Government payment by results reforms risk leaving charities in the cold – report

4 October 2012

The Government must ensure its attempts to introduce payment by results for public services do not squeeze out charities and community groups, according to a new report published today.

The Charities Aid Foundation (CAF), which promotes charitable giving and provides financial services and social finance to not-for-profit organisations, draws on the recent experience of its social investment arm CAF Venturesome in helping charities and social enterprises to finance payment by results contracts. CAF warns that the way payment by results is being implemented threatens to exclude charity and social enterprise expertise.

Under payment-by-results contracts, government departments pay organisations such as charities and social enterprises once they have achieved their specific, measurable outcomes in tackling social problems such as rehabilitating ex-offenders or getting long term unemployed people back into work.

But a CAF report warns that charities may not be able to take up contracts based on payment by results because they often have limited reserves and require capital up-front to finance their work. It says that commissioning practices are also making it too difficult and risky for social investors to get involved.

The report argues that social investors, who aim to achieve social aims rather than simply maximise financial return, are often willing to help charities bid for government work, but are often deterred because officials give them too little time to assess contracts and face high risks.

CAF is calling on Ministers and public service commissioners to make it easier for charities to bid for government contracts by guaranteeing a proportion of up-front payments to fund start up costs, and to make it easier for charities and social enterprises to raise capital by giving social investors more time to assess risks before funding charities delivering government payment by results contracts. Public service commissioners and social investors are also encouraged to recognise that charities and social enterprises need to be invested in and up-skilled in order to be effective with this kind of contract.

John Low, Chief Executive of the Charities Aid Foundation, said: “Charities and other not-for-profit organisations work closely with beneficiaries and have a huge amount of expertise in tackling sometimes intractable social problems. Payment by results contracts represent real opportunities to innovate and to make a difference by getting involved in public service delivery.

“Government wants to make services better by paying organisations for their results in areas such as getting people into work or cutting reoffending rates. The problem is that most charities simply cannot afford to take on contracts to tackle social problems without up-front funding because they are not allowed to carry large financial reserves and have limited access to capital compared to for-profit businesses.

“Many social investors are eager to help charities and non-profit organisations get involved in public service delivery, but more could be done to help them take up publically funded contracts and put their expertise to work.  By working closely with beneficiaries whose needs they understand very well, civil society organisations are well placed to maximise the social impact of public funding and reduce waste.

“It’s good news that Government is planning a fund to help charities work with payment by results contracts, but Ministers need to look closely at the detail of this policy to ensure their vision of charities and social enterprises tackling social problems becomes a reality.”

Download the report 'Funding good outcomes - Using social investment to support payment by results'.

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