Peers have raised have warned that the commissioning landsape does not work for small charities and have recommended a number of improvements, including a move to more grant funding.
The House of Lords Select Committee on Charities was set up to study the sustainability of the charity sector. Its final report is published today (26 March).
In its report, Stronger Charities for a Stronger Society, the committee said that charity income from government contracts has “increased substantially” since 2003/04 from £5.8bn, to over £12bn in 2013/14.
However, the report said that that “the commissioning landscape is skewed against smaller charities” and recommended that practices be reformed to open up the space to smaller organsiations and to encourage genuine partnerships.
Peers recommend that “contracting authorities embrace the recent changes to public procurement rules, which allow for smaller contracts” as a way of “potentially giving charities better access to funding opportunities”.
It also recommended that the government’s implementation group on commissioning practices "considers the risks of larger organisation exploiting smaller charities through the commissioning and subcontracting process".
The report said that future government guidance on commissioning “should highlight these risks and encourage the design of contracts in a way which prevents such practice so far as possible”.
Peers also called for the Social Value Act to be strengthened.
Return to grants
Public sector commissioners have moved away from grant funding in favour of contracts to deliver specific services, but the committee warned that grants played a vital role in supporting smaller charities.
Peers recommended that funders consider this when making future budget decisions.
The report said that “grant funding has great potential in sustaining a healthy civil society” and recommended that local authorities across the UK “should bear this in mind in the course of their financial planning” and maintain or revive grants wherever possible.
“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,” said the report.
The report also highlights the role that grants play in enabling “charities to test new ideas and innovate” which can be of benefit in the long term.
As part of this, the report recommended that commissioning organisation “refrain from setting overly-detailed requirements for the mechanism of service delivery” when it came to offering grants and commissions.
The committee has also recommended that the government ought to “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 should be included in contracts
The reports recommends that public sector commissioners show regard for charities’ core costs when they tender for services.
Witnesses in the House of Lords investigation said charities increasingly struggled to find money for staffing, project management, office costs, accountancy, and regulatory compliance, partly due to them being forced to remove such costs from their bids to be competitive.
“We recommend that public sector commissioners should be expected to have regard for the sustainability of the organisations which they commission to deliver services,” it says.
“This should include an expectation that realistic and justifiable core costs are included in contracts.”
Focus on Social Impact Bonds ‘disproportionate’
The report also criticised the government’s focus on social impact bonds “as disproportionate to their potential impact” and effectively called on the government to refocus its efforts on more financially sustainable social investment products.
Social impact bonds are a specialised form of payment by results contract involving a deal between service delivery charities, social lenders, and a government commissioner. They require complex impact measures and are expensive to procure, but despite this the Office for Civil Society has promoted them heavily.
“The expectations placed upon social impact bonds have yet to materialise and we believe the government’s focus on them has been disproportionate to their potential impact," the report says.
“While the government should redouble its efforts to make them work better, future public funding should be reoriented towards financial products with application to a wider range of charities and beneficiaries.”
The report said that, while SIBs “can be a useful tool for both charities and the public sector” they are only relevant “where they produce a saving that can be transferred to a private investor”.
More flexibility for volunteering
The report calls on the Office for Civil Society to collaborate with other organisations to encourage greater flexibility for workers to take time off for charitable work.
Peers also urged funders to provide resources for volunteer managers and co-ordinators, which many charities that provided evidence said was needed.
It recommends “government guidance on public sector grants and contracts is amended to reflect this and set a standard for other funders”.
HMRC needs to have regard for charities
The report calls for OCS and HM Revenue & Customs to ensure that the needs of charities are “high on the agenda” in relation to future changes to VAT and the National Living Wage.
The report recommends OCS works with HMRC on potential changes to Gift Aid.
Some smaller charities do not currently claim Gift Aid due to its administrative burden and the report urges the two bodies to examine whether changes could be made to rectify this.
“It is imperative for the charity sector that tax policies and processes are structured to ensure that charities are able to maximise their income and that bureaucracy is kept to a minimum,” it says.
Peers also criticised government departments for not offering payroll giving to their staff, despite the government promoting it.
It urges all government departments to offering payroll giving to all their staff to “set an example” for other organisations.
“We recommend that the OCS works to improve significantly the awareness and availability of payroll giving by companies,” it says.
Reporting by Rob Preston and Hugh Radojev