House of Commons - Public Administration

Select Committee on Public Administration Written Evidence

Memorandum from the Charity Commission

ABOUT US

1. The Charity Commission is the independent regulator for charitable activity in England and Wales. Our aim is to provide the best possible regulation of charities in England and Wales, in order to increase charities' effectiveness and public confidence and trust. We have recently conducted a major survey to which more than 3,800 registered charities responded, and which forms the basis of Stand and Deliver, a report into their experiences of delivering public services.

2. In presenting evidence to the Committee we have also drawn on our conference on the subject of public service delivery held in March 2006, and attended by 160 people, including representatives of charities, government departments and other organisations with an interest in the issue.[110] We held subsequent follow-up discussions with a number of these representatives, as well as a broader range of charities, who also commented on our guidance Charities and Public Service Delivery[111] which we published alongside Stand and Deliver.[112]

SUMMARY OF THE MAIN POINTS OF OUR EVIDENCE

3. We recognise the many advantages charities can bring to public service delivery. We also recognise that for many charities, delivering public services represents a means of fulfilling their objectives, highlighting their beneficiaries' needs to government, and obtaining funding. As the independent regulator, it is not for the Commission either to encourage or to deter any charity undertaking or considering public service delivery; in this context our role is to highlight the legal requirements that charities must meet, examples of good practice to which they should aspire, and risks that they should take account of.

4. We would like to focus our evidence around Question 3 in the Committee's Issues and Questions paper, "Does commissioning benefit the third sector?" We also have some comments to make with regard to Question 5, "What are the financial implications of providing services through the third sector compared with directly provided state services?" and a brief but important point to contribute with regard to Question 2, "Is the third sector more likely to provide better public services than the state or the private sector?".

5. Our research shows that:

— public service delivery is concentrated amongst the larger charities—over 60% of charities with an income above £500,000 currently deliver public services;

— in contrast, the vast majority of smaller charities do not deliver public services—only 8% of charities responding to the survey with incomes below £10,000 reported that they delivered public services; charities in this income band make up two thirds of the Register of Charities;

— only 14% of charities that are not currently delivering public services are actively considering doing so in the next year;

— one third of charities that deliver public services obtain 80% or more of their income form that source; and

— there are important issues for charities to consider when thinking about whether or not to engage in public service delivery; including their

— independence, governance and mission;

— funding; and

— sustainability.

OUR RESEARCH

6. A copy of our research report is submitted along with this memorandum.[113] It contains a detailed explanation of our methodology. To summarise, during the summer of 2006 we invited all charities on our Register of Charities to take part in an online survey about their experiences of public service delivery. Our aim was to obtain some basic information about their involvement in public service delivery, its impact on their activities, funding and governance, and future scope for their involvement in this kind of activity. In total, over 3,800 charities completed the survey, representing a broad cross section of the Commission's Register of Charities by income and operational area. This is the largest survey on this subject to date. The Charity Commission designed the questions in the survey and analysed the results, and the logistics of the survey itself were carried out on our behalf by the Directory of Social Change.

Question 2: Is the third sector more likely to provide better public services than the state or the private sector?

7. Charities may have unique or distinctive qualities giving them the potential to provide enhanced services. Such qualities might include specialist knowledge or experience, the charity's ethos (for example, being user-led), or innovative approaches to service delivery. Many charities have an in-depth understanding of, and empathy with, the needs of beneficiaries, making them well-placed to deliver services based around those needs. These qualities are often described as "added value", and there are certainly many examples of charities making a real difference to the quality of public services.

8. However, there are some misconceptions around the term which we would like to challenge. Added value does not mean the innate ability of charities to lever in additional funding, or to deliver more for less. Its potential is not present in every charity, waiting for a commissioner to come along and unlock it. Charities are not merely alternative vehicles for public service provision. The diversity and uniqueness of the sector are its strengths, and public service delivery is, and will remain, outside the scope and role that most charities will chose for themselves.

Question 3: Does commissioning benefit the third sector?

9. Our research shows that some of the current approaches to obtaining services from the charitable sector can compromise charities' independence, financial viability and mission. Furthermore our research raises important issues for charities to consider when thinking about their future direction, including their sustainability. It also suggests that the achievement of the Government's targets to increase the level of charities' participation in public service delivery will depend heavily on the achievement of commitments the Government has given to the sector.

10. We recognise the many advantages charities can bring to public service delivery. The way in which the voluntary sector works in communities is often a model of best practice and innovation in service delivery; charities have particular skills in reaching people with whom the state finds it hard to engage, and can design services which are genuinely based around the needs of users. We also recognise that for many charities, delivering public services represents a means of fulfilling their objectives, highlighting their beneficiaries' needs to government, and obtaining funding. Our guidance[114] explains that there is no legal prohibition on charities delivering public services, makes clear to charity trustees that the decision to do so rests with them, and highlights legal requirements, examples of good practice, and issues of risk, which should inform the trustees' decision-making.

Funding and contractual relationships

11. At our conference on public service delivery, charities expressed dissatisfaction with progress in implementing full cost recovery and longer-term funding. There is perceived to be a gap between central government policy and the reality of the funding situation. These concerns were borne out by the findings of our survey.

12. Government guidance[115] states that funding arrangements for public service delivery by charities ought to be appropriate to the intended outcome. The Charity Commission supports this principle. We believe that depending on the service being delivered, grant, contract or service level agreement arrangements may be appropriate. Similarly, multiple contracts ("spot" contracts) may better reflect the differing needs of individual users, or a "block" agreement may best serve an organisation which is delivering the same service to a changing group of users. In some cases shorter-term contracts may be appropriate, for example if the service delivered is a one-off with an agreed end-date, whilst in other situations longer-term funding may better enable the charity to plan its service provision over a number of years.

13. Our survey shows that the most common funding arrangement for charities delivering public services is a mixture of grants, contracts and service level agreements (37% of charities delivering public services said they are funded in this way). On the one hand, this diversity of funding streams is to be welcomed, for the reasons given above. On the other hand, it is unclear whether in practice the type of funding agreement is selected with any consideration of its appropriateness to the service involved. These survey findings suggest a lack of consistency in the way that public authorities are commissioning from charities which may make it difficult to identify and spread good practice amongst commissioners.

14. The use of non-contractual funding agreements also raises questions about the extent to which a public authority duty (for example under Human Rights or Equality legislation) can be applied to charities providing public services, which of course impacts upon the wider issues of accountability and risk management. Without clearly defined contractual arrangements, it is much more difficult to ascertain the extent of the responsibility which has been delegated to the provider. There is a consequent danger that service users will not be clear about who is accountable for the standard of service, and may not have adequate access to redress if the service fails to meet their needs.

15. Our survey also shows that over two thirds of all funding agreements for public service delivery, whether it be through grants, contracts or service level agreements, last one year or less. Appropriate duration is a key element of sustainable funding, so the short term nature of the majority of current funding agreements is a potential concern, particularly given that the majority of charities we spoke to were delivering health and social care services, where longer contracts might well be appropriate. However, 13% of charities already have a funding agreement that is longer than three years, which suggests that there is already some good practice in this area which can be developed and promoted. We strongly welcome the Office of the Third Sector's commitment in the Third Sector Action Plan to three-year funding agreements as the norm.[116]

16. Charities entering into multiple individual funding agreements also feature in the survey's results. Whilst the majority of charities appear to have between one and five funding agreements, the results showed that some charities had much higher numbers of agreements, particularly in cases where charities have separate agreements for each individual beneficiary. For example, one respondent had 4,000 individual one year contracts. This raises issues about the time and resources needed to manage these agreements and whether the resulting bureaucracy is always an effective use of the charity's time and resources. However, it would be a mistake to assume that multiple funding agreements are always detrimental to charities: some charities have commented to us that they find such an arrangement gives them greater flexibility in negotiating and pricing agreements around individual beneficiaries' requirements, enabling them to best meet complex or multiple needs. Again the key is that arrangements are appropriate to the intended outcome.

17. Something which our survey did not cover, but which can have a huge impact on the bureaucracy facing charities, and which was raised at our conference, is the monitoring regime to which they are subject in delivering public services. Under charity law, registered charities must already comply with a number of reporting requirements, including an annual report and accounts. Charities with an income above £500,000 must have their accounts audited by a qualified auditor and those with an income above £1 million must complete a Summary Information Return. We would suggest that in many cases commissioning authorities could make better use of this publicly available information, avoiding a certain degree of duplication in monitoring requirements.

18. Some charities attending our conference expressed concern about the inflexibility of public authorities when contracting with charities. For example, some authorities insisted on using their own standard contracts rather than Compact-compliant models, and some commissioning processes were seen as overly bureaucratic. Charities expressed concerns about certain approaches to commissioning, where contracts to charities operate more like grants, entailing administrative costs having to be justified and surpluses being subject to clawback. Our advice to charities is that the principles of the Compact (and local Compacts) should underpin any relationship between a charity and a public authority, and we therefore recommend that charities familiarise themselves with, and make use of, these documents. We welcome the establishment of the Compact Commissioner to champion the full implementation of the Compact at every level of government.

19. Whereas different types of funding agreements may be suitable for different circumstances, we are particularly concerned that of the charities responding to our survey, only 12% of those delivering public services reported that they obtain full cost recovery in all cases. A further 37% said they did so in some or most cases. Despite government support for the principle of full cost recovery, the survey results show that there is a long way to go before delivery of public services by charities is fully funded. Most charities at our conference expressed strong objections in principle to subsidising statutory services. In particular, grant giving charities wanted to fund additional provision, not the "basics"" which they felt should be the responsibility of the state. Of course, this issue must be tackled by both sides: as well as good practice by finders, charities also need to accurately assess, and negotiate for, the true costs of providing a service. Charities have expressed concerns, supported by our own observations, that smaller charities may not have the skills to succeed in competitive tendering processes. Many charities may lack both a proper understanding of their cost bases and the capacity to adequately negotiate contracts. This highlights the need both for charities' capacity, and for commissioners' understanding of these issues, to be developed.

20. There are financial implications of this for commissioners as well, which are discussed under Question 5. There are also implications for the public perception of charities, which are considered along with the character of the sector later in this paper.

Independence

21. The results of our survey suggest that there may be some cause for concern regarding the impact of public service delivery upon the independence and governance of charities. For example, only 26% of charities that deliver public services agreed that they are free to make decisions without pressure to conform to the wishes of funders, in comparison to 58% of those charities that don't deliver public services. (A higher percentage, 69%, of charities that deliver public services agreed or mostly agreed that they are free to make decisions without pressure to conform to the wishes of funders, in comparison to 84% of charities that don't.) However, these figures do not prove that public service delivery is necessarily a barrier to exercising independence from government; merely that charities feel under pressure from funders. Indeed, the level of concern expressed by charities about this issue might suggest that they are keen to guard their independence and find ways to express their views regardless of their sources of funding.

22. There are a range of views on this issue within the charitable sector. The Association of Chief Executives of Voluntary Organisations (ACEVO), for example, tells us that its members feel, that such a contractual relationship allows them to influence funders' policies. Shelter comments on the tension they feel between delivering public services and campaigning, particularly when they were in contractual relationships with the local authorities whose policies they wished to criticise. However, they believe that their voluntary income base and the strength of their campaigning brand mean that they are able to resist pressure when it was applied.

23. A greater proportion of larger charities are involved in, and earn a higher proportion of their income from, public service delivery: our survey showed that almost 67% of charities with an annual income above £10 million delivering public services obtain 80% or more of their income that way. In contrast, 46% of charities that deliver a public service with an annual income below £10,000 obtain less than 20% of their income that way.

24. The Commission would have to consider regulatory action in any case where:

— a charity carried out activities or services outside its objects or powers in order to gain funding;

— a public authority exercised control over a charity's decision-making processes in such a way that the trustees were prevented from acting solely in the charity's interests; or

— a charity's trustees were insufficiently involved in decisions about what activities the charity should undertake, by making these decisions themselves, or by setting clear parameters for delegation and reporting of such decisions.

25. There are consequent risks to services and funders which are set out in our response to Question 5.

Polarisation

26. The Committee and others have asked whether there is a risk that the charitable sector will become polarised between large service-providing organisations and smaller groups. Our survey suggests that this is already happening: only 8% of charities responding to the survey with incomes below £10,000 reported that they delivered public services; in contrast, 62% of charities with incomes above £500,000 reported that they delivered public services. Even amongst charities that deliver public services, the survey results showed a divergence between smaller and larger charities. As highlighted above, over two thirds of such charities with incomes above £10 million obtain 80% or more of their income from public service delivery in contrast to nearly half of such charities with incomes below £10,000 that obtain less than 20% of their income in this way.

27. However, our understanding of the size and shape of the charitable sector contradicts the assumption made in the Committee's Issues and Questions paper that the dichotomy is between large charities providing public services and small charities campaigning and being more "radical"—this is oversimplifying the situation. In reality, charities do many other things besides campaigning and service delivery (such as providing community facilities, medical research, grant-giving and so on), and of course there are examples of charities which manage both to campaign and to deliver services successfully. The Commission's view is that it is essential that charities which are delivering public services also continue to exercise any campaigning role they may have which is consistent with their objects and aids their beneficiaries.

28. Martin Narey, the Chief Executive of Barnardo's, for example, has recently written in the Guardian that "In the last few months, Barnardo's has criticised Asbos; highlighted the poor educational outcomes for children in care (criticising some of the local authorities for whom we provide services); highlighted the plight of young carers; and made a sustained attack on inhumane treatment of asylum seekers' children. Last week we persuaded the Government to introduce the use of polygraphs for child-sex offenders."[117] Clearly, in this case delivering services on behalf of the Government has been no barrier to the charity seeking to influence government policy and campaign on behalf of its beneficiaries.

Sustainability and future scope

29. The results of the survey raise further questions about charities' future capacity for, and the sustainability of, public service delivery. It suggests that larger, regionally-based charities predominate in public service delivery. This may be a result of market pressures or barriers to funding opportunities, rather than choice on the part of charities. Whatever the cause, there may be a risk of creating a restricted market where only those charities above a certain size and capacity can successfully compete for future delivery of public services.

30. The overall picture that emerges presents a key issue in relation to future public service delivery by charities:

— Roughly two thirds of the sector is made up of very small charities (with an income of £10,000 or less) that are not heavily engaged in public service delivery and, because of their size, seem unlikely to have significant capacity to take on substantial public service agreements.

— The largest charities are already significantly engaged in public service delivery. Over 60% of charities with an income above £500,000 currently deliver public services. It is unclear how many more charities in this income band will want to take on public service delivery.

— The survey results also indicate that medium sized charities (particularly those with incomes of £10,000—£250,000) are struggling the most to obtain sustainable funding.

31. The Government has made numerous commitments to increase the capacity of the sector to deliver public services, to open up the market so that a wider range of organisations can participate, and to make sustainable funding the norm. From the findings above, the achievement of government's targets to increase the level of charities' participation in public service delivery will depend heavily on the successful implementation of these commitments.

The identity and distinctive ethos of the sector

32. Some charity sector commentators have expressed general concerns that an increasing focus on public service delivery is fundamentally altering the character of the charitable sector, with a deleterious effect on public trust and confidence in charities. It has also been suggested that in particular the failure to achieve full cost recovery, and the resulting charitable subsidy of public services, might lead the public to question how their charitable donations are being used. As the regulator, increasing public trust and confidence is at the heart of our remit, so we wish to ensure that increased service delivery by charities does not adversely impact upon levels of trust and confidence. A number of surveys have been carried out into the public's perception of what is charitable activity, and on what drives public trust and confidence in charities, for example by the Directory of Social Change[118] and also by the Charity Commission.[119] In addition, nfpSynergy have carried out some research into public attitudes towards charities delivering public services.[120] Taken collectively, the results indicate that there is scope for further research and analysis, but public confidence may be based on a limited understanding of the role of charity and the breadth of charitable activity.

Question 5: What are the financial implications of providing services through the third sector compared with directly provided state services?

33. The funding and stability issues highlighted by our discussions with charities and the results of our survey have clear financial implications for commissioning authorities. The price paid by commissioners of services from charities may be cheaper in the short term, but our research suggests that this is not sustainable and may not represent true value for money in the long term. There will obviously be hidden costs if:

— charities lack the capacity to accurately calculate their costs in tenders to deliver public services or to negotiate effectively to cover those costs;

— charities regularly or substantially subsidise public service delivery out of their reserves;

— charities consequently lack the capacity to "add value" or deliver quality services because of underinvestment; or

— charities ultimately fail to deliver services to the required standards, or services fail altogether, because of under-funding.

RECOMMENDATIONS FOR THE COMMITTEE TO CONSIDER

34. A significant number of charities are already involved in public service delivery, and there is considerable appetite from government to see more services delivered in this way. In order for this to be successful, we would suggest the Committee recommends the following:

— Guidelines proposing that funding arrangements should be appropriate to the intended outcome, in terms of the type of arrangement, its duration and whether multiple agreements, must be fully implemented at all levels of government (see paragraph 12 above).

— Charities delivering public services must not face an unnecessary bureaucratic burden due to over-monitoring by funders. Monitoring should be effective yet proportionate.

— Risk must be clearly identified and fairly apportioned between the charity and the funder in funding agreements.

121

— Commissioning authorities must interact with charities in a way which ensures that the charity's decisions are still made independently in the interests of their beneficiaries; that the charity retains the right to campaign publicly if it so chooses; and that the public trust and confidence in charity as a whole is not undermined. Charities can only act within their charitable purposes, ie. the stated aims of the organisation, which, along with their independence, necessarily limits the legal scope of their contribution to public service delivery.

122

— There is clearly a need for increased support to locally based, lower-income charities that want to get involved in delivering public services but which currently lack the capacity to do so. The Government may wish to consider what can be done to ensure that smaller and more local organisations have access to appropriate capacity building opportunities.

— Charities undertaking public service delivery must achieve full cost recovery and the compact must be fully implemented at all levels. We welcome the appointment of the Compact Commissioner in ensuring this.

123

March 2007

110 A summary of the conference is submitted with this memorandum and is available on our website here: http://ww2charity/spr/psdevent.asp Back

111 Our guidance (CC37) is submitted with this memorandum and is available on our website here: http://ww2charity/publications/cc37.asp Back

112 The full report is submitted with this memorandum and is available on our website here: http://ww2charity/Library/publications/pdfs/RS15text.pdf Back

113 Not printed. Back

114 CC37, ibid. Back

115 Improving financial relationships with the third sector: guidance to funders and purchasers, HM Treasury and others, May 2006. Available on the Treasury's website here:
http://www.hm-treasury.gov.uk./media/485/B9/guidncefunders1505061v1.pdf Back

116 Partnership in public services: an action plan for third sector involvement, December 2006. Available on the Office of the Third Sector's website here:
http://www.cabinetoffice.gov.uk/third-sector/documents/public_service_delivery/psd_action_plan.pdf Back

117 "Our charities are not co-conspirators", The Guardian, 14 February 2007. Back

118 A recent DSC survey (reported in The interplay between state, private sector and voluntary activity (Directory of Social Change, 2007)) found that 68% of respondents do not think public service delivery is charitable at all. Back

119 Opinion Leader Research for the Charity Commission: Report of findings of a survey of public trust and confidence in charities (2005). Back