Managing funding to non-government organisations – from principles to practice

In 2006, we published Principles to underpin management by public entities of funding to non-government organisations (NGOs). We expect the principles and the risk-based approach outlined in that guidance to be evident in the management of funding arrangements with NGOs. We were interested in the extent to which this was the case in a public entity that managed many such arrangements.

We recognise the challenges to a public entity in taking a risk-based, principles-driven approach, especially in a large organisation like the Ministry of Health. It is not easy to be consistent and yet responsive to varying circumstances, especially those peculiar to service delivery where a market with few providers may operate.1

Exploring those issues with the Ministry of Health

The Ministry of Health (the Ministry) is a public entity with many funding arrangements with NGOs to deliver services. In 2005/06, the Ministry paid an estimated $552 million to non-profit organisations, from a public sector total of an estimated $1.25 billion. It manages more than 900 contracts with NGOs to deliver health, disability, and social services.

What we looked at

We looked at nine case studies of Ministry/NGO relationships, focusing on the main funding arrangement in each case. We looked at the Ministry's systems for managing its NGO funding arrangements in general, how the Ministry managed the nine specific arrangements, the issues encountered (from the Ministry's and the NGO's point of view), and how these were addressed.

We focused on how the Ministry considered the particular risks involved in each arrangement and the principles of good management outlined in our guidance:

  • accountability;
  • openness;
  • value for money;
  • lawfulness; and
  • fairness and integrity.
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Elements of a risk-based approach

  • The goal: It is important to focus on what you are trying to achieve, including the relationship that the public entity wants to achieve with NGOs. Process should not dominate at the expense of the outcome.
  • Simplicity and proportionality: The funding arrangements should be as simple and as practical as possible, considering the amounts involved and the complexity and level of risk. It is appropriate to consider compliance costs for both parties, and to seek to reduce them where possible.
  • The context: The arrangements need to fit with the context of the funding, including any more general relationships that the third party has with the entity or with other relevant government or public entities.
  • Well-managed risk taking: Public entities need to identify risks in or around the funding arrangement and consider what steps might be needed to manage those risks. This does not mean being overly risk averse; the key is to get the right balance between risk and expected benefit, and to do so consciously.
  • Understanding each other: The needs and standards of NGOs, for example, in accountability or transparency, may be quite different from those of the public entity. An NGO might have unique obligations to constituent groups or members. The arrangement is likely to be more constructive if each party understands the needs of the other and the consequences for them.

In the nine funding arrangements we looked at, the Ministry demonstrated a good awareness of the issues and principles involved when a not-for-profit provider delivers public services. We decided to share some of the Ministry's experiences, to help clarify some of the more difficult areas for other public entities.

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Be clear about how NGOs fit into your overall purpose and strategy

Where a public entity has extensive and significant relationships within the NGO sector, we would expect the entity to consider and state where those relationships fit within its overall purpose and strategy.

The Ministry has adopted a framework to govern its relationship with NGOs, following on from the Government's Statement of Government Intentions for an Improved Community-Government Relationship. The framework is the Ministry's "written handshake" with the NGO sector.

In our view, such frameworks are helpful. They usefully indicate to staff, NGOs, and others, the general disposition of the public entity toward NGOs.

We would also expect such frameworks to explain how NGO-delivered services fit into the public entity's overall purpose and strategy. Relationships without a context of purpose may not be good use of public resources.

In some cases, public entities say that they are taking a "partnership" approach with NGOs, without making it clear what this means. Where a partnership approach is taken, or where - as in the Ministry's case - the relationship aspect is obviously valued, the public entity needs to make it clear how this is expected to work in practice. In particular, we would expect such a framework to reconcile the relationship or partnership considerations with the "value for money" principle. This is often quite difficult for staff to grasp unless it is set out clearly in the framework.

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Consider if the arrangements are "fit for purpose"

Buying, investing, or giving?

We expect a public entity to be clear about the nature of each funding arrangement with an NGO, and what it is meant to achieve. We expect to see policies that encourage, in each case, the type of funding arrangement that best suits the purpose.

Government departments often have a buying focus to their policies. However, sometimes an investing or giving arrangement would be more appropriate. The public entity needs to encourage and guide its staff, through its policies, to consider what it is trying to achieve with a particular funding arrangement - whether a buying, investing, or giving arrangement is appropriate. Formal "arrangements documents" should be appropriate to the particular situation.

Be careful with templates

A template may be a helpful guide, but is unlikely to suit every set of circumstances. A template may even lead the public entity toward a contractual arrangement that is inappropriate. Form should follow purpose.

Why clarity about the type of funding and what it covers is so important

The Ministry sometimes bundled set-up costs (that we consider a grant) in with a contract for services, though there was no intention to recover the former, and a clear intention to require certain services to be delivered for the latter. The result was confusion for the NGO about whether set-up costs were intended to cover on-going overheads costs.

In another case, funding to develop a piece of infrastructure that the NGO would retain was presented as a formal contract instead of a grant. Clarity about what the funding covers, and what is required in return for the funding, would have helped the NGO and the Ministry to understand the arrangement better.

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Recognise and manage the particular risks in each funding arrangement

The management of funding arrangements should be appropriate to the risks involved, such as the size and length of the funding arrangement and the "track record" of the provider.

The Ministry was well-informed of the risks surrounding each of the arrangements we looked at. Mostly, it took these risks into account when managing the funding arrangement with the NGO. Formal assessments and evaluations are not necessarily needed, but the funder should have enough notes on file to make successive staff aware of the risks and why they have been handled in a particular way.

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Be committed to effective relationships with NGOs

Where the public entity depends on NGOs for service delivery, we expect to see:

  • monitoring of the quality and effectiveness of the funding arrangements with those NGOs, appropriate to the nature and significance of the arrangements and the risks involved, and including timely feedback to the NGOs;
  • consideration and adaptation of the approach if it is not working as well as it might; and
  • staff consistency and fairness in relationships with potential and actual NGO providers.

Structures that enable effective relationships

The Ministry's commitment to good relationships with NGOs is demonstrated by its framework, its "NGO desk", and its NGO forums. The NGOs in the funding arrangements that we looked at said they had good relationships with the Ministry's contract managers.

Surveys of NGOs

The Ministry has also demonstrated its commitment to understanding the views about funding of NGO providers in the health sector, with the surveys it conducted in 2004 and 2007 of its relationships with NGOs.

The surveys let the Ministry know that relationships were not consistent throughout different directorates within the Ministry, and that NGOs sometimes find that inequality between themselves and the Ministry adversely affects the relationship.

Responding to NGO feedback

It is up to the public entity to evaluate its feedback from NGOs and to respond appropriately. We expect to see responsiveness, and improved relationships as a result.

Relationships, according to respondents, declined between the Ministry's 2004 and 2007 surveys. This suggests that more work was needed to understand and respond to the points made by NGOs.

1: For example, people with disabilities may depend on particular support providers, so there is no "choice" available to the funder.

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