This note discusses the case for greater use of the third sector to provide public services. More work needs to be done on the value-for-money provided by charities when performing public sector contracts but the Better Government Initiative thinks it likely that expanding the sector’s role would bring advantages in terms both of better outcomes and lower costs. Government would, however, need to change its policies in order to create the conditions in which the sector could increase its contribution. There are also issues for the sector itself to address.

1. The Spending Review decisions announced by the Chancellor of the Exchequer on 25 November 2015 will require both central and local government to think imaginatively about how to maintain the quality of public services provided by those programmes for which resource allocations have been cut and those which, even if resources are to be held stable or increased, may not be able to cope with rising demand eg adult social care. The Better Government Initiative believes that as part of its strategy for maintaining the quality of essential public services while reducing the deficit the Government should consider the case for making make more use of the third sector. This note considers the possible advantages of increasing the involvement of charities and not-for-profit bodies in the provision of public services and some of the problems which would need to be overcome.

2. The third sector has in some respects had a poor press in the last year or two because of criticism of some of its fundraising methods and of the remuneration enjoyed by the chief executives of some leading charities. There are legitimate issues here but they are in our view tangential to the question explored in this paper. The collapse of the charity Kids Company has also cast a more substantial shadow over the sector, raising issues about public funding, governance and financial control.  Serious though the failings at Kids Company undoubtedly were, we do not believe that the way in which it was managed, led and governed is typical of the sector as a whole. Moreover Ministers rejected civil service advice that the charity was no longer a proper recipient of public funds. We nevertheless believe that in view of recent public concerns, the present is a good moment to consider the case for the sector’s involvement in public service provision and some of the issues that affect its performance.

3. This note is concerned only with those situations in which services provided by central or local government or by statutory agencies are replaced or augmented by the voluntary sector and not, for example, with charities whose main object is campaigning or whose focus is predominantly overseas. And, although there are 190,000 charities plus a great many other not-for-profit bodies in Britain, this note is mainly concerned with the minority which are of sufficient size to provide public services at some scale.

Why use the voluntary sector to provide public services?

4. The voluntary sector has advantages over public authorities and the private sector which might enable it, at least in theory, to provide services more cost-effectively. In general it has less complex and expensive governance and management structures, it can draw to a greater degree on voluntary effort and it often has lower overheads than public sector agencies or private companies. Also it has the advantages over private sector providers that it does not need to make a profit (though it may well seek to generate surpluses to apply to its charitable objectives) and that it enjoys favourable tax treatment.

5. Just as importantly the sector’s use might bring other key benefits, including greater responsiveness, innovation and the ability to gain the trust and support of its client groups. Its responsiveness comes in many cases from a greater understanding of, and empathy with, the needs of users of its services than other providers usually achieve. This is driven by its charitable objectives expressed as a commitment to help those in need. Most charities try to ensure that their policy-making and service design is closely informed by the experiences and views of their beneficiaries. The most successful include service users in their governance structures in order to ensure that they do not lose sight of their needs.

6. Charities’ ability to innovate derives in part from the same source – their understanding of what their clients want. But it is also a function of smaller scale, flexibility and openness to change which are not characteristic of many public services. The ability to gain greater trust from their client group comes in part from the simple fact of their being neither government nor business, but also from the fact of their often having worked with the same client group for many years and having gained their confidence over an extended period.

7. By contrast, government departments often think of service provision from their own viewpoint, seeking to satisfy narrow objectives which may not take sufficient account of what the service user actually needs or wants or of the fact that those needs will often cross departmental boundaries. Consequently, the way departments deliver services sometimes simply doesn’t work and the voluntary sector, with its ability to think holistically, could in these circumstances often do a better job.

8. Because charities enjoy these advantages, it might be argued that in competition with the private sector the latter is at a disadvantage. However, the private sector has advantages that the third sector generally does not, such as the ability to raise capital and take greater risk. Overall, provided that the voluntary sector offers lower costs or better outcomes, or both, we doubt that its being in competition with the private sector would be a matter of public concern.

Why has more use not been made of the voluntary sector?

9. Successive governments have for these reasons been keen to make more use of the third sector and much good work has been done in this field. However, they have generally found it difficult to create the conditions in which charities can make a sustained long-term contribution. Short-term contracts, frequent changes of policy and an inability to understand charities’ cost structures and their ability, or more accurately inability, to carry risk have not helped. The prime and sub- contractor model has led to too many cases where charities have been involved in consortia with private contractors to government in which the private sector has reaped most of the benefits. More recently, the pressures on public expenditure have led to relentless reductions in contract prices hitting very hard those charities that are heavily reliant on public funding for the bulk of their finance. And there would be some challenges for the third sector itself if it were to become a more substantial contributor to the provision of public services.

10. There is an existing concordat between government and the third sector – the ‘Compact’ drawn up in the late 1990s – which was intended to deal with some of these obstacles but it has had a limited impact. There has been little appetite in government for effective arrangements to secure or monitor compliance by departments with its provisions. As a result, there is much scepticism in the third sector about whether departments are serious about treating it as a useful partner and any attempt significantly to extend use of the sector would need to start by rebuilding trust. It would also need to acknowledge that the voluntary sector has its own, valid, objectives and priorities and should not be seen just as a contracted subordinate delivering services on government’s behalf.

11. We suspect that the lack of an adequate information base about the cost-effectiveness of using the third sector has been a further constraint; neither government nor charities themselves have collected information systematically. There is little published data about the value-for-money which the sector provides when delivering public services. It may be that despite the theoretical advantages described in paragraph 4 above, third sector bodies’ difficulty in achieving economies of scale or the levels of efficiency of which the private sector is sometimes capable limits – perhaps severely – the circumstances in which they can deliver services at lower cost than the public or private sectors. Cost should not be the only factor, of course: quality of outcomes matters too and might justify using the third sector even if its costs were higher. But information about comparative outcomes is also often lacking. One would expect the answers to these questions to vary between different sorts of services. We believe that work is needed to bring together and to analyse the available information on cost-effectiveness and that either the Government should commission up-to-date research or that the National Audit Office should be asked to carry out a study in this area.

Issues for government

12. Previous use of the third sector as contractors both by central and local government suggests that there are some important obstacles that would need to be overcome if the scale of public service provision by the sector were to be increased significantly.

What does government really want?: Governments usually say that they want to encourage innovation and experiment in public service provision – to ‘let a thousand flowers bloom’ in order to find new and better ways of doing things. But in practice the demands of public accountability lead to inflexibility, frustrating Ministers’ stated aims. Reconciling this conflict requires a change of mindset in government, together with a more sensitive – and complex – appraisal system for contracts.

Capacity: charities generally do not have a lot of spare capacity – their financial model does not allow it. There will be some spare capacity at present in some sectors as a result of the cutting back of services by local authorities in recent years and the consequent loss of contracts by charities. If there were to be greater reliance on them, they would need to be given time to build up capacity, almost certainly some support to do so and the certainty of long-term contracts.

‘Scalability‘: scaling up innovative and high quality provision by particular charities operating on a small scale is a major challenge. The larger charities may be capable of it, certainly if providing a service across the area of a discrete local authority. But many will not. It may be necessary to encourage and enable different charities operating in the same field to form consortia or to involve the private sector, but it would need to be on a basis that recognises the reality within which most charities exist and not on terms which fundamentally favour the private sector and disadvantage charities. It may also be necessary to accept that provision by charities can work in some parts of the country but not in others.

Standards: government or local authorities, as the case may be, will want to set minimum standards of provision but should not be over-prescriptive and should not seek perfect consistency of provision everywhere. The latter is not achievable by large numbers of voluntary bodies and would in any event tend to stifle innovation, which ought to be one of the strengths of a charity-based approach.

Contracts: framing contracts in a way that enables the third sector to bid successfully is essential. Failure to do this, by both central and local government commissioners, has long been an obstacle to the sector’s achieving its full potential for public service provision. It will often be necessary to package services in a way which matches the size of the voluntary bodies expected to deliver them. And the administrative burden and costs involved in setting up and managing contracts must not be dis-proportionate. Many charities currently spend very large amounts of time and resource simply coping with the bidding process.

Risk: most voluntary bodies do not have the financial capacity to bear high levels of contractual risk in the way that private companies contracting with government are expected to do. This includes vulnerability from uncertainty about future volumes of work or the effect of payment by results and the risk that funds could be withdrawn arbitrarily at short notice, leaving a voluntary body with commitments it cannot sustain. Public sector bodies using the voluntary sector need to use contractual models which impose levels of risk which the sector can reasonably be expected to bear and no more. Partnership with private companies which are capable of carrying risk may provide part of the answer provided, as mentioned above, that this is done on terms which are fair to the voluntary sector partner.

Accountability: use of the third sector on a large scale may well raise issues of accountability for government and local authorities. Central and local government, and Parliament also, need to understand and acknowledge the extra challenge of ensuring a reasonable degree of accountability which arises when operating through a large number of providers, many of them small. Government needs to work with the sector to ensure that participating charities can observe minimum essential rules on use of public money and provision of information about how money is spent and with what result. But this needs to be done in a way that does not over-burden the voluntary sector, making it impossible for it to deliver the advantages – responsiveness and innovation – which ought to flow from its involvement.

Funding cuts: charities should be no more immune from the challenge of delivering their services more cost-effectively than any other providers, public or private. But the reality currently for many charities is that successive rounds of very substantial funding reduction have left them at a point where their senior managers and trustees are having to ask themselves increasingly whether they can any longer deliver their services at even minimum levels of quality, safety and acceptability. For many the well is now dry; their only option appearing to be to hand back existing contracts and cease to bid for new or repeat business.

Freedom of Information: there have been suggestions that the FOI Act should be extended to charities. Where such bodies are providing services under contract to a public authority, it is right that the arrangement should be transparent and that full information about it should be publicly available. But applying the Act to the third sector would in our view be both unnecessary and very damaging. The public sector finds dealing with FOI requests labour-intensive; most charities do not have the free capacity to take on a burden of this kind and we should not impose it on them.

13. One could argue that in view of some of these difficulties, rather than seeking a contractual relationship with third sector bodies, government should simply grant-aid them to carry out specified roles. While we see a case for grant-aid in some circumstances, we do not argue that this is invariably the better approach. But we are clear that if the sector is to be able to compete successfully, the conditions for it to do so have to be created.

Issues for the voluntary sector

14. There are also issues for charities themselves.

Dependency: many charities are campaigning organisations as well as providers of advice and services to those whom they seek to benefit. They want to be able, if necessary publicly, to criticise government and public policy. Financial dependency on government through public contracting may inhibit the campaigning role and for some charities – or, more importantly, their supporters – that risk would be a significant obstacle. There may be structural solutions to this problem, eg campaigning and service provision to be undertaken by separate but linked charities. But the better solution may be to rely on good, mature relationships – for both government and local authorities on the one hand and charities themselves on the other simply to acknowledge that such tensions will sometimes arise and to accept from the outset that they should not be allowed to interfere with the service provision role.

Delivery and standards: notwithstanding what we have said above about not expecting a multiplicity of charities to provide exactly the same service everywhere, minimum standards would have to be met and charities operating in a particular field ought to cooperate so as to share best practice and new ideas. This would be a challenge for a sector in which charities are often in competition for funding and where willingness to cooperate cannot be assumed. There may be a role for government, perhaps working through the NCVO, to encourage and enable working together.

Mergers: according to the Charity Commission there are some 190,000 charities in the UK. Many are, of course, run by a single individual or family but, even leaving these aside, there are still very large numbers. One of the main umbrella organisations – the National Council of Voluntary Organisations (NCVO) – has some 11,000 members. If charities are to achieve a scale, efficiency and durability which will allow them to deliver successfully in the present highly constrained funding climate more takeovers or mergers are going to be necessary. But these are no easier to carry through successfully than they are in the private sector, particularly given that trustee boards may often be constrained by their own charitable purposes and articles of association; and there is no ‘acquisitions’ culture in the sector.

Working with the private sector: some charities find working with private companies difficult because, for instance, they find the private sector’s ethos or its disciplines uncongenial. The third sector needs to be ready to acknowledge the strengths of the private sector and to be willing to compromise in order to produce effective partnerships drawing upon the best attributes of both sectors.

Conclusion

15. It is possible that there would be significant benefits for both government and service users in greater use of the third sector to provide public services, with lower costs or better, more responsive services. We believe that research is needed either commissioned by the Government or undertaken by the NAO to improve understanding of the advantages and disadvantages of third sector service provision.

16. Assuming such research did indeed show that there would be benefits from greater use of the third sector, there would be real challenges for both sides if those benefits were to be realised. For its part, government would need to acknowledge the realities within which the sector operates. It should also recognise that it would have to rebuild trust and to demonstrate that it was serious about achieving a better relationship with the sector. It would have to help the sector to scale up its activities and to be flexible. Even more fundamentally it would need to recognise that without sustained long-term funding models at levels which enable charities to operate successfully, aspirations to see a greater role for the third sector in public service delivery would inevitably be still-born. For their part, charities would need to accept the inevitability of change, the legitimate demands of the public purse for a reasonable degree of accountability and for greater efficiency and be willing to accept that dependency is an issue, but that it is one that can be managed provided that both parties are committed to making the third sector’s involvement in public services work.

BGI

January 2016