Is it just a matter of time until we have a voluntary sector Carillion?

Last month the massive construction and services company Carillion collapsed – sending shockwaves through the political system and throwing a multitude of outsourced public services into turmoil and uncertainty. This was a big private sector player and a multi-billion pound business which relied heavily on government contracts – contracts that now appear to have been so unsustainable and unprofitable that the company went belly up.

The wider implications of this colossal failure in public procurement will keep unfolding over coming months, but there are questions the voluntary sector needs to ask now. In particular, what does this development mean for service delivery by charities – and in particular local charities working with local councils that are under huge financial pressure? And: isn’t it finally time we totally rethink the current system, including revisiting the role of grants?

Carillion was hooked on government contracts. These contracts were mainly about delivering big government construction projects and maintenance services worth a total of £5.7bn. Delivering the government services and projects via contracts has been increasingly the main delivery model over recent decades, as successive governments sought to reduce government head count. This phenomenon has been mirrored in the voluntary sector, which increasingly competes in the public services market, with a corresponding increase in this type of income for the sector overall.

The demise of grants and the rise of contracts

Some basic numbers illustrate the magnitude of change in the voluntary sector’s income:

• The share of income that the voluntary sector receives from government contracts increased dramatically. Income that the voluntary sector received from government contracts was worth £12.4bn in 2014/15 out of a total income of £45.5bn (roughly 27%). This is up from £5.8bn in 2003/04 when the voluntary sector income was almost £36.6bn (or roughly 16%).
• The ratio of government contracts versus government grants also shifted massively. In 2003/04 government grants stood at £6.2bn and made up over half of all income to the voluntary sector from government. Since then this share has massively declined and stands at £2.9bn (out of £15.3bn) in 2014/15. This means grants make up just below 19% of income that the voluntary sector received from government. However, when looking at the overall income (£45.5bn) than government grants (£2.9bn) play an even more diminished role. They make up only around 6.37% of the sector’s income.

What are the related risks for charities?

What do these two developments mean for charities? As Kathy Evans, CEO of Children England sets out in her excellent blog on the collapse of Carillion, many charities are ‘in the extended family’ of Carillion. The same pressures that forced Carillion to crash affect charities when they operate and compete in the public services market. In fact, it’s likely that many contracts delivered by charities are only still functioning because the charity is plowing in other resources like donations to subsidise the service. What happens if those dry up? Kathy lists some core elements of the problem: under-pricing, pension deficits and supply chain risk exposure. The gargantuan bureaucratic waste in the current system is also a sunk cost that doesn’t help anybody.

At the same time, NCVO forecasts that the public service delivery system could be at a breaking point this year. Charities that rely on government grants or contracts will feel the pressure. For example, by complete cuts (less contracts or grants overall) or financial pressures (being asked to do the same or even more for less money). More widely, the state’s withdrawal from more service delivery areas, particularly locally, will increase the pressures on charities to step in.

We need to make local communities more resilient – and grants must be part of it

All these developments leave local communities exposed. If smaller organisations are part of wider supply chains, they risk going down if the big players do – or being slowly hollowed out by increasingly unsustainable subcontracting arrangements. Local SME’s which were relying on Carillion as sub-contractors will probably have to lay off workers soon.  This all happens in a local environment where charities are facing the above mentioned financial pressures and state withdrawal.

Carillion shows us why we need to urgently rethink the whole commissioning system – or we will be forced to in a messy and chaotic way if we carry on the same path. There are many aspects to this, and some areas like Plymouth and Preston, to name a few, are setting good examples. Given the chaos at Westminster, it’s more likely that innovation which produces the way forward will happen locally.

Grants can and should be part of the solution. They normally go to organisations rooted in a local community – not big firms like Carillion that have no local presence, knowledge or ownership. The charity sector is often the backbone of our communities. Of course, contracts can play a role and it largely depends on what the service is for, the nature of it, and what the commissioner is trying to achieve. But the balance between grants and contracts is currently so skewed that it represents real risk to communities. This must change.

Why ‘local’ matters

From the perspective of a local authority you want a local ecosystem which is sustainable and can absorb shocks. Local decision-making and spending plays a role is key in this. For example, Preston has improved its local economy by rethinking how they commission local services, steering local authority spending to local firms. This means rejecting a ‘Carillion-type’ delivery model and supporting local businesses. The same logic should apply to grants and the local voluntary sector – by investing in local charities, local government can help make the community more resilient.

Grants for Good campaign

The Carillion collapse is a shot across the bows for policymakers to reform the system. For the charity sector, rethinking the role of grants must be part of the solution. DSC has been campaigning with others as part of the Grants for Good Campaign to reverse the trend of declining government grants to charities and community groups. The campaign has some key principles which go to the heart of this debate. Learn more and support the campaign here.