Nearly two-thirds of charities say they have used money from public donations to prop up key health and social services they have been hired to provide, according to new research to be published next week.
The study by analysts, New Philanthropy Capital (NPC), will warn that charities believe their relationship with the state is increasingly dysfunctional, with many of those charities most dependent on public service contracts now struggling.
“We found some charities describing the relationship with the state as in ‘crisis’. The fact that so many charities feel they need to subsidise public sector contracts shows how much austerity is effecting charities’ ability to successfully deliver these contracts,” said Patrick Murray, head of policy and external affairs at NPC.
Charities say years of austerity have triggered a drive by councils and the NHS to get contracts at the cheapest possible price, driving down the quality of services and leaving many providers in a financially unsustainable position.
The warning follows the collapse this week of Lifeline Project, one of the UK’s leading drug and alcohol treatment charities, amid claims of weak financial management. Lifeline had expanded rapidly in recent years, reporting in 2016 that it had grown contract income by 45% to £62m.
Lifeline, which employed 1,300 staff and delivered services to 80,000 people a year, including prisoners in 22 jails and young offender institutions, is hoping to transfer services to other providers. The charity’s demise is currently being investigated by the Charity Commission.
There are concerns that public sector bodies are regularly requiring charities to agree to subsidise the cost of contracts with donor funds as a condition to being awarded them in the first place, leaving trustees with an ethical dilemma over whether to continue out of a sense of duty to beneficiaries.
The NPC research will show that over half the charities they surveyed turned down contracts because the operational risks of trying to deliver a quality service on the cheap were too high. Others handed contracts back because they felt they could not deliver value to beneficiaries with the available funding.
The services provided by charities under contract are typically in areas like social care, young people, homelessness, employment, public health, and drugs and addiction, where expertise was often developed in the voluntary sector and only later funded by the state.
A survey published last year by the Charity Finance Group (CFG) found that many charities were making huge losses on public sector contracts, with some of the larger voluntary organisations subsidising up to 16% of the value of a service contract.
Andrew O’Brien, head of policy at CFG, said: “This is an increasing dilemma for charities, partly as commissioners are trying to squeeze more out of every contract.”
Karl Wilding, director of public policy at the National Council for Voluntary Organisations, said the collapse of Lifeline was symptomatic of the challenges facing charities operating in an increasingly risky public sector marketplace at a time of huge budget cuts.
The public sector had increasingly offered a smaller number of bigger-value contracts in order to drive down costs. But this excluded smaller charities with specialist expertise who could not afford to compete, leaving services in the hands of a group of bigger generalist charities.
Kathy Evans, chief executive of Children England, which represents children’s charities, said: “I hear increasingly widespread accounts of the losses being incurred, and subsidies that charities are having to pay, on underfunded public contracts. That’s not a sustainable proposition for any organisation, or any service sector.”
Last year 4Children, one of the biggest childcare charities which provided nursery and family support services, went into administration after a rapid expansion fuelled by private loans unravelled in the face of government cuts.