Seb Elsworth
A curious orthodoxy has emerged in parts of the third sector that recalls a version of history when grants for the delivery of public services flowed freely from statutory bodies. Third sector organisations did not have to do sordid things like compete or demonstrate the difference we would make with the money. But this utopia is now under threat from the forces of commissioning and contracting.
This version of history is far from true and it is far from helpful in our shared efforts to move towards a professional third sector, and a more professional understanding of how it should be funded.
Public funding for the delivery of services has never come without strings and has very often been competitive. Grants have never signalled either security or sufficiency of funding. The growing use of contracts has not changed the imperative for organisations to compete for resources or demonstrate the impact they will make.
The reality is that in most cases when the state wants to buy services from the third sector, a contract is the right vehicle.
Make no mistake, donor-type approaches to funding, including grants, have an important role to play in the public funding mix for the third sector.
Grants, the best option or not?
Many commissioners falsely believe that grants are not an option for them and this risks the public sector losing much of what the third sector can offer. Grants are appropriate when the public sector wants to invest or increase an organisation's capacity; they can help to sustain very small scale service delivery; and they may be the most appropriate way to provide an opportunity for an organisation to experiment and innovate.
The opportunity to pool resources and take chances without the dire consequences of having broken contractual obligations allows third sector organisations to continue to push the boundaries and transform services in the best possible way for our beneficiaries. Grants can also play a critical role in market stimulation, a task which many commissioners fail to do effectively.
However, donor approaches to funding are not appropriate vehicles for third sector delivery of mainstream public services. Grants can reduce efficiency and produce perverse incentives on both sides.
Once delivery has begun, the provider has very little incentive to use resources more efficiently. The incentive is to spend the whole budget: we all know cases where organisations are forced to spend excessively up to the year end for this very reason. This is real waste, for beneficiaries, for tax payers and for the future of our own organisations.
In a contractual arrangement, the incentives are very different. A successful bid is based on price and evidence of quality. Once the provider begins to deliver that service, they have every incentive to be more efficient and use resources effectively. The commissioner has not asked and has no business knowing how much of the price was a margin for the provider, and the opportunity for the contract to generate a profit means resources can be re-invested for additional services or campaigning on behalf of the organisation's beneficiaries.
Having an incentive to maximise profit is a key driver for improved third sector service delivery. Full cost recovery has been widely accepted as a sound principle protecting third sector organisations from making unanticipated losses on service delivery. Its logical evolution is for third sector organisations to be able to use it to calculate their profit margin on top of this break even position. We should quote whatever price will generate our target profit when we are delivering services on behalf of the state. If we go on to deliver that service even more efficiently, our profit increases and our organisations benefit. Only contracts allow us to do this.
Playing a significant role in transforming public services
The idolisation of grants in the context of public funded services does a further disservice to the sector because it dampens our collective aspiration to play a more significant role in mainstream public service delivery. By dismissing the opportunity to bid for contracts we lose the ability to compete with and challenge the private sector. Third sector provision will remain on the margins and we will have failed to play a significant role in transforming pubic services.
Contracts hold other clear advantages. A contractual relationship places the funder and the provider on equal legal footing, thus significantly strengthening the position of third sector providers. Grant relationships are fundamentally patronising and provide very little security for third sector providers. One of the greatest worries for third sector chief executives in the recession is the cutting of local authority grant schemes.
None of this is to say that contracts are always used appropriately. There are VAT discrepancies between the use of grants and contracts which need to be addressed. The work to build bidding and pricing capacity within the third sector must continue. We must look for effective partnerships to increase our market power. Equally, much work is still needed to improve the skills of commissioners and public bodies to commission on outcomes, provide long term funding arrangements and monitor contracts proportionately.
However, let's not be continuously distracted by this false polar argument between "good grants" and "bad contracts" but rather focus on using the most appropriate funding mechanisms to achieve the best outcomes for our beneficiaries.
Seb Elsworth is director of strategy at the Association of Chief Executives of Voluntary Organisations
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