The government should carry out a fundamental review of how it makes non-competitive grants to charities and establish a register of such awards, a committee of MPs has suggested.
The House of Commons Public Accounts Committee has called for the measures in a highly critical report about the government’s funding of the defunct charity Kids Company, released on Friday.
The charity, which received at least £42m of central government funds since 2002, closed abruptly in the summer. About £7m of this funding came in the months before the charity shut down.
The PAC’s report said that, despite repeated warnings from officials about the charity’s financial position, the government ignored the charity’s cash-flow problems and its funding "was never seriously questioned, let alone stopped".
It said that funding decisions were not based on evidence and did not follow due process, adding: "As the government recognises, there are lessons to be learned from its funding of Kids Company. This situation must never occur again."
The charity was passed around Whitehall like a hot potatoMeg Hillier, chair of the PAC
The report recommended the government should review how it made direct and non-competitive grants and should consider factors including how the processes were made fair and how the government assessed the financial suitability of a charity.
The report said that a register of grants the government makes to the voluntary sector should be developed so that it could easily identify those charities receiving large amounts of government funding from single or multiple sources, and so that intelligence on charities’ past performance could be shared. It was not made clear if the register should be publicly accessible.
The report also suggested that if the government were to use its powers, granted under the Charities Act 2006, to give funding directly to charities, it should provide a transparent case for the decision and report regularly on the use of these powers.
The committee said it was concerned not only that the government repeatedly gave money to Kids Company, but that "the amount of money kept going up, even though there were warning signs about the charity".
The report noted that Kids Company received national funding despite effectively operating only, for most of its life, within two London boroughs.
"We were concerned whether it was fair to fund a local charity, for such a long period, with such significant amounts that could otherwise have been offered to charities or organisations elsewhere in the country," the report said, adding there had been too little scrutiny of what the charity was delivering for taxpayers’ money and that by treating it as a special case the government missed opportunities to help other children.
Successive governments threw money at Kids Company at the same time as they were making life harder for other charitiesKarl Wilding, NCVO
It said that accounting officers in government departments failed to stand up to ministers on granting funding to the charity.
Meg Hillier, chair of the PAC and the Labour and Co-operative MP for Hackney South and Shoreditch, said the lack of scrutiny of Kids Company’s funding was staggering.
"Fairness and value for money – fundamental values when considering public spending – appear to have been forgotten in repeated and ultimately doomed attempts to keep Kids Company afloat," she said.
"The case of Kids Company will anger many people. The charity was passed around Whitehall like a hot potato, with no one willing to call time on spending millions of tax pounds for uncertain outcomes.
"So many other charities did not get the same support and it is clear that Kids Company received special treatment – to the detriment of other deserving charities around the country."
Karl Wilding, director of public policy at the National Council for Voluntary Organisations, said the report would make "extremely frustrating reading for the thousands of charities that have to submit highly detailed plans in order to have a hope of funding".
He said: "Successive governments threw money at Kids Company at the same time as they were making life harder for other charities."
A Cabinet Office spokesman said the government would consider the report’s recommendations.
"The welfare of the young people continues to be our primary concern and we are now working closely with local authorities to make sure they have access to the services they require," he said.