Part 2: Types of funding arrangements and relationships with non-government organisations

Principles to underpin management by public entities of funding to non-government organisations.

In this Part, we discuss:

What is a non-government organisation?

There are several ways of defining an NGO; some use the term in its wider sense to mean any organisation that is outside the government (whether or not it has a commercial interest). More usually – and we have taken this approach – the term is used in the sense of a not-for-profit organisation.

We have based our definition of an NGO on work by Statistics New Zealand on the definition of not-for-profit organisations,1 and the UN Handbook on Non-profit Institutions in the System of National Accounts.2

On this basis, we use the term NGO in this guide to mean an organisation that is:

  • Independent of government – The organisation is not part of government (either central or local) and does not exercise governmental authority in its own right. However, it does exercise its own authority in all matters relating to its own governance – that is, advocacy, policies, and procedures. The organisation may receive significant financial and/or other support from the Government, and it may have public officials involved in its governance. However, it has enough discretion in managing both its generation of funds and its use of funds, that its operating and financing activities cannot in practice be fully integrated with government finances. We acknowledge that the distinctions between the public and private domains are not always clear. In our view, and for the purpose of this good practice guide, some of the distinguishing features of organisations independent of government are that they have no regulatory or taxation powers and that they have no direct responsibility for the management of the expenditure of rates and tax revenue.
  • Self-governing – The organisation is able to control its own activities, and is not under the effective control of any other body. It controls its management and operation to a significant extent, appoints its own chief executive officer and its own staff, has its own internal governance procedures, and enjoys a meaningful degree of autonomy. It can set and change its governing rules, and alter its mission or internal structure without having to secure permission from anyone other than the relevant registration authorities.
  • Non-compulsory – Membership and contributions of time and money are not required or enforced by law or otherwise a condition of citizenship or determined by birth. NGOs can perform regulatory roles that make membership necessary to practise a profession (for example, the New Zealand Law Society that licenses lawyers to practise law). But, as long as membership is not a condition of citizenship, as opposed to a condition of practising a chosen profession, the organisation can still be considered non-compulsory. By contrast, organisations in which membership, participation, or support is required or otherwise stipulated by law or determined by birth (for example, iwi) would be excluded from this definition of NGO.
  • Non-profit making – NGOs are organisations that do not exist to produce profits for themselves, and are not chiefly guided by commercial goals and considerations. They may accumulate a surplus in a given year, but any such surplus must be reinvested in the basic mission of the organisation, and not delivered to the organisation’s owners, members, founders, or governing board.

An NGO is an organisation in the sense that it usually has its own legal personality (for example, an incorporated society). Even if it does not have any formal legal status of its own, it will be recognised as an entity, with at least some degree of structure and measurable activity.

NGOs within the scope of the definition used for this good practice guide cover the spectrum in which local and central government are involved – from economic development, cultural, and recreational sectors to the more traditional sectors where NGOs assist government to achieve its objectives, such as social services, housing, education, and health.

Over time, a number of NGO “umbrella” groups have formed to support NGOs. Such groups assist their members with matters such as training, mentoring, and advocacy.

Typical funding arrangements with NGOs

Public entities, at both central and local government level, engage in different types of funding arrangements with NGOs. These arrangements range from grants that have very few conditions attached to their disbursement, to highly specified contracts for services that are paid by instalments against pre-set milestones or after the required services have been delivered.

At central government level, the appropriation type authorised by Parliament for the public funding will, to a large extent, determine the type of funding arrangement that the public entity will use to disburse the funding.

The funding continuum

Figure 2 shows the continuum of different types of funding arrangements, and the main distinctions between them. This good practice guide has been prepared with the funding continuum in mind.

Figure 2 – The funding continuum

Unconditional grants Conditional grants Relational contracting Classical contracting
Limited or general unspecified expectations of performance Some specified expectations of performance High expectations of an ongoing relationship Potential for future relationship not necessarily a driver
Detailed performance specifications.
Accountability is enforceable.
Currently – a shift to clearly linking activities purchased to outcomes.

This diagram has been adapted from: Lawrence, H.D.V. (2005), Funding the Community and Voluntary Sector, The Office of the Community and Voluntary Sector presentation to Taranaki Funders’ Forum, 26 April 2004.

In our view, the principles in this good practice guide are as applicable to an unconditional grant as they are to a conditional grant and a traditional or “classical” form of contract.

The scenarios in Part 4 provide some insight into how the principles can be applied in some of the different types of funding arrangements that exist within the funding continuum.

No matter what type of funding arrangement is used, it is critical that a public entity considers the risks; and plans, negotiates, manages, and monitors the funding arrangement in such a way that the public entity can be held to account for its effective and efficient use of those public funds.

Particular relationship considerations

Distinctive features of NGOs

NGOs are by definition not part of the public sector. Provision of public funding to them does not change this.

Using our definition, NGOs also have features that, taken as a collective set, mean that they differ significantly from public sector organisations or private sector companies.3 Those features may include:

  • a charitable purpose;
  • governance and staff are accountable to its members;
  • inability to distribute profits from their operations, which gives them an objective different from that of for-profit corporations;
  • involvement in producing public goods and services (as well as whatever private goods and services they may produce), but without exercising coercive or other statutory powers (for example, ability to levy rates);
  • the use of volunteer as well as paid staff and, often, a revenue structure that can include large voluntary contributions of time and money;
  • limited access to equity capital because of the prohibition on distribution of profits;
  • in many countries, eligibility for special tax advantages; and
  • legal rules about governance, reporting requirements, political participation, and related matters, separate from those for corporations.

Relationship and partnership considerations

While effective relationship management is not a principle in itself, it is important and does contribute to the effectiveness of the funding arrangement overall.

As noted in Part 1, public sector reform has led to a broadening of the base of service delivery, so NGOs are now frequently involved in delivery, policy, and facilitation in relation to public services.

2.18 The Government has acknowledged this situation in a statement about its intentions for relationships with the voluntary sector.4 The statement highlights the importance of relationships between government and community, voluntary, and iwi/Māori organisations being strong and respectful, and based on honesty, trust, and integrity. It also sets out the Government’s commitment to fostering relationships that, among other things, recognise the independence of such organisations, promote effective 2-way communication between parties, and are founded on public accountability.

Therefore, we expect a public entity to use a collaborative approach that appropriately acknowledges the relationship that the Government currently expects between public entities and the non-government, not-for-profit sector.5

Some degree of collaboration and partnership between central and/or local government and communities is now expected if public policy objectives are to be realistic and achievable. To make policies realistic, policy choices around the spending of public funds are usually made in consultation with those who are affected. NGOs often have a role in facilitating consultation with service users.

However, there is tension between the ideal of a collaborative partnership and the need for accountability for the stewardship of public resources. Even in a collaborative relationship, it is important for the accountability of the public entity to flow through to the NGO, and be reflected in the contractual arrangements.

Before the public sector management reforms of the past 20 years, there was a much lower level of accountability and transparency in the management of public resources. NGOs often received grants from public entities with little or no definition of, or insistence on, tangible outputs. Such arrangements were in line with the growing idea of partnership between government – both local and central – and community, especially in the delivery of social services.

However, the public sector reforms required accountability arrangements in general to be more “transparent”. This resulted in funding arrangements being made with NGOs that were increasingly contractual or quasi-contractual. Because of the pressure for accountability, public entities have tended to opt for a control approach when managing the risks in their relationships with NGOs. Contracts are seen as the way to achieve this control.

Where an NGO’s involvement in the delivery of services is a commercial arrangement, the usual forms of accountability – such as an arm’s-length commercial contract – would be appropriate.

Funding arrangements other than a formal, traditional contract might be more appropriate in some circumstances in a government–community partnership environment. However, just as a commercial arrangement does not prevent a high quality relationship, a partnership environment does not negate the need for a sound, business-like approach. Any transfer of public funds in return for consideration is, in law, a contract – even if contractual formalities are kept to a minimum. Any such agreements should be combined with a relationship that recognises the value and contribution of each partner.

Partnership is often aspired to in relationships between public entities and NGOs. However, it may be difficult to achieve a partnership where there are major disparities between the public entity and the NGO in terms of relative power, size, and governance structures. Where there is a partnership relationship, both parties need to keep each other’s interests in mind.

Sustaining the relationship becomes more important in a partnership, and requires different procurement strategies, management arrangements, and skills. Thought needs to be given to how to sustain the partnership, and balance the short- and long-term benefits of the relationship.

There may be tension about the nature of accountability in the public entity–NGO relationship. Public entities are accountable to Parliament – or to councils in the case of council-controlled organisations – and to the public, both in general and to service users in particular. An NGO is accountable to the public entity for the public funds that it receives, but also to its own “community”, and perhaps to other funders (other purchasers of services, or the general public where public donation is involved) and to service users. Yet an NGO, for capacity and/or capability reasons, may find it difficult to produce the level of information required by public entities for accountability.

The focus on accountability and openness has been a challenge for public entities and NGOs – for public entities in their ability to specify and monitor the use of public funds to the expected standard, and for NGOs in their ability to comply with reporting and other accountability requirements.

The government-NGO funding environment can also involve high risks and high costs. Relationships should be managed well – to manage the risks to the funds, but also to manage the risks to the end user in the event of a service failure.

1: Statistics New Zealand is using a structural-operational definition, based on 5 main criteria, to determine which organisations fall in and out of scope of the Not for Profit Institutions Satellite Account.

2: This 2003 publication was prepared in close collaboration with Johns Hopkins University Centre for Civil Society Studies and the Economic Statistics Branch of the United Nations Statistics Division.

3: Having noted this, public entities should consider the applicability of these principles for funding arrangements with for-profit organisations. However, this guidance has been specifically developed with public entities’ funding arrangements with NGOs in mind.

4: Statement of Government Intentions for an Improved Community-Government Relationship, December 2001, Ministry of Social Development.

5: See

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