As the conference season gathers pace, we can expect politicians of all parties to mouth platitudes about the goodness of the charity sector, pay homage to the spirit of voluntarism rekindled by the Olympics and Paralympics, and laud to the rooftops community groups achieving miracles with virtually no resources.
Well, there is nothing wrong with praising this sector, which is motivated by a sense of doing good – in stark contrast with what much of the banking sector appears to have been up to in recent years. But the reality is more complex.
Make no mistake, the state is withdrawing. It is cutting back its role mainly for financial and fiscal sustainability reasons, but also for ideological ones. Councils have felt the pain early and charities and other not-for-profits are feeling it down the line as the largesse of these funders rapidly declines.
The coalition idea, expressed in the stillborn phrase the ‘Big Society’, was that the voluntary sector would fill the gap that spending cuts left behind. Indeed, they argued that it was too much spending, allied with the top-down, target-driven way it was distributed, that led to a decline in voluntary action.
It’s a nice theory. But there is about as much evidence of a negative relationship between state intervention and not-for-profits as there is for the idea that if you cut public spending you automatically get an inflow of private investment to replace it. Whatever the theory, civil society is going to have to fill in the gap left by the pulling back of the state, because nobody else can.
Estimating the size of the cuts as they have cascaded down to the third sector is not easy. Much has gone from local council grant programmes. A great deal of central government funding for infrastructure and core costs has been axed. Although it is hard to put a figure on it, the National Council for Voluntary Organisations reckons that, cumulatively, the sector stands to lose £3.3bn over the current Spending Review period – 2010/11–2015/16.
Harder still to quantify is the reduction in central government contracts as commissioners tighten their belts and look for economies of scale. In a survey earlier this year by New Philanthropy Capital and Zurich, more than 90% of charities said they faced more risk in the current commissioning environment than last year. One in ten said they were at risk of going under – probably an underestimate given the optimism bias in the sector.
In addition, while British people appear to continue to dip into their pockets to fill the collecting tins or appease the chuggers in these tough times, they are clearly not able to fill the gap left by cuts in state funding. So what is happening in a world where needs are going up and funding is going down?
First, charities are attempting to draw on the help of service users or beneficiaries – the ‘co-production approach’ to solving social issues. It is said to be more effective in many cases than previous professional-led approaches and, crucially, it saves money too. Cases include empowering diabetes patients to manage their own problems and enabling older people to have better networks and to create the links themselves. Southwark Circle, a membership organisation in south London offering practical help and a social network, is a good example.
A variant on this, and one the coalition’s Big Society agenda hoped to encourage, is using more volunteers to provide services such as mentoring and befriending, to run libraries councils can no longer afford and to form groups to keep community centres going. The charity Community Links in Newham, east London, has done that in response to cuts in funding. Some of its community centres had to go as it could not afford to run them any more. To keep others going it has severely reduced its use of paid professionals to stay within budget. In the NPC/Zurich commissioning survey, 75% of respondents said they were making more use of volunteers in response to funding cuts.
Of course, there are great benefits to be gained from co-production and using volunteers. The call to arms for us to be ‘all in it together’ is a powerful one. But issues abound. The army of volunteers who made the Olympics and Paralympics happen might have done a fantastic job, but sadly the day-to-day running of a charity or community group doesn’t always inspire the same level of fervour. It also requires a much more sustained effort. There are other issues, too. For example, who is in charge if things go wrong? What happens if the library volunteers want to stock books of only one type, do not choose to open at times useful to certain members of the locality or are not interested in outreach? What happens if something goes awry at the community centre?
Equally, while the use of volunteers might work in some sectors, there are other areas where professionals are essential. The importance of personal relationships and need for continuity for vulnerable service users, for example, plus the necessity in many cases for highly professional skills, limit the inroads a Games-inspired volunteer approach can make.
So what are the options for organisations that cannot rely on volunteers to take on their work? For many not-for-profits, public contracts might seem an attractive option. All the rhetoric from government suggests the coalition wants the voluntary sector to be a bigger player in the mix of public service provision. Last year’s Open public services white paper says this. Ministers can’t help themselves saying it over and over. They have even appointed a crown representative to look after the interests of the voluntary and community sector in Whitehall.
The reality is rather different. As our survey showed, a combination of bigger contracts – as commissioners search for economies of scale – and the trend towards payment by results makes it tough for charities. They have not got the cash flow to be paid in arrears. And they cannot cope with the financial risks.
Nevertheless, many are getting involved with such contracts. They see no alternative, so the idea of walking away feels irrelevant. Some end up as sub-contractors to bigger, often for-profit, prime contractors. For some this works well, for many it is a bad experience, as the Work Programme has illustrated.
In any case, the amount of money available from such contracts has not only shrunk as a result of the last Spending Review but is due to plummet further at the next. Local authorities in particular expect a further set of cuts that will hit the charity sector.
Commissioners, naturally enough, are looking for contracts that will make serious savings within a few years. In such circumstances, pleas by great charities that a pound invested in them saves £20 for society over the next 40 years fall on ears that might want to hear but have no opportunity to listen.
The net result of all this is that charities are being squeezed. It is especially tough for medium-sized organisations that do not meet unique local or niche needs yet lack the scale of the big national charities. This might not matter if it meant efficiencies were being driven out of the system. But if one believes in the importance of civil society to the texture of our towns and communities, then it is something worth worrying about.
Further implications for the third sector come in the shape of central government’s desire to increasingly focus its budget on ‘buying’ interventions that have been proven to work, via rigorous evaluation of the randomised control trial type. While a good way of avoiding public sector waste, it could squeeze out the innovation that is the raison d’être for many charities.
With government money increasingly impossible to come by, charities are trying to raise more from non-statutory funders – charitable foundations, corporates and, of course, philanthropists and other high-net-worth individuals. Indeed, in some ways we are returning to a sort of pre-welfare state world, where your chances of receiving a service depended on whether you lived in an area, or suffered from a social problem that rich people had decided to put their money into.
This trend came crashing into the limelight when Chancellor George Osborne, with no prior notice, suddenly brought in a philanthropy tax in his 2012 Budget, only to retreat a few months later due to the cacophony of noise from charities saying they would lose crucial funding if it were implemented.
But there remains a lingering feeling that there is something strange about giving tax breaks to high-net-worth individuals as they choose where to bestow money that has been tax enhanced by the rest of us.
The whole philanthropy tax episode was a strange move from a government that has, on the whole, been good for giving, especially by the rich. There have been reductions in inheritance tax if you leave enough to charity, improvements in Gift Aid, and there are ongoing campaigns to enhance giving while living. When Jeremy Hunt, now health secretary, was at the Department for Culture, Media & Sport he brought in matched funding for endowments for charitable arts organisations. Still, raising more money from the rich must be an important goal for charities in difficult times.
So what of the sector’s shiny new toy, social investment? Surely with the advent of Big Society Capital and its £600m of funding, mainly from dormant bank accounts – rescue is in sight?
Social investment is a good thing. For some charities, especially more commercially minded social enterprises, it will provide sources of risk capital that were not available before. But it is often really just a fancy name for loan finance. In this case, lenders look for a sub-market return because they offset that with the social return they believe they are getting. Only charities that generate revenue in one way or another can get hold of such investment. Those with good assets, such as charity shops or a diversified set of government contracts, are good bets. But many do not have the business models or the appetite for risk to make this a realistic option.
Another form of social investment, social impact bonds, are being championed as a way to magic up extra resources. They can be a useful way of funding a charity up front to hit certain outcomes – and can therefore get more money into early intervention and prevention programmes. But they have many complexities and at present we are struggling to see much action beyond the one in progress at Peterborough Prison. This is paying for the One* Service, which rehabilitates short-term prisoners.
Social investment, and payment by result mechanisms such as SIBs, add to a growing emphasis on assessing the impact of a charity’s services. With money tight, voluntary organisations and their donors need to think much harder about their impact. Do they know what are they achieving, and do they have some handle on that in terms of quantification of outcomes? Crucially, could they achieve more?
For too many years, charities have seen measuring and assessing the effects of their services as a distraction, or as something desirable but in practice too difficult, or as a waste of resources. The past decade has seen a change in attitude, as a forthcoming New Philanthropy Capital survey will show. In the current climate this is likely to be ratcheted up with the Big Lottery and the Office for Civil Society funding work to improve impact measurement and the take-up of shared approaches. Assessing impact is going from a nice-to-have to a necessity, and not before time.
Most charities are pretty down to earth. They care passionately about the group of beneficiaries they were established to serve. But they are also realistic. They work out where the agenda is heading and, more often than not, go with the flow. Add to this the natural desire not to rock the boat if you want contracts for statutory services, and you can argue that the sector ‘voice’ gets neutered.
This idea of mission drift is something that some in the sector say comes from feeding from the devil. But it does become an issue if charities lose their campaigning role, their desire to shape policy rather than just fit into it. For instance, in the Labour years the voluntary sector brought to bear a great deal of pressure on the issue of child poverty. Now that the coalition government appears less interested in this area, and the public are harsher in their attitudes to benefits, charities have to some extent gone a bit quiet. But should they accept the new reality, or challenge and try to shape it?
During the Olympics and Paralympics, we saw athletes make herculean efforts to break records and win medals, public interest in sport peak like never before, and the London 2012 volunteers play a heroic part. But at the same time, funding cuts weren’t far from the headlines, as school playing fields were sold off and Osborne faced a booing crowd at the Paralympics, angered by cuts to disability benefits.
Against the expectations for the Big Society and the collective efforts of volunteers to fill gaps in state funding, the harsh reality of public sector cuts looks stark. Charities will need all their resourcefulness and innovation over the next few years to help fill the gaps.
Dan Corry is chief executive of New Philanthropy Capital, a think-tank on the third sector. He was also a special adviser to the previous Labour government and ran the Number 10 policy unit for three years. This feature first appeared in the October issue of Public Finance