News analysis: The realpolitik of full cost recovery

Will charities ever be able to free themselves from subsidising the public services? Mathew Little reports.

If the state does not pay up for the services you provide, what do you do? The answer from many charities seems to be "sell off the family silver".

Former Charity Commissioner Julia Unwin claimed last week that, faced with under-funded contracts from local authorities and primary care trusts, a number of organisations were raiding their own reserves to make up the shortfall.

"This is a real threat, not only to tomorrow's beneficiaries, but also to organisational resilience," she said.

There is growing scepticism in the sector that the Government's oft-stated commitment to full cost recovery is anything more than rhetorical. Reviews are conducted, ministers make promises, but the mindset of local government commissioners does not seem to change. This could partly be because they don't even have enough money for in-house services - social services departments complain of a £1.76bn shortfall.

Dream on

"Is full cost recovery a pipe dream?" asked Michael Shaw, chief executive of John Grooms, at the Charity Commission conference on public services last month.

"There is little evidence that all the reviews are helping funding to trickle down and produce a fair apportionment to the voluntary sector."

Faced with the glacial pace of change, charities are left with an unenviable dilemma: chip away at their reserves or perpetrate a deception on donors by diverting donated income to plug the gaps. Neither is desirable, but some in the sector argue that utopianism over full cost recovery should be replaced by realpolitik.

To Chris Harris, finance director of Action for Blind People, the important issue is not whether charities subsidise the state - they inevitably do, he says - but whether they do it knowingly or under duress.

"The issue is whether the charity feels it's being taken advantage of," he says.

"If the charity and the government agency come to an agreement that, for example, the local authority will put in 80 per cent and the charity 20 per cent, both sides know what they are doing and the result is a better deal for the beneficiary, then I don't think anyone can complain."

Harris asserts that, in some areas of provision, full cost recovery can be achieved. In specialist areas such as autism, where there is a lack of alternative provision, charities can exploit their monopoly position and insist upon full reimbursement. But in other areas, such as residential care or children's services, the statutory purchaser can play competing charities off against each other to secure the best deal - from the state's point of view.

Whether full cost recovery can be achieved across the board is not the right question for Harris. "The real issue is whether the third sector can win at contracts, and I would say that, increasingly, it can," he asserts.

"But winning may not involve 100 per cent funding. Winning means the third sector agency isn't being taken for granted, abused or ripped off."

Ian Theodoreson, director of corporate resources at Barnardo's, says full cost recovery could become a "red herring" if statutory purchasers standardise their commissioning practices for both companies and charities.

"At the moment, local authorities buy services from a charity in a different way from how they buy services from commercial providers," he says.

"They expect us to give a blow-by-blow account of how our costs are made up. But if they buy from Capita, they just ask for their price."

If charities were allowed to set a price for each service they provide, they could choose to subsidise in some cases by making a profit on others, Theodoreson says.

"It might be that some types of work lend themselves to a much more economic return than others," he says. "A charity may decide to do the uneconomic stuff because it is reaching a community that otherwise wouldn't be reached, and make the money elsewhere."

In the end, he argues, if charities costed their services properly, they would break even overall and would no longer need to draw upon reserves or donations - thus achieving full cost recovery by a roundabout route.

But for some charities the issue is still straightforward. Sue Ryder Care, which estimates its subsidy to the state at £7m a year, is running a 'We care, who pays?' campaign to pressurise local authorities to pay up.

"We're not asking local authorities to fund everything we do," says Dan Beety, public affairs manager at Sue Ryder Care. "Just the care services that they are commissioning.

"We offer cutting-edge, modern healthcare in line with what the Government wants, but we are being funded by an antiquated grants system more akin to Victorian philanthropy."

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