News analysis: Don't let full cost recovery cost you

Indira Das-Gupta

Government departments endorse the principle, but local authorities don't always follow.

As the Government's deadline for the implementation of full cost recovery draws nearer, it looks increasingly likely that it will fail to meet its target. Research recently published by Acevo shows that 97 per cent of its members think the Government won't make the deadline and 90 per cent believe this will have serious implications for both the sector and those who depend on its work (Third Sector, 11 January).

Scope and the National Society for Epilepsy have admitted they are already experiencing financial difficulties, largely as a result of the failure of local authorities to match the true cost of the services they provide.

The Treasury's 2002 cross-cutting review pledged that all statutory funders would have full cost recovery in place by April this year. A spokesman for the Treasury insists: "The deadline for adopting the principle will essentially be met - no government departments reject the principle. All accept it." But the reality is that, although full cost recovery might have been accepted in theory, there is a long way to go before it becomes standard practice across the country.

Much of the problem lies in relations between local authorities and voluntary sector organisations, which, despite Compact Plus, can be far from friendly, according to David Josephs, a member of the strategic review team at the National Society for Epilepsy. The charity announced earlier this month that it is being forced to close two of its care homes to help plug a £1m hole.

"The crux of the matter is that we provide a very specialist form of residential care for people with severe epilepsy, which costs a lot of money," explains Josephs. "To put it bluntly, some local authorities are prepared to pay for it and are sensible to negotiate with, but others are not and can be confrontational."

This view is shared by Dan Beety, PR manager at Sue Ryder Care, which last year launched its 'We care, who pays?' campaign to address the barriers hindering the charity's relationship with local government.

He says: "It's almost a postcode lottery in which you get different rates for a similar service - it can't be right.

"If the Government wants us to play a greater role in service provision, then we have to create an environment in which we can be genuine partners," says Beety.

"We are not saying the state should pay for everything, but it should pay for the part it commissions."

However, John Knight, head of external affairs at Leonard Cheshire, believes the sector must accept some of the responsibility. "In the past the sector has been its own worst enemy by allowing the subsidisation of services to happen," he says. "There was a reluctance to be more businesslike, although I think that is changing now."

Leonard Cheshire is living proof that full cost recovery is achievable, having turned what was a £5m deficit into a small surplus that can be re-invested into services.

"It was not quick, though," adds Knight. "We had to establish a very transparent cost pricing model so we can individually cost a person's care package in a way that allows the purchaser to see exactly what they are getting. If you can justify what you are spending their money on, local authorities will pay.

"We have also recruited people with business backgrounds, who have more experience in negotiating and drawing up contracts."

Sharon Collins, executive director of operational services at Scope, estimates that the charity has been subsidising services to the tune of £174m for the past 14 years. She believes full cost recovery is not only desirable, but essential.

"It is effectively an extra tax mechanism," she says. "When people decide to leave us a legacy, they should be positive their money is going to pay for a new service rather than being used to subsidise state services."

Knight agrees: "When we were shovelling money into this area, we were not fulfilling our charitable purpose, and we realised that it was a breach of trust to our beneficiaries.

"If donors knew how much charities spend on subsidising local services, they would probably think 'I already pay my taxes, why should I pay again?'"

But Deborah Cameron, the new chief executive of Addaction, argues that the issue of full cost recovery is just part of a wider problem.

She explains: "It's part of a bigger picture, which is all about the implementation of Compact Plus. We work with 70 local authorities and there's quite a variation in terms of how quickly they pay. We have a written contract with only about 20 per cent of them.

"There should be stronger guidance from central government, and Compact Plus should be mandatory, not advisory."

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