Choosing an approach to a funding arrangement

Spending public money wisely and well: how to put basic principles into practice.

As already explained, the basic principles will be relevant regardless of the funding arrangement’s purpose or type. However, the way in which they are given practical effect may vary considerably depending on the form of the funding arrangement.

It is therefore important for public entities to decide which type of funding arrangement is appropriate when they prepare the business systems, policies, and procedures to support particular categories of funding, and when they enter into individual transactions or arrangements. We have identified some questions to help public entities consider the characteristics of particular types of transactions and relationships, and identify the most appropriate category of funding arrangement.

What is the goal?

A public entity should focus on what it is trying to achieve in any particular context. It should ask, at a very simple level, what the goal is with a particular funding arrangement. Is it a purchasing relationship, where the public entity is buying goods or services of some kind? Or is it essentially an exercise in capacity building or general support, where the public entity is assisting an external party with a particular activity or project, or with some part of its ongoing operation? The answer to these questions will determine which types of funding arrangements are going to be most appropriate – those that are designed to support purchasing or those that support grants and gifts.

What is the relationship context?

An important part of the context for any funding arrangement will be the relationship background. That background may have sectoral and strategic, market, and end-user dimensions, as well as the general relationship between the public entity and the external party.

Sectoral or strategic context: Is there any general sectoral relationship or strategic context that needs to be considered? For example, central and local government have operated a “partnership” relationship for some years and have shared strategic goals that might at times inform the way that central government funds some local government activity. Similarly, the Government has a programme of activity for its relationship with non-government organisations and community organizations in the social services sector. This activity aims to give greater acknowledgement to the capacity building and support aspects of those relationships, and the importance of ensuring a sustainable civil society sector.

Type of organisation: What type of organisation will receive the funding? Although all types of organisations can feature in all of the funding categories, there are some specific relationships that are more common in particular categories. For example, relationships in the “giving” and “investing” categories are much more likely to involve non-government organisations and other non-profit bodies than commercial organisations. Relationships with foreign governments may have very few enforceable conditions attached and so are more likely to be grants with limited conditions. Relationships with commercial organisations are much more likely to be purchase or procurement contracts of some kind. Therefore, although the type of body being funded does not determine the funding category, it can indicate the categories that are more likely to be appropriate.

Length of relationship: Is the funding arrangement long or short term? Even if it is short term, is it part of a longer-term relationship between the public entity and the external provider? The continuity of the relationship between the funder and the external party may be relevant. A long-standing relationship – for example, with a community provider of a specialist service – will often suggest that the contracting environment will be shaped by what we have termed “relational” considerations rather than market factors. Equally, although an individual contract may be for a short term and of low value, if it is part of a long-term pattern of procurement from a single external party, then the public entity may need to have a system in place to respond to the cumulative total of work going to that provider.

Presence of a market: Are there many potential providers of the goods or services being sought? Are there many potential buyers? The more effective the market, the more likely it is that the arrangement will be a conventional contract using traditional competitive disciplines to manage price. If there is only one plausible supplier, then the arrangement may be better managed as a relational contract.

The end users: The purpose of many funding arrangements is to deliver a service or provide support to individuals needing assistance– for example, by supporting residential care facilities or other forms of social support. It may be important to consider the needs of the recipients or end users of a service when thinking about the relationship with the external party. For example, if the end users of the service are going to value long-term stability highly, then that will affect the way the public entity should manage the funding arrangement with the provider. A more long-term and strategic approach to quality and price will probably be more appropriate thanthe use of short-term market-based disciplines.

Thinking about risk

Identifying and managing risk is a vital part of any business planning.Public entities need to think about risk when they put in place business processes, policies, and procedures to manage funding arrangements with external parties, as well as when they consider entering into any individual funding arrangement. Thinking about risk will help a public entity to make appropriate decisions on how to structure and manage funding arrangements both at a system and individual level.

Control: What level of control does the public entity want over the detail of what is done and the outcome? Are there significant requirements around the quality of what is delivered? In general, the greater the level of control that the public entity seeks or expects, the more likely it is that the relationship will be a highly specified and contractually enforceable conventional or relational purchasing arrangement. If significant control is not needed or appropriate – for example, because of the autonomy and governance arrangements of the external party – a grant arrangement may be better.

Performance and consequences: What happens if the external party does not do what is intended? Is the intention to create legally enforceable performance or delivery obligations? If the intention is to make the provider legally accountable for delivering the contracted goods or services, then it is more likely that the relationship should be set up as a contractual purchase arrangement where the parties can withhold payment or go to court to seek remedies for non-performance. In a grant relationship, the consequence of non-performance is likely to be an end to the current funding arrangement, reputational damage, and a reduced ability to obtain similar funds in future. There may be an obligation to return funds not used for the purpose of the grant. However, the external party may be less accountable for the quality or detail of what is being produced with the funding.

Tolerance of risk: What level of risk is the funding public entity prepared to tolerate? What level of risk does the particular activity carry? Within a grant framework, higher risk may lead to a more structured arrangement, with more conditions attached to the ongoing release of funds. Within a purchasing context, higher risk to a public entity may sometimes lead to a greater emphasis on strategic and relationship aspects, and might therefore push the contract into the relational category. The closer interaction of a relationship-based approach can sometimes be a sensible way of managing risk to an acceptable level.

Sustainability: If the government or the public entity has a long-term interest in the viability of the external party, or the sector or market it operates in, that interest may affect how the public entity approaches the relationship as a whole and any particular funding arrangement. It is likely to affect how it defines and manages risk, because risks to the external party’s viability may also be seen as risks for the public entity.


The other aspect of the strategic context that deserves specific mention is the monetary value of a funding arrangement. It is common sense that high-value contracts should attract more attention, at every stage of their life cycle,than contracts for small amounts. At this broad level, high value is one simple indicator of risk.

The definition of high and low value funding arrangements will differ between public entities, depending on the nature of their activities and budget. However, in any public entity, policies and systems should support an approach that tailors the level of planning, documentation, and monitoring to the financial significance of the arrangement for the public entity.

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