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Sir John Bourn, head of the National Audit Office (NAO), reported today that substantial improvements are needed in the way government departments provide funding to Third Sector Organisations (TSOs) to deliver public services. A 2002 Treasury Review made numerous recommendations aimed at improving funding practices relating to TSOs. These recommendations have in the main been implemented, but this action has not been enough to bring about a widespread and substantive change in government funding practices. The government has committed itself to increasing the involvement of TSOs in public services. Today’s report emphasises that further progress is dependent on departments’ willingness to embrace new ways of working with the sector and to embed new practices across their funding streams.

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In recent years the government has recognised that TSOs have an important role to play in the drive to improve public service delivery. In some cases TSOs may be best placed to deliver a service, or can use their specialist expertise to develop and pilot innovative solutions to difficult issues. In the right circumstances they can help to deliver a more effective service providing the taxpayer with better value for money. TSOs already carry out a wide variety of public services such as hospice care for terminally ill patients, childcare services in disadvantaged areas, and advice and guidance for young people.

The Home Office co-ordinates the government’s efforts to engage with TSOs, but the quality and timeliness of its data on the level of public funds invested should be improved. TSO activity is estimated to account for around £2 billion of central government expenditure in the financial year 2001-02, the most recent year for which figures are available, around 0.5 per cent of public expenditure. Departments do not have consistent methods of categorising expenditure with TSOs, however, making collation of more accurate data difficult.

Despite government’s efforts, led by the Home Office and the Treasury, to implement the recommendations of the 2002 Treasury Review, a number of funding issues continue to cause difficulty for TSOs. ‘Full cost recovery’ – ensuring that funders contribute towards TSOs’ overhead costs as well as the direct costs of projects – is not yet embedded. Annual funding is still common, creating uncertainty for the TSO and diverting staff from front line activity to the negotiating table. Funding commitments of more than a year allow TSOs to do more forward planning and improve their service delivery. Funders’ monitoring processes are not always proportionate to the funding and nature of the services provided. Progress has been made in other areas. Payment in advance of expenditure, which can be vital to allow TSOs to make the necessary investments to deliver a service, is more common than in the past, and departments have also made efforts to improve the application processes that TSOs must go through to obtain funding.

In many cases, funding to TSOs is administered by bodies other than central government departments, such as executive agencies and non-departmental public bodies (NDPBs), Government Offices for the Regions, Regional Development Agencies and the National Health Service. Local authorities are also an important source of TSO funding. The NAO research shows that spreading good funding practice throughout government and at a local level is a particular challenge. Some intermediary bodies have adopted the Treasury’s recommendations, but others have not yet taken them on board. The NAO believes there is scope to simplify and reduce the complexities and transaction costs of filtering money through a variety of organisations until it reaches the front line.

The Home Office, working with the Treasury and all government departments, should take a number of steps to help departments improve their engagement with the Third Sector. These include:

The Home Office has already published proposals for a new initiative known as ‘Compact Plus’, which provides a new and encouraging step forward. The National Council for Voluntary Organisations worked with the NAO on this report, examining the third sector’s perspective on progress on funding issues. Their report recognised that third sector organisations also needed to enhance working practices when seeking funding.

"Community and voluntary organisations play a vital role in delivering public services. When engaging with the third sector, departments need to be clear as to whether they are "shopping" (buying a service), "giving" (supporting a worthy cause) or "investing" (building capacity in the sector) and adapt their approach to funding accordingly. Developing shared centres of expertise across departments would enhance effectiveness in working with the third sector through, for example, application of specialist procurement skills. They would also assist in streamlining monitoring processes and building relationships based on trust and professionalism thereby securing the full contribution which the third sector can make."

Sir John Bourn

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