Time of charities to recoup their costs from councils

Many voluntary sector projects run at a loss, leaving the groups themselves to pick up the tab. There is a mechanism to make good the debt, but full cost recovery remains a pipe dream for many in the third sector. Mark Hunter finds out why

Many of the organisations that raise money for the benefit of others are desperately in need of cash themselves.

This third sector of voluntary, charitable and community groups receive 5bn a year from the government, the NHS and the European Commission to fund an array of services, including charity-run hospices, rehabilitation for war veterans, drug treatment programmes and tax advice.

Many of the projects, however, run at a loss. The shortfall must then be picked up by the voluntary organisations which, in a throwback to the Victorian era of philanthropy, end up subsidising the state’s provision of statutory services.

Indeed, the widespread inability or refusal of funders to offer full cost recovery limits the government’s plans to expand the influence of third sector organisations and threatens the future of many projects and the organisations that run them.

Charity Sue Ryder Care, which provides palliative and home care services, estimates that each year it supports a shortfall in statutory funding of 7m. This makes a big dent in the charity’s income from voluntary donations and impairs its ability to expand its services. It is not, the charity points out, a situation that can be sustained for long.

Nor should it be happening at all. Full cost recovery was one of the key principles recommended for third sector funding in Sir Peter Gershon’s efficiency review in 2004.

As long ago as 2002, the government pledged in the Treasury’s cost-cutting review that the concept of full cost recovery should be embedded in the funding of all services commissioned by the state from the third sector. The deadline for meeting these criteria was April this year.

The rhetoric from local government has also been positive towards the concept of full cost recovery. The report Closer to People and Places, published last month by the
Local Government Association, emphasises the need for full and long-term financing of voluntary groups and community organisations.

“Councils support moving to full cost recovery as quickly as possible, and propose that all councils should routinely address three-year contracts to allow the voluntary and community sector to plan ahead,” says LGA chair Sir Sandy Bruce-Lockhart.

But, according to the Association for Chief Executives of Voluntary Organisations (Acevo), for most third sector organisations full cost recovery remains a pipe dream.

“There has been some progress since 2002, but it’s been very patchy,” says Acevo’s policy officer, David Hunter. “Full cost recovery was meant to be in place by April of this year but 95 per cent of our members have been unable to meet that deadline.”

An Acevo survey last year of 74 chief executives of third sector organisations found little evidence of improved funding practice among local authorities, government departments or primary care trusts.

Asked to rate progress towards full cost recovery since 2002, only 2.7 per cent of respondents said matters had improved.

This tallies with a survey of charities earlier this year by the Charity Finance Directors’ Group, in which 60 per cent of those responding said they did not expect to achieve full cost recovery on the services they provided. Reasons for the expected shortfall included financial pressures faced by funders and a fear among the charities of losing contracts, leading to the pressure to put in low bids.

Equally depressing is a survey conducted last year by the National Audit Office of 13 government departments that regularly commission services from the third sector. This found that approaches to full cost recovery varied widely, often within the same department and that, although there had been a positive “change in government rhetoric”, few third sector organisations felt that this had been translated into practice or adopted throughout all funding streams.

“Our research shows that government departments have made some progress on allowing full cost recovery since the Treasury review, but as yet this is very limited,” concludes the report.

So, why has progress been so slow on what is surely a fairly basic principle of paying for what you get?

One reason, suggests Hunter, is a lack of understanding among commissioners on how the voluntary sector works.

“There’s a feeling that councils and the primary care trusts don’t understand how voluntary agencies fund projects, that there’s some sort of magic pot they can use, to make up the shortfall,” he says.

Another problem is that, although funders are often willing to pay for the direct costs of a project, they baulk at paying for certain overheads and core costs. Third sector organisations that apply for such funding are then asked to provide a detailed analysis of where and how these costs are incurred.

Providers from the private sector, on the other hand, are simply asked to bid for contracts on a single price, while public sector providers have their core costs covered by the taxpayer.

“Local authorities have the option of a broader market in which they can go to the private sector or take services back in-house,” says Andy Haines, chief executive of the children’s charity Together Trust.

“But it’s not a level playing field because private companies are not under the same scrutiny as we are and the comparison with in-house provision doesn’t work because you can’t cost services like for like.”

The Together Trust runs projects that provide care, education and support to young people with emotional, behavioural or social difficulties, physical and learning difficulties. While emphasising that none of these projects is currently at risk, Haines says there is a limit to how long the charity can continue to subsidise statutory services.
“There’s a mismatch between government policy and the behaviour of councils at the moment,” he says. “If you peel away the rhetoric, what’s happening in practice is very different and the long-term implications for the whole voluntary sector are serious.

“Currently, it is difficult to fund projects for children and young people. Councils have severe budgetary constraints and there’s also the reorganisation of children’s services to contend with. We have to make up the difference and underwrite services, which we can do in the short term but in the long term it is not sustainable.”

Clearly, it is in no one’s interest for any project providing statutory services to become unsustainable. So how can the voluntary sector kick-start its funders’ ponderous progress towards full cost recovery?

Hunter urges third sector organisations to “get tough” with their funders and Acevo has produced a full cost recovery template to help voluntary organisations make their case for proper funding. Indeed, the government itself has urged third sector organisations to walk away from poor contracting processes, particularly contracts that are funded below full cost.

However, as Haines points out, many voluntary organisations will be unwilling to walk away from projects that have become vital for many vulnerable people.

“We’ve been providing these services in one way or another since 1870. You can’t just walk away from that. But what we can do is lobby very hard to ensure that in the next spending round, much better provision is made.”

Recovery position
Full cost recovery is the concept whereby third sector organisations secure funding for all the costs of the services they provide. This includes the cost of overheads, core costs and the direct costs of the projects themselves. Failure to recover all these costs threatens an organisation’s ability to pay its employees, rent office space or expand its services.