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Generic funding model 1: ‘straightforward procurement’
| Key features | |
| Channel | Procurement |
| Intermediaries | No |
| Degree of competition | Open |
| Duration of contract | Three years |
| Payment formula | Linked to outputs/outcomes Mainly in arrears |
| Monitoring and evaluation | Focus on outputs/outcomes Inspection (risk-based) |
Illustrative scenario
Strategic decisions
The objectives of your programme are clearly specified as outcomes or outputs. There are no particular social factors associated with these objectives but Ministers want the programme to have demonstrable environmental benefits in addition to its core purpose. The programme is likely to take around five years to achieve its objectives. It is a national programme.
You establish that the programme does not qualify as a state aid. There are many potential providers. Collectively, these potential providers have a high level of capacity. There is no particular provider or group of providers with which you have a relationship that is relevant to the achievement of the purpose of your programme. You choose procurement as the funding channel.
Suppliers will need to demonstrate they can respond flexibly to the needs of a diverse customer base – which will include those from harder-to-reach communities that may be distrustful of statutory services. You decide the programme will be more effectively delivered through smaller lots, rather than through an aggregated programme of national delivery, and work to ensure a level playing field for all providers, by ensuring local organisations, that may have particular expertise in this area, are also fully aware of contract opportunities. Most risks that arise at the provider level are controlled by the provider and are, therefore, to be allocated to the provider.
There is no strong case at present for an intermediary.
Tactical decisions
You decide on open competition using the procurement channel. You make the environmental issues, which are linked to the subject of the contract, clear in the tender documents. You offer initial three-year contracts. It is down to the organisations that bid to include their full costs in their pricings. In selecting the winning organisations, you will want to check that these pricings are sustainable. However, this is not a major issue for you because of the competitive provider market and because you have structured the contract to prevent your organisation from becoming locked into the funding relationship if the service fails to deliver.
You explain in the tender documents that payment will be on the basis of the provider’s achievement of programme outcomes and outputs. You also explain that you will consider some initial payments in advance, depending on needs of the provider and the other criteria for deciding on the funding formula [Footnote 1]. Monitoring will focus on the achievement of agreed outcomes and outputs, so it can be closely integrated into the payment system. But you will also carry out risk-based inspections to assess wider quality issues. In addition, you will require providers to send you information on the total volumes of clients, analysed by age, gender, ethnicity, as this is directly linked to the successful delivery of the programme, and so that you can report to ministers and Parliament on these issues.
Finally, you decide that you will design a separate funding model for the national evaluation of the programme.
Generic funding model 2: ‘procurement with demand risk’
| Key features | |
| Channel | Procurement |
| Intermediaries | No |
| Degree of competition | Open |
| Duration of award | Three years, with annual review |
| Payment formula | Minimum payment guarantees Other payments linked to outputs/outcomes |
| Monitoring and evaluation | Focus on outputs/outcomes Inspection (risk-based) |
Illustrative scenario
Strategic decisions
The strategic issues in model 2 are the same as those in model 1, with one exception. In the risk meeting, you identify that overall demand for the programme may fluctuate greatly. Furthermore, your organisation can strongly influence the flow of work to individual providers but cannot forecast this with confidence. This uncertainty could place an unacceptable demand risk on providers, which could deter good, potential providers from taking part in the programme and be unfair to providers that did take part. The risk meeting decides, therefore, that the government as funder must carry this demand risk.
Tactical decisions
The tactical issues in model 2 are the same as those in model 1, except for the need to design a mechanism to allocate the demand risk to the funder. At the risk meeting, you decide to how manage this risk: you will maintain the element of ‘payment-by-results’ used in model 1; but you will adjust it to give a minimum payment guarantee to providers. This makes an annual review appropriate, because the minimum payment guaranteed must be proportionate to actual demand.
Generic funding model 3: ‘procurement with investment in capacity’
| Key features | |
| Channel | Procurement |
| Intermediaries | No |
| Degree of competition | Open |
| Duration of award | Up to 3 years |
| Payment formula | Payment in stages for development funding Payments for services linked to outputs/outcomes |
| Monitoring and evaluation | Focus on outputs/outcomes Inspection (risk-based) |
Illustrative scenario
Strategic decisions
The strategic issues in model 3 are the same as those in model 1 with one exception: in the risk meeting, you identify that, to deliver the programme, many providers will need to commission new facilities, such as buildings and ICT systems, before they can start to receive actual clients. Many of the kinds ofpotential providers that you have identified as desirable for the success of the programme do not have the internal capacity to do this under ‘payment by results’. They would need to be supported to develop those facilities.
You consider dealing with this by establishing two programmes, with separate funding models: one for the development of the facilities, the other for ongoing delivery. You decide that this would be disproportionate. You therefore decide on a single programme with a single financial model but with two elements.
It is important to bear in mind that supplying capacity-building funding and procuring services from the same organisation may give rise to conflict with EU state aid rules (see Annex C) and/or procurement rules against discrimination in favour of particular suppliers. You should seek specialist advice. In particular, you will need some form of guarantee that the resource supplied for capacity-building will be used for your desired objectives rather than other purposes the recipient may have.
Tactical decisions
The tactical issues in model 3 are the same as those in model 1, except for the need to design a mechanism to accommodate the strategic decision about supporting development of facilities. You explain in the tender documents that the programme has two separate elements and ask organisations to price these separately in their bids [Footnote 2]. Payment in the development stage will be on the basis of completion of agreed stages in the work.
Note
In this scenario, if capital investment is required, the appropriate model could be a prime contractor providing the investment, plus either separate contracts for services or sub-contracting opportunities offered by the prime contractor.
Generic funding model 4: ‘competitive grant’
| Key features | |
| Channel | Grant |
| Intermediaries | No |
| Degree of competition | Open |
| Duration of award | Three years, with annual review |
| Payment formula | Linked to activities or outputs/outcomes Advance or arrears as appropriate |
| Monitoring and evaluation | Activities and outputs/outcomes Inspection (risk-based) |
Illustrative scenario
Strategic decisions
The objectives of your programme are quite complex but, with effort, they can be expressed as outcomes or outputs. However, you would like to test them in delivery. They include social and environmental factors. The programme is likely to take around 10 years to achieve its objectives. It is a national programme.
You establish that the programme does not qualify as a state aid. There are a fair number of potential providers within the third sector and, collectively, these providers have a reasonable level of capacity. But this is not a fully functioning market. One of your development objectives is to build the strength of the supplier base. You choose grant as the financial channel.
In a risk meeting for the programme, the main risk that you identify at national level is that no providers are well developed at this stage to deliver your whole programme. You therefore decide to deliver the programme through a series of local organisations. Most risks that arise at the provider level are controlled by the provider and are, therefore, to be allocated to the provider.
There is no obvious intermediary at present, however, you wish to keep this option open for the future.
Tactical decisions
You decide on a two-stage competition for local awards among potential providers. This allows any organisation to take part in a fair process and allows you to identity those with greatest capacity. You offer initial three-year awards, to be renewed annually. The costing process is transparent between you and potential providers, ensuring that both parties are content that appropriate central administrative costs are covered.
You decide to make payments quarterly in advance, based on anticipated activities. However, in the grant documents, you indicate that grant funding on these lines will only be provided for a maximum of a certain number of years, and that in the long term you may wish to switch to a procurement model of funding, with payment by outcomes or outputs, made in arrears.
Monitoring will focus on both the completion of activities and the achievement of agreed outcomes and outputs. This will allow you and providers to test the validity of the output and outcome measures in delivery, and also means that monitoring can be closely integrated into the payment system. But you will also carry out risk-based inspections to assess wider quality issues. In addition, you will require providers to send you information on the total volumes of clients and on their ethnic origins, so that you can report to ministers and Parliament on these issues.
Generic funding model 5: ‘allocated grant’
| Key features | |
| Channel | Grant |
| Intermediaries | Yes |
| Degree of competition | Allocation |
| Duration of award | One year, with indicative figures for next two years |
| Payment formula | Linked to related programmes Linked to activities and outputs/outcomes Advance or arrears as appropriate |
| Monitoring and evaluation | Activities and outputs/outcomes Inspection (risk-based) |
Illustrative scenario
Strategic decisions
The programme has a balance of both service and development objectives. The service objectives are quite complex, but, with effort, they can be expressed reasonably precisely as outcomes or outputs. However, you would like to test these in delivery. They include social and environmental factors. The developmentobjectives include extending the range of services for the future and building other capacity: they are less easy to define in terms of outputs and outcomes. The programme is likely to take around 10 years to achieve its objectives. It is a national programme.
You establish that the programme does not qualify as a state aid. This is not a functioning market. Providers are localised and lack capacity. In any single area, there is either one or a small number of potential providers. In areas where there is more than one provider, you would like them to work in partnership to maximise capacity. Collectively, the sector shares the programme’s objectives and there is a good level of understanding between the sector and government about the issues involved. You choose grant as the funding channel.
In a risk meeting for the programme, the main risk that you identify is that the sector is underdeveloped at this stage to deliver your programme. You therefore decide to deliver the programme through a series of organisations. Those organisations that have the most capacity will be financed to work to develop the capacity of other organisations and the sector as a whole. You will finance this as part of their grant. Most risks that arise at the provider level are controlled by the provider and are, therefore, to be allocated to the provider.
You establish that many local authorities finance local organisations in their area to undertake activities that are similar to those of your programme. They do this under another programme that is run by another government funder (the ‘existing programme’). Those authorities are also well placed to understand the needs in their area and the capacity of local organisations to address them. You therefore decide to deliver your programme through the existing programme. This will also help those local authorities to join up the delivery of your programme with that of the existing programme and of other relevant programmes that they deliver.
This is a substantial change in the design of your programme. You therefore decide to hold another risk meeting, where you establish that there is a risk that local authorities will come under pressure to use your funds for purposes other than the objectives of your programme. You therefore agree with the government body that finances the existing programme that it will adjust the performance management framework of the existing programme to include the objectives of your programme. You will receive regular reports on this.
Tactical decisions
Awards will be made annually, with indicative funding for years two and three.
Monitoring will focus on both the completion of activities and the achievement of agreed outcomes and outputs. This will allow you and authorities to test the validity of the output and outcome measures in delivery. It also means that monitoring can be closely integrated into the payment system. But you will also carry out risk-based inspections of the providers to assess wider quality issues. In addition, you will require local authorities to send you information on the total volumes of clients and on their ethnic origins, so that you can report to ministers and Parliament on these issues.
Generic funding model 6: ‘allocated grant-in-aid’
| Key features | |
| Channel | Grant-in-aid |
| Intermediaries | No |
| Degree of competition | Allocation |
| Duration of award | Five years, with annual reviews linked to monitoring |
| Payment formula | Linked to activities Advance |
| Monitoring and evaluation | Annual monitoring of activities Quinquennial review |
Illustrative scenario
Strategic decisions
The programme has mainly strategic objectives. These can be expressed reasonably precisely as outcomes or outputs. They include social and environmental factors. The strategic objectives will be ongoing but progress on particular fronts can be measured. It is a national programme.
You establish that the programme does not qualify as a state aid. This is not a functioning market: there is limited capacity in the public and third sectors to deliver the programme. You wish to develop capacity in the third sector for this task. To maximise economies of scale and the capacity on the provider side to deliver the objectives, you are seeking only one provider at this stage. But its strategic role will be to strengthen certain capacity within the sector as a whole. There is one highly respected provider in the third sector with which you have a long-standing and trustful relationship. You choose grant-in-aid as the funding channel.
In a risk meeting for the programme, the main risk that you identify at national level is that the provider will be in a monopoly position and so may become inefficient and lack the incentive to develop other capacity. You agree that you can take some comfort from the degree of trust between you and the provider and from its values. However, you will need to manage the risk through the monitoring scheme. Most risks that arise at the provider level are controlled by the provider and are, therefore, to be allocated to the provider.
There is no case for an intermediary at present. You establish that the provider receives another grant from another government funder and you agree with the other government body to align conditions of the grant as closely as possible.
Tactical decisions
The award process is allocation. You decide to make the award for five years with annual reviews as part of the monitoring process.
The costing process is transparent between you and the provider. This ensures that both parties are content that appropriate central administrative costs are included.
You decide to pay on the basis of planned activities and three months in advance.
Monitoring will focus on the completion of activities, the achievement of agreed outcomes and outputs and on efficiency in the use of the grant. You ask for and are given observer status on the board of trustees. You review the provider’s effectiveness, economy and efficiency in its use of the funding once a year, in a fairly light touch way. You decide to hold a full quinquennial review at the end of the first five years of funding.
Notes
- Please see HM Treasury’s ‘Guidance to funders’ for more details on payment in advance.
- You could decide to to make the funding for the development of facilities a grant, for capacity-building, rather than using procurement processes.
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