Cathy Pharoah examines whether the voluntary sector's funding model is fit for purpose.
The biggest challenge for future voluntary funding is not its amount, growth or sustainability. It is whether its funding model is fit for purpose. Unlike profits in the markets, funding in the voluntary sector is never an end in itself. It is only the means to achieving greater social value. How does the future economic model for this shape up?
Voluntary organisations receive £16bn from private donating, and £3.3bn in total tax reliefs each year. This is the ‘premium’ the public pays for charities to provide services where public and private sector often fail - protecting the most vulnerable, reaching excluded or neglected need, building healthy communities, and widening access to all social endeavours. This is the sector’s ‘added social value’. Government grants, fees and contracts for services represent the other chunk of sector funding - almost 100 per cent in many organisations. And the door is now wide open for voluntary organisations to win more. But this involves entering an increasingly competitive market-place of private, public and voluntary providers. And while the voluntary sector’s ‘unique selling-point’ is its potential for added social value, the funding model which is emerging to underpin this appears fragmented and lacking in coherence.
For example, there is potential tension between the principles of full cost recovery, and the Social Value Act. The viability of voluntary organisations lies in more efficient pricing and charging, as in the private sector. In its full cost recovery guidance around statutory procurement the National Audit Office states clearly that: "If the provider is a charity, you must not expect it to subsidise the cost of your programme from donations it receives …and its unrestricted funding." However, the Social Value Act introduced to help voluntary organisations win contracts may potentially lead them into doing just that. Few aspects of additional social value do not have a cost to organisations – whether supporting intermediate labour, managing or training volunteers, improving services (eg adding social support through meals-on-wheels) or ‘greener’ working. To remain competitive, they may call on unrestricted funds to support such costs. Moreover, the kinds of added value most likely to be attractive to commissioners will be precisely those items which enable savings elsewhere, as overall budgets are unlikely to increase.
A further uncertainty is donors’ expectations around cross-subsidising services through donations of time, or money. The emerging sector funding model is only workable by presuming a convergence of goals between statutory providers, donors, and voluntary organisations. The whole issue of the sector’s ‘independence’, its ability to go where government and private sector cannot, loses its salience.
Smaller organisations face particular funding challenges. In areas of deprivation government funding has historically shaped the growth of voluntary services. When such funding is cut, all the evidence suggests smaller organisations prioritise front-line services at the expense of fundraising, training and investment in new business. This leads to a vicious cycle in which, without adequate income generation resources, funding falls further. Unless smaller organisations are better supported through transition, sector services may further weaken in the areas where most needed. Some major charitable funders recognise this danger and are re-prioritising core funding. Statutory funders must follow suit. This needs to be at the heart of localism policy, which should also aim to help build the local donations market-place. Local organisations increasingly need to find philanthropic alternatives to statutory support. While local people see the problems of their communities every day, they often lack easy, attractive access to information about needs and how to help. This local information gap is one which governments and local authorities could help plug. Local organisations are also well-placed to make more use of crowd-funding approaches, which are not new but follow in a long tradition of community-based fundraising, the backbone of thousands of independent little organisations today.
Different organisations will make different choices about their offer and their funding. Not all have to be the same. The challenge is not necessarily for individual organisations to diversify, but for the sector’s future funding as a whole to provide sufficiently diversified and differentiated means for all its activities. While charitable foundations may partner with government, they should not converge on private or public sector funding models around enterprise investment or efficiency. Their independence is crucial to maintaining sector diversity and funding models which are fit for purpose.
Cathy Pharoah is co-director of the Centre for Charitable Giving and Philanthropy at Cass Business School
- This article is part of a series on the future of the voluntary sector being published by Civil Society News ahead of the publication of a collection of essays by Civil Exchange.
