Stronger Charities Report on Funding and Finance

Following the publication of the House of Lords select committee on charities’ report Stronger Charities for a Stronger Society (PDF, 1.7MB), we are publishing a series of posts covering the take-away issues and what charities can do in response, highlighting what we think are the best available resources to help you if you want to take action. Look out for further posts on:

• governance
• regulation
• public services and contracting
• impact
• campaigning and advocacy
• digital
• public trust and confidence
• volunteering
• next steps for infrastructure: An action plan for implementing the report.

Despite the focus of the Lords Report on governance, it sets out a constructive vision of how the sector’s funding could change for the better, with an increased role for grants, highlighting the importance of funding core costs, and taking a realistic approach to the role of social investment and social impact bonds. There were also significant recommendations on commissioning practices, use of payment by results contracts, and resourcing volunteering which would undoubtedly have implications for the wider funding picture – we’ll be covering each of these in more detail in other blogs.

Not taken for granted

The Committee’s approach to funding was notable for its support for a ‘revitalised role for grants’, highlighting good practice across the sector, and noting their suitability for generating new ideas in public service delivery. The Big Lottery Fund’s funding approach was singled out in particular for its longer-term focus and support for training that helps develop the sustainability of organisations beyond the particular programme being funded. Where contracts are used, the Committee said they should avoid being too specific on delivery methods to enable scope for charities to innovate. These suggestions reflect similar conclusions that came out of last year’s VCSE Health Review, but it’s helpful to have cross-party support for them, with a particular call for local authorities to maintain or revive grant funding as part of their financial planning.

The Committee’s comments on the role of social investment were also refreshingly pragmatic. While it recognised the need to develop the investment readiness of smaller charities to maximise the potential of the market, it identified problems with high transaction costs despite ‘heavy promotion’ by government. The Committee went further with respect to social impact bonds (SIBs), saying that the Government’s focus on them had been ‘disproportionate’ to their potential impact and future funding should be targeted at methods with wider application to charities and beneficiaries – a position we’ve supported for some time.

Getting down to the core

Of all funding issues, the Committee placed particular emphasis on the lack of funding typically available for charities’ core costs, such as project management, office costs, regulatory compliance, and other necessary elements of running an organisation.

Several witnesses indicated that the unwillingness of funders to cover core costs has been causing charities to strip out or understate their core costs in funding bids, even where funders were likely to look favourably on such requests. The Garfield Weston Foundation (the 5th largest funder by giving in 2016) reported that only a quarter of applicants asked for core costs funding, for fear of being turned down. This issue won’t be news to those in the sector – it’s very much the domestic manifestation of the ‘overhead myth’ that US non-profits have been campaigning about. It does highlight however the fact that the solution lies on both sides of the fence – the sector as a whole also needs to be more confident about building core costs into their bids.

The Committee called for there to be an expectation that ‘realistic and justifiable’ core costs of organisations should be included in public service contracts, although no mechanism for ensuring this was suggested, reflecting the difficulties in changing commissioning practices across increasingly devolved services.

Technical tweaks

The Committee’s support for grant funding and core costs is significant, but it also made a series of more technical recommendations that could nevertheless improve the funding picture for charities. For example, it recommended simplification of the tax position of charities to minimise bureaucracy – something that the upcoming Commission on Charity Taxation will be looking at. It also highlighted the Law Commission’s work around making mergers easier for charities, and said legislative time should be made for these improvements, despite the likelihood of the next parliamentary session will be focused on the legislative impact of leaving the EU.

It was similarly practical when it came to the impact of Brexit on charities, recommending that the Office for Civil Society (OCS) should undertake an audit of the potential impact of Brexit on charities, including the likely loss of funding and research collaboration – this is something we’re already in conversation about with the Department for Leaving the EU and the OCS.

These more focused suggestions aside, the next piece of the puzzle will be working out the practical steps for implementing the Report’s wider recommendations. Keep an eye out for our final blog in this series, which will focus on the role of sector infrastructure in taking forward the report.