Government needs to be more cautious about giving direct grants to charity in the wake of the collapse of Kids Company, civil servants told a committee of MPs yesterday.

Richard Heaton (pictured), former permanent secretary to the Cabinet Office, and Chris Wormald, permanent secretary to the Department for Education, appeared before the Public Accounts Committee, following the publication of the damning National Audit Office report into Whitehall funding for Kids Company over a thirteen-year period.

The committee questioned why the DfE had held a competitive grants process, which Kids Company had competed in and lost, and then given a grant larger than any received by any of the charities which won.

Both civil servants denied that this or other grants to the charity consitituted "special treatment", although Wormald conceded that ministers did take a “special interest” in Kids Company over the years.

Both said the Kids Comany scandal showed the danger of government ministers being able to use powers of patronage to give charities discretionary grants.

Heaton said: “One of the learnings from this is that the use of the Charities Act powers to step in and provide frontline services is very unusual and should probably be treated with a bit of caution.”

He added that the Cabinet Office is spending less “directly on grass roots funding” and that those projects should be funded by “people who understand the issues better than central government”.

“We should be less willing to use general powers under the Charities Act to make uncompeted grants. There are plenty of instances where we should but we should be cautious,” he said.

Under section 70 of the Charities Act ministers have the discretion to make grants to charities without going through an open bidding process.

Heaton also said government should be more wary of charities with “multiple approaches into government because they are quite hard to corral” and that people in government need to be careful about “giving what appear to be funding commitments” without referring it to the department.

Heaton also said that charities need to get better at measuring their impact and that “government has a role in helping the sector achieve that” through initiatives such as the Impact Readiness fund.

Wormald said that the problems with Kids Company raised wider questions about “our relationship with the wider voluntary sector”.

He said that he would be looking at the relationships the DfE has with various charities.

Wormald also said that the government had set poor targets to measure the success of its grants. 

He said that in the past the DfE had been focused on “outputs” rather than “outcomes” but that it was a “difficult area”.

Kids Company reluctant to embrace impact measurement

Heaton said that when the Cabinet Office took responsibility for the charity “we were aware that it was an unusual funding situation”.

He said that one of the first things his department did was get a measurement framework in place.

“We found that Kids Company were not particularly interested in measuring outcomes,” he said. But he said by the time it came to award the grant the charity had appointed a head of impact who “got the point” and he was confident “we could get a sustainable organisation free from government funding”.

MPs pressed Heaton and Wormald as to why they did not seek ministerial directions before awarding grants prior to 2015.

Heaton revealed that he was “never totally comfortable” with the situation at Kids Company, and that it was not “an open and shut case” but following conversations with the charity and its auditors he was confident that it could use the £4.5m grant to make itself sustainable.

He said that he was surprised that the charity had come back asking for more emergency funding, having failed to meet conditions of the earlier grant, so soon and the initial response from government had been a flat no.

When the charity came back with a “radical” and “different proposition” he requested ministerial direction because he did not believe they could do it.

Wormald said that having gone back through the decisions taken by DfE he did not think there was a time a ministerial direction would have been appropriate.

Both Heaton and Wormald said that they had not been unduly pressured by ministers.