New funding thresholds exclude small charities

by Jay Kennedy, Policy Officer, Directory of Social Change

A number of recent central government funding programmes contain some new eligibility criteria based on prospective applicants’ level of income, as demonstrated by their accounts. These thresholds explicitly exclude smaller organisations at the first hurdle, regardless of the quality of their work or their ability to operate nationally.

What really got the alarm bells ringing was the fact that they have appeared in funding programmes across several different departments. This looked like an instance of that rare and elusive creature – joined up government. And one might be forgiven for a degree of suspicion as to why this has suddenly happened.

The examples that have come to our attention so far:

• The Communities and Local Government department’s proposals for its Empowerment Fund, currently out for consultation, contains two income threshold limits at £400,000 and £1m that organisations must exceed to be eligible to apply for smaller or larger amounts of funding;
• The Department for Children Schools and Families’ Youth Sector Development Fund specifies that eligible organisations must have an average turnover of between £1m and £5m for the past three years;
• The new Department of Health main investment programme specifies that the amount awarded may not exceed 25% of an organisation’s income (this is just a just a different expression of the same proportional relationship between the maximum size of grant that can be awarded and the organisation’s total income).

We made some enquiries with the relevant fund managers to find out what was going on. The main reason given was that there are concerns about organisations becoming too dependent on one source of income. If funding is significant and it is not renewed, it could put the organisation’s existence at risk.

This would appear on the surface to be a sound principle. It certainly seems well-intentioned. But we’re skeptical. Is it really true that central government has suddenly woken up and decided it needs to help us maintain our own independence and financial viability? Surely there is more to the story.

The more likely reason is that difficulties with a few organisations which have been jeopardised by funding cuts led to this response. The driving factor surely is the department’s desire to cut down on administrative hassle, rather than any truly benevolent intentions for the organisations concerned.

After all, maintaining an organisation’s independence and sustainability are mainly the responsibility of the organisation’s trustees in particular. While being dependent on a single source of income is not good, there is no reason why any particular amount of funding received necessarily translates into dependence if the organisation manages it properly and has a good exit strategy in place. That is what an informed, engaged funder should look for.

We were also told that the thresholds had been put in because of guidance from the National Audit Office, but our contacts could not give any more specifics.

Last year, NAO published a Third Sector Funding Decision Support Tool, which aims to give fund managers comprehensive guidance about the process of involving third sector organisations in policy delivery, and how to put appropriate funding mechanisms in place to support this. This would be the most likely source of any recommendations, but it says absolutely nothing about income level or size of funded organsations.

We contacted NAO, who confirmed our opinion and stated that the criteria did not originate from them their recommendations. Indeed, they said it would be ‘strange’ for them to have provided any such guidance.

Setting aside the evident lack of clarity in the decision-making process, and the very thin reasoning given by fund managers, there are a number of problems with using income level as a selection criterion in any application process of this type:

• Income does not necessarily indicate effectiveness, reach, ability to achieve national policy goals or even size necessarily. What’s the difference between an organisation with £500,000 income and 5000 volunteers and one with £5m income and 500 paid staff? The former may be more effective and sustainable than the latter;
• The criteria exclude organisations which are arbitrarily defined by the department as ‘small’, even though those organisations may do high quality, relevant work and would therefore be desirable organisations to fund;
• Conversely, the criteria unfairly favour organisations with well developed funding streams or enterprise income, which already have an inbuilt advantage in putting forward funding proposals;
• There is likely to be a disproportionate impact on BME organisations, which are already under-represented;
• The criteria create an artificial incentive for organisations to grow in order to be able to influence government policy and service delivery – but this is quite clearly not the primary purpose of charitable endeavour;
• The proportion of funding awarded does not inherently lead to being dependent on the grant – if organisations plan properly they will not necessarily be threatened with closure. Further, it is the responsibility of trustees to determine if this risk is acceptable in the interest of supporting beneficiaries;
• The criteria are impractical and will prove difficult to manage and justify consistently (what if income is just on the threshold, or increases/declines year on year?).

These flaws are so obvious it’s hard not to be cynical, but there’s probably no conspiracy here. That said, the concerns about sustainability must be mostly window-dressing. The real reasons are likely to be nothing more sophisticated than the bureaucracy wanting to limit the number of applications received, and to cut down on the flak that it inevitably gets when funding is inevitably cut.

Extrapolating backwards from the bad outcomes of bad processes to a ‘solution’ that potentially damages the policy goals of the entire programme is bad practice, but typical. It does not deliver the best policy outcomes for the department, the government, or the taxpayer in the long term. And in this case it also presents an unnecessary obstacle to small organisations influencing government policy.

We call on the departments concerned to abandon these arbitrary thresholds entirely and to evaluate the merits of applicants according to how well they can contribute to the goals of the programme and their ability to manage the funds properly. Any other departments thinking of introducing such thresholds should think again.