Scandals about the award of public money to charities by way of grants or contracts and companies through contracts are hardly new. Ancient Rome was rocked by scandals about the contractors to the state. But a recent case raises some major and fresh issues about how these arrangements should be governed. The press has devoted acres of print to the collapse in 2015 of the children's charity, Kids Company, led by the charismatic figure of Ms Camila Batmanghelidjh, which had reportedly been awarded central government grants over a period of more than a decade, despite government officials' concerns and sometimes as a result of ministerial insistence. Several inquiries have been instituted. We are still waiting for the result of one by the Charity Commission into the way in which the charity was run and regulated, of one by the Official Receiver into the manner in which the charity finally went bust, and for the result of police investigations into abuse of children by some people allegedly connected with the charity. But now finally we have a fascinating, largely factual report carefully written without recommendations, by the National Audit Office (NAO), which is the body responsible for checking the propriety and value for money of government spending. The NAO wasn't asked or expected to find new evidence about whether Kids Company was effective or even cost-effective in the work it did with vulnerable children. Rather, its task was to look at what government departments did with the information they possessed about Kids Company, in making decisions about whether or not to award new grants and contracts.
The bare bones of the story have been reported widely. The NAO finds that government too often relied on Kids Company's self-assessment reports; too often officials' concerns about the quality of the charity's management and its financial viability were set aside by ministers from both Labour and Coalition governments who wanted to find a way to fund the organisation; and too often government ministers and officials seem to have made decisions based on imperatives to keep the organisation going rather than on the basis of strategic procurement.
Cynics will no doubt shrug and comment that at least these aspects of the tale could have been told about government relationships with a great many defence contractors over many decades, where the sums involved have been greater by orders of magnitude.
Yet, carefully factual as it is, the NAO report highlights three questions which deserve wider debate.
First, the NAO note that each time Kids Company's central grant was about to expire, the charity's leaders would lobby ministers and try to secure publicity in the mass media for their campaign for renewal. Of course, charities have lobbied government as much for their own grant aid as they have about wider policy issues affecting their clientele, for as long as governments have been making grants to them. In itself, this is hardly novel. Yet the emphasis that the NAO gives to the issue suggests that there may be a shift in attitudes to the propriety of this sort of lobbying. After all, if for-profit companies which are engaged in competitive tendering lobbied for extensions and renewal contracts in the same way that charities lobby for grant renewal, it is often regarded as improper. Indeed, sometimes terms and conditions for tendering specifically state that bodies which lobby for their bid will be excluded. The NAO report raises the three related questions, “is lobbying for a grants still regarded as more acceptable than lobbying for a contract?” and “is lobbying by a non-profit charity on its own financial behalf still regarded as more acceptable than a company doing so?” and “is an organisation lobbying for its own grant still regarded as more acceptable in social welfare fields where clients are disadvantaged than it is in government procurement of, for example, submarines or cataracts operations or computer systems?”.
After all, lobbying generally has been subject to increasing regulation around the world, with new requirements for transparency, and much of the concern has been about for-profit companies. Recent British legislation restricts even charities from doing lobbying on wider policy issues in the periods immediately before elections, if the political parties have positions on those topics.
The NAO report makes no recommendations for further regulation but the question will immediately occur to many readers, whether it might be desirable. It would not be easy to design. Policing the boundary between lobbying for a policy change and lobbying for one's own funding will not always be straightforward. It would not be difficult to see how a rule against a charity lobbying for its own funding might be abused by governments seeking to prevent lobbying on a wider policy issue.
Moreover, it would raise some tricky issues of fairness between charities and companies. For when faced with closure, companies making steel, warships and even train carriages have lobbied for government contracts to help them survive. Is this different in principle from a charity lobbying for a government contract? Some might say so. Some people would say that where a company is the largest single employer in an area, lobbying for a state contract is really lobbying for economic development for an area. Charities are hardly ever economically critical to whole city or regional economies. But big charities which are dominant in service provision in their field would no doubt say that lobbying for their grants is tantamount to lobbying for their clientele. Critics, on the other hand, would reply that this is precisely the problem – namely, that some geographical communities are too dependent on company that have local monopolies on employment and economic activity and that the more scattered disadvantaged clienteles served by charities are too often dependent on monopoly charities. But this, critics will say, is not an argument for the state to prop up incumbents in either sector. In European competition law, there is no difference between a government contract, grant or subsidy: all are “state aids” and suspect, unless they are open to competition under open government procurement rules, or subject to one of a limited number of exemptions. Voluntary may lay claim to the grand rhetoric of “civil society”, but the NAO report about Kids Company, in effect, asks us to consider afresh whether we still think that when government awards grants and contracts to charities, not least when they might be in difficulties, those charities should be able to lobby for their own funding.
The second issue raised by the NAO report is that government repeatedly found ways to award to award contracts to Kids Company without a competitive process, using special Charities Act 2006 powers. As the NAO puts it (para 4.18), ministers can use these powers “for example as in this case to secure the continued viability of a charity”. In the education department, a special Public Interest Case was prepared to justify this, which, the NAO report says, did not present a value-for-money assessment.
Government contracts are sometimes awarded to companies without competitive processes too. There are some special exemptions from competition permitted in procurement rules. For example, innovative services which can't be defined in advance can be bought under negotiated tender, and where patent or copyright provides for a single supplier, competitive tendering can be dispensed with, and very small contracts are not subject to the rules. But there is no general exemption from competition in European procurement rules either for charities or for social welfare activity or for aid by way of grants.
Many charities, including Kids Company, would want to argue that they too offer unique and innovative approaches, and some might even claim that the outcomes cannot be specified in advance, although for continuing human services such as supporting at-risk children the argument for unspecifiable outcomes is harder to make that it might be for a contract for a one-off project with a brand new technology.
Nowhere does the NAO suggest anything so drastic as the repeal of the Charities Act powers for ministers to award grants to charities on a non-competitive basis. But the simple recounting of the facts implicitly raises the question of whether attitudes are changing. Perhaps we are moving into an age in which the non-profit sector, government grant aid and social welfare activity is now regarded as a matter of public sector procurement just like government buying civil servants laptops or the navy's submarines or high street dental services for NHS dental care. For the issue is not just a matter of the scope for ministerial patronage which ad hoc grant aid powers allow. It is also a question of whether the rhetoric of “civil society” can still be used to justify special exemption from open competition for awards from public funds, and whether the viability of any private organisation, whether for-profit or non-profit, should still be regarded as an acceptable objective for government decision-making about the award of funds.
Third, the NAO point out that throughout the history of Kids Company, officials were anxious about the excessive reliance of the charity upon both central and local government grants and contracts. Again, most defence contractors are in the same position. There are big generalist companies which provide public services under contract to public authorities and could be said to have been rather dependent on government at various points in their recent history (although some have diversified their revenue sources recently), including G4S, Serco, Amey and Capita. Some specialist consulting firms depend on the NHS or on the Department of Transport for their work. So if there is a special problem about charities such as Kids Company, what is it? In some sections, the NAO report suggests that officials were more anxious about the charity's dependence on funds from central government and on grants than they were about either its dependence on the wider public sector generally or on contracts; in other passages, the concern is simply about excessive reliance on “government funding”. At any rate, it seems from the report that this is a quite distinct concern from those about, for example, the charity's lack of adequate reserves or its too frequent financial emergencies.
A major dilemma for government, in any procurement, is whether ministers and officials should worry more about a supplier that doesn't need them or about one that does. A supplier that doesn't depend on government for a huge proportion of its income may not be amenable to change its practices so suit a public sector client and may be able to resist the kinds of control that ministers and officials might want or might even feel able to walk away from a contract when the going gets tough and when this might be most inconvenient for government. There are even companies which resist governments' invitations to them to tender, precisely lest they become too dependent on the state, yet departments might well prefer to buy from those companies than from those who will sell to them. When big IT companies have walked away from government projects, they have left departments with major problems and embarrassment. On the other hand, a supplier that does depend on government for its revenues might be able to hold its public sector client to ransom if its profile is high enough or if it can make a case that government would be embarrassed should it fail (a fear which, the NAO suggests, perhaps Kids Company was able to rely on for too long).
The NAO makes no suggestions of any new general rules about suppliers or even about charities' dependence on government. But the repetition of the point about officials' concerns being documented yet not leading to discontinuation of awards until the final collapse in 2015 suggests that a fresh debate may be opening up about this. If we no longer regard charities as being any different from companies when public funds are being considered, then should we think of some charities in the way that defence ministries have for so long regarded their key suppliers of fighter jets and submarines, as both too important to be allowed to fail and too important to be allowed NOT to be dependent on the state? Or should the argument now run in precisely the opposite direction? Should we now conclude that any organisation's excessive financial dependence on the state, whether it is a charity or a firm, should be regarded as a risk for government and should trigger an expectation that funding will actually be reduced, unless some very special justification is given such as national security, which few charities but some defence contractors might be able to show?
The sorry tale of government's relationship with Kids Company may, in hard cash terms, be a small one by comparison with huge scandals in contracting such as the US government's contracts for reconstruction in Afghanistan, where the sums involved were truly eye-watering and where the abuses were horrific. Yet the manner in which the NAO has written its report on the case suggests that it may yet lead to debates that Britain has not conducted in very fundamental terms for a generation, about whether the freedom of advocacy which charities surely right have about policy issues affecting their clienteles can still extend to lobbying for their own grants, about just how different government's grants and contracts for charities really are from its general procurement, and about whether a key criterion for whether government should award any contract or grant to any organisation should be whether that would take the proportion of its revenues from the state over a certain threshold unless there is some special justification such as national security.
To put the point bluntly, in a way that the NAO never would or could, the issues raised in this report ask Britain to debate whether the voluntary sector's rhetoric about “civil society” and the facts charities do not pay dividends to shareholders and may serve disadvantaged clients still afford a justification for special treatment in law and practice of public procurement. That is not only a public management question. It is also a question about what kind of country Britain will regard itself as.