Stronger charities for a stronger society Contents

Chapter 4: Funding: grants, contracts and commissioning

The decline of public sector grants

178.Grant funding from national and local government has traditionally been a significant source of income for the charity sector.232 However, grant funding from government has declined since 2003/04, when charity income from grants was estimated by the NCVO to be £6.1 billion, and by 2013/14 it was just £2.8 billion. At the same time, charity income from government contracts has increased substantially, from £5.8 billion in 2003/04 to £12.2 billion in 2013/14.233

Figure 3: Charities’ income from government contracts and grants, 2000/01 to 2013/14 (£bn, 2013/14 prices)

Source: NCVO, UK Civil Society Almanac 2016

179.The NCVO suggested that the transition from grants to contracts had benefitted the largest charities at the expense of smaller ones. They said that the largest charities:

“will have been the best placed to secure increasingly large-scale contracts offered by central and local government. Conversely, small and medium sized charities did not recover income lost from Government since 2009/10. These organisations have consistently reported problems in bidding for contracts, from the increasing scale of contracts, to reduced focus on quality, and payment-by-results mechanisms that disadvantage smaller providers.”234

180.Paul Streets of the Lloyds Bank Foundation for England and Wales also told us that the redistribution of funding from grants to contracts had led to a gain by larger charities at the expense of smaller ones. He said that between 2008 and 2013 the income from government to charities with an income of between £25,000 and £1 million fell by up to 38%, while income to charities with an income of more than £100 million went up by 38%.235

181.The NCVO said that the move from grants to contracts had led to a “different operating environment for charities, and a different relationship with Government; one where charities are seen mainly as service providers and have to compete amongst each other to win contracts.”236 Rebecca Bunce of the Small Charities Coalition told us that the reduction in grant funding was making it harder to support good governance among small charities.237

Charities and contracts

182.The transition from grants to contracts, and the challenges for smaller charities bidding for and operating contracts, were frequent topics in the evidence we received.

183.We heard that contracts were increasingly large, and that this excluded smaller charities from accessing them. The Lloyds Bank Foundation said that the proliferation of larger public service contracts meant that new types of charity had emerged, which had little interest in meeting local community need, but were instead “driven by market share” and “prepared to slash costs to win contracts, with little regard to service quality.”238 They added that, in many cases, small contracts had been “rounded up into ever larger contracts over larger geographical areas, forcing smaller charities out of the market place” and that in some cases larger providers had “collude[d] with commissioners to develop ever larger contracts and undercut smaller providers.”239

184.New Philanthropy Capital said that the transition from grants to larger contracts had “locked out smaller, more specialist organisations, with some charities struggling to even continue their existence.”240 Some of the small charities we spoke to in Cardiff told us that they were unable to bid for many contracts because they required a larger scale or wider geographical reach than they were able to offer.241

185.Locality told us that financial pressures on local authorities resulted in larger contracts, covering multiple areas and specialisms, and greater standardisation of services, in order to avoid the costs associated with multiple smaller contracts.242 They added that “scale in commissioning can also often mean that community organisations are delivering public services as part of a supply chain which can also bring financial pressures, including through a lack of referrals and inability to plan cash-flow.”243

186.We also heard that seeking funding through funding bids was expensive and potentially restrictive.244 MyBnk told us that:

“To maximise our chance of funding we must orientate the application to the funder’s vision e.g. a particular age group, geography or innovation. This results in the majority of funding being restricted and, although we are fully costed, free (unrestricted) reserves are low.”245

187.We heard that small- and medium-sized charities had ethical concerns about their ability to fulfil contracts where they face acute cost pressures. The Lloyds Bank Foundation for England and Wales told us that “unlike larger competitors, they are not prepared to threaten service quality by cutting prices, with grantees reporting that they have not bid for contracts knowing that they would not be able to deliver an effective service at the price available through a contract.”246

188.In order to help smaller voluntary organisations bid for contracts, NCVO said that Government should provide some support for the development of voluntary sector consortia, which it described as “a vital route, through collaboration, to innovation and efficiency savings” but which had little statutory support following the closure of funding streams such as the Community Right to Challenge grant fund which had been administered by the Social Investment Business.247

189.The Lloyds Bank Foundation for England and Wales said that partnerships, consortia and mergers had been suggested as a way for small- and medium-sized charities to respond to commissioners’ demands for scale. They added that “while they can offer opportunities, they can present challenges in themselves, particularly where commissioners have gone so far as to specify that charities must merge as a condition of a contract.”248 New Philanthropy Capital advocated a commissioning approach “that provides a level playing field, where competition is focused on who can deliver the greatest impact, not necessarily at the lowest cost.”249

190.The Minister for Civil Society, Rob Wilson MP, told us that the Government had been having an “open policy discussion” with charities, including smaller charities, “to explore the scope for Government and the voluntary sector to find ways around the barriers that currently exist” to small charities’ ability to bid for and fulfil public service contracts.250

191.He also said that, as a result of The Public Contracts Regulations 2015, public sector commissioners awarding large contracts were required to explain why they had not been broken up into smaller ones.251 He added that “a number of charities are perhaps taking on contracts because they feel they have to. I would strongly advise them not to do that.”252 We understand, however, that given the financial pressures on charities and the move in public funding from grants to contracts (see Figure 3), there are strong incentives and justifiable reasons for charities to apply for contracts.

192.In December 2016, the Government announced new measures and an implementation group to help small charities “shape and deliver” public services. These included a “public services incubator” to record and overcome barriers to the involvement of small charities in public contracts; exploring the development of a “commissioning kitemark” which commissioners could use to show that they were friendly to small charities; and recruiting a “voluntary, community and social enterprise crown representative” to champion commissioning practices that help small charities.253 We also note that recent changes to EU public procurement directives encourages contracting authorities to break contracts up into smaller “lots” to allow for greater participation from smaller organisations.254

193.The commissioning landscape is skewed against smaller charities. We recommend that contracting authorities embrace the recent changes to public procurement rules, which allow for smaller contracts, potentially giving charities better access to funding opportunities.

194.We welcome the Government’s recent announcement on new measures to improve commissioning and help small charities get commissioned. We recommend that Government provides support for the development of voluntary sector bidding consortia, and takes steps to promote commissioning based on impact and social value rather than simply on the lowest cost.

195.We also heard that small charities being used as subcontractors by large charities or private sector organisations as part of big contracts were at risk of exploitation. Lord Hodgson of Astley Abbotts said that commissioners were by their nature risk averse, and so the “default option is to award contracts to large organisations with smaller local charities as subcontractors.” He added that “too often this means that the large organisations take the vanilla flavoured cases and leave the harder cases to the smaller local organisation.”255

196.The Lloyds Bank Foundation told us that:

“Smaller charities report problems of ‘bid candy’ whereby prime providers use smaller charities to add knowledge and legitimacy to their bids then later fail to pass referrals and money to the smaller subcontractee. The Foundation has even heard examples where larger organisations have demanded that small charities do not negotiate or discuss applications with other prime providers, only to be left out of the larger organisation’s bid and having lost the opportunity to work with other primes.”256

197.Charities have a long and distinguished history of delivering services and, with their focus on the needs of their beneficiaries, the quality of the services they provide can be better than those delivered by other organisations (see Chapter 2). Charities should not be dissuaded from seeking funding through contracts in order to deliver services.

198.We recommend that the Government’s implementation group on commissioning practices considers the risks of larger organisations exploiting smaller charities through the commissioning and subcontracting process. We recommend that Government guidance on public sector commissioning should highlight these risks and encourage the design of contracts in a way which prevents such practice so far as is possible.

Commissioning processes

Commissioning skills and co-operative development of contracts

199.We heard that the close proximity of small charities to their beneficiaries meant they were better placed to understand the needs of their beneficiaries and the services required to support them, than those responsible for commissioning services. We also heard that cuts in local authority budgets meant staff no longer had the experience and expertise of commissioning for the relevant sector.257

200.Action in Rural Sussex told us that the desire of some commissioners for control over the terms of service delivery was a weakness in practice. They said that:

“commissioners have to make a choice between short term control in order to deliver a narrowly defined service definition on the one hand and long term impact on the other. Long term impact is achieved by giving ownership and control to a charity, or a group of charities working together, that provides them with an incentive to find a route towards sustainability.”258

201.We heard about the potential of “co-designed” services, in which commissioners, suppliers, beneficiaries and service users are all involved in developing services to alleviate these difficulties. Such services were said to be better for beneficiaries and could lead to long-term savings for commissioners. Councillor Stephen Powers from Newcastle City Council told us that their “co-operative” approach to service design and delivery “involves, beyond just the council commissioner service, working collaboratively with education providers, with the voluntary and community sector and with business leaders, to make sure that we are making a holistic offer to people.”259

202.Andrew Seager from Citizens Advice told us that they had successful experience of co-designed services in relation to preventing excess winter deaths and developing an advice centre commissioning strategy in Birmingham.260 He added, however, that commissioners sometimes paid mere “lip service” to co-design, and that it “needs the proper level of investment; it needs to start at the beginning of a commissioning process.”261 Jacob Tas from Nacro said: “If it is fake, if it is just as a good show, of course it is waste of everybody’s time, and usually it is very short-lived.”262 Dan Scorer from Mencap also expressed concern as to whether involvement was taking place at a sufficiently early stage. He said that:

“we see wide variation in practice in early engagement of people with learning disability and their families when changes to services are being discussed: whether the consultation process is itself accessible, so whether information is made available in an easy read format that people can access; and whether consultation events on the service redesign are widely publicised so that people with learning disability and their families can genuinely engage in the process of designing services.”263

203.Barnardo’s told us that:

“there remains a concern that legacy commissioning practice and behaviours are not yet fully adjusting to take advantage of the strategic partnering concept. Barnardo’s believes that this means there is a risk that the opportunities for genuine dialogue and co-design and production that are integral to true strategic partnering are being missed.”264

204.We also heard about initiatives related to ‘whole systems commissioning’, whereby different types of services are commissioned together in order to provide more holistic support to beneficiaries, and a related approach of ‘whole person commissioning’, where the needs of beneficiaries are the starting point and services are designed around them.265

205.Dan Scorer of Mencap gave the example of the Transforming Care programme, which was initiated after the Winterbourne View abuse scandal. The programme is intended to support people with learning disabilities to move from institutional settings into the community. He told us that such a change:

“obviously requires a huge amount of co-ordination between health services and local authority social services, which in many areas has not existed previously. It requires the pooling of budgets to remove the risk of disputes about who is paying for what when people may be moving out of an NHS-funded service and back into a local authority-funded service in the community.”266

206.This view was echoed by Andrew Seager, who said that: “fundamentally, we are here to help individuals, and individuals do not fit into neat little funding streams or boxes. Without integration, you commission vertically on those various points and not bottom upwards about what an individual needs.”267 London Funders concurred with these views. They told us that:

“the role and purpose of charities cannot be seen in isolation, in the review team’s view. Charities should be part of an integrated system that works to improve peoples’ lives. National governments, local government, health commissioners, independent and statutory funders, businesses, politicians and communities themselves each have a role to play.”268

207.We believe it is important that local authorities and other public service commissioners adopt a partnership approach to service design and provision, involving charities, other voluntary bodies, service users and beneficiaries in the commissioning process from an early stage. We do not believe that meaningful relationships of this kind are common, and as a result charities are losing out on potential work and funds and commissioners are missing out on the values, knowledge of local needs and innovation that charities bring to service delivery. Public sector commissioners need to embed a genuine partnership approach in their structures, processes, contracts and cultures to ensure that the best possible results are achieved.

208.Public service commissioners should also be encouraged to commission different types of services together. They should consider the potential of whole systems commissioning and whole person commissioning, with services and the commissioning process being designed around the needs of beneficiaries. This will result in better services for end-users and also long-term savings for commissioners.

Public Services (Social Value) Act 2012

209.One commissioning mechanism that should benefit small- and medium-sized charities is the Public Services (Social Value) Act 2012 (commonly known as the Social Value Act). The Act requires all public bodies in England and Wales to consider how the services they commission and procure might improve the economic, social and environmental well-being of an area.

210.“Social value” was described by Social Enterprise UK as “a way of thinking about how scarce resources are allocated and used.”269 This involves looking beyond simply the price of an individual contract to also consider the value that would be delivered to the community through a contract. An example of this would be a commitment from a potential contractor to provide local employment opportunities as part of the contract.

211.The Cabinet Office commissioned Lord Young of Graffham to carry out a review of the effectiveness of the Social Value Act, which was published in February 2015.270 Lord Young concluded that, while there was growing awareness of social value among public bodies, this was not reflected by the number and value of procurements. He said that there had been inconsistent practice in bidding and commissioning and that commissioners often lacked the ability to measure and quantify social outcomes.271

212.Lord Young recommended that the Cabinet Office should do more to promote awareness of social value, and to promote better understanding of how to apply the Act.272 He considered options for extending the Act, by strengthening the language, replacing the requirement to “consider” social value with alternatives such as “account for”, or by making consideration of social value mandatory, or by making the Act apply more broadly. He concluded that such an extension “would not be beneficial to the Act at this early stage of development.”273

213.The uses of the Social Value Act were a frequent theme in our evidence. A number of successes were reported: Peter Holbrook of Social Enterprise UK told us that the Department of Health had been “particularly embracing of social value as a concept” and that the Ministry of Defence had also undertaken innovative social value initiatives.274 He added that the Act should be supported with statutory guidance so that commissioners had a clearer idea of how to secure the best value for money through social value.275

214.Councillor Robert Light from the Local Government Association suggested that the Act had had a positive impact. He cited the example of Chelmsford City Council, which in its commissioning procedure required tenderers to set out the percentage of staff they would employ from the local area and the percentage of value arising from the contract which might reasonably be expected to be returned to the local economy.276 Councillor Stephen Powers from Newcastle City Council told us that “we have absolutely built social value into our whole design process when it comes to commissioning services and procuring services. We have done that right from the start rather than it being an afterthought at the end.”277 The representatives from the Greater Manchester Combined Authority told us that social value in commissioning gave them a lot of flexibility in their decision-making and said they wanted to make more use of it.278

215.We also, however, received some evidence that the Act was yet to function as effectively as it might. Andrew Seager from Citizens Advice told us that, while he welcomed the Act, “we have little experience of it coming through and making a difference.” He said that social value considerations were not necessarily in every tender and that, where they were included, they often did not contribute to more than 5% of the overall score on which a tender would be judged. He suggested that some commissioners might still view social value as an “afterthought.”279

216.Locality proposed that commissioners should be required to incorporate social value into their contracts, rather than merely considering it.280 NCVO echoed this recommendation, arguing that commissioners should be required to “’account’ for and report on social value in their commissioning,” and that the Act should be extended to cover goods and works.281

217.New Philanthropy Capital said that the Act had “not delivered the many significant changes that were hoped for” and that, while they had advocated for and welcomed many of the recommendations contained in Lord Young’s review, “it is disappointing there has been little progress since in improving how the Social Value Act works.”282

218.The Office for Civil Society told us that “we continue to support procurers to improve the way they commission services, including through sharing best practice on implementing the Public Services (Social Value Act) 2012.”283 They said that they had recently published the first two in a series of eight case studies on the Act, under its Social Value Implementation and Measurement Project and that “as well as giving a practical insight, the case studies are intended to serve as starting points for initiating new ideas and for sparking innovative thinking.”284

219.In February 2017 the Minister for Civil Society, Rob Wilson MP, announced another review of the Social Value Act to consider its progress.285

220.While the Government has taken some steps to promote the implementation of the Public Services (Social Value) Act 2012 and to encourage wider awareness of social value among public sector commissioners, we believe more could be done to maximise its potential. We welcome the Government’s new review of the Act and hope that it will result in further improvements.

221.We believe there is merit in considering the options for extending the Public Services (Social Value) Act 2012 as set out by Lord Young of Graffham. We recommend as a first step that the Government requires public sector commissioners to “account for” rather than merely “consider” social value. We further recommend that the Government sets measurable targets for the use of social value in commissioning and outlines the steps it will take if those targets are not met.

Financial and planning challenges

Payment by Results

222.The use of Payment by Results (PbR) schemes in contracts was raised by many of our witnesses. PbR contracts can take a number of forms and can be commissioned by national government, local government or other public bodies. They are most commonly understood to be based on payments tied to the delivery of specific outcomes or outputs. A 2011 Cabinet Office white paper stated that “open commissioning and payment by results are critical to open public services”, and that “payment by results will build yet more accountability into the system—creating a direct financial incentive to focus on what works, but also encouraging providers to find better ways of delivering services.”286

223.We received evidence criticising the widespread use of PbR contracts, including from Civil Exchange which informed us that contracts under the Work Programme “have often been poorly designed, transferring financial risk to institutions that are already financially vulnerable and leading to poorer services for people with complex needs.”287

224.The Lloyds Bank Foundation noted that PbR contracts were often unsuitable for small- and medium-sized charities because they lack the upfront capital or risk capacity to be able to take them on.288 Locality told us that “the financial risk which is transferred through the payment by results model is often borne largely by the weaker partner. This requires sophisticated management information systems to evidence performance and manage risk.”289

225.Locality also suggested that, where a PbR contract did not incorporate a sufficient upfront payment, it could cause charities cash flow problems and possibly mean that upfront costs had to be funded through reserves or other income sources.290 The Springboard Project told us that contracted payments often arrived late and required charities to dip into their reserves to cover them. They noted it was “very difficult” to build up reserves from restricted contracted funding.291 The NCVO told us that the use of reserves or the sale of assets by charities to fund ongoing expenditure left them “vulnerable to further financial shocks”.292

226.Andrew Seager from Citizens Advice told us that they had resisted Payment by Results in subcontracting because they were concerned about the risk of delivering services without a guarantee of receiving payment for the work.293 Dan Scorer from Mencap added that the two key issues were accountability and transfer of risk:

“clearly, we have to be accountable for delivering outcomes, and payment by results delivers that, but when you are talking about transfer of risk, the financial model has to work for specialist organisations that are trying to work with people who have more complex needs and has to recognise the journey that those individuals will go on.”294

227.Dan Corry of New Philanthropy Capital told us that Payment by Results contracts may have some benefits for charities:

“Charities have to be very clear whether they want to get involved in these contracts or not because they can pull you away from the mission. A lot of them feel, though, that they can achieve more if they have some freedom via outcome-based contracts, which causes them cash flow and risk problems but nevertheless gives them a bit more freedom to deliver in the way they think is right, which is a good thing.”295

228.In 2015 the National Audit Office (NAO) published a report on outcome-based payment schemes, which concluded that PbR was not suited to all public services and that commissioners should justify their use of PbR over other delivery mechanisms. They said that contracting with PbR had costs and risks that the Government often underestimated, that commissioners should devote more time and effort to designing an appropriate payment mechanism and that they should actively plan and manage provider performance.296

229.The NCVO recommended that the Government should systematically collect evidence on the use of PbR so that practice could be improved and that commissioners should be required to use the NAO’s analytical framework for decision makers when considering PbR contracts. They also suggested that, when developing new PbR programmes, the Government should support the voluntary sector in building skills in financial planning, risk assessment and the modelling of contracts.297

230.Where contracts—especially those involving Payment by Results—are used for service delivery, public sector commissioners should give greater consideration to the sustainability of organisations which are commissioned to deliver services. The Government should examine whether its guidance to public sector commissioners needs to be amended to ensure that this happens. At the same time, charities need to ensure that they have the cash flow to support undertaking work within such schemes.

231.We recommend that the Government’s review of commissioning considers the impact of Payment by Results contracts on charities and examines what support the sector needs to engage in service delivery in a sustainable manner.

Core costs

232.Many of our witnesses reported that charities had increasing difficulty funding their core costs.298 Core costs for charities may include staffing, project management, office costs, accountancy, and regulatory compliance. The Robertson Trust reported the results of a survey of its grant holders, which found that 85% saw “lack of funding for core costs” as one of the three biggest challenges facing their charity.299

233.The Charity Finance Group told us that charities have had to remove such costs from funding bids, on the basis that local and central government commissioners were not prepared to pay them.300 The Springboard Project said that they had received advice to “strip out any administrative or back office costs to have even a remote chance of success” of funding from BBC Children in Need.301 MyBnk said that funding was offered for ‘front-line’ services only and did not cover the ‘back-office costs’ that made services possible.302

234.The Garfield Weston Foundation said that only 25% of applicants asked for funding for core costs and that charities told them that they were afraid of seeking this funding for fear of being turned down.303 Philippa Charles from the Garfield Weston Foundation said that:

“charities are inevitably under significant pressure to ensure that their costs are as lean as possible in that kind of environment, which has the unintended consequence of placing pressure on them, in some cases, not to apply for their core and running costs. That sometimes concerns us, because it can disguise the true cost of delivering a very important service.”304

235.Citizens Advice said that, while various funders were willing to support new projects, few were interested in covering core costs or in keeping their programmes running day-to-day.305 New Philanthropy Capital said that, as the public were unlikely to donate to cover the costs of management capacity and strategic capability, “funders and government need to consider how they can support organisations to be more effective in delivering their mission.”306

236.Dr Beth Breeze from the Centre for Philanthropy at the University of Kent told us that covering core costs in service delivery had “always been a problem historically”, and that it was being exacerbated by the concept of the “golden pound”, the notion that all money received by charities must go directly to beneficiaries “and not a penny is wasted on things like getting an accountant to do your accounts properly or all the other things that you need to do.”307

237.Philip Lawford of the Linbury Trust said that he would always seek to ensure that charities were able to cover their overheads if they were bidding for funding for a new project. He said that “the more thoughtful donor would expect overheads to be included, because they have to be paid for somehow.”308

238.Some charities and sector representatives called for provision for “full cost recovery” in public sector commissioning, including the Small Charities Coalition and the Charity Finance Group.309 The Institute for Voluntary Action Research (IVAR) reported the findings of a survey which indicated that voluntary organisations were increasingly having to borrow to cover working capital, and reported the view of one respondent that “full cost recovery” should not just include direct and indirect costs, but also the requirement to produce unrestricted surpluses to finance reserves, working capital and funds for innovation and development.

239.Charities cannot operate unless their core costs are met. We recommend that public sector commissioners should be expected to have regard for the sustainability of the organisations which they commission to deliver services. This should include an expectation that realistic and justifiable core costs are included in contracts.

Duration of contracts

240.We heard that service delivery contracts tend to be brief in duration, typically lasting for one or two years, which made it difficult for charities to plan for financial sustainability.

241.The NCVO reported that short contracts had become standard in commissioning, and that they often exacerbated bureaucracy, “leaving little time to embed and improve a service before bidding starts afresh.”310 Barnardo’s noted that, while this was not a new problem, it was seeing it “not only persist but also become increasingly challenging in the current, tough commissioning climate.”311

242.The Cranfield Trust observed that, where charities were particularly dependent on a small number of contracts for their income, “this tends to lead to short term planning based on these income sources, rather than setting an independent agenda based on beneficiary needs or factors affecting their beneficiary group.”312

243.Dan Scorer from Mencap told us that the requirement to demonstrate immediate impact often created problems in relation to the fulfilment of short term contracts. He said:

“Looking at employment support, a current issue is that many programmes are designed to get people into work within 12 months. Clearly, if you are dealing with people who are further away from the labour market who you think you can make significant progress within that time, you face two issues. One is that you will not get payment within that time. The other is that if you do not get someone in work within 12 months, you get nothing at all.”313

244.Charity consultant and commentator Stella Smith told us that:

“Charities invest significant amounts of time and energy filling in funding applications often with limited success. When they are successful, funding is often for just 3 years. By the time staff have been recruited, inducted and skilled up this often only leaves 2.5 years to deliver on the project outcomes. In reality the last eight to six months of the project staff are often preoccupied with trying to extend the funding or find other jobs.”314

245.New Heights—Warren Farm Community Project told us that short-term funding regimes were also prevalent among grant-makers, and asked “how can a community charity provide local residents with confidence of on-going delivery of essential services when funding commitments are always short-term?”315 It proposed that there should be a mechanism whereby during the penultimate year of a funding period, an independent evaluation could assess whether there was an ongoing need for the service and, if so, recommend any measures required, including a “continuation funding commitment” if ongoing need was established.316

246.The Lloyds Bank Foundation said that there were examples of local authorities entering into longer term partnerships with charities to ensure sustainability and more effective planning. For example, Camden Council offered “strategic partner funding” for the sector of up to seven years “to provide unprecedented security.”317

247.Councillor Robert Light from the Local Government Association told us that “because of the changing nature of local authority services and finances, local government has shied away a little bit from longer term contracts, because there have been instances where, if you are tied into a long contract and your financial resources are much reduced, that ties your hands very much.”318 He added, however, that there were examples across the country of statutory and voluntary organisations “working together to reconfigure services”, which enabled local authorities to give longer-term funding commitments where appropriate.319

248.Councillor Anne Brown from Essex County Council expressed a similar view, stating that council contracts were “getting longer as we get more confident in each other.” She added that “as I see it, the duration of contracts will get longer and they will improve.”320

249.We recognise that local authorities are limited in their ability to offer significant long-term funding, given that the size of their annual funding settlements from central government cannot be predicted. However, annual or biennial commissioning and tendering is a costly burden for both local authorities and charities alike.

250.Long-term contracts, with appropriate break clauses for performance and viability, should be the norm wherever ongoing service delivery is likely. Public sector funders should seek to commission services over a longer period wherever possible, to ensure that the services can be delivered sustainably by charities with the capacity to plan effectively for the future.

Innovation by charities

251.Another frequently raised topic was the impact of the transition to contract income on charities’ ability to innovate. We were told that prescriptive contracts had a detrimental impact on service quality because providers no longer had the flexibility or resources to invest in improvement or alternative delivery mechanisms.321

252.The National Council for Voluntary Organisations told us that “payment by results inhibit rather than encourage innovation” and that public sector contracts were often structured in a restrictive way which limited the ability of charities to save money which could be invested in risk-taking. They recommended that commissioners provide capital to support charities in early-stage innovation and public procurement processes.322

253.Civil Exchange observed that “tightly determined contracts have squeezed out the potential to innovate and deliver services in different ways, the very reason why charities might have been considered a better provider than the public or private sectors in the first place.”323 Jacob Tas from Nacro said: “The more open the delivery model is to you to interpret, the greater the chance that you can bring innovation and new ideas to the fore.”324

254.The Young Barnet Foundation said that “public service contracts tended to just address the project costs, with no surpluses” that could be invested in development or sustainability.325 This links to our consideration of funding of core costs, above, and unrestricted funds that charities can use to innovate.

255.During our visit to Cardiff, we also heard that charities faced an inverse pressure: that in some cases they wished simply to provide important services to the best of their ability, but that they sometimes felt under pressure to develop ideas that would be deemed innovative or different simply to secure funding, rather than to improve services to beneficiaries. They also suggested that when some public sector funders requested innovation, they were only really interested in cost efficiencies rather than in improving the quality of services.326

256.Tightly-prescribed contracts that dictate the process of delivery, rather than the desired outcome, can be the greatest inhibitor of innovation. We therefore recommend that public sector commissioners refrain from setting overly-detailed requirements for the mechanisms of service delivery.

257.Additionally, restrictive commissioning practices can hinder charities’ capacity for innovation by limiting their working capital. We recommend that, where appropriate, public sector commissioners pay or provide grants for charities to test new ideas and innovate during both the early scoping and development of services, and their later delivery. Such funding would generate positive returns, through supporting new and more effective ways of working, while also contributing to the sustainability of the charity sector and generating potential cost-savings for commissioners.

A revitalised role for grants

258.Many of our witnesses emphasised the positives of grant funding compared to contracts. Paul Hackwood from Church Urban Fund said that: “grants are an easier way to do it, and it is easier to make them accountable than commissioning processes that become quite complicated.”327 The Greater Manchester Centre for Voluntary Organisation told us that:

“so often a grant is the most efficient and effective way to commission an outcome, or to invest in the long term work of a small organisation. Investing in small organisations is in turn often the best and best value way to achieve the outcome and can bring immense added value as well.”328

259.Dawn Austwick from the Big Lottery Fund told us that her organisation had a particular approach to grant making, which involved a commitment “to the notion of the engagement of citizens, people, end-users, service users, beneficiaries … in the process of thinking about our grant making and in looking at the organisations that we might fund”.329

260.The Directory of Social Change argued that grants from all sources offered a range of benefits over other sources of income, including the ability to adapt to change; invest in local economies; support communities and the use of community resources; nurture innovation; and sustain services.330 They said that:

“Grants give organisations freedom to respond to changing priorities, conditions and beneficiary needs. They reduce the risk of tying organisations down into services that aren’t working, and can allow organisations to redeploy resources where they are most needed. Grants are especially good for small organisations, which succeed by drawing on resources in the community to deliver their project. By engaging the understanding and skills of the area’s people, the needs and capacity of the community are more likely to be met and sustained.”331

261.Richard Jenkins of the Association of Charitable Foundations noted that sources of grant funding had moved considerably towards foundations in recent years, with foundations now giving more in grants (£2.5 billion) than government (£2.2 billion). He added:

“One thing that strikes me about what charitable foundation grants can do is that they might not be big in scale, but they are almost unique in their currency. Grants can do things that other forms of funding cannot. It offers flexibility and a bit of freedom for innovation.”332

262.Matthew Taylor from the RSA observed that grant funding gave an “intangible element” of benefit with regard to service provision which could not be replicated through tightly specified contracts.333 He said that certain parts of the public sector, such as care commissioning groups, “are going back to a bit of grant funding because they are, possibly, starting to realise that in the act of defining everything through a contract you lose something.”334

263.The Big Lottery Fund told us that they tried to use grant funding to support the sustainability of charities, notably through its Reaching Communities and Building Capabilities programme, in which grant holders were offered £15,000 to support internal initiatives such as marketing plans, governance reviews or income generation reviews.335 Gemma Bull from the Big Lottery Fund said that it was “very much our role to try to support civil society and charity to be ready for anything and to be able to take the lead in their own organisational development. That is hugely important to us.”336

264.While acknowledging the increasing financial constraints that public sector bodies are under, we emphasise the important role that grant funding plays in ensuring the sustainability of charities, particularly with regard to innovation. There should be a wider understanding in the public sector of the use and potential of grant funding for charities and their beneficiaries, drawing on the practices of institutions such as the Big Lottery Fund.

265.We heard that some councils continued to operate grant funds. Councillor Stephen Powers from Newcastle City Council told us that they maintained a grant fund “focused on building individual and community resilience, linked to the council’s overarching priorities around tackling inequalities, decent neighbourhoods, a working city and a fit-for-purpose council.”337 He also said that they were currently undertaking a review to determine the future focus of the fund, with reference to financial pressures.338

266.Councillor Anne Brown from Essex County Council told us that it ran a Community Initiatives Fund (CIF), to help charities build capacity, introduce new initiatives and create innovative programmes. She added that the CIF incorporated six-monthly evaluation reports in order to monitor outcomes and spending.339

267.However the NCVO noted that local authority grant programmes had been closing, community budgets had been reduced, and that some services that had been provided by charities were returning to direct council delivery.340 The Esmée Fairbairn Foundation told us that cuts to arts and leisure budgets, and closures of libraries, sports and arts facilities, had “affected many small organisations delivering creative and entrepreneurial programmes of support for communities through those venues.”341

268.We recognise the significantly reduced funding available to local authorities. Nevertheless, grant funding has great potential in sustaining a healthy civil society and in enabling communities to benefit from charities’ capacity to innovate. We recommend that local authorities should bear this in mind in the course of their financial planning, and maintain or revive grants wherever possible.

269.We draw the attention of the Government’s review of commissioning practices to all the recommendations in this Chapter, and we expect to see the ones at paragraphs 194, 198, 207–208, 230–231, 239, 250 and 256 addressed as part of their work.

232 Charities have also received funding from other public bodies such as NHS Trusts, the European Union, devolved and regional governments and a range of non-departmental public bodies (NDPBs).

233 NCVO, ‘UK Civil Society Almanac 2016: Income from Government’: [accessed 14 March 2017]

234 NCVO, ‘UK Civil Society Almanac 2016: Income from Government’: [accessed 14 March 2017]

235 Q 57 (Paul Streets OBE)

236 Written evidence from National Council for Voluntary Organisations (CHA0148)

237 Q 28 (Rebecca Bunce)

238 Written evidence from Lloyds Bank Foundation for England and Wales (CHA0031)

239 Ibid.

240 Written evidence from New Philanthropy Capital (CHA0055)

241 Note of roundtable discussion in Cardiff, Appendix 8

242 Written evidence from Locality (CHA0133)

243 Ibid.

244 Written evidence from Springboard Project (CHA0011)

245 Written evidence from MyBnk (CHA0186)

246 Written evidence from Lloyds Bank Foundation for England and Wales (CHA0031)

247 Written evidence from National Council for Voluntary Organisations (CHA0148)

248 Written evidence from Lloyds Bank Foundation for England and Wales (CHA0031)

249 Written evidence from New Philanthropy Capital (CHA0055)

250 Q 213 (Rob Wilson MP)

251 The Public Contracts Regulations 2015 (SI 2015/102)

252 Q 213 (Rob Wilson MP)

253 Department for Culture, Media and Sport, ‘Putting small charities at the heart of public services’: [accessed 14 March 2017]

254 Crown Commercial Service, A brief guide to the 2014 EU public procurement directives (October 2016): [accessed 14 March 2017]

255 Written evidence from Lord Hodgson of Astley Abbotts CBE (CHA0026)

256 Written evidence from Lloyds Bank Foundation for England and Wales (CHA0031)

257 Note of meeting with Greater Manchester Centre for Voluntary Organisation, Appendix 6, and note of roundtable discussion in Cardiff, Appendix 8

258 Written evidence from Action in Rural Sussex (CHA0001)

259 Q 157 (Councillor Stephen Powers)

260 Q 192 (Andrew Seager)

261 Ibid.

262 Q 192 (Jacob Tas)

263 Q 192 (Dan Scorer)

264 Written evidence from Barnardo’s (CHA0172)

265 Q 195 (Jacob Tas, Andrew Seager) and written evidence from FaithAction (CHA0015) and London Funders (CHA0090)

266 Q 195 (Dan Scorer)

267 Q 195 (Andrew Seager)

268 Written evidence from London Funders (CHA0090)

269 Social Enterprise UK, Public Services (Social Value) Act 2012 — A brief guide (February 2012): [accessed 14 March 2017]

270 Cabinet Office, Social Value Act Review (February 2015): [accessed 14 March 2017]

271 Ibid.

272 Ibid.

273 Ibid.

274 Q 74 (Peter Holbrook CBE)

275 Ibid.

276 Q 146 (Councillor Robert Light)

277 Q 152 (Councillor Stephen Powers)

278 Note of meeting with Greater Manchester Combined Authority, Appendix 6

279 Q 194 (Andrew Seager)

280 Written evidence from Locality (CHA0133)

281 Written evidence from National Council for Voluntary Organisations (CHA0148)

282 Written evidence from New Philanthropy Capital (CHA0055)

283 Written evidence from Office for Civil Society, Department for Culture, Media and Sport (CHA0160)

284 Ibid.

285 ‘Minister announces review of Social Value Act’, Civil Society News (10 February 2017): [accessed 14 March 2017]

286 HM Government, Open Public Services White Paper, Cm 8145, July 2011, paragraphs 5.4, 5.16: [accessed 14 March 2017]

287 Written evidence from Civil Exchange (CHA0141)

288 Written evidence from Lloyds Bank Foundation for England and Wales (CHA0031)

289 Written evidence from Locality (CHA0133)

290 Ibid.

291 Written evidence from Springboard Project (CHA0011)

292 Written evidence from National Council for Voluntary Organisations (CHA0148)

293 Q 191 (Andrew Seager)

294 Q 191 (Dan Scorer)

295 Q 57 (Dan Corry)

296 National Audit Office, Outcome-based payment schemes: government’s use of payment by results (June 2015): [accessed 14 March 2017]

297 Written evidence from National Council for Voluntary Organisations (CHA0148)

298 Q 129 (Dr Beth Breeze) and written evidence from Charity Finance Group (CHA0092), Charity Futures (CHA0183), Finchingfield Guildhall Charitable Incorporated Organisation (CHA0063), Locality (CHA0133) and National Association for Voluntary and Community Action (CHA0076)

299 Written evidence from The Robertson Trust (CHA0077)

300 Written evidence from Charity Finance Group (CHA0092)

301 Written evidence from Springboard Project (CHA0011)

302 Written evidence from MyBnk (CHA0186)

303 ‘Small charities ‘too afraid’ to ask for core costs, says major funder’, Civil Society News (8 June 2016): [accessed 14 March 2017]

304 Q 126 (Philippa Charles)

305 Written evidence from Citizens Advice (CHA0177)

306 Written evidence from New Philanthropy Capital (CHA0055)

307 Q 129 (Dr Beth Breeze)

308 129 (Philip Lawford)

309 Written evidence from Charity Finance Group (CHA0092) and Small Charities Coalition (CHA0140)

310 Written evidence from National Council for Voluntary Organisations (CHA0148)

311 Written evidence from Barnardo’s (CHA0172)

312 Written evidence from The Cranfield Trust (CHA0103)

313 Q 194 (Dan Scorer)

314 Written evidence from Stella Smith (CHA0060)

315 Written evidence from New Heights — Warren Farm Community Project (CHA0009)

316 Ibid.

317 Written evidence from Lloyds Bank Foundation for England and Wales (CHA0031)

318 143 (Councillor Robert Light)

319 Ibid.

320 Q 151 (Councillor Anne Brown)

321 Written evidence from Charity Finance Group (CHA0092)

322 Written evidence from National Council for Voluntary Organisations (CHA0148)

323 Written evidence from Civil Exchange (CHA0141)

324 Q 190 (Jacob Tas)

325 Written evidence from Young Barnet Foundation (CHA0101)

326 Note of roundtable discussion in Cardiff, Appendix 8

327 Q 65 (Paul Hackwood)

328 Note of meeting with Greater Manchester Centre for Voluntary Organisation, Appendix 6

329 Q 167 (Dawn Austwick)

330 Directory of Social Change, ‘Grants for Good Campaign’: [accessed 14 March 2017]

331 Written evidence from Directory of Social Change (CHA0128)

332 Q 31 (Richard Jenkins)

333 Q 47 (Matthew Taylor)

334 Ibid.

335 Q 172 (Dawn Austwick)

336 Q 173 (Gemma Bull)

337 Q 156 (Councillor Stephen Powers)

338 156 (Councillor Anne Brown)

339 Ibid.

340 Written evidence from National Council for Voluntary Organisations (CHA0148)

341 Written evidence from Esmée Fairbairn Foundation (CHA0044)

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