| Government and the third sector
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| 1. | It is clear that the State is commissioning more services from the third sector than ever before, and is increasingly doing so through procurement-type relationships. These commissioning trends, and their impact on the third sector, are at the heart of this report. (Paragraph 24)
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| The Government vision |
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| 2. | If there is no common understanding of what commissioning means, that can only be a barrier to effective relationships. Government and the private and third sectors need to come to a commonly accepted definition of commissioning if it is to continue to be the State's preferred method of interacting with the sector. In particular, Government needs to convince the third sector that commissioning is something distinct from procurement. (Paragraph 38)
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| The scale of third sector involvement
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| 3. | As our witnesses told us, third sector organisations are ill-equipped to provide universality and equity to service users. Whatever transformation of public services is about, it should not be about transferring responsibility for delivering large areas of public service out of the State and into the third sector. It appears that government accepts this. Despite the emphasis given in government publications to involving the third sector, only 2% of public service spending is on third sector delivery. The debate on the transformative capacity of the third sector is a rhetorical storm in a fiscal teacup. (Paragraph 48)
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| 4. | The Government's position has moved from actively pursuing the transfer of services to allowing a more ready transfer "where appropriate". We support that change of emphasis. However, it immediately prompts a further question: how to judge where it is indeed appropriate for services to be provided by the third sector. (Paragraph 51)
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| Third Sector distinctiveness
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| 5. | One of the most commonly cited characteristics of third sector distinctiveness—almost its unique selling point—is the sector's focus on service users. Yet user focus is not unique to the third sector, and indeed what little research there is suggests that this user focus can be lost when organisations provide services to a large, general population. (Paragraph 69)
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| 6. | If the test of distinctiveness is that the third sector offers more specialist knowledge and expertise than other sectors, then we have not been provided with sufficient evidence to prove that claim. (Paragraph 69)
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| 7. | There is some evidence that third sector providers in certain fields provide more flexible, joined-up services. However, flexibility of services seems very dependent on good commissioning practice. (Paragraph 70)
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| 8. | The many fine examples of innovative practice in the third sector do not add up to conclusive evidence that the sector is inherently more innovative. (Paragraph 71)
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| 9. | In certain areas, it appears that third sector organisations may indeed be more likely to secure users' trust than public sector counterparts. It is equally apparent, though, that this is not universal across all forms of public service provision. Nor is it clear that it is a third sector-specific strength. It may be more accurate to suggest simply that certain types of service users, or would-be service users, may be apprehensive of dealing with the State. (Paragraph 72)
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| 10. | Added value has many facets, from generating social capital and voluntarism to levering in additional income or providing other unexpected but tangible benefits. Third sector organisations are often likely to be best placed to provide some of these benefits; but this may say less about the capability of other sectors than it does about the weakness of commissioning processes. Unless commissioners ask for added value, we cannot really know if it is a distinctive third sector strength. (Paragraph 82)
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| 11. | The evidence is simply not there to judge conclusively whether there are shared characteristics across all third sector organisations, arising from their commonality of origins or ethos, which might make them particularly suited to the provision of public services. Indeed, there is widespread consensus that this evidence base does not yet exist. Will Werry of the Commissioning Joint Committee put it most succinctly when he told us that "it is surprising that a major national exercise is based on … supposition". (Paragraph 86)
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| 12. | We have already noted that the Government is not looking to transfer any set proportion of services to the third sector. At most, it has identified certain services which it believes third sector organisations may be particularly well placed to provide. This is a more nuanced approach and more sensible than attempting to claim general merits across the whole third sector. Given the absence of useful evidence, too, it is entirely sensible that the Government should no longer set numerical targets for the sector's contribution to public service delivery. (Paragraph 87)
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| 13. | The real question in each service should be what characteristics are needed to get the best outcomes for users and for citizens. This might give commissioners an evidence base when they consider what characteristics they might look for when deciding how to commission a service. It is in this direction that research should focus if the policy of encouraging third sector provision is to be pursued. (Paragraph 88)
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| Levelling the playing field
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| 14. | Public bodies should not be attempting to claw back surpluses from third sector organisations in contractual arrangements. (Paragraph 99)
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| 15. | Too many service delivery contracts still appear to be unnecessarily short. Nobody seems to be claiming that one-year contracts are generally sensible. Although there are disadvantages of overlong contracts too, in that it is harder to secure accountability to commissioners, there are clear practical problems with the length of many contracts currently. Repeated changes of provider are bad for staff; more importantly, they are bad for service users, who often need to build up relationships with service providers. Nor is it to anyone's advantage if service delivery organisations are unattractive places to work. (Paragraph 105)
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| 16. | Government has talked for some time of a three-year norm for contracts, and longer where appropriate. It is time that this was translated into changed practice. However, we understand that this is not easy. The National Audit Office reported in 2005 that good intentions here were being lost as funding flowed through the delivery chain. The decisions on contract length are made by individual commissioners and not by central government. The priority for the Office of the Third Sector, therefore, must be getting the message through to commissioners on the ground. (Paragraph 106)
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| 17. | Commissioners need to lose the habits of grant funding when dealing with third sector organisations in competitive procurement processes. The onus should always be on the bidding organisation to decide how much they want to charge. The responsibility of the commissioner is to ensure that there are neither arbitrary barriers preventing them from doing this, nor discriminatory requirements to compel them to charge their full costs where they may not wish to do so. (Paragraph 111)
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| 18. | It is important to recognise that full cost recovery is not a right—it has to exist in a competitive context. While bidding organisations should not be prevented from pricing their full costs into a bid to provide a particular service, commissioners will always retain the right to reject that bid in favour of a cheaper competitor. Government's commitment to full cost recovery does not, and should not, immunise the third sector from the pressures of efficiency and competition. (Paragraph 112)
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| 19. | In a competitive contracting environment, commissioners retain a residual duty to consider and manage the risks that aggressively low bidding might pose to the quality or sustainability of a service or a market, and act accordingly when selecting a preferred provider. However, responsibilities towards organisational sustainability remain the prime responsibility of third sector organisations themselves. This reinforces the importance that bidding organisations understand their full costs before entering the procurement process. (Paragraph 113)
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| 20. | In designing each procurement exercise, the challenge of the commissioning body is to try and determine the trade-off between affordability and service quality to the best possible extent. (Paragraph 118)
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| 21. | The growth of consortia is encouraging. We do not believe, however, that it is yet at a scale that is going to affect significantly the overall shape of the public services market. It is also costly and time consuming for organisations to come together into consortia. (Paragraph 121)
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| 22. | It is evident to us that even where there is some evidence that distinctive potential to transform public services does exist, such as in employment services, it risks not being captured due to the nature and scale of the procurement processes in place. Sub-contracts, which third sector organisations are having more success at winning, carry their own risks, and may still be too large for some of the most distinctive organisations; consortia of a sufficient size are hard to establish and maintain. If government wants to involve the smallest organisations who sometimes offer the most distinctive services, it may have to look at doing a number of things:
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- radically simplifying its tendering processes;
- helping organisations to bid, and in particular helping them to form consortia and allowing sufficient time in the commissioning process to do so;
- incentivising prime contractors to work with third sector sub-contractors and build their capacity to participate in the commissioning process; or
- identifying opportunities to advertise contracts at a significantly smaller level. (Paragraph 122)
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| 23. | If a level playing field is taken to mean that third sector organisations are able to compete as financial equals with potential providers in other services, then it will never be achieved. Most third sector organisations, including many who have the characteristics government is looking for in service delivery, are too small to compete for most contracts. Capacity-building is important in itself for reasons beyond service delivery, and it has a role in pump-priming particular would-be service providers, but it will not in itself achieve a level playing field in service delivery. (Paragraph 133)
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| 24. | The suggestion that charities are "almost uniquely penalised" by the VAT regime appears to have some force (although of course charities have their own tax advantages as well). (Paragraph 134)
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| 25. | TUPE appears likely to cause practical difficulties when services are moved into the third sector. Many organisations will not have the capacity to take on staff at existing levels of salaries and benefits. If the Government is committed to pump-priming the third sector to improve service provision, it will need to invest in supporting third sector organisations who are effectively prevented from delivering services by the requirements of TUPE. (Paragraph 135)
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| 26. | There is clearly an onus on government not to outsource undue risk to third sector providers, or any other providers, without fair recompense—but the fair sharing of risk is in everybody's interest, if services are not to be allowed to fail. (Paragraph 139)
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| 27. | There are limits to the differential treatment which commissioners can give to third sector organisations in a procurement process. If Compact financial undertakings are to be built in to tender exercises, they must apply to all sectors equally. Therefore, while the Compact may have value in a contracting environment in redressing imbalances between buyer and seller, it does not level the playing field between bidders from different sectors. (Paragraph 146)
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| 28. | With less access to capital and less capacity to take risks, there will always be practical limits to the third sector's ability to compete for certain contracts, especially the largest ones. The Government accepted this when Campbell Robb assented to our proposition of a "carefully contoured playing field" as the realistic goal. It is legitimate for the Government to pump-prime the sector and invest in building its capacity, both in general terms and specifically to aid public service provision, as long as it does not unfairly advantage third sector organisations over rivals for service delivery bids. At the moment this seems some way off happening, and so we see Futurebuilders and Capacitybuilders as laudable schemes. (Paragraph 147)
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| 29. | There is a limit, though, to what can be done by attempts to eliminate inherent disadvantages of third sector organisations when those disadvantages can arise out of the same characteristics that might make them distinctive. If government wants more third sector organisations to deliver services, then the most effective way will be to ensure that commissioners set out requirements when they commission services that play to these organisations' distinctive qualities. Where there are any barriers, these should be eliminated, and capacity building will play an important part; but the key to improving outcomes will be ensuring that there are the right people in the job, with the right skills and knowledge to use their legitimate client discretions more wisely. The key is intelligent commissioning. (Paragraph 148)
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| Intelligent commissioning |
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| 30. | Commissioners need external input when designing service specifications, and this is recognised in EU procurement rules. If some commissioners still believe that the rules prevent them engaging with organisations who are potential bidders, the onus is on the Government to disseminate the real position. (Paragraph 155)
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| 31. | If contracts are almost always going to go to the bidder meeting the tender requirements at the lowest price, it becomes absolutely essential that the service specification is designed to the highest possible standard. If commissioners want services to be provided in a distinctive way, they will need to specify that in their tender requirements, because otherwise there will be little scope for bidding organisations to emphasise their distinctiveness during the procurement process. (Paragraph 158)
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| 32. | It follows from this that commissioning bodies will need an extensive knowledge of the services they are looking to buy before they advertise for bidders. If they are to require bidders to provide a service in a particular way, the commissioners need to find out what distinctive ways of providing services are out there. The onus is on commissioners to look at the different potential providers and not be shy to talk to them in designing service specifications. (Paragraph 159)
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| 33. | Third sector organisations can play a particularly valuable role in service design, because they can often act as a conduit to service users, and particularly the hardest to reach. Commissioners should talk to potential providers, but their interaction with the third sector should not be limited there. Above all, commissioners need to understand what service users value in a particular service. (Paragraph 160)
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| 34. | Government's task, at a central and local level, is to specify what it wants to gain from the delivery of a particular service. It should certainly take into account wider benefits; but it may need to do more than that, and actually ask for those benefits to be delivered when commissioning services. (Paragraph 164)
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| 35. | We see merit in the targeted development of template social clauses. But this will not be enough. Commissioners should be expected to think about possible added value at the design stage of commissioning, and then to ensure it is taken into account in the procurement stage. For many commissioners, this will be a significant cultural change. A commissioning authority like the National Offender Management Service is not judged on the generation of social capital or of a spirit of voluntarism—it is judged on core outcomes like providing the right standards of prison accommodation, or prevention of re-offending. It is also judged on how much it spends. The challenge for government is to foster a culture where added value is routinely taken into account in addition to costs and core outcomes, and find the right incentives for commissioners to think about specifying wider benefits where these are appropriate. (Paragraph 168)
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| 36. | Contracts and innovation are uneasy bedfellows. Although it is not impossible to innovate within the parameters of a contract if it is designed to allow it, it requires something of a leap of faith for commissioners to give the necessary levels of freedom to providers. To do so requires a willingness to fall short of desired outcomes in a certain proportion of cases. It seems inevitable that most innovation will continue to take place outside of contracted services. (Paragraph 175)
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| 37. | The challenge is to create enough flexibility of process within contracts to allow providers to pick up on proven innovative practice elsewhere. As the Government has identified, the spreading of innovative practice is the key to improvement on a national scale. The Government should support outcome-based commissioning where possible, in the interests of flexibility and responsiveness; but where providers have truly innovative ideas for public service delivery, these need to be tested on commissioners at the design stage. It is largely unrealistic to expect commissioners to specify outcomes in a contract without an understanding as to how they will be reached. (Paragraph 176)
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| 38. | Intelligent commissioning depends on able, knowledgeable commissioners. Training is an essential part of developing skills, and the Government's steps to train key commissioners are positive and will benefit more than just third sector providers. Guidance, championing of the sector and external assessment will all play their part in changing organisational behaviour too; but there are no processes which adequately substitute for skills and ability. If commissioning is one of the keys to transforming public services, government needs to work at every level to attract its most talented people into working as commissioners, because commissioners are the people who will shape the services the public receives. At the very least, this will involve key posts being properly advertised and properly rewarded. (Paragraph 181)
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| The risks of third sector provision
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| 39. | 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. (Paragraph 189)
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| 40. | 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. (Paragraph 194)
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| 41. | 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. (Paragraph 195)
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| 42. | 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. (Paragraph 196)
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| 43. | 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. (Paragraph 200)
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| 44. | 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. (Paragraph 201)
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| 45. | 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. (Paragraph 209)
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| 46. | 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. (Paragraph 211)
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| 47. | 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. (Paragraph 219)
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| 48. | 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. (Paragraph 225)
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| 49. | 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. (Paragraph 226)
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| 50. | 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. (Paragraph 227)
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| Conclusions |
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| 51. | While the scale of third sector involvement in service delivery remains close to its current small-scale level, many of the risks to the sector which were identified in our inquiry appear to us to have been overplayed. (Paragraph 229)
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| 52. | The risks to government and to the service user may be more significant. Most of these are also not sector-specific, and are better seen as general risks of contracting out public service delivery. There is a particular issue around accountability, where action needs to be taken regarding the application of users' rights under the Human Rights Act and the Freedom of Information Act; and clarity is also needed around who service users can complain to when they have concerns about the service they have received. Beyond this, all commissioners face a significant challenge in effectively monitoring service provision while preventing unnecessary costs and bureaucracy. It is by no means proven that the benefits of contracting out services to providers from any sector outweigh the costs of effectively monitoring performance. Only the last of these risks, however, is potentially a show-stopper. The risks around accountability, while significant, could be mitigated by changes to the law. If the Government commits to tackling those issues, therefore, we see no reason not to continue cautiously along the path of encouraging third sector provision of public services. (Paragraph 230)
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| 53. | Caution is needed because progress must be on the basis of trialling in certain areas, through better use of commissioners' legitimate discretions, towards the collection of an evidence base. We do not want to see a mass transfer of services without significantly stronger evidence that this would be beneficial, and we are heartened that the Government does not appear to support such a mass transfer. Ultimately, it must be right to judge all prospective service providers on their merits. To do that, we need a vigorous mixed economy of provision, capable of eliciting the various distinctive strengths of different organisations in different sectors. (Paragraph 231)
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| 54. | However, the idea that there will ever be a level playing field where providers of every variety compete on an equal basis is unrealistic. There should certainly be no unnecessary barriers to particular providers competing for contracts, but there will always be significant disparities between third sector organisations and counterparts in other sectors, not least in financial terms. While intelligent commissioning might mean more decisions could be made on factors beyond cost of service provision, cost will rightly always remain a factor for commissioners. (Paragraph 232)
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| 55. | With all those caveats, though, we believe that intelligent commissioning offers scope to involve the third sector more. The key to getting the best out of the sector will be fostering an understanding of the sector's strengths among commissioners, who are central to determining the shape of public services. A culture change is needed to encourage the best people to become commissioners, with the right training and experience in place to ensure that they get the right mix of skills and specialist knowledge. That culture change should lead to the decline of perverse practices like overly short-term contracting. It should lead to an understanding of the importance of designing service specifications appropriately, engaging with users and possible providers to consider the outcomes which might be delivered for service users. It is at this crucial design stage where commissioners can design the playing field to play to the distinctive strengths of certain organisations, by determining the nature of the outcomes being bought, the scale of the contracts through which they buy them, or any wider social benefits that ought also to be delivered. In short, intelligent commissioners have a great deal of scope to involve third sector organisations more by wise use of their legitimate client discretions. If that happens, and those organisations are given the freedom to be distinctive, we believe there may well be potential in some areas for genuinely improved outcomes for the public. (Paragraph 233)
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