Part 3: Principles for good management of public resources

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

A principles-based approach

Public resources should be applied for the best possible public benefit. Therefore, we expect public entities to be guided by certain principles when they manage public resources. These principles, in turn, will inform the development of the public entity’s rules, policies, and procedures.

We expect public entities to demonstrate that they have entered into and managed funding arrangements with NGOs according to the following principles:

Dynamic relationship between the principles

The principles cannot be applied equally in all circumstances, which is why “how to” procedural guidance can sometimes be counter-productive.

A public entity needs to start from the basis that public resources should be applied for the best possible public benefit. It must be aware of where this compromises one or other of the principles, manage the risks inherent in doing so, and be open about it. Documenting decisions is important.

For example, a public entity may need – in the short term – to build the capacity of one particular NGO to deliver a service. If the public entity uses a non-contestable procurement approach, the principle of fairness is, to this extent, compromised (as far as existing potential suppliers are concerned). If the amount of funding involved is small, then the administrative costs to the public entity and to the NGO should be appropriately modest. Fairness to the NGO would to that extent have precedence over accountability.

We expect that the dynamic relationship between these principles, the need to take a risk-based approach, and effective relationship management will all be taken into account in managing public resources.

Individually, the principles can be explained as:


Public entities must act within the law, and meet their legal obligations.

Activities, resourcing, and accountability requirements must be undertaken within the authority of the Crown or any relevant legislation. A public entity must meet its legal obligations, and cannot contract out of them. For example, in central government, a Ministry cannot engage an NGO – using public funds – to lobby for a particular policy alternative, an activity which the Ministry is prohibited from doing.

The public entity also needs to be mindful of the NGO’s legal obligations. For example, an NGO may have obligations within its trust deed which may not be over-ridden by the funding arrangement with the public entity.


Public entities should be accountable for their performance and be able to give full and accurate accounts of their activities, and have in place governance and management arrangements suitable to address any concerns.

There is much debate about compliance costs, for both funder and NGO, resulting from the need for accountability. Accountability is about performance and the measurable achievement of the goals that the funding arrangements were designed to meet.

To ensure that it can meet its accountability requirements, a public entity should keep sufficient records to show what it did, and why. Specifically, the records should show that the public entity:

  • acted within its authority (for example, by documenting in the contract its authority to transfer funds to the NGO in return for the services to be provided);
  • followed central or local government policy to the extent that it is required to do so;
  • followed due process;
  • gave due consideration to each potential service provider;
  • observed the overall principles of equity and fairness; and
  • achieved value for money and optimal benefit to the end user.

The public entity’s records should be readily accessible, both for good ongoing management, and for openness.

Where the funder’s accountability responsibilities rely to a large extent on information provided to it by the NGO, this risk needs to be considered within the accountability arrangements between the public entity and the NGO.

From time to time, we are asked for our views on whether all NGOs applying for, or in ongoing receipt of, public funding should be required to provide audited annual financial statements to the funder.

We consider that this may not be a reasonable or justifiable request in all circumstances. It would not always be feasible, for example, for a small NGO to have its financial statements audited by a member of the New Zealand Institute of Chartered Accountants.

However, there are other forms of assurance that funders could seek from NGOs which would minimise compliance costs for both parties. In any case, public entities should take a risk-based approach to imposing such a requirement on an NGO, and use the principles contained in this good practice guide to inform their decision.

In the event that a public entity decides not to impose such a requirement on an NGO, it should be able to justify this decision.

These sorts of issues should be considered very early in and throughout the funding arrangement.


Public entities should act in a way that is – and is seen to be – transparent.

Transparent management throughout the life of the funding arrangement will ensure that:

  • all parties to the funding arrangement understand and respect their own objectives;
  • all parties continue to understand and observe their obligations; and
  • benefits and value gained early in the funding arrangement are sustained throughout its life.

Openness depends on high standards of reporting and disclosure.1 This has a dual benefit: it demonstrates that the public resource is being used properly, fairly, and effectively to the optimal public benefit; and the communication of risks to the NGO ensures that the NGO properly provides for present and future service delivery.

Value for money

Value for money
Public entities should use resources effectively, economically, and without waste in achieving their policies and end-user benefits.

Effectiveness and efficiency

The value-for-money principle involves several aspects, such as:

  • balancing effectiveness with efficiency;
  • sustaining the funding arrangement (where this is desirable); and
  • demonstrating the competence of the public entity.

A public entity is accountable for using resources efficiently, to avoid wasting public resources. But this does not mean “lowest short-term cost”. Effectiveness and efficiency trade-offs may have to be made. Waste occurs when a service – no matter how cheap or expensive – is ineffective. Effectiveness and efficiency should be balanced to achieve value for money. By “value for money”, we mean the best possible outcome for the total cost, rather than the lowest cost.

As we note in Part 2, the costs and benefits of each arrangement must be evaluated in terms of what the public entity seeks to achieve – just as the public entity needs to assess, at the planning stage, whether an arrangement with an NGO is more or less appropriate than a commercial arrangement.

We expect a public entity to manage any risks to its own interests, and to use arrangements and processes such as monitoring, review, and evaluation to meet its need to demonstrate effectiveness and value for money.

At the planning stage, the public entity should be able to justify how it intends to apply the public funds. Further on in the life cycle of the funding relationship, it should also be able to demonstrate that the policy is having the desired effects, and that the money is not going to waste. If there are unintended outcomes from its policies, the public entity needs to be aware of these, and adapt its funding arrangements to take them into account.

The public entity must also be mindful of the cumulative effects of many small contracts in terms of waste through duplication of administration and monitoring. The public entity does not necessarily reduce risks by “splitting” funding between contracts.2

Tangible and intangible outcomes

It may be easier to justify the funding where outcomes, and the contribution of the funded services to these outcomes, are tangible – such as the specific health or welfare benefits of the services delivered. The choice of funding arrangement in this instance is likely to be contractual, and accountability for the outcome more easily demonstrated.

Nevertheless, the principle that public resources should be applied for the best possible public benefit still applies even where the desired outcome is less tangible. In the case of, for example, a “capability-building grant”,3 the questions “capability for what?”, “was capability improved?” and “how will we know?” still need to be answered.

Where there is less clarity as to the “deliverable”, both the public entity and the NGO may need to give more time during the negotiation stage to arriving at a clear understanding of how effectiveness is to be measured. (This also helps to ensure fairness in the treatment of the NGO.)

Suboptimal provider market

Some public entities operate in less than optimal situations, where there is no market of providers or where those that are available do not have quite the capability or capacity that is required. The public entity needs to acknowledge this, and take action to mitigate any risks that might arise. The actions taken, and the reasons for the actions, need to be documented.

Sustainability of the funding relationship

A public entity should take care that it does not put the continuity of a service unreasonably at risk in its pursuit of the lowest cost. For example, it should not exploit its negotiating position when there is only one potential supplier, or where the NGO relies substantially on its public funding.

A public entity should take into account the possible effects of its funding decisions on the number of NGOs available to supply a particular service, and on their ability to deliver it. The public entity needs to fund the NGO at a rate that is fair and reasonable, and sufficient to sustain effective service delivery for the term of the arrangement, and not jeopardise long-term delivery prospects.

At the same time, the public entity should avoid accepting a “low-ball” or “loss-leading” tender that will not cover the costs, but is submitted to win the tender against a higher cost from an alternative supplier. The other suppliers’ cost estimates may perhaps be more realistically based on effective service delivery.

Competence and effectiveness

Another aspect of effectiveness is the competence of the staff of the public entity. We expect the public entity to be able to demonstrate that its staff members are well-trained and competent to manage public resources effectively.


Public entities have a fundamental public law obligation to always act fairly and reasonably. What public entities do should be open and impartial.

Where there are multiple providers who are capable of delivering the required services on behalf of the Government or local government, the public entity should give a fair opportunity to those NGOs to be selected to do so. This is comprehensively discussed in our procurement guidelines. The principle of fairness has some particular implications for selective (non-contestable or limited contestability) procurement, or where “capacity-building” grants are involved (discussed further in our scenarios in Part 4).

The public entity should also act reasonably in dealings with the NGO throughout the life cycle of the funding arrangement. This has several implications for the public entity. It means managing the tension between accountability, transparency, and high standards of reporting and disclosure on the one hand, and, on the other, managing the effects on the service provider of either compliance requirements or a failure of the policy to have the desired effect. Public entities should consider opportunities to use NGOs’ existing reporting requirements to other public entities before establishing separate accountability requirements for a “new” funding arrangement.

Compliance costs should be reasonable for a small NGO with restricted access to administrative resources, and recognise its commitment to ensuring that every dollar goes to supporting the service.

Monitoring effectiveness

The public entity needs to monitor the effect of its funding initiatives, and consider how everything funded contributes to the outcomes intended by the public entity. It is possible for a service to be delivered according to the funding arrangement in every way, and yet fail to make the intended difference. For example, an NGO may deliver services that change the eating habits of a target population, yet this does not result in reduced obesity in that population. The public entity needs to be able to determine the reasons for the policy failure, and if necessary, adapt or discontinue its funding initiative as a result. The process that the public entity uses to change the funding arrangements, should that be the case, should be fair and reasonable to the NGO.

Change of circumstances

Circumstances may also change which affect the adequacy of the original funding arrangements. For example, there may be circumstances where the initial expectations and agreements about the price for services to be delivered through a funding arrangement – such as those for a new or modified service – are insufficient to cover the “cost” of the services being provided. This may not become clear until the service delivery has begun.

In our view, funding arrangements need to be responsive to changing circumstances, provided that the relevant principles are still met and any decisions to deviate from initial agreements can be justified and are clearly documented.

Imbalance of power

The public entity and the NGO have different amounts of power in the relationship. The public entity is resourced directly by public funds, and influences the policy that underpins the funding arrangement. The NGO may depend on voluntary contributions of time and money, or it may depend on public funding, or a combination of both. It cannot direct the funding arrangement. To be fair and reasonable, the public entity should consider this power imbalance in the way in which it conducts the relationship.


Anyone who is managing public resources should do so with the utmost integrity.

Public entities and NGOs must meet Parliament’s and the public’s expectations of an appropriate standard of behaviour in the public sector. The public entity must ensure that the NGO using the public resources is capable of, and is, managing the resources with a standard of conduct the public expects in the use of its taxes and rates.

A public entity should have policies and processes to underpin the highest standards of integrity – for example, a code of conduct; a policy on fraud. It should require its employees to declare any personal interest that may affect, or could be seen to affect, their impartiality in any aspect of their work. Expectations of conduct of public employees are clear.4

The public expectation about the management of public resources extends to the way that NGOs handle them. Whether the public resources are managed by a public employee or not, the public expects the resources to be managed with the highest integrity and honesty, and not for personal gain. The public entity will need to make this clear within its funding arrangement with the NGO. The NGO also needs to self-manage according to these expectations.

1: Securities Commission (2004), Corporate Governance in New Zealand, Principles and Guidelines, New Zealand.

2: In our report, Inquiry into the Ministry of Health's contracting with Allen and Clarke Policy and Regulatory Specialists Limited (December 2005), we note that a public entity needs to "ensure that consideration is given . to the cumulative value and number of [low value] contracts" (page 7).

3: "Capability- or capacity-building grants" are grants made to providers to enable them to develop their ability to deliver public services more effectively, or to play a more effective role in community development.

4: See the integrity and conduct section of the State Services Commission's website at

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