SUMMARY

  This paper seeks to:

— Assess the significance of lottery funding to the third sector in Wales.

— Place the lottery funding within a broader political economy of how the sector is funded.

— Set out challenges facing funders in Wales.

— Distinguish between long and short term funders.

— Identify the particular roles of short term funders (like the lottery).

— Make specific recommendations to enable the lottery to demonstrate its unique characteristics as a funder and build upon its strengths.

— Argue that lottery should consider a mixed approach to funding, including endowments, loans, capital and revenue.

1. INTRODUCTION

  Over the last decade the voluntary sector almanac has assembled an increasing accurate understanding of how the third sector is funded in Wales.

  This is visually represented in the diagram below.

  The comparative importance of such intelligence is threefold:

— It gives a snap shot of relative weighting of sources of income (with 89% coming from the public, government or self generated income with 11% coming from business, lottery and charitable trusts).

— It enables trends within the funding of the third sector to be identified (sustained increases in central and local government funding and self generated activity, declines in giving, lottery and European funding).

— It enables comparisons to be drawn between the income and expenditure of the third sector and that of government eg Welsh Assembly Government spends 1.1% of its budget on the Third Sector, while Local Government and Health Boards spend 3% and 0.5% respectively.

  However, while such comparisons and trends have been drawn, less analysis has been done of how past experience can be used to inform future funding methodologies and roles.

  Funders often evaluate and analyse individual programmes but broader and cross-funder lessons have yet to be drawn and placed within a wider and holistic "political economy of funding".

2.  THE EXPERIENCE OF LAST DECADE

  The political economy of funding over the last decade has five significant characteristics, although it is important to remember that the majority of third sector organisations neither seek nor receive public funding and self finance their own activities.

The gradual increase in central government funding of the third sector

  1.  The most significant aspect of central government funding is its "strategic core funding"—a long term commitment to the core funding of organisations, networks or partnerships with Wales wide coverage.

The increase in local government funding

  2.  While local government is a significant core funder of local organisations the trend has been to secure local service agreements, which are potentially long term.

The importance of giving

  3. Giving is critical to the functioning and independence of the sector. This has been reflected in recent government initiatives to simplify and promote giving and by charities developing new opportunities for giving which appeal to a wider public. Such initiatives have stopped the decline in giving but have achieved only modest increases.

The growth in trading

  4. Many third sector organisations have a greater understanding and expertise in creating their own revenue streams though few will ever achieve (nor aim to) complete financial self sufficiency.

The growth in short term high revenue grants

  5. Both European and lottery programmes have invested heavily (c £500,000,000 since 1999) in predominantly short term proportionately large revenue high impact service providing projects.

  While individual programmes have achieved significant outcomes for individuals and communities their outputs tend to stop or are severely curtailed once the short term funding stream dries up, leading to high and inefficient transactional costs for organisations who have to rapidly upsize and then downsize, or in extreme cases cease to operate. The loss or curtailment of service to the client / community and the experience built up are significant downside costs.

3.  CURRENT AND FUTURE POLICY CHALLENGES

  The Assembly Government has produced a wide and comprehensive range of strategies and has summarised its commitments in its One Wales document, which may or may not be achievable with its existing resources.

  There is, however, a growing recognition that government alone, regardless of its level of resources, is unable to deliver the aspirations of individuals and their children and grandchildren, for a safe, sustainable healthy and happy life. Services, however well resourced or carefully delivered will not succeed unless they engage the individuals and communities who use them.

  Thus, underlying all the strategies are more fundamental themes:

— Personalisation of public services


Most public services were created and remain fundamentally similar to 1945—50 models of "one size fits all". However, all other aspects of our lives are increasingly tailored to meet individual and personal needs and the mismatch increases each year. The characteristics of the third sector make an effective way to secure and support such transition.

— Climate change


The challenge of climate change requires action at all levels, but there is increasing evidence that individual and community action will precede the political action which will ultimately be needed. Both the campaigning and grass root action are likely to come from the third sector.

— Social harmony


The desire to live in a healthy safe, prosperous and active community cannot be delivered by government alone (though its policies can do much to tackle deprivation and poverty). Instead as the research undertaken by recent Carnegie Commission on rural areas and the Young Foundation on neighbourhoods demonstrated, it requires communities to reach out and take control of their own destinies with the role of funders to assist.

  If it is accepted that the "third sector" is an appropriate way to achieve some of these wider goals, it follows that the third sector and its funders, particularly those outside government, take a broader view of the future of Welsh society which while complementary to government, is not constrained by its understandable focus on what it can do. It also requires new thinking on how the sector is funded which replaces the current dysfunctional boom/bust methodology with a much longer term perspective and approach, more akin to public and private sector investment.

  Yet the third sector in Wales, despite the not inconsiderable investment, appears as yet unready to rise to the challenge.

  The sector has been criticised for:

— Lacking innovation.

— Chasing short term funding.

— Failing to win tenders.

— Shortage of managers.

— Providing patchy support services.

— Insufficient focus on outcomes or evaluation.

— Failing to diversify and create sustainable funding streams.

  Equally, funders have been criticised for:

— "prescribing" innovation;

— risk aversion to innovation;

— unfair procurement procedures;

— outcome obsession;

— tick-box monitoring;

— short-term revenue funding;

— lack of core funding;

— boom/bust approach;

— lacking consistency and transparency in decision making;

— insufficient attention to sustainability; and

— failure to implement full cost recovery.

4.  THE FUTURE

  Wales is now at the point of a new funding era, with new interest in the sector at a national (The Third Dimension), local (local service boards/Making the Connections) and health levels (Designed to Add Value), renewed interest in social enterprise and sustainable funding and new European (2007-13) and lottery (2009-12) programmes.

  The question, however, is whether the experience of the last decade is factored into the new arrangements or whether 2008-13 becomes simply a repeat of 1999-2006 six years later.

  An opportunity now exists to secure a stronger, more sustainable sector if each funder plays to its strengths.

5.  DEMOLISHING FUNDING MYTHS AND ORTHODOXIES

Three years is long term funding

  1.  Three years is short term—one year set up, one year implement, one year closedown and search for more money—10-25 years is long term.

  2.  Long term outcomes and services are achievable with short term funding, if the sector is providing a service meeting a long term or recurrent need (eg, a school, day centre, housing) then it needs long term funding.

  3.  Government can only fund for 3 years at a time. HM Treasury has stated that there is no reason why government cannot fund for longer periods and, indeed, government has entered into many long term contracts and funding arrangements.

  4.  Long term funding will make organisations complacent and lazy. This confuses funding security with performance review. Performance review should be a continuous process with get out clauses at any time (with reasonable) notice if there is performance failure. Funding security can facilitate more effective performance review systems. Using short-term funding is a very blunt and expensive instrument to achieve performance.

  5.  There are many sources of long term/continuation money. There are only really 3—local government and agencies, central government and earned income.

  6.  European, lottery or trust money are the sustainable exit strategy but these are all short term funders and are just pushing away the time when grant aid will cease.

  7.  There's always another "windfall" fund coming.

  8.  Government cannot afford to fund the sector. As WAG spends 98.9% and local government 97% of its income on the public or private sectors, there is scope for change, if government wills it.

  9.  Procurement is the way forward. There is much talk of procurement as the new funding mechanism, but it is only appropriate where funder wants to buy a highly specified service, and does not and need not replace grant as a mechanism of development and long term partnership. It is a small part of the overall planning process.

6.  TOWARDS A NEW PARADIGM

So, what could a new paradigm of funding look like?

	1.	All applicants and funders would take a longer term view—and ask what are we trying to achieve by say 2015 or 2020?
	2.	Application processes would give as much attention to the longer term as to immediate.
	3.	Funders would be clear as to whether they are short or long term funders.
	4.	Long term functions and services would be funded over long term recurrent periods of time, in the same way as statutory services.
	5.	Government commitment to third sector delivery would be backed and judged by % of overall budget going to sector (eg, 1% of health budget).
	6.	Short term funders including the lottery.

  Short term funders would consider targeting their short term funds on long term benefit, assets and capabilities, which strengthen an independent civil society, empower communities, increase initiative, and achieve satisfying and sustainable outcomes. This can be done by funders moving to a new range of programmes.

1. Innovation


The sector needs to innovate, claims to innovate, but funders have tended to create processes and assessments which unconsciously deter new ideas. An innovation programme would actively encourage and seek out genuinely new ideas social and environmental innovations, and try them out, accepting that they would be few and many would fail.

2. Replication


Innovation programmes will throw up ideas and methods which could be replicated, franchised or scaled up in other areas. This programme would provide a short cut into potential main stream funding (cf Crossroads, Homestart).

3. Sustainability


These programmes would invite applications for grants, loans and endowments which help create a non statutory funding stream or resource which, in turn, would sustain the activity or organisation and could include:

— Grant/loan to purchase buildings or land but only if the use of that asset could demonstrate a revenue stream that could either be returned in loan or used to finance a (revenue) activity or service.

— Grant/loan to facilitate the transfer and use of assets from the public to the third sector.

— Grant/loan to purchase equipment or plant (eg generators, windmills, print, IT), which, in turn, can produce a revenue stream.

— Endowments to create a secure and permanent revenue stream and service (eg under existing revenue intensive scheme applicants could apply for £1 million over three years to develop services employing four paid development staff. The larger the revenue grant the less likely it is to last beyond three years.

— An alternative approach would be to give the £1 million as an endowment and finance a part time development post from the interest for ever.

— Initiatives which are sustainable by design including mutual aid, volunteering and time bank schemes.

— Endowments to create independent small grants schemes for ever.

4. Improvement


These programmes would invite proposals which improve and strengthen the sector.


They seek to enhance the innovation, replication and sustainability programmes by:

— Building upon and strengthening support services to local groups.

— Developing new complementary support services where gaps exist.

— Extending the depth and accessibility of existing support services.

— Increasing community influence at local planning level (and thereby opening up opportunities to groups to achieve longer term local funding).

— Strengthening participation at every level.

— Supporting national networks and initiatives in their early years with a view to longer term WAG funding.

— Showcasing and piloting best practice commissioning and procurement procedures.

— Helping identify community assets and ways to transfer assets into community ownership.

— Developing management and leadership training.

— Financing one off costs of achieving efficiency savings.

  So what would this mean for some of the principal funders of the third sector?

7.  WELSH ASSEMBLY GOVERNMENT

— Continuing, maintaining and developing its responsibility as the long term strategic core funder of national organisations, networks and partnerships.

— Ensuring complementarily action between those it funds.

— Opening up ways of enabling new national organisations, networks and partnerships to gain long term core funding.

— Developing and funding the departmental action plans.

— Playing a full part in determining fair funding procedures.

— Implementing the funding proposals and procedures in the Third Dimension.

— Implementing the recommendations in Delivering Beyond Boundaries.

— Considering loans and endowments as a way of achieving long term sustainability.

8.  LOCAL GOVERNMENT & HEALTH AND OTHER LOCAL COMMISSIONERS

— Continuing or introducing long term strategic core funding of local organisations networks and partnerships.

— Involving the sector in the design and planning of services in innovative ways.

— Resourcing the role of the sector in providing a citizen perspective.

— Developing an increasingly mixed economy of provision that included third sector partners helping transform the way services are delivered.

— Considering loans and endowments as a way of achieving long term sustainability.

9.  EUROPEAN FUNDING

— Recognising the short-term nature of funding.

— Building sustainable skills into programmes.

— Planning the exit at the beginning.

— (as far as possible) use programme to leave a legacy beyond 2013.

10.  TRUSTS AND FOUNDATIONS

  Many trusts and foundations, as small short term funders of the sector, are reviewing their roles and are seeking to develop new ways of making a distinctive contribution to third sector funding.

  Many are moving away from targeting deep seated long term complex problems toward supporting the development of a sector which is freer to tackle such problems in unconventional ways. For example Barings has a programme to enhance the independence of the sector, Carnegie is seeking to action/research approaches and ideas to rural areas and the future of civil society while Tudor welcomes any and all ideas at any time.

  This diversity of approach is welcomed by the sector because applicants accept that they are likely to fail with any one application but do wish to apply to other funds. Some funders deliberately market schemes separately to achieve this diversity.

11.  INDEPENDENT TRUSTS AND FOUNDATIONS

— Recognise role as small short term funder.

— Relish independence from government.

— Support ideas and projects which make sector more distinctive and challenging.

— Support campaigning.

12.  BIG LOTTERY FUND

— Recognise

— Its unique role as only large source of new uncommitted and "few strings" money.

— Celebrate its role as a funder of third sector outcomes (since between 2001-12 it will have to allocate 99% of its grants to the third sector to meet the Olympic cash guarantee).

— That it is not a significant or desirable funder of private or public sectors since they have better routes to sustainability (market, taxation) and thus concentrate 100% of its funding on the sector.

— That it is a significant but short term funder (since becoming a core funder would mean indefinite commitment).

— Develop a suite of programmes which do what no other funder can do, and

— Address the broader needs of the citizens of Wales, are easily understood and fit together both with each other and within this paradigm of funding.

— Avoid the trap of additionally. If the lottery simply adds or matches existing programmes, it may both ultimately undermine those programmes (if they are long term programmes or commitments), become swallowed up within much larger programmes or cease to have any rational as a separate funder.

— Are acclaimed by sector, other funders and countries.

— Build a consensus between government, the sector and the distributor.

— Provide long term benefit using short term funding.

— Are inclusive because they do not exclude particular client groups.

13.  LOCAL COMMUNITY FOUNDATIONS

  There are a variety of programmes providing small grants to small groups (eg "awards for all" type schemes).

  While these schemes do not have the sustainability challenges of larger revenue schemes, there is nevertheless an opportunity to make them more sustainable by providing, over time, an endowment to each area to run a small grants scheme from the interest for ever.

  This could provide the stimulus for local community funds.

14.  UNCLAIMED ASSETS

  An excellent opportunity exists to test some of the principles outlined in the paper with the projected unclaimed assets funding which will consist of one large (endowment/loan), followed by a smaller annual funding stream, which could also be used for rolling endowment or loan or investment to earn schemes.

CONCLUSION

  If we, as both funders and applicants, are really interested in building sustainable communities and services, we need to develop/re-invent funding mechanisms and approaches which will produce independent community institutions.

  We need to learn from our histories about asset acquisition and endowment building, which builds independence and funds for ever and releases us from the whims of short term funders.

November 2009