissioners may place a higher premium on innovation and flexibility. In those circumstances they retain the option of funding those outcomes through a grant, either for a specific project or more broadly in support of an organisation's overall objectives. The current funding mix does not appear to us to be unsustainable. Ultimately, though, it is up to Government to use the variety of funding mechanisms available to pursue its objectives (on behalf of service users and the public) in what it judges to be the most effective way.

FREEDOM TO CAMPAIGN

220. Another danger identified to us was that third sector organisations might be more reluctant to campaign against or criticise government on behalf of client groups if they were financially dependent on government funding through commissioning. The campaigning role of the sector is universally recognised to be of enormous importance to the health of civil society, as it achieves important functions like giving a voice to the seldom heard and ensuring a vibrant democracy. Again, the hypothetical risk is plain to see, and the question we sought to address was whether this risk was translating into a problem in practice.

221. Many of our witnesses were keen to downplay this risk. Turning Point and Rainer, for example, told us that they were both routinely involved in campaigning against the Government despite being highly dependent on public sources of funding.[255] Lord Adebowale mentioned Turning Point's highly public campaign on the subject of blood-borne viruses in needle exchanges:

I have never in my career withdrawn a campaign that we thought was valid and valuable on the basis of a threat by a minister, MP, councillor or anyone else for that matter, and we would not.

Neither had any experience of their funding being threatened by a public authority. Nor had Barnardo's, who supplied us with a list of the campaigns they had been involved with recently.[256]

222. On the other hand, while confident of their own circumstances, these larger bodies did express concern for their smaller counterparts. Turning Point told us that some local commissioners had been at the least nervous about funding organisations who might campaign against them.[257] The Compact Commission also feared self censorship by smaller organisations. Rotherham Metropolitan Council put it succinctly:

258

223. Martin Narey told us that there was a particular danger to organisations whose core funding came from a single source; he told us that there was some evidence from the 1990s that Nacro did have core funding removed, partly because they had spoken out against the penal policies of the then government. The key strength here appeared to be in income diversity; Rainer and Turning Point told us they had great numbers of contracts, so were not too worried by the prospect of losing some, while the evidence from Barnardo's suggests that if anything a dependency on grant aid is potentially more risky.[259] Commissioning may actually help stability in this regard.

224. The National Consumer Council told us that despite the oft expressed fears, they had encountered no evidence of problems here:

260

Meanwhile, the Local Government Association told us that "many local authorities directly fund the third sector precisely so they can lobby local government and give a voice to specific groups in the community".[261]

225. It is clear that pursuing and delivering public service contracts is not necessarily a barrier to independent campaigning and advocacy. In particular, there may be positive effects of entering into a contracting relationship, as it can deliver stability of income; organisations which rely on grants for core funding are arguably more at risk than large service delivery organisations.

226. Yet the risk is only there if government allows it to be. Perhaps the single most important message government can give to commissioners, and commissioners can give to the third sector, is that third sector organisations must continue to feel free to speak out. It is also important to have an apparatus to protect independence, and the Government deserves credit for establishing one in the form of the Compact—as well as an enforcer in the form of the Commissioner for the Compact. We will follow with interest the discussions between the sector and the Government on whether the Compact and the Commissioner ought to be put onto a statutory footing.

PUBLIC DISENGAGEMENT FROM GOVERNMENT

227. One final risk that we identified is that out-sourcing services could mean that the funders of these services did not get the credit for providing them. The danger here for the citizen is that it will increase a public mood that the State does not provide citizens with what they need, and so enhance the already troubling public disengagement with government and politics. We believe that where services are provided on behalf of the State, it should be made very clear to all service users—perhaps through partner-branding services. The exception to this would be where there is a risk that it might deter vulnerable users.

218 Ev 250 Back

219 Fourth Report of Session 2004-05, Choice, Voice and Public Services, HC 49, March 2005, para 156 Back

220 Q 107 Back

221 Ev 135 Back

222 Ev 170-171 Back

223 Ev 218 Back

224 Fourth Report of Session 2004-05, Choice, Voice and Public Services, HC 49, March 2005 Back

225 As above, para 155 Back

226 Q 437 Back

227 Q 39 Back