Scenario 1: Establishing a capacity-building grant programme

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

What is capacity building?
Capacity-building grants in the public sector
How one Ministry establishes and administers a new capacity-building programme

What is capacity building?

S1.1
Increasingly during the past decade, central and local government bodies have used public funds to build the capacity of NGOs.

S1.2
The policy decisions authorising the use of public funds for this purpose invariably define capacity as the skills, systems, processes, and structures of an organisation. While this definition provides the public entities administering the funding with significant flexibility in how the funding can be applied, it is important that the funding is not used to build capacity simply for capacity’s sake.

S1.3
To ensure that such public funding is used for public benefit, capacity-building funding should, in our view, be used to help NGOs to better contribute to achieving government policy goals. That is, all decisions to allocate capacity-building funding should clearly show how the resulting “built capacity” will benefit taxpayers and ratepayers.

S1.4
As with the expenditure of all public funds, public entities entering into capacity-building funding arrangements with NGOs must be able to demonstrate how the principles outlined in Part 3 underpin their funding arrangements.

Capacity-building grants in the public sector

S1.5
Almost all of the public funds allocated for capacity-building purposes in the central government sector are provided through Other Expenses to be Incurred by the Crown appropriations approved by Parliament. This is an important characteristic of capacity-building funding as it sets the parameters for these types of funding arrangements with NGOs.

S1.6
Essentially, it means that the capacity-building funding is intended to be made available to NGOs through a conditional grant – that the funding is granted for a particular purpose or purposes, and that goods or services are not being purchased. This contrasts with the use of a contract where funding is disbursed on receipt of goods or services. A traditional contractual relationship may not be appropriate for NGOs receiving public funding as a capacity-building grant.

How one Ministry establishes and administers a new capacity-building programme

S1.7
In this scenario, the fictitious Ministry for New Zealanders (the Ministry) is responsible for establishing and administering a new annual Other Expense appropriation of $14 million for capacity building. Cabinet has approved the new capacity-building programme, with the funding authorised by Parliament through the Appropriation (Estimates) Act.

S1.8
As this is a new initiative, the Ministry first establishes the operational parameters for administering the overall capacity-building programme. The Ministry uses the Cabinet policy decisions to guide its initial planning for funding arrangements with NGOs. This includes clarifying the policy intent (that is, the purpose and objectives for which the capacity of NGOs is being built) and ensuring that this intent flows through all of the Ministry’s operational policy decisions in relation to the capacity-building programme. This helps to ensure that the Ministry is acting lawfully (that the public funding is being used for the purpose for which it was appropriated), and can demonstrate accountability to the responsible Minister for its administration of the capacity-building programme.

S1.9
The Ministry recognises that careful scoping is required in setting up the programme because of the flow-on effects on the Ministry’s ability to monitor and evaluate the programme’s overall performance, and also each of the individual funding arrangements with NGOs.

S1.10
In planning the implementation of the programme, the Ministry identifies:

the ways in which the programme links with the Ministry’s corporate objectives and its other outputs;
the overall resourcing implications for administering the programme, and what that means for the Ministry’s other output priorities;
the senior manager in the Ministry who will be held to account for the programme through a performance agreement with the chief executive;
the timelines for the implementation of the programme in Year 1, and the periodic reporting to senior management that will occur on implementation progress;
the additional resources needed to manage the programme and the business case for senior management approval for each of the new positions sought;
the job descriptions for the new programme managers, and recruits to these positions using an open and transparent recruitment process;
the programme’s effect on existing Ministry staff at a central and regional level;
the respective roles and responsibilities for each of those Ministry staff who are going to be involved in the programme, and amends existing job descriptions and performance agreements as appropriate;
the existing departmental systems, policies, and processes that are relevant to the implementation and monitoring of the programme;
the processes and systems (including record-keeping) that need to be set up to support the ongoing implementation and monitoring of the programme;
the main risks in programme implementation, and how these will be managed;
the estimated breakdown of administration costs, and how these are to be funded (that is, they are to be funded separately from the $14 million appropriation for the actual building of NGO capacity);
a periodic reporting strategy to Ministers who have expressed a strong interest in the performance of the programme; and
the data requirements for future evaluation purposes, so that this information can be built into the individual funding arrangements (where appropriate).

S1.11
All of this information is set down in a comprehensive project plan that is considered and approved by the Ministry’s senior management team. The project plan will be the subject of regular reporting of progress to the senior management team by the senior manager responsible for the programme.

S1.12
It has taken the Ministry some time to plan this funding arrangement. The Ministry needs to ensure that it has managed the risks affecting the successful implementation of the programme; developed the necessary systems to ensure that the funding process is fair and transparent; and that it is able to meet its accountability obligations. Essentially, this means that there is a transitional period from when the funding was approved for disbursement (1 July), and when the Ministry will be in a position to move to the next phase – selecting which NGOs will receive capacity-building funding.

S1.13
In the interests of transparency, the Ministry reports to Ministers its progress-to-date in implementing the programme. The report outlines the rationale for the transitional period; that is, the steps taken to ensure that the funding process is fair and transparent. The report seeks confirmation that the operational policies being prepared for the programme are consistent with the programme’s overall policy intent as approved by the Government.

S1.14
Once the Ministry has a solid platform for the overall programme, it moves to the next phase of the NGO funding arrangement life cycle.

Selecting NGOs and setting up monitoring systems

S1.15
The programme is being established to build the capacity of NGOs to deliver services to the Ministry’s clients throughout New Zealand. This gives the Ministry significant flexibility, but also creates some clear selection risks that it needs to actively manage.

S1.16
When considering how the programme’s $14 million can best be allocated among NGOs to provide value for money, the Ministry uses demographic data, its knowledge about its current (and likely future) client base, and relevant information from its past experience in managing grant funding programmes.

S1.17
It also sets up a process to fairly recognise that NGOs’ funding applications will form a core part of the actual funding arrangement (and the monitoring thereof) while also acknowledging that some of the NGOs in most need of the programme’s resources will find the application process a significant challenge.

S1.18
This phase of the programme’s implementation involves deciding:

whether the programme will be used to fund as many NGOs as possible, to broaden the Ministry’s potential provider pool, or on a smaller number of NGOs, with each receiving a significant amount to boost their capacity. This involves undertaking a cost-benefit analysis of each of the options;
how the $14 million fund will be spread throughout the country, and among the different Ministry regions;
the eligibility criteria for NGOs wishing to access programme funding, and how the Ministry can be satisfied that each NGO meets the minimum eligibility requirements during the selection phase;
the advantages and disadvantages of a national approvals process versus an approvals process based in the Ministry’s regional offices (including the consideration of the conflict of interest risks associated with having decision-makers closely located to applicants);
the appraisal criteria for applications for programme funding (including minimum score requirements), and how the appraisal criteria link to the original Cabinet approvals and the Ministry’s strategic objectives and other relevant programmes;
whether specific legal or financial expertise is needed to add to the robustness of the selection process;
who will be responsible for making funding decisions (a panel versus the programme manager), and the quality assurance process that will operate for all funding decisions (including the appeals process);
whether, for transparency purposes, the Ministry should seek independent assurance on the initial funding round for the programme (with the findings informing future programme funding rounds);
how successful and unsuccessful applicants will be notified;
the appeals process for unsuccessful applicants;
how the Ministry will promote the programme to potential providers with whom it does not have an established relationship (over and above using its existing network of NGOs to promote the programme);
how the Ministry, in the selection process, will take account of its existing knowledge of NGOs it has relationships with; that is, whether a “proven performer” will be able to apply for programme funding through a more streamlined process;
how the funding of NGOs will link to the Ministry’s outcomes framework, and how the eligibility process and funding will ensure that grants from the programme will help the Ministry to achieve its intermediate outcomes as well as the Government’s policy objectives for the programme;
how the Ministry can be assured that potential recipients of the programme’s funding are suitable for receiving public funds, and can be (and are prepared to be) held to account for their use of the funding;
how the Ministry will use its limited resources to monitor the programme in the most effective way, to ensure that it closely monitors the most high-risk NGOs and applies sufficient monitoring to lower-risk NGOs; and
the templates and standard forms the Ministry should create to help it to be consistent in its application of the selection and approvals process.

S1.19
To ensure that its funding process will stand up to scrutiny, the Ministry documents the rationale for each of the decisions it takes in setting up the selection and overall monitoring processes for the programme.

S1.20
It promulgates its operational policy decisions on its website, and the rationale for the criteria which will guide the selection process. The Ministry also decides that, for transparency purposes, it will publish an annual list of those NGOs which receive capacity-building funding, and for what purpose.

S1.21
At the same time as these decisions are made, the Ministry also focuses on its internal operation of the capacity-building funding programme.

S1.22
The Ministry identifies the risk of conflicts of interest in the selection phase, and prepares a clear statement and set of procedures about conflicts of interest for those staff involved in administering the programme. This set of procedures draws on the Auditor-General’s and the State Services Commission’s published material on managing conflicts of interest in the public sector, and reflects the Ministry’s corporate policy on conflicts of interest.

S1.23
Before the capacity-building programme’s first funding round, staff are given training on how the selection phase will operate, and on the underlying rationale for the funding criteria and decision-making process.

S1.24
Staff are also informed of the need to consider the monitoring and evaluation requirements during this early phase, so that monitoring and evaluation are not treated as an after-thought. At all times, the original policy intent of the capacity-building programme is emphasised to staff – that is, that the funding should be used to build the capacity of NGOs that the Ministry will have an ongoing relationship with – specifically, with a view to the NGOs delivering services to the Ministry’s clients.

S1.25
The Ministry establishes a panel that will be convened if required to consider any decision appeals or complaints about the programme. The panel includes independent representatives from NGOs and the public sector.

Negotiating and recording the terms of the funding arrangement

S1.26
The Ministry designs the funding documentation in the capacity-building programme so that NGOs are required to provide information that enables the Ministry to account for how the NGO has spent the grant funds (and, to the extent practicable, the effect of the funding). The Ministry must be able to demonstrate that each funding recipient has spent its grant for the purpose for which it was provided, and that the purpose relates to the policy’s intent (which is to build a pool of potential NGO providers for the Ministry’s client base).

S1.27
The Ministry’s approach to negotiating the terms of the funding arrangement reflects that it is fundamentally interested in having a long-term relationship with each of the NGOs it funds under the capacity-building programme.

S1.28
In the medium to long term, the Ministry expects to contract with these same NGOs to deliver services to its clients. Given this, the Ministry approaches the negotiation process with a relationship focus, and uses each funding recipient’s capacity-building application as the basis for the terms of the funding arrangement. The funding arrangement documentation makes these longer term intentions clear, but it is not a condition of the grants.

S1.29
Importantly, the funding arrangement documentation is not in the form of a contract for services. It is more like a written record of the parameters within which the grant funding should be spent; what it cannot be spent on (in this case, capital works); how spending will be monitored (and the information that the NGO needs to supply to the Ministry to facilitate such monitoring); the jointly developed risk profile of the funding arrangement (and how those risks will be managed); and each party’s rights and obligations in the funding arrangement.

S1.30
The Ministry ensures that each funding arrangement document under the programme (whether in the form of a contract or other form of written record) receives legal clearance before it is signed by the programme’s project manager, who holds the appropriate financial delegations. This checking process – where appropriate, based on a risk assessment – also includes making sure that the NGO is not receiving funding for a similar purpose through other Ministry programmes, or through programmes operated by other government departments.¹

S1.31
A signed copy of the documentation of the funding arrangement is issued to the NGO and kept centrally within the Ministry. It is also entered onto the Ministry’s central database of funding arrangements which is linked to its finance system. This helps to ensure that payments are made only when funding conditions are met.

S1.32
Each funding arrangement is assigned to a Ministry staff member who is a central internal and external contact point for all matters relating to that particular funding arrangement with that NGO. The staff member is responsible for:

carefully compiling the official file for that funding arrangement;
undertaking all communication with the NGO on its performance in meeting the terms of the funding arrangement;
verifying that funding arrangement conditions have been met before any payments are made;
contributing information to the wider reporting of the programme’s performance to senior management, Ministers, and to the public; and
carrying out a post-funding final assessment.

Conclusion

S1.33
This scenario outlines the steps for establishing a new initiative, in line with our principles for managing funding arrangements with NGOs. As with the other scenarios in this good practice guide, this scenario is not meant to be used as a checklist. However, we consider that it provides some useful pointers on the issues that need to be considered at particular points in the process of setting up a new grants funding programme.

S1.34
Most particularly, we expect public entities to thoroughly consider monitoring, reporting, and evaluation requirements as the programme is being set up, and before funding arrangements with NGOs are negotiated and signed.

S1.35
There is necessarily a sliding scale of monitoring for all programmes, as scarce resources need to be used wisely. However, in the interests of maintaining relationships and being transparent, public entities should be proactive in identifying where the risks lie in funding each NGO, and allocate sufficient resources to manage those risks satisfactorily.

S1.36
No amount of monitoring will ever provide a total guarantee against provider failure. However, public entities will be better able to manage their NGO funding arrangements for the public benefit if they:

consider risks and how they can best be managed early in the process; and
ensure that the policy objectives are guiding each decision during programme implementation.

1: NGOs are asked to disclose applications to other funding sources for funds for similar purposes.

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