Contracts are an important source of income for charities
Charities play a key role in supporting people and communities.By being close to their service users, charities often have a unique perspective on their needs and how to adapt services to meet those needs. My colleague Andrew O'Brien has written previously on the growing consensus that charities can play a key role in delivering preventative services. In this way, charities are well-placed to help reduce long-term demand on services. Alongside income from individuals, funding from government through both grants and contracts is the largest source of income for charities. Over the last few years the value of grants has fallen in favour of contracts, which are worth £11 billion to the sector.
Challenges of PbR
Charities have previously raised their concerns about the increasing reliance on Payment by Results (PbR) in government contracts. NCVO, for example, has reported that contracts often fail to accommodate the complex nature of the service being provided. Charities are therefore at risk of being penalised for circumstances outside of their control. The high financial risk attached to PbR can also mean that small- and medium-sized charities end up dropping out of public service provision. These organisations make up 83% of the sector. So service users are potentially losing out on the wider social value that these organisations provide. The NAO's report reflects these concerns.
What can we take from the report?
The report found that PbR contracts account for £15 billion of public spending. The NAO recognises the potential value of PbR contracts offer, in terms of ensuring that it is the impact of the service provided (rather than the activity) that is rewarded. However, it is critical of the fact that neither the Treasury nor the Cabinet Office have evidence of how PbR is used across government, nor of how effective it is, despite the significant financial commitment it has received.
Encouragingly, the report noted that commissioners need to spend time to develop their understanding of charities as providers and to recognise the differences between voluntary and private sector providers – particularly in reference to their ability to take on risk. This will involve commissioners taking the time to not only understand providers that they have direct contact with (which are typically private companies), but also those further along the chain (where you are more likely to find charities). To me the NAO report supports principles outlined in the Compact, an agreement between government and the voluntary sector. The Compact states that government should “ensure the widest possible range of organisations can be involved in the provision of services". This, it goes on to state, should be done through appropriate funding and financing models such as outcome based payments and payment in advance of expenditure. Importantly, it states that payment in advance of expenditure should be considered on a case by case basis where this represents value for money. With income from government contracts reducing it is important that charities are not excluded from government contracts because of PbR, the effectiveness of which has not yet been evidenced in all cases.
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