Holy grail or a hornets' nest?

Early this year the Charity Commission published its new guidance publication CC37 '“ Charities and Public Service Delivery. It issued this guidance in the light of an evolving environment for charities engaging in public service delivery (PSD), with the intention of highlighting the issues for trustees to consider when deciding if public service delivery is appropriate for them.

As the Commission says in its introduction: 'As the independent regulator of charities, it is not for the Commission either to encourage or discourage the delivery of public services by charities. For some, there may be significant funding opportunities and the chance to deliver better services to those they help. But there are also risks: risks to independence, risks to achieving full funding and the danger of mission drift. Some charities are already delivering public services successfully, but it is certainly not the only way that charities can fulfil their mission.'

Before 2004 there was a lack of clarity about the extent to which charities could legitimately deliver public services. This was removed by two cases that were published by the Commission in February 2005 '“ Trafford Community Leisure Trust and Wigan Leisure and Culture Trust. The principles set out in these cases have formed the basis for the Commission's guidance.

From the guidance, the Commission has identified three key aspects which trustees must take into account: 'stick to your mission; guard your independence; know your worth.' By way of the briefest of summaries of what CC37 says in this regard :

• Stick to your mission '“ a charity's activities and mission must fall within its objects. In the desire to enter into a contract for PSD with a public body a charity should not be diverted from its mission, and should definitely not agree to enter into activities that fall outside its objects;
• Guard your independence '“ contractual terms and conditions should not be such as to compromise the independence of the charity. Equally where a commissioner is a trustee or appoints trustees to a charity, then conflicts of interest need to be properly managed, bearing in mind that even if a conflict of interest can in fact be properly managed there are still issues of public perception that might arise which will need to be dealt with. Equally, a charity should not be dissuaded from campaigning where the trustees believe that it is in the charity's interests to do so;
• Know your worth '“ charities should know both their unique and distinctive qualities and their limitations. They should know the full cost of the charity's services and be prepared to expect and negotiate for full cost recovery as the norm rather than the exception, unless the charity decides it is in the beneficiaries' interests to forego full cost recovery.

Charities delivering public services

There has been an evolving debate about whether in principle charities should deliver public services at all. After all, are these by definition not services that public bodies should provide? Of course, the delivery of public services by charities might be in respect of discretionary services, so that a public body might not deliver them unless it contracted with a charity to do so. Even if that were not the case, however, there would appear to be a number of 'value addeds' which charities can deliver when engaging to provide public services.

For instance, the treasury cross cutting review has identified the following 'value addeds':

• connection with the community;
• flexibility and capacity to take risks;
• robust campaigning ability;
• robust independence unrivalled by local government;
• trust by the community that central and local government cannot match.

This is supported by the 2004 spending review which identified the following drivers justifying PSD by the voluntary sector:

• providing services tailored to personal needs;
• exhibiting a service ethos;
• delivering dividends in terms of service quality and community cohesion;
• enhancing contestability through both additional capacity and contestability at the tendering phase.

The National Council for Voluntary Organisations suggested in a 2005 report on The Reform of Public Services: the Role of the Voluntary Sector that the voluntary sector's involvement with PSD went further than this:

'The role of VSOs (voluntary sector organisations) in the public service reform agenda is about more than delivery.

VSOs play a crucial role in advocacy, campaigning, advice and information. This enables VSOs to contribute to the broad strategy for the development of particular services, and to provide a voice as well as a choice. As much emphasis needs to be given to the sector's role in providing communities with a voice about the public services they want as is currently given to the issue of choice'.

Practical problems

Despite these 'value addeds', however, there are a number of practical problems with the delivery of public services that potentially disadvantage charities which can be used as arguments against PSD.

There are even more radical arguments: for instance, in a recent book called Who Cares? published by Civitas, Nick Seddon has argued that charities that receive 70 per cent or more of their income from the state should be stripped of their charitable status as they are in effect state agencies.

While there are many arguments against this viewpoint, it has some legitimacy in the sense that charities that do receive the bulk of their income from public bodies must ensure they safeguard their independence in accordance with the Charity Commission's guidelines.

The Compact (agreement) was issued in November 1998, and comprises a statement about the objectives and undertakings of government and the voluntary and community sector (VCS) to work in partnership to achieve common goals. It has been supplemented by a series of local Compacts with local authorities. The Compact argues, amongst other things, that:

• voluntary action is an essential component of democratic society;
• an independent and diverse voluntary
• sector is fundamental to the well-being of society;
• in the development and delivery of public policy and services, government and the voluntary sector have distinct but complimentary roles.

So, again, the Compact provides a platform justifying PSD by charities. A number of codes of good practice have been concluded, including codes on: funding; consultation and policy appraisal; black and minority ethnic voluntary and community organisations; community groups; code champions and volunteering.

Unfortunately, the Compact is regarded as being more honoured in the breach. A new commissioner for the Compact has been appointed to help drive it forward; but it is argued that, without teeth, it will be difficult to persuade local authorities to change their culture and address the issues that continue to make PSD problematic for charities.

Some problems around PSD

Capacity: The question arises whether charities have sufficient capacity to deliver PSD contracts. The capacity put into delivering them could detract from other activities that the charity might wish to undertake, for instance other forms of outreach or campaigning. Government has a number of initiatives in place that are intended to address the capacity issue, for instance futurebuilders and the ChangeUp (Capacity Builders) programme. Trustees should always ensure, however, that they have sufficient capacity to deliver public services without detracting from their other intended activities. They should also be aware that the tendering process can often take up considerable management time.

Full cost recovery: The costs attributable to a PSD contract might include not only direct costs, but also a reasonable allocation of indirect costs such as overheads. The Charity Commission suggests that such indirect costs might include 'the share of management costs (such as senior staff time and board meetings), research and development costs (including training) and other support costs (including premises and utility costs) that can be fairly allocated to the service'.

The issue is that, if full cost recovery is not achieved, then the charity is to some extent subsidising the provision of the service on the public body's behalf. Taken to extremes, this could result in significant depletion of charitable funds across the entire sector '“ funds that might have been put to good use by charities in other ways.

According to the Charity Commission, only 12 per cent of charities delivering public services achieve full cost recovery all of the time; while 43 per cent say that they are not achieving full cost recovery at all. If trustees are prepared to enter into PSD contracts without achieving full cost recovery, then they must be clear as to why it is in the best interests of their beneficiaries that they should do so.

Multi-year contracts: The longer a contract's duration the more security a charity will have, and the better able it will be to plan and develop capacity. Additionally, there will be less need to divert valuable resources towards frequent repetitive tendering. Unfortunately, public bodies tend to favour annual contracts when it comes to contracting with charities; and according, again, to the Charity Commission over 66 per cent of all funding agreements for public service delivery are for one year only. Trustees should generally aim to achieve multi-year contracts where they can.

Changing cultural perceptions: It is argued by many that a shift in perception is needed by the public sector if the voluntary sector is able fully to engage with it. There have been a number of initiatives in this regard, such as the 2004 Think Smart.. . Think Voluntary Sector publication. This states, for instance, that: 'Essentially what is needed is a change of approach to the sector by government decision makers. Too often the choice is between public and private sector solutions and the potential contribution of the VCS is overlooked'.

Key barriers to PSD

Think Smart. . . Think Voluntary Sector also identifies a number of key barriers to PSD by the VCS, including: lack of early and effective consultation; failure properly to assess capability and to consider the VCS as serious contenders; difficulty in finding out about contract opportunities and whom to approach; a trend towards use of large scale contracts; complex and costly pre-qualification and tendering procedures with unrealisticï'žÂ¸ timescales; and lack of a level playing field in procurement, particularly relating to the unwillingness of some procurers to accept full cost recovery. Equally, Improving Financial Relationships with the Third Sector: Guidance to Funders and Purchasers is an attempt to influence cultural attitudes towards commissioning the third sector.

In its introduction, Gordon Brown states that: 'The aim of this guidance is to set out best practice and provide guidance on effective and efficient use of public funds in a way that is consistent with the principles of public accountability. The guidance is not meant to be a comprehensive guide and it is intended to supplement, not override, government accounting. But it is our desire that all public bodies should seek to follow it, embed it in procurement policies and finance manuals, and ensure that best practice is mainstreamed'.

Other government initiatives such as the Cabinet Office Action Plan for Third Sector Involvement and Exploring the Role of the Third Sector in Public Service Delivery and Reform: a Discussion Document, also seek constructively to address these issues.

The sector therefore needs to lobby for increased usage by public bodies of government initiatives such as these; and for the ongoing and intensive education of public bodies around the flexibilities they may adopt the better to enable them to engage for PSD with charities. It may be that the Commissioner for the Compact will have a key role to play in this regard.

Holy grail?

PSD by charities need not be a holy grail. It is only one of a series of tools in the armoury of the sector which can be used to further charitable missions. Equally, while there are a number of significant issues that arise which can sting a charity, PSD need not be a hornets' nest if trustees act prudently in the best interests of their charity and are prepared to negotiate in their own interests.

Perhaps the most powerful tool to guard against the hornets' nest is to retain independence by being prepared in the last resort to walk away from the table. Knowing your worth '“ especially if you can deliver all those 'value addeds' '“ means sometimes to be able to say 'no' as well as 'yes'. Charities that seek to deliver PSD might be best advised to retain alternative income sources, and so flexibility.