Part 4: Types of funding arrangements with external parties

Public sector purchases, grants, and gifts: Managing funding arrangements with external parties.

The spectrum of different funding arrangements

For those entering into funding arrangements, an important first step is to understand the underlying nature and purpose of the arrangement, so that expectations are clear and the arrangements can be structured and managed appropriately.

A commonly used and simple typology asks whether the fundamental purpose of the arrangement is to buy, invest, or give to the external party:1

  • “Shopping” or “buying” arrangements (procurement) are a form of purchase, and can range from simple and low-value purchase transactions to major construction or other infrastructure developments that may be managed through full and formal procurement processes.
  • “Investing” arrangements often take the form of grants, and are designed to build capacity or to support a particular activity or organisation.2
  • “Giving” arrangements, along with donations and other forms of unconditional grants and payments, are where the public entity provides something without any conditions attached.

Thinking about those three broad groups can help public entities to clarify the basic purpose or nature of what they are trying to achieve with any particular programme of funding arrangements.

However, for practical purposes it is useful to go a step further and think about the different types of arrangements within each of those broad groups.

Therefore, as a second stage, we have broken procurement into four subsidiary categories:

  • major and minor conventional contracts operating in an ordinary market situation; and
  • major and minor contracts with a significant relationship dimension.

We describe contracts that have a significant relationship dimension as “relational purchases” and discuss them further in paragraphs 4.18-4.25.

Similarly, we divide the category of grants into conditional grants and those with only limited conditions, to distinguish between major funding support for substantial projects or development activity (which is likely to attract significant controls) and more easily managed or minor grants (which may have fewer conditions attached).

It would be possible to break down these categories further. For example, we could differentiate between small simple gifts or donations and more substantial grants with no conditions attached, or between major contracts that are once-only purchases and major contracts that involve long-term supply chain arrangements. Equally, it would be possible to collapse the categories into two major groups – grants and contracts. However, for practical purposes, we have found it useful to work with these seven categories.

Figure 1 shows the way in which we divide the general area of funding arrangements with external parties into seven categories.

Figure 1
The seven categories of funding arrangements with external parties

Figure 1: The seven categories of funding arrangements with external parties

These are not inflexible categories. One type of arrangement can blur into the next, and a funding arrangement with an organisation may have several dimensions to it. We and others have described a continuum or spectrum of arrangements, from formal or simple contracts, to contracts with a relationship focus, through to conditional and unconditional grants and gifts.3

A highly specified or conditional grant can look very similar to a relational purchase contract. The distinction between a minor purchase and a major one is also subjective. Even though the lines between the categories are not solid, it is useful at a practical level to identify the different types of funding arrangements as a starting point for guidance on appropriate administration and management.

Figure 2 shows the different types of funding arrangements as a spectrum, as well as our guidance documents relevant to each.

Figure 2
The spectrum of funding arrangements and our relevant publications

Funding arrangements OAG good practice guides
Overarching guide Procurement Public private partnerships NGO funding arrangements Sensitive expenditure
Minor conventional purchase tick tick
Major conventional purchase tick tick tick tick
Minor relational purchase tick tick
Major relational purchase tick tick tick tick
Conditional grant tick

Grant with limited conditions tick

Gift or donation tick


The different types of organisations that are funded

All of these types of funding arrangements can be with a range of different organisations or individuals, although some arrangements are more likely to be with one kind of organisation than another. The different kinds of organisations include:

  • Commercial organisations: Funding arrangements with a commercial body are more likely to be a contractual relationship to purchase goods or services, or to develop capital assets, but there are situations where commercial companies receive grants (for example, through business or regional development programmes).
  • Non-government organisations: Funding arrangements with non-government organisations can span the full range of arrangements, from simple grants or donations through to major purchases of services. Long-term purchasing arrangements with non-government organisations are more likely to fall into the category we have described as relational purchases than commercial organisations.
  • Other public sector entities: It is relatively common for one public entity to fund another for some purpose, and this funding will sometimes fall into one of the categories described above. For example, a government department may contract for a Crown entity to provide goods or services or research, it may buy services from a State-owned enterprise, or it might provide a grant to another state sector body such as a local authority.
  • Other private bodies such as clubs, societies, and trusts: There are a variety of other private organisations, not strictly non-government organisations or businesses, that exist for particular purposes and enter into funding arrangements with public entities. Again, these can span the full range of funding arrangements.
  • Other governments and overseas organisations: Funding arrangements also extend beyond our national boundaries, particularly in the context of aid programmes. It is therefore common for grants to be provided to overseas governments or organisations.

The seven categories of funding arrangements

Minor conventional purchases

Minor conventional purchases are relatively self-explanatory. All public entities will have a range of goods and services that they buy regularly, that are of relatively low value, and that are able to be bought through ordinary procurement systems. Common examples include office consumables, such as stationery or catering, or once-only and short-term contracts for professional or consulting services. There will usually be a reasonable range of suppliers or providers to choose from, so that ordinary market-based procurement techniques and competitive processes are likely to be effective as a way of managing the price and value for money.

Major conventional purchases

As with the previous category, the presence of an effectively functioning market is the main factor in a conventional contracting environment. That means that ordinary market disciplines can be expected to operate well to manage price and value for money. Major conventional purchases are high value – possibly worth millions of dollars. Inevitably, they carry higher risk to the public entity and require a different level of planning, authorisation, documentation, monitoring, and general management.

Examples of major conventional purchases include contracts to procure or build capital assets, information technology contracts, and major consultancy contracts.

There can be some overlap between this category and that of major relational purchases, as there is a growing pattern of managing major contracts through more strategic arrangements such as partnering and project alliances. Such arrangements may have a lot in common with major relational purchases, even if they are developed within a market context.

Minor relational purchases

There are two main factors that suggest that a purchasing arrangement might not fit the conventional category, and might be better conceptualised as having a significant relationship dimension. They are:

  • the absence of an effective or meaningful market to provide the goods or services; and
  • the strategic importance of the goods or services, or of the relationship with the provider, for the public entity.

These two factors may be present more often for public entities purchasing goods or services that are essential to the delivery of public sector (and implicitly non-market) services, that are highly specialised, or that are provided by non-commercial and public interest bodies such as non-government organisations.

Other factors that might suggest a relational purchase include the nature of the goods and services purchased, the duration of the relationship between the public entity and external party, the relationship between the public entity or external party and an end user (such as a person receiving health care or other social services), and the specialist nature of the goods or services. For some external parties, there may be other policy goals that are relevant and that would suggest a relational approach, such as a goal to support the development of a strong and stable non-government organisation or civil society sector, or a goal to encourage strategic relationships or build capacity within some part of the wider state sector.

In such situations, conventional market-based systems for managing a contract may not be appropriate or particularly effective. It may be more useful to give greater weight to the relationship or strategic dimensions of the contract and to set up other systems to manage the dimensions usually managed by competitive market mechanisms.

Common examples of minor relational purchases include contracts to purchase policy or other advice from specialist advocacy or special interest representative groups, highly specialised professional advice, small and specialised research work, or the supply of minor health services or a niche product produced for a particular and unusual requirement.

Major relational purchases

The same factors identified in paragraphs 4.18-4.20 apply to major relational purchases. The main difference between the previous category and this one is the value or size of the goods or services being purchased. A larger contract will inevitably require additional attention and management throughout its whole life cycle.

Examples of major relational purchases include residential care or other social support services (where the funding arrangement may need to provide stability for end users for many years), major and long-term research contracts, or significant professional or consultancy relationships.

We have already noted the overlap between this category and that of major conventional purchases, through the growing use of relationship-based contracting arrangements in major projects such as infrastructure development.

Conditional grants

A grant is a funding arrangement that is designed to support an organisation or an activity rather than to buy goods or services. It can operate on any scale, from very small and localised grants to extremely large grants to support major infrastructure projects. We have found it most useful to distinguish between grants that have substantial conditions attached and grants that have very few conditions, rather than to focus on the value of the grant. However, it is likely that a high value grant will require more substantial and complex conditions.

Conditional grants are where the public entity manages the risk of non-performance by attaching significant conditions to the ongoing payment of funds. Common conditions include:

  • dividing a project into stages and releasing funds only as each stage is completed;
  • requiring the commitment of other funders to be confirmed before releasing all funds; or
  • requiring particular project management disciplines to be used, such as regular audit or the use of only certified or approved personnel or contracted providers.

There may also be conditions that require funds to be repaid if they are not used to achieve the purpose of the grant.

Grants with limited conditions

Grants with only a few and relatively simple conditions are common when the funding is relatively small. One example is grants to community groups from a fund set up for specific purposes, such as an environmental projects fund. Another is a fund that people can apply to if they want to organise an event to celebrate Waitangi Day or similar. Other examples include scholarship funds or grants to support an organisation with a specific initiative (for example, a community consultation exercise) or to build the organisation's capacity (for example, by setting up a website).

However, not all grants within this category are small. In some circumstances, grants of foreign aid, for example, might have limited conditions attached, because they are being provided to another government and it may not be appropriate to impose strict conditions or reporting requirements in that context. In other contexts, aid funding may take the form of a grant with substantial conditions, or may be a contract with a provider to deliver a particular set of services or outcomes.


Gifts are self-explanatory. Sometimes public entities just give money, goods, or time to an external party. Things that are explicitly called gifts or donations are easily identified and should be covered by the public entity's policy on such matters. We have already set out our expectations in this area in our good practice guide, Controlling sensitive expenditure: Guidelines for public entities. However, a grant may sometimes be awarded with no conditions attached at all. We would categorise an unconditional grant as a gift.

Typical features of the different funding arrangements

Figure 3 summarises the features and typical examples of the different funding arrangements. We develop this diagram further in Part 6 to indicate our high level expectations throughout the life cycle of each category of funding arrangement.

A funding arrangement may have several different aspects – for example, it might support an organisation to develop and equip a new training capacity for unemployed people looking for work, and fund the organisation to deliver that training or support to such people.4 The first aspect is essentially capacity building, or investing in the capability of the organisation. It could be treated on its own as a grant. The second aspect is more clearly the purchase of a service.

In such cases, the public entity may need to consider whether it is more sensible to manage the two separate aspects within a single funding arrangement that acknowledges the different nature of the two aspects (thus reducing compliance costs for both parties), or as distinct funding streams. The practical considerations discussed in Part 5 will be relevant to these decisions.

Figure 3
Features of the different types of funding arrangements

Type of funding relationship Features that indicate this type of relationship Common examples
Minor conventional purchase Legally enforceable obligations to deliver.

Likely to be an effective market.

Low or moderate value.

May be unplanned or once-only purchase.
Consumables, such as stationery.

Once-only professional or consultancy services.
Major conventional purchase Legally enforceable obligations to deliver.

Likely to be an effective market.

High value.

High risk.

Possibly long term.

May have alliancing or partnership characteristics.
Capital assets.

IT systems.

Major consultancy services.
Minor relational purchase Legally enforceable obligations to deliver.

May not be an effective market.

May be a long-term relationship between the parties, even if specific contract is limited.

Provider may be highly specialised.
Policy advice or peer review services from an advocacy group.

Specialist professional advice.


Minor health services.
Major relational purchase Legally enforceable obligations to deliver.

May not be an effective market.

Likely to be a long-term and substantial relationship between the parties.

Critical supplies or services.

High risk.

May have alliancing or partnership characteristics.
Residential care services.

Major research programme.

Ongoing professional advice.
Conditional grant Supports a "public good" activity, organisation, or project.

Limited ability to legally enforce performance.

Funding is staged; tranches released as milestones achieved.

Significant conditions attached (for example, commitment of other funders, procedural checks).

Often not a commercial body.
Support for major development projects (for example, a community facility).

Research grants.

Ongoing support for a public interest activity or organisation.
Grant with limited conditions Supports a "public good" activity, organisation, or project.

Limited ability to legally enforce performance.

Any obligations likely to be around process and reporting.

Unlikely to be a commercial body.

May involve a relationship with another government.
Foreign aid.

Environmental grant.

Minor research.

Support for specific purpose initiatives (for example, setting up a website for a community group).
Gift or donation No obligations attached.

Usually very low value.

Unlikely to be a commercial body.
Business gifts.

Gifts to build relationships.

Cultural courtesies.

Marketing and public relations giveaways.


1: This typology was originally developed in Unwin, Julia, The Grantmaking Tango: Issues for Funders, Baring Foundation, London, 2004, and was subsequently adopted by the National Audit Office, Working with the Third Sector, June 2005.

2: We use the term "investing" here in its colloquial sense, to mean a contribution to, or some support for, the capacity of an organisation or a particular activity, rather than as a technical accounting term. We do not intend to cover investments in equity or other "ownership" transactions.

3: Controller and Auditor-General (2006), Principles to underpin management by public entities of funding to non-government organisations, Wellington.

4: This example is taken from the National Audit Office's Financial Relationships With Third Sector Organisations – a Decision Support Tool for Public Bodies in England, page 11. It is a common situation in New Zealand as well.

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