The Regulator for Charities in England and Wales
Thank you for asking me speak to you today.
Today is about bringing the leaders of the sector together. To inspire, learn from and teach each other as we move forward into a new year, a new era and some very real challenges.
You might be expecting to hear from me today about the challenge of the public benefit requirement. I’m not sure whether you will be disappointed or relieved to hear that all I want to say is this: we will be publishing our draft guidance on the principles of public benefit for consultation on 7 March. The public benefit requirement is a legal test of purposes which a charity must pass before it can be registered, but existing charities must also be mindful of the continuing need to meet that requirement and publicly account for the benefit to the public they provide.
Every charity will have views on the guidance we publish and the approach we set out, and I would like to hear from as many of you as possible in response.
That’s all I want to say about the challenge of the public benefit test, because today I want to talk about a different challenge: the challenge of public service delivery by charities. Like the public benefit test, the issues raised by the delivery of services relate directly to the perceptions of the public, the response of the sector to changing social conditions, and ultimately to the very heart of what it means to be a charity.
The way in which the voluntary sector works in communities is often a model of best practice and innovation in service delivery. You reach parts of our communities the state can’t. You win their trust, where the state may fail. And you give them the services they know they need, not what policy planners think they want. These are just some of the things that are rightly making you so attractive to the commissioners of public services.
In this context, I would today like to sound a wake up call to the sector and to commissioning authorities alike about the future of public service delivery by charities.
Today the Commission publishes Stand and deliver: the future of charities delivering public services - our findings from the first ever all-charity survey into the experience of charities themselves carrying out public services. Our research complements the work done by the Cabinet Office and the sector in putting together the Third Sector Action Plan, and gives the clearest picture to date of the state of service delivery across the sector.
We commissioned the survey in our role as regulator. In 2005 we made clear, in the ‘Wigan and Trafford’ decision, that charities can lawfully deliver public services that are within their objects. We had a responsibility to follow up our decision and consider the implications across the sector. The implications for the assets of charities, for their reputation, and for their independence.
The debate about charities delivering public services has so far been largely ideological. The basic data on how many charities are delivering services on behalf of government and on what terms has been, as NCVO pointed out to us, sadly lacking. Our unique access to charities as their regulator has allowed us to secure this hard data, creating a strong evidence base for future debate. We want these results to inform discussions within the sector and across government.
Over 3,800 charities responded to the online survey we conducted last summer, representing a broad cross section of the register of charities both by income and operational area.
I’d like to present the results to you and consider their implications.
Some of these results make for serious reading. They certainly underline the necessity of ensuring, as the Cabinet Office Action Plan promises to do, that at all stages – commission, procurement, and capacity building – the sector is supported if it is truly to stand as an equal partner in public service provision.
Firstly, some context – what is the extent of charity engagement in public service delivery?
Over 60% of charities with an income above £500,000 deliver public services. At the big end the sector is significantly engaged in public sector delivery.
The most common funding arrangement for charities delivering public services is a mix of grants, contracts and service level agreements – 37% of charities in our survey are funded this way. In general, it seems the smaller the charity, the more likely it is to be grant-funded. It is predominantly the larger charities on contracts or service level agreements.
Now the crucial issue of length of these funding arrangements.
Admittedly it is not all bad – 13% of charities in our survey report having contracts longer than three years. The overall picture however is not good, as you probably suspected already. Over two thirds of all funding agreements for public service delivery are for one year only.
And that million dollar question – are charities being paid the full cost of the services they deliver?
43% of charities delivering public services say they are not achieving full cost recovery. And this doesn’t, unfortunately, mean that 57% are. Around 38% say they only achieve full cost recovery some of the time and – slightly perplexingly - the remaining 7% don’t know if they’re achieving it or not.
But the bottom line – and this is critical - is that only 12% of charities delivering public services achieve full cost recovery all of the time. I’m not sure even the most vehement critics of charities undertaking public service delivery would have guessed at such a low figure.
And it gets worse. What is the impact on independence and integrity?
Only 26% of charities delivering public services feel they are free to make decisions without pressure to conform to their funders’ wishes.
Of even greater concern, only a fraction above half agree their activities are determined by the charity’s mission, rather than by funding priorities.
These impacts are exacerbated by the heavy funding dependence of some charities on precisely the sources which may be threatening their independence.
Over 30% of charities which deliver public services get 80% or more of their income from public service delivery. This rises to almost 67% for charities over £10 million.
And what of the future? What levels of interest in public service delivery exist in the rest of the sector?
Only 14% of charities which don’t currently deliver public services are actively considering doing so in the next year. In total, nearly half of all the charities surveyed said they would not deliver public services within the next twelve months.
These are the bald facts. Their implications are serious and complex.
Let’s mine down further. Start with charities which are most likely to deliver public services. Our report shows engagement in public service delivery is highest amongst charities over £100,000, and which operate regionally, rather than just nationally or just locally.
And it’s also charities in this group which, if not delivering public services already, showed most interest in doing so in the coming year. A regional structure seems an advantageous one for charities wishing to deliver public services.
Other parts of the sector appear much less interested. Of those that would consider it in future, many are small and locally based. Under current procurement and funding frameworks they may struggle to get a foot in the door.
The Government has set out ambitious plans to increase third sector participation in public service delivery.
We may be seeing evidence of an emerging capacity gap.
The finite group of charities most likely to deliver public services are the same ones most likely to consider doing so in the future. For most charities, public service delivery is and will remain outside the scope and role they choose for themselves.
Unless the commitments in the Third Sector Action Plan become a reality, truly opening up the market, it is unclear how these targets can ever be met.
The future for charities delivering public services is highly competitive and highly complex. Some will win funding agreements because others will fail to. Commissioning authorities themselves are unlikely to want to purchase services from an ever-expanding number of smaller suppliers, providing roughly the same service options.
And the axis isn’t public versus charitable but public versus charitable versus private. Boundaries are blurring and there are regulatory implications at every step.
Smaller charities and those in the middle income brackets are getting squeezed, and the creeping so-called ‘Tesco-isation’ which our report suggests may be happening will need a new response from those charities that don’t fit the Tesco model.
I was in Somerset recently visiting Barnardo’s. In Somerset, there are family centres run by Barnardo’s, the Children’s Society and NCH among others. In the next bidding round, the commissioning authority may decide creating and managing funding agreements with three separate organisations is no longer viable.
Would it inevitably be winner takes all? Maybe not.
A consortium bid could be an option here and creating consortia could be a solution for smaller and middle income charities who currently feel the barriers are too great for them to enter this kind of market alone. The sector has known for some time that working in partnership to deliver projects, sharing back office and support functions, is increasingly advantageous. Our survey suggests it may become essential if those middle income charities are to resist the squeeze.
For the moment, it’s not actually clear whether lack of opportunity or lack of desire lies behind some parts of the sector not taking up public service delivery. This is something government may need to consider further.
If you manage to win the bidding war to provide services, what does your hard-won funding agreement actually look like?
The patchwork of grants, contracts and service level agreements which so many charities in our survey report are their funding arrangements is surprising, to say the least.
Does this arrangement exist because charities delivering public services are still able to diversify their income streams? Because they’re forced to seek additional funding due to inappropriate funding agreements? Or because they’re still insufficiently knowledgeable to insist on the ‘right’ type of funding agreement for the job?
The fact that two-thirds of all funding agreements are currently only for one year may answer some of these questions.
The Local Government White Paper aspires to create a commissioning framework with three-year funding as the norm, an aim supported by the Third Sector Action Plan. Such a low base clearly has implications for how swiftly and consistently this will happen in practice.
With two thirds of agreements currently for one year only how long will it be, even with the most optimistic interpretation, before the 3-year aspirant norm can become a reality for most charities? The Compact Commissioner has a hell of a job on his hands.
Yet even three, four, or five year funding agreements won’t help if they effectively amount to a slow leaching away of a charity’s assets.
Full cost recovery is not happening for the vast majority of charities. Let me reiterate: only 12% are managing to achieve it.
The implications for those not in this 12% are serious. It is not clear from the responses to our survey why charities are undertaking service provision which they must subsidise from other income sources, or how they intend to make up the deficit. In some cases it seems that the charities themselves have no idea how they came to be in this position.
Consistent under-funding cannot but threaten a charity’s very existence. First, innovation and the development of new services are threatened. Then quality and effectiveness of the range of services offered is undermined. Finally, at worst, the funding dries up and the charity collapses.
Why would a commissioning authority pay for a reduced, out-of-date service when there are other organisations around who can deliver better? Or at least do better until they, too, feel the progressive bite of under-funding and succumb in their turn?
Our 2005 policy statement on public service delivery came with a caveat. It explains that charities can, exceptionally, subsidise the delivery of public services which the authority has a statutory duty to provide if this is clearly in the best interests of the beneficiaries.
Well, it’s hard to believe that is what’s happening here. I am concerned that some local authorities may believe the impact of Wigan and Trafford is that they can now expect charities to provide public services or fund gaps in provision. We have been quite clear that charities should still generally expect an authority to fund fully the cost of delivering a service it has a legal duty to provide. With 88% of charities failing to achieve full cost recovery for service delivery – statutory services or not – can we really sustain the belief that this can be in the best interests of charities, beneficiaries, or the sector as a whole?
Again, our findings suggest it’s the middle income charities who are most likely to lose out on full cost recovery. Caught between the ‘supercharities’ and the small, specialist ones, these middle charities appear to be feeling the squeeze on all fronts when it comes to public service delivery.
Public trust and confidence in charities is high, but notoriously capricious. nfpSynergy’s recent report into public attitudes towards charities delivering public services shows a mixed picture, with varying levels of trust in charities providing services depending on the sector of work. And one respondent in five saying they would be less likely to donate to charities which receive income from government to provide services.
The impact on public perceptions of charity, of public trust in charity, could be severe indeed if charities don’t respond.
There is a fundamental communications challenge for the sector here: if more isn’t done to identify and explain the benefits of diverting charitable income towards public service delivery, then the public could begin to lose confidence in how charities are choosing to spend their money. Those of you who focused on the flawed calculations underpinning the Civitas report on charities receiving state funding published a few weeks ago may have missed a chance to challenge the bigger argument being made.
Finding out the truth about full cost recovery was an important aim of our survey, and the results are even worse than we imagined.
But there is something that threatens sustainability even more. The risk to charities’ independence.
Independence, of course, is active behaviour, not just a state of mind. Independent charities make choices about accepting funding on the terms proposed; they identify and manage conflicts of interest; and outside the scope of the funding arrangement, their decisions are not constrained. Above all, their activity should always be in support of the charity’s objects.
However, in our survey almost 50% of charities delivering public services can’t agree whole-heartedly that their activities are determined by the charity’s mission, rather than by funding priorities.
For me, there is a parallel here with work I was involved with in the 1980’s, undertaken by food and health charities on food poverty. Government was willing to fund us to do some work, but essentially only to teach the marginalised how to shop and cook, not fund campaigns to examine whether benefit levels were the real barriers to reducing food poverty.
Activities were not being driven by trustees so much as what we could get funding for.
There are significant differences in the responses to the question we asked about independence from charities which do deliver public services and those which don’t. The latter clearly have a much greater sense of independence and control.
The Commission’s regulatory framework, of course, applies to charities and charity trustees. And it’s trustees who face the consequences if mission drift becomes a breach of trust. For their own sake, as well as the sake of their charity, I would urge them to view independence as absolute, non-negotiable and sacrosanct.
So, where do we go from here?
Firstly, we need to point out the massive discrepancy between the strong and positive aims of the Compact at a national level and the reality when translated at local level.
This has been done before, but this survey gives both the regulator and the sector the evidence base we need to do so with confidence and authority. Stand and deliver joins the growing body of reports on public service delivery and roots the arguments in the facts.
And, make no mistake about it, this is a two-way street. Charities also need to get better at costing and pricing their services. If you don’t ask for sustainable funding don’t be surprised when you don’t get it. A public sector with its own funding ceiling has to make hard choices about what to fund in whole, in part or not at all. Figures published last week by the Department of Health suggest that charities in the health and social care field may be underestimating their ability to compete for service delivery contracts – perhaps that’s true across the board. If charities don’t have the knowledge to bid appropriately the sector needs to look at training, and again think about where collaboration could help.
Lines of accountability and redress must not be ignored. With almost 40% of charities delivering services lacking any complaints procedure, and with some authorities arguing that they are not responsible for services they contract to charities, there is a risk that vulnerable users could be left to fall between the cracks.
I know that CFDG, ACEVO and NCVO itself, amongst others, have been making these arguments for some time, and I hope this evidence will help them.
Under-funding threatens the very survival of charities delivering public services. Charities themselves, commissioning authorities and Government all have to address this urgently.
If they don’t, they will end up killing the very thing they believe in.
Does our report title Stand and deliver signify a sector taken hostage, or a sector standing firm to deliver public services on equal terms? Everyone in this room instinctively knows it should be the latter, but many will fear that we are actually facing the former. What factors might influence which way it falls?
Much as John Donne’s bell tolled for everyone, so one charity’s loss of reputation, mission or integrity could have an impact on the way in which charities are generally viewed.
Reputation at best is a fragile thing and must be protected.
We have said before and will carry on saying with new emphasis after the publication of today’s report:
Guard your independence
Know your worth
Stick to your mission
In other words, do it on your terms, and only on your terms.
Charities have a distinctiveness they must not lose. We must not see a fourth sector emerge – charities delivering public services which are charities in name only.
In a rather bleak moment the American essayist James Gibbons Huneker wrote: “Life is like an onion: you peel off layer after layer and then you find there is nothing to it.”
Charities can only lose so much of what makes them distinct before they cease to be charities. USP must continue to mean unique selling point, not undersold on price.
And the all-party love-in with charities and the voluntary sector needs to be reminded: charities do not exist just to provide government with ready-made vehicles for delivering public services.
This report confirms what many in the sector had feared – short-term funding, partial cost recovery and the threat of mission drift are too often a reality for those of you undertaking this work.
Perhaps the report we’ve published poses as many questions as it answers, but they are important questions:
Why do only 12% of charities achieve full cost recovery and – importantly – how do they do it?
Why do two thirds of funding agreements last only a year?
Why do less than a third of charities delivering public services feel their decisions are free of pressure from funders?
Why are so many of the largest charities delivering services reliant on this funding for such a large proportion of their income?
Tough questions I know. But we need to work together, sector, commissioning bodies and regulator, towards the answers.
I’m glad we commissioned this survey. This evidence will help us be more informed as a regulator, in our messages to trustees about governance, independence and the duty of care, and in our messages to government about the risks of unequal partnerships.
But there’s a lot more work needed from all sides to ensure charities are being the best they can be when they engage in public service delivery. And in today’s political climate the proportion of public services delivered by charities is only likely to grow. The terms on which this happens must be clear, consistent and constant.
You are the sector’s leaders. You initiate change, influence social policy and make things happen at national level. I hope you can rise to the challenge of turning political enthusiasm for the third sector into a firm commitment that delivering public services will be undertaken in a spirit of genuine partnership: fully funded, fully supported and truly equal.
Ed Miliband has made clear that Government understands this: the contribution of the sector to social progress arises from its independence. As the sector’s regulator, I agree whole-heartedly. The independence of charities providing public services must not be undermined – not by the actions of commissioning authorities, not by the decisions of charity trustees, and not in the minds of the public. On the current evidence, we should not take that independence for granted.
Thank you