4 Funding the voluntary sector |
59. Throughout this inquiry, and our earlier examination
funding of the voluntary sector, we have received considerable
evidence on reductions in grants and local authorities for charities
and community groups. It is not easy to find a substantiated,
accurate figure for the size of spending cuts to the sector. New
Philanthropy Capital has estimated the cuts in state funding to
be between £3.2 and £5 billion
and Sir Stuart Etherington, Chief Executive of the National Council
for Voluntary Organisations, thought that cuts of £3 billion
to the sector "was not unlikely".
Much evidence appears to be anecdotal. The Minister for Civil
Society strongly disputed the estimates we put to him as "a
totally speculative number, not based on any evidence at all"
but did not offer an alternative figure; arguing instead that
while the total would be higher than £100m, it was not possible
to produce a definitive figure.
60. While the size of the cuts has been disputed,
many witnesses have criticised the pace of the funding reductions.
The Bishop of Leicester reported concern that some Ministers had
not fully accepted the impact of spending reductions on charities.
[...]the way in which public funding is withdrawn,
the speed at which it is withdrawn, the consequences for the most
vulnerable and the negative effects on those charities and voluntary
organisations that train and mobilise volunteers has not always
been taken full account of. 
The trade union Unite warned:
The scale and speed of the cuts to the voluntary
sector is terrifying, and is hurting society's most marginalised
and vulnerable. Ill-conceived and rushed budget decisions have
been made at every level, from local councils and authorities,
to central government.
61. To understand the changing funding environment,
we considered the existing funding streams for charities, and
the attempts to bring in new funding mechanisms.
The current funding situation:
the 'funding gap'
62. Any consideration of the funding of the voluntary
sector at present should first recognise its breadth and diversity.
Voluntary bodies vary widely in terms of their objectives, their
size, their volume of income, their geographical scope, and their
types of activity. Figure 1 below is an illustration of this.
Figure 1 Voluntary sector size and income distribution 2007-08
(Micro = Less
than £10k income; Small = £10k to £100k; Medium
= £100k to £1m; Large = £1m to £10m; Major
= More than £10m)
Source: NCVO, Funding the Future
63. Across the sector, voluntary bodies are funded
by a mixture of income from the state, charitable giving and social
investment. The Minister for the Cabinet Office has highlighted
that the majority of charities75%do not receive
However, the NCVO estimates that "many of these are small
or micro organisations".
64. The 36% of sector income (£12.8bn) from
the state can
then be sub-divided as follows:
a) £9.1 billion of the total income from
the state (representing 71% of all state income, and 25% of total
sectoral income) is from the "payment for the delivery of
services under contract."
This may be from either national or local government. Polly Toynbee
appeared keen that income received for the provision of services
commissioned by the state should not be seen as a donation, or
a state subsidy for charity, arguing that:
[...] it is not money being given to charity as if
it were a charity donation, they are contractors. They are doing
a particular job. The local authorities have said, 'We want someone
to deal with young offenders', or, 'We want someone to do a day
centre for the elderly'.
b) £6.6 billion (52% of the total state
income, representing 18% of total sectoral income) comes from
Examples of this funding could be payment for contracted services,
or local grant programmes, such as Early Intervention Funds, Children's
Fund, or those that support volunteers and volunteering infrastructure:
such as Voluntary Sector Councils.
A further source is central government grants to local authorities.
NAVCA cited the use by some local authorities of central government
grants such as Area Based Grant and Working Neighbourhoods Fund
"to replace their own voluntary and community sector grants
When funding was subsequently withdrawn by central government
for these programmes NAVCA reported that it had not been replaced
by equivalent funding by local authorities.
65. A proportion of state funding has in the past
been derived from programmes such as the Future Jobs Fund, (which
closed in June 2010),
the Volunteer Brokerage Scheme which ended in November 2010,
and FutureBuilders, a £200m scheme which provided loans for
third sector organisations delivering, or planning to deliver,
public services (it was "effectively shut for business"
in June 2010.) These funding streams are no longer available
66. Particular charities receive proportionally more
public funding than others. The Third Sector Research Centre found
that a greater proportion of charities dealing with people with
mental health problems, ex-offenders or victims of crime received
public funding compared to charities serving 'the general public
or everyone' (60% compared to 28%).
Their research also found that "voluntary organisations working
in deprived areas are much more likely to be in receipt of public
67. We heard of great enthusiasm for the development
of new funding streams for charities from social finance. Bernie
Morgan, former Chief Executive of the Community Finance Development
told the Committee that "we are on the threshold of a new
era and paradigm shift" with regards to finance for social
enterprises and charities.
While a natural caution in approaching such claims is understandable,
Sir Ronald Cohen, Chair of Big Society Capital Limited,
asked the Committee to put aside its "initial
scepticism about whether something that seems so new can actually
be effective" suggesting that there were parallels with the
growth in venture capitalism in the UK in the 1980s.
68. While the projections for social finance are
ambitious the new income streams available cannot at present replace
the spending reductions already experienced. Kevin Curley of NAVCA
reported that £1.2 billion of funding to charities and voluntary
groups had been cut by local authorities, and that the funding
from Big Society Capital although "important in the future
[...] is small scale" in comparison.
69. There is also a considerable time lag between
cuts to local authority grants and spending and the development
of new sources of funding.
We heard evidence that funding cuts to small charities could undermine
the Big Society project. The National Council for Voluntary Youth
Services told us that
many organisations who might otherwise have a vital
and creative role to play in the Big Society may be lost over
the next 18 months due to the suddenness and severity of statutory
funding withdrawal, and the lack of viable alternative funding
pathways to 'bridge' their survival and adaptation to the new
The charity Community Links concurred:
Cutting too quickly risks destroying groups like
Community Links which are perfectly placed to develop the Big
Society if given the time to continue adapting and innovating.
70. The NCVO described this funding gap as "the
most significant problem" facing charities and voluntary
groups. In February
2011, the Prime Minister spoke to reassure such groups:
[...] some people say that the Big Society can't
happen because our voluntary bodies are being starved of state
money. No area can be immune from cuts, but I'd ask people to
look beyond the headlines and see a much bigger structural change
in how the voluntary sector can work in future. We are in the
process of opening up billions of pounds' worth of government
contracts so charities and social enterprises can compete for
the first time. The scale of this opportunity dwarfs anything
they've ever had before.
But we understand that while the opportunity lies
in the future the local authority cuts are happening now. So this
week we are launching a transition fund to help charities prepare
to bid for these contracts and a big society bank to provide some
working capital when they're awarded them.
are concerned that many charitable and voluntary organisations
are suffering the immediate effects of reductions in public spending.
In some cases their existence is at risk, yet they are the very
organisations which may wish to participate in the Government's
Big Society policies.
The Transition Fund
72. A £100m Transition Fund for voluntary and
community funds facing hardship as a result of spending cuts was
announced on 20 October 2010 as part of the Spending Review. Applications
were to be submitted by 21 January 2011. Eligible
organisations could apply for
a grant of up to 50 per cent of the reduction in taxpayer-funded
income that they used to deliver public services, with grants
available between £12,500 and £500,000. The fund was
open for applications from charities which:
- had turnovers of between £50,000
- spent at least half their total income on delivering
front line public services in seven defined areas including health
and social care, education, welfare to work and homelessness;
- had evidence, or had substantial reason
to believe, that between April 2011 and March 2012, they would
experience a reduction of at least 30 per cent of the taxpayer-funded
income they receive for the delivery of front line public services
in England; and
- had free reserves equal to, or less than,
the cost of running their organisation for six months.
73. The Transition Fund has attracted some criticism.
New Philanthropy Capital (NPC) was concerned about the way the
fund was operated, raising a number of specific points:
- The application period was
only 7½ weeks, which covered the Christmas and New Year holiday
- The application period closed while local authorities
were still making decisions regarding spending from April 2011
onwards. Many charities which are eligible for support from the
Transition Fund may not have been notified of their funding situation
until after the deadline for applications; and
- Charities which had followed 'best practice'
and not relied on one source of funding (in this case from the
state) for over half their income had effectively been penalised
for this by being rendered ineligible for the fund.
74. The Minister for Civil Society, Nick Hurd, explained
that the Transition Fund was designed to "get money out as
quickly as possible to organisations that are extremely dependent
on public income but have aspirations to deliver more public services.
We therefore had to set strict criteria for it."
He was clear that the Transition Fund was not intended "to
compensate fully, and we have always been quite clear that we
can't protect every single charity and voluntary group from a
reduction in public expenditure, because the scale of the reduction
that we need to make is so great."
75. We welcome
the Transition Fund and the intention to sustain the voluntary
sector which underlies it. The fund itself can clearly not provide
assistance to every charity and voluntary group struggling to
bridge the gap between public spending reductions and new sources
of social finance income. This funding gap may effectively inhibit
some charities from tendering for public service delivery, and
thus undermine the Government's efforts to procure from charities
and social enterprises, as they may lack the available funds to
enter into contracting arrangements. There is also a question
about democratic accountability for the allocation of such funds.
We urge the Government to bring forward proposals to address this,
such as a form of voting system, in order to reflect the aspiration
to involve people and communities.
Big Society Capital
76. Speaking at the launch of the Big Society project
in Liverpool in July 2010, the Prime Minister recognised that
charities and smaller organisations could find it difficult to
tender for public service contracts because of difficulties raising
working capital. To remedy this, the Prime Minister described
"providing finance" as one of the three main areas of
policy action necessary to achieve the Big Society project (the
others being decentralisation and transparency).
The Prime Minister stated that:
we believe in paying public service providers by
results. It encourages value for money and innovation at the same
time. But the potential problem is that you can lock smaller organisations
out, because they don't have access to start-up capital. So government
has a crucial role to play in bridging the gapand indeed,
more widely, in connecting private capital to investment in social
77. The Prime Minister provided further details of
the Big Society Bank, now renamed Big Society Capital. It would
be capitalised by
using every penny of dormant bank and building society
account money allocated to England. These unclaimed assets, alongside
the private sector investment that we will leverage, will mean
that the Big Society Bank willover timemake available
hundreds of millions of pounds of new finance to some of our most
dynamic social organisations.
This is estimated to amount to up to £100m from
bank and building society accounts which have been untouched for
at least 15 years.
In addition to these funds, the Bank will be capitalised with
£200m as a result of the February 2011 Project Merlin agreement
between the Government and the UK's four biggest banks .
78. In February 2011, the Cabinet Office published
a strategy paper entitled Growing the Social Investment Market:
a vision and strategy which set out how charities and social
enterprises would be able to access social investment funds. The
strategy describes a considerable opportunity for growing the
social investment market, noting that
UK charitable investment and endowment assets alone
account for nearly £95 billion. If just 5% of
these assets, 0.5% of institutionally managed assets and 5% of
retail investments in UK ISAs were attracted to social investment,
that would unlock around £10 billion of new finance capacity.
79. The establishment of Big Society Capital has
been considerably delayed by the need to secure EU state aid approval
for the use of the dormant bank account funds. A formal notification
for state aid approval was submitted in October 2011, and the
Cabinet Office expects to secure approval by April 2012.
Given the already difficult funding environment for charities
and community groups, this delay is unhelpful.
80. Delays in
setting up Big Society Capital are contributing to the 'funding
gap'. In our report 'Change in Government: the agenda for
leadership' we reported on the frustration in Government
about the "deadweight of inherited policy, not least by the
overbearing constraints imposed by the vast body of EU law and
regulation". The delay in the operation of Big Society Capital
by the need to seek EU state aid approval is a case in point.
81. The mission of Big Society Capital is
to boost significantly the ability of the social
sector to deal with social issues. It will do this by supporting
the development of a social investment market which is more effective
in attracting capital to achieve social impact.
The potential impact on charities and social enterprises
is indeed considerable. As Sir Ronald Cohen explained, traditional
fundraising measures involve the uncertain procedure of charities
and social enterprises approaching a number of donors and philanthropic
trusts and requesting large sums for a long period of time. Big
Society Capital will bypass this hindrance.
Sir Ronald also recognised the need to build capacity in the social
investment market, and spoke of the purpose of Big Society Capital
as being "proactive" and "with the purpose of getting
the social sector going". This would mean that Big Society
[...] is going to be a lot more than just a fund
of funds. Part of it is making sure that Social Impact Bonds help
those who are capable of being helped by them, where the metrics
are there and the organisations can deliver social outcomes and
Claire Dove, Chair of the Social Enterprise Coalition,
spoke of the considerable help this would provide social enterprises,
citing her own hard-fought battle as a social entrepreneur.
82. Sir Ronald struck a note of caution in warning
that Big Society Capital should not be expected to "bring
a revolution in the space of five years".
Instead, he urged it to be seen as a "10 to 20-year project":
a similar growth period to that of business entrepreneurship in
the UK in the 1980s.
83. Big Society Capital will be a private sector
body independent of Government, and it will be expected to make
a sufficient return on its investment to cover operating costs.
Under the Dormant Bank and Building Society Accounts Act 2008,
it is required to work as a wholesaler: charities and social enterprises
will not receive funding directly from Big Society Capital, but
instead from intermediary social finance organisations.
This point concerned some witnesses. NAVCA warned that, as the
social finance intermediaries with which Big Society Capital would
be working will be offering loans, and not grants, they did not
think that it would be relevant for small and local charities
and voluntary groups.
Other charities report not being willing to seek loan finance
owing to resistance among some trustees to a new, and potentially
riskier funding model.
84. Two recent reports have cast doubt on the ambitious
forecasts for the take up of social finance by the sector. The
Young Foundation and Boston Consulting Group warned that there
were too few social finance intermediaries to deliver these
funds, meaning that much of the Big Society Capital's money would
remain in dormant bank accounts.
New Philanthropy Capital claimed that social finance was only
relevant to a small proportion of the sector, and could be dangerous
to ambitious charities that took on debt they would not be in
a position to repay.
85. We raised concerns about the rates of return
the Project Merlin banks would receive on their investment. The
Minister for the Cabinet Office told us that banks would "be
entitled to a share of any distributable surplus/profits made
by Big Society Capital in proportion to their investment".
86. Sir Ronald Cohen believed that Big Society Capital
would not experience the lack of demand for social investment
experienced by other social finance funds. Instead he believed
that "the supply of money does create its own demand"
as the ambitions of social enterprises and charities would increase
when they knew that there would be a source of funding for their
activities. This would also attract new social entrepreneurs into
the market. Claire
Dove cited research carried out by the Social Enterprise Coalition
which had indicated that one of the biggest barriers to growth
of some social enterprises was access to capital.
87. A contrasting view came from NESTA (the National
Endowment for Science, Technology and the Arts) which argued that
"by far the majority of demand for capital" was for
'soft capital', defined as patient, semi-commercial capital which
typically took many years to return the principal. NESTA warned
that Big Society Capital "should not expect to achieve commercial
returns on many of its investments".
NESTA challenged Big Society Capital to be clear whether its role
would to help social enterprises and charities access capital
to increase social impact, or to deliver financial returns.
The National Association for Voluntary and Community Action (NAVCA)
urged Big Society Capital to "accept that some investments
will not see a return" and instead balance risk across a
range of investments.
88. Big Society
Capital is a genuinely imaginative social innovation, which has
enormous potential in the long term. The concept is as yet unproven,
and large scale effects will take a decade or more to bear fruit.
Furthermore, Big Society Capital will not provide the solution
to the 'funding gap' for many small, local charities who do not
wish to take out loans. The Government must acknowledge that in
the short term Big Society Capital is unlikely to resolve the
current 'funding gap'.
Social impact bonds
89. In September 2010 the Ministry of Justice launched
a pilot social impact bond aimed at reducing reoffending by prisoners
who served short custodial sentences at HMP Peterborough. The
bond raises finance for a Payment by Results contract, whereby
the private sector assumes the risk of delivering a public service,
and is rewarded by Government based on the outcomes it achieves.
The scheme is worth £5m and run jointly by the non-profit
organisation Social Finance and the offender rehabilitation
charity St Giles Trust. If this pilot project reduces re-offending
by 7.5%, or more, investors will receive from Government a share
of the long-term savings, up to a maximum of 13%.
The first social impact bond was only available to foundations
and charitable trusts, not the private sector, but Sir Ronald
Cohen envisaged private sector interest further down the line.
This is not guaranteed: private investors might have to wait several
years to see a return.
Third Sector magazine, the trade journal for the charity and voluntary
sector, warned that social impact bonds
are considered more likely to appeal in the short-term
to philanthropists and then to smaller investment funds and private
banks, which are more able to take risks. Among institutional
investors, insurance firms are seen as likely takers because they
would benefit from reductions in crime and antisocial behaviour.
Traditional institutional investors such as pension funds are
thought likely to be the last in line.
90. The progress of social impact bonds will also
depend on the ability of commissioners to develop metrics for
measuring social outcomes. Sir Ronald Cohen recognised that the
need to measure success "will rule out certain social issues
where it is very difficult to find metrics that are reliable".
91. While witnesses were positive about the development
of social impact bonds, concerns were expressed that the limited
examples at present were all at very early stages. For example,
NAVCA cautioned that the results of the pilot programme at Peterborough
Prison would not be clear for around six years.
In the meantime policy based on social impact bonds is being formulated
in the absence of any evidence of their success.
92. Social impact
bonds have the potential to transform the way public services
are delivered and financed. Until further evidence of their success,
both in achieving social aims and attracting capital, is available,
we urge caution in reliance on their growth. We welcome the reviews
taking place of the pilot project at HMP Peterborough, and look
forward to receiving information on the project's progress.
114 New Philanthropy Capital, Preparing for cuts,
(London: 2010), p 2 Back
Q 94 Back
FVS Q 170, 171, 172 Back
Q 370 Back
Ev w292 Back
The Funding Commission, Funding the Future, (London: 2010),
p 8 Back
"Battle of the Big Society" The Independent ,13
February 2011, p. 10-11 Back
NCVO The State and the Voluntary Sector (London, 2009),
p. 11. Back
FVS Ev 51 Back
FVS Ev 51 Back
Q 92 Back
FVS Ev 51[The NCVO calculations are based on figures from 2007-08:
the most recent figures available]. Back
FVS Ev 53 Back
Ev w213, FVS Ev 53 Back
FVS Ev 53 Back
HC Deb, 9 June 2010, col 319 Back
Ev w240 Back
Ev w240 Back
Q 251 Back
Q 264 Back
Q 434, 436 Back
Ev w107 Back
Ev w141 Back
Ev w108 Back
Ev w249 Back
'David Cameron: Have no doubt: the Big Society is on its way'
The Observer 13 February 2011 Back
"Transition Fund" Big Lottery Fund website, 30
November 2010 biglotteryfund.org.uk Back
"£100m Transition Fund for charities: tight deadline"
New Philanthropy Capital Blog, 11 January 2011, newphilanthropycapital.wordpress.com
Q 153 Back
Q 155 Back
Prime Minister's Big Society speech, 19 July 2010 www.number10.gov.uk
'Big Society Bank will start with £60 to £100m in unclaimed
assets, say government advisers' Third Sector 19 July 2010 Back
HC Deb 9 Feb 2011 Col, 312. Back
'Growing the Social Investment Market: a vision and strategy'
Cabinet Office February 2011 Back
Ev 125 Back
"The Big Society Bank Outline Proposal", Big Society
Capital, May 2011, www.bigsocietycapital.com Back
Q 256 Back
Q 315 Back
Q 309 Back
Q 290 Back
Q 295 Back
Ev 126 Back
Q 297, BS 50 Back
The Young Foundation and Boston Consulting Group, Lighting
the Touchpaper: Growing the market for social investment in England,
(London: 2011) Back
New Philanthropy Capital, Best to Borrow: A charity guide to
social investment, (London: 2011) Back
Ev 125 Back
Q 292, Q 293 Back
Q 310 [Claire Dove] Back
Ev w295 Back
Ev w296 Back
Ev 126 Back
"Social Finance launches first Social Impact Bond" Social
Finance 10 September 2010 www.socialfinance.org.uk Back
Q 313 Back
"Analysis: Can Social Impact Bonds help create a better society?"
Third Sector, 1 November 2011 Back
Q 260 Back
Ev 126 Back