Part 1: Introduction

Principles to underpin management by public entities of funding to non-government organisations.

This good practice guide sets out the principles that the Auditor-General expects public entities to consider – and act in keeping with – to manage funding arrangements with non-government organisations (NGOs).

While public entities could usefully consider the Auditor-General’s principles for all of their funding arrangements (including those that they have with the private sector), this guide has a specific focus on the principles that should underpin funding arrangements between public entities and NGOs.

The emphasis in this guide is mainly on the use of public funds. However, the principles apply to the use by NGOs of any public resources – for example, land, buildings, staff time, or assets.

The Auditor-General’s principles for good management of public resources are outlined in paragraph 1.15, and explained in detail in Part 3. We have also created 4 typical scenarios to show how the principles might be applied (Part 4). In Part 2, we describe NGOs and typical funding arrangements.

Why have we prepared this good practice guide?

We have previously published good practice guidelines for procurement of goods or services by a public entity,1 and reported on several occasions our concerns about the management of contracts and other funding arrangements with NGOs.

During our audits of public entities in the past 2 years, we have also reviewed, at a high level, the management of public entities’ funding arrangements with NGOs. In our report Central government: Results of the 2003-04 audits,2 we indicated that we intended to carry out further work in this area.

Public sector reform in the past 20 years has led to a broadening of the base of service delivery, both in New Zealand and overseas. NGOs are now frequently involved in delivering public services, influencing policy design and implementation, or performing a facilitative role to ensure that government objectives are met.3

Public entities are accountable for public resources used by NGOs

The public expects that public resources, including those funds derived from taxes and rates will return value for money – that is, that they will be managed lawfully, competently, and to good (public benefit) effect. The public also expects that public resources will be managed with integrity.

The Auditor-General gives Parliament and the public independent assurance over the use of public resources. This assurance includes an annual audit4 of the financial statements of all government departments, Crown entities, State-owned enterprises, local authorities, statutory boards, and other public bodies, including bodies that are controlled by any of these organisations. We refer to all of these collectively as “public entities”.

However, the roles and responsibilities of public entities have changed, especially in the past 20 years. Activities that were once carried out by public entities are increasingly carried out by NGOs on behalf of public entities.

A different set of risks arise when a public entity funds another organisation to deliver services on its behalf. A public entity still has responsibilities and obligations when it devolves public funds in this way. The public entity still needs to ensure that the NGO puts the public funds it receives to good use, and that the arrangement to manage the funding and the relationship between the NGO and the public entity is effective.

When NGOs receive public resources – most commonly through funding arrangements such as grants and contracts – it must be for the public benefit.

The Auditor-General has an interest (as the auditor of public entities) in ensuring that public entities make good use of their resources. However, the Auditor-General is not the auditor of NGOs that may receive grants or funds from those public entities.

Public entities are accountable for taking appropriate measures to ensure that public funds devolved to NGOs are used lawfully, effectively, efficiently, and with integrity. The Auditor-General is able to report to Parliament on how well public entities do this.

The Auditor-General expects public entities to show that they have entered into and managed funding arrangements with NGOs according to the following principles:

  • Lawfulness: Have activities, resourcing, and accountability requirements been undertaken within the authority granted by Parliament?
  • Accountability: Have public entities given full and accurate accounts of their activities? Are governance and management arrangements suitable to address any concerns?
  • Openness (transparency): Is the nature of the funding arrangement, and the way in which it was entered into, clear to all parties?
  • Value for money: Are resources used effectively and efficiently, without waste, and in a way that optimises the public benefit?
  • Fairness and Integrity: Are public entities and NGOs that are involved in funding arrangements together meeting Parliament’s and the public’s expectations of an appropriate standard of behaviour in the public sector?

We recognise that a public entity must manage its business within the resources available. It must also operate in an environment of high – and often increasing – expectations about what is acceptable conduct for public officials, and what constitutes the responsible use of public resources.

We expect a public entity that is relying on an NGO to deliver public services and/or funding an NGO to demonstrate that it has considered and acted in keeping with these principles. The public entity is also responsible for showing this in respect of the work that the NGO does, where the NGO is delivering services on behalf of the public entity.

Management needs to be risk-based

Accountability requires a public entity to actively manage the risks involved in devolving resources and activities to an NGO. However, there are many competing risks – for example, lack of transparency from under-reporting versus high compliance costs.

This means that a “checklist” or “template” approach to managing funding arrangements may not be appropriate. Further, if there is to be value for money, there must be a balance between funding the administration of a policy, and funding that delivers benefit to the end user. The approach must be adapted to the particular situation.

Sometimes, to use the available resources for the most benefit to the end user, the funding arrangements will be less than optimal. An example would be where the most suitable provider has an inadequate governance or management structure. The public entity will need to assess the risks in any such arrangement, and make appropriate provision to manage them. It will need to be open about the reasons why the arrangements are less than optimal, and demonstrate how improvements will be sought.

How does this good practice guide differ from existing guidance?

There is other guidance available on the management of funding arrangements with NGOs.

The Treasury has a responsibility to ensure that all government departments and Crown entities are aware of, and take into account, best practice principles in the management of public resources. The Treasury provides guidance on the contracting relationship with NGOs, as well as advice on good monitoring processes. This guidance is of interest to other public sector agencies.

The State Services Commission advises on state services management issues, and defines and promotes good practice in several areas.

Our good practice guide supplements the guidance of the Treasury and the State Services Commission.

Some government departments also have guidance, policies, and/or procedures in place on procurement or contracting. This documentation usually aims to be consistent with the Treasury guidance, or to reflect the findings of our reports, or both – for example, the Ministry of Social Development and the Ministry of Health adopt this approach.

The Office of the Community and Voluntary Sector, administered by the Ministry of Social Development, has a website on good practice funding, and is available to provide guidance to public entities and NGOs.

Such guidance has tended to focus on the processes of good practice, and providing “rules” around those processes, rather than focusing on the underlying principles.

In our view, because of the variety of public entities and NGOs, there is no single form or set of procedures that would be optimally effective for the good management of all funding arrangements with NGOs.

We also consider that, if there are prescribed rules for funding NGOs, there is a risk that the rules will be too onerous for both the funder and the NGO to put into effect.

In our view, putting the focus on understanding and using the principles for good management of public resources will help public entities to apply their limited resources to best effect.

How this good practice guide fits with our procurement guidance

“Procurement” is often used to refer to only the purchasing element of a funding arrangement. It may not necessarily encompass the whole of the life cycle of that arrangement, although, in our view, it should.

We expect our procurement guidelines (see paragraph 1.5) to be a benchmark for appropriate procurement practice, with both NGOs and other organisations. We also expect public entities to consider the principles outlined in this good practice guide in regard to their own procurement practices.

Life cycle of a funding arrangement with an NGO

The guidance already available has tended to focus on the best practice to follow at various stages throughout the life cycle of contracts with NGOs.

For example, the Treasury document Guidelines for Contracting with Non-Government Organisations for Services Sought by the Crown (the Treasury Guidelines document), is structured around the main stages of the contract life cycle, although it states that the guidelines may also be useful to public entities and NGOs that enter into other types of funding arrangements (such as grants).

The Treasury Guidelines document sets out 6 main stages in the life cycle of a contracting arrangement:

  • planning for the funding arrangement;
  • selecting a provider;
  • negotiating the terms of the arrangement;
  • managing and monitoring the arrangement;
  • reviewing and evaluating the arrangement; and
  • starting over.

In our view, there is a close association between the second and third stages (selecting a provider and negotiating terms), and the last 2 stages (review and evaluation, and starting over). We see the life cycle of the funding arrangement between a public entity and an NGO as a 4-part process (see Figure 1).

Figure 1
Life cycle of a funding arrangement between a public entity and a non-government organisation

Figure 1.

How did we prepare this good practice guide?

To prepare this good practice guide, we first reviewed:

  • the results of our recent relevant audits;
  • the guidance provided by the Treasury and the Office of the Community and Voluntary Sector;
  • overseas literature on the management of public funding to NGOs; and
  • guidance provided by Auditors-General in Canada, Australia (State and Federal), the United Kingdom, and the United States, from 1996 to 2005.

Next, we drafted a document, emphasising the underlying principles of lawfulness, accountability, openness, value for money, fairness, and integrity.

We then sought feedback on the draft document to gauge whether the principles were reasonable. We also queried the degree of change that public entities – and particularly those most involved in funding relationships with NGOs – would need to make if they were to adopt policies and practices consistent with our principles. Feedback was sought from:

  • the Treasury (including the Crown Company Monitoring Advisory Unit);
  • the State Services Commission;
  • the Office of the Community and Voluntary Sector;
  • the Institute of Internal Auditors New Zealand Incorporated;
  • the New Zealand Institute of Chartered Accountants;
  • Audit New Zealand, and other selected audit providers;
  • District Health Boards New Zealand;
  • the Society of Local Government Managers;
  • Local Government New Zealand;
  • the Department of Internal Affairs;
  • the Ministries of Education, Health, and Social Development;
  • the New Zealand Agency for International Development; and
  • a district health board.

We also received comments from a number of individuals active in, and with experience of, NGOs.

1: Procurement: A statement of good practice, 2001.

2: Parliamentary paper B.29[06a], March 2006.

3: Robert Buchanan and Colleen Pilgrim, Transparency and Accountability in Government Decision-Making: Devolved Service Delivery, May 2004. Paper prepared for the Conferenz 6th Annual Public Law Forum, see

4: An annual audit attests that an entity’s financial statements comply with generally accepted accounting practice.

page top