Scenario 2: A risk-based approach to funding non-government organisations

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

It is essential that public entities take a risk-based approach to how they enter into funding arrangements with NGOs. This means identifying the type and scale of the risks that exist, and then managing those risks proactively.

Risks range from a lack of clarity about what outcomes are being sought to a lack of capability in the public entity to monitor the arrangement effectively, or in the NGO to deliver what is specified in the arrangement.

A common feature of funding arrangements between public entities and NGOs is the tension between the need for NGOs to be accountable for their use of public funds while not being unduly burdened by bureaucratic reporting requirements that hinder their ability to deliver what the arrangement requires them to. To get an appropriate balance between these 2 often competing demands requires the public entity to take a risk-based approach to its funding of NGOs.

How one Ministry funds domestic NGOs to deliver international aid programmes

In this scenario, the fictitious Ministry for International Assistance (the Ministry) manages the risks associated with funding New Zealand NGOs to deliver international aid programmes.

The Ministry is responsible for managing the government’s overseas development funding. It works within the government’s overseas aid policy framework, and its strategic priorities reflect its commitment to working collaboratively with partners and the international community.

How does the Ministry’s funding scheme operate?

The Ministry funds development programmes through a wide range of NGOs and their overseas development partners. The funding is provided through a co-funding scheme, jointly managed by the Ministry and representatives of New Zealand NGOs, and is focused on supporting community development activity through the agencies that work with New Zealand NGOs in developing countries.

A feature of the funding scheme is that, for most cases, funds are available to match funds that NGOs are able to raise themselves. The more funding an NGO can raise, the more funding is available from the scheme to match these funds, up to specified limits. An NGO must demonstrate its ability to match the scheme’s funds by submitting a statement from its treasurer or accountant, or a copy of a bank draft, or record of a telegraphic transfer.

The funding scheme is managed by a project selection committee consisting of 4 New Zealand NGO representatives and a Ministry representative.1 Overall management rests with the Ministry’s development programme manager, who is also the Ministry’s representative on the project selection committee.

The project selection committee normally makes decisions by consensus, but a vote may be taken when consensus is not reached. Once a decision is reached, all members adopt it as a decision of the whole project selection committee.

How do the Ministry and NGOs work together on the funding scheme?

The funding scheme is based on the guiding principles set out in the Ministry’s policy statement. There is a close correlation between these principles and those identified within the Strategic Policy Framework (a shared agreement that sets out the rationale and guiding principles for relations between the Ministry and NGOs).

The Ministry’s first step in its risk-based approach is to gain the commitment of New Zealand NGOs to take a collaborative approach to achieving the overall outcome of eliminating poverty in target countries. This is because effective working relationships based on trust and a mutual understanding of each other’s roles and responsibilities will reduce the likelihood of problems caused by unrealistic expectations and misunderstandings about respective obligations. In turn, this should increase the likelihood that funding arrangements will work effectively for both parties.

As well as the Strategic Policy Framework, the Ministry provides an NGO Funding Scheme Handbook. In line with the Ministry’s commitment to working collaboratively with NGOs, the handbook, including associated template forms, was produced after extensive consultation between the Ministry, the NGO funding scheme project selection committee, and representatives from New Zealand NGOs involved in the international development sector.

The handbook contains all the information NGOs need in order to apply for funding. The handbook sets out:

  • the policy framework within which funding applications must be made,
  • the application process;
  • the monitoring and evaluation arrangements;
  • criteria against which funding applications are assessed; and
  • template forms for funding applications and reporting and accountability requirements.

Another feature of the funding scheme is that the project selection committee also funds the provision of training workshops to build the capacity of NGOs to participate in effective development activities.

How one NGO gets involved with the funding scheme

This section of the scenario sets out the actions of the Ministry in its dealings with a fictitious NGO, Pacific Aid, in its applications to and dealings with the funding scheme. We explain how the scheme operates and gives effect to our principles and, in particular, describe the concept of a risk-based approach in practice.

Applying for funding

The Ministry receives an application from Pacific Aid for funding for an aid programme focused on generating income on a Pacific island. The Ministry does not know Pacific Aid.

The first step in the process is for Pacific Aid to submit an organisational profile to the funding scheme’s project selection committee, and gain preliminary approval for the profile. This approval is needed before an NGO can submit funding applications to the scheme.

In support of its application, Pacific Aid submits to the project selection committee a letter requesting accreditation to the NGO funding scheme, a completed organisational profile, a copy of its constitution, its most recent annual report, and most recent audited financial statements. Approval depends on an NGO demonstrating that its activities are consistent with the funding scheme’s development principles and criteria, and that it has the financial and management capability to assess, manage, and report accurately on projects for which funding is received.

This requirement enables the Ministry to ensure that any NGO it may fund is legitimate. The Ministry can therefore mitigate the risk of funding an organisation that is either unlawful or unlikely to be able to effectively deliver its obligations under a funding arrangement.

If the organisational profile is not accepted, the committee will have to explain its reasons for non-approval to Pacific Aid, and Pacific Aid will have the opportunity to appeal the decision.

Preliminary approval enables an NGO to apply to the scheme for funding for specific projects it wishes to deliver – this is called non-block2 grant funding. Full approval depends on an NGO successfully applying for funding and reporting on its activities over a 2-year period. Once full approval is received, an NGO is able to apply for block grants.

Having gained preliminary approval from the project selection committee, Pacific Aid then applies to the scheme for funding for the income-generation project it wishes to deliver. The Ministry sends Pacific Aid copies of the handbook, and a comprehensive funding application form.

The application must include information about the nature of the proposed project, including its goal and objectives, the rationale for the project, its expected duration, and who will benefit from it and how. The application must also include a detailed forecast budget for the project.

The project selection committee considers and approves the application for funding for Pacific Aid’s proposed income-generation project, and recommends to the Ministry that funding be provided. If the committee had decided the application had insufficient supporting information, it would have requested further information from Pacific Aid, which would have been reconsidered by the committee at a later date. If the application had been declined, Pacific Aid would not have been able to reapply for that particular project again within the same financial year.

In considering an application, the project selection committee highlights any problems or potential weaknesses it identifies about a project. Future applications from an NGO are checked against the funding scheme database to see if any problems (such as the late submission of reports) may have arisen in the past. In this way, the project selection committee is able to monitor the performance of NGOs, identify any issues or risks specific to the NGOs, and take action accordingly.

NGOs must submit an application form for each individual project during the first 2 years of participating in the scheme.


NGOs are responsible for ensuring that the funds they receive are used and accounted for in keeping with the funding scheme criteria, and for the purpose for which funding was approved.

The funding scheme handbook includes templates for the types of reports that NGOs must submit at specified times during, and at the end of, a funding agreement.

Under the scheme’s funding arrangement, Pacific Aid is responsible for ensuring that its project partners are aware of the scheme’s reporting requirements, and are prepared to provide the information needed to meet these requirements.

The reports that Pacific Aid submits include a detailed breakdown of actual expenditure against the budget included in the original funding proposal. Pacific Aid is also required to submit a report for its project within 15 months after the release of funds. The funding scheme withholds further funding until all reporting requirements have been completed satisfactorily.

The project steering committee must be notified of any changes to the project if what is being delivered differs from what was originally approved. Approval by the committee is required for any substantial changes.

Multi-year funding

Development projects can be large-scale and complex, and may take several years to complete. The NGO funding scheme recognises this, and multi-year funding is available to provide more flexibility to achieve objectives for a period of up to 5 years. Applications for multi-year funding must include a detailed monitoring and evaluation plan, to form the basis of the annual reports that are required throughout the life of the project. A full report must be submitted at the end of these projects.

Approval for multi-year projects is given in principle only, with funding for future years depending on the Ministry’s annual appropriations from Parliament, and on the satisfactory performance of, and reporting from, an NGO during the first year of a multi-year project.

The reports describe the progress made against objectives and expected results, any issues or limitations that had changed or were likely to change the activities from those originally approved, and actual against budgeted expenditure.

Block grants

In the first 3 years after its initial application, Pacific Aid applies for and receives funding for 4 income-generation projects in the Pacific. It meets all of its reporting requirements for these projects. Having proved its ability to interpret and implement the funding scheme’s criteria, to distribute the funds efficiently, and to report satisfactorily on its activities over a period of at least 2 years, Pacific Aid receives full approval from the project selection committee.

This means that Pacific Aid is eligible to apply for an annual block grant allocation, instead of having to apply for each individual project or programme. The block grant system has several advantages for the Ministry, the project selection committee, and NGOs. The system:

  • has greater flexibility than the non-block grant system (which requires NGOs to apply for funding for each individual project);
  • enables a quicker and easier response to the needs of partners in developing countries; and
  • promotes an ongoing partnership that is more consistent with the long-term nature of development activities.

Receiving a block grant enables Pacific Aid to decide which projects to support from its block grant, rather than having to apply for funding for each and every project.

In effect, through the block grant mechanism, the funding scheme delegates the project selection role to those NGOs in which it has confidence. The scheme requires such NGOs to report to the project selection committee on how they have used the grant.

To apply for a block grant, an NGO must be fully approved by the project selection committee, have well-managed financial and management systems, have project identification, appraisal, monitoring, and evaluation systems in place, and be able to demonstrate its capacity to provide matching funding for projects from its own funds. In addition, the NGO is required to participate in an organisational review including an overseas partner visit.

There are 4 levels of block grant funding, the first of which is up to $500,000. NGOs are able to move up to the next level of funding after 2 years of having reported satisfactorily against these projects, and having demonstrated successful operations during this period.

To do so, NGOs must complete an application form that includes another self-assessment of its performance against the funding scheme criteria. The self-assessment also includes an overview of an NGO’s previous development activities, and evidence of its successful operations within the funding scheme framework.

If the project selection committee considers that an NGO has not adequately met some criteria (for example, failing to report on time, or an unsatisfactory self-assessment) then it will take this into consideration when it decides whether or not the NGO can move to the next funding level. The failure of an individual project will not, in itself, be a reason to decline further funding.

Every year, each NGO that receives a block grant to undertake projects (of less than $200,000 for each project) is required to submit detailed reports on up to 5 projects funded by the scheme. Additional detailed reports may be required for institutional reviews or impact evaluations. These progress reports include actual expenditure against budget for each of the projects under review.

Monitoring and evaluation

The primary basis of accountability for the scheme’s funds is the submission by NGOs of regular reports to the project selection committee. The committee also conducts institutional reviews of recipients of the scheme’s funds, as highlighted in the Funding Scheme Handbook and specified in the funding agreement.

Regular users of the funding scheme are subject to institutional reviews every 3 to 5 years to ensure that funds are being used in line with scheme’s criteria. The purpose of the institutional review is to assess an NGO’s management, financial, and project systems as they relate to receiving and managing the scheme’s funds. The focus is on confirming compliance with the scheme’s requirements, and the capacity of an NGO to meet the scheme’s standards.

The type of review conducted depends on the amount of funds accessed by the NGO. The reviews can include desk reviews of documentation, site visits to New Zealand NGOs, and visits to selected developing country partners. Institutional reviews are conducted by teams appointed by the project selection committee, and involve the New Zealand NGO and its overseas partner.

In addition, mechanisms for operating the overall funding scheme, such as the processes used by the committee, are evaluated every 5 years.

The scheme places much emphasis on self-evaluation with appropriate external verification.

When problems occur

The funding scheme recognises that there are risks specific to development work. These risks include the development partner itself being a high risk because of:

  • the political, social, or economic situation that it operates in;
  • the remoteness of project sites, which can make communication between the New Zealand NGO and the overseas partner difficult;
  • reliance on a certain individual within an NGO; and
  • the partner’s limited financial management ability.

Generally, the funding scheme aims to promote innovative projects to address development needs. It recognises that it is important that NGOs are not deterred from funding projects that are potentially risky and, accordingly, sets out in the handbook some of the ways NGOs can approach such projects. Central to this approach is the need for clear and regular communication between the NGO and the project selection committee to ensure that both parties are fully aware of the nature and potential scale of risk involved.

If it becomes evident that an NGO that receives a block grant is having difficulty using the funds effectively, the project selection committee will discuss with the NGO ways to address the situation. The committee may request a detailed report from the NGO, and may initiate a review that involves visiting the NGO in New Zealand, overseas, or both.

An NGO will usually be given the opportunity to put right any problems identified within an agreed timetable. If little or no progress is made, then the committee may remove the NGO from block grant status and advise the Minister of this decision. In cases of fraud or serious negligence, the NGO may have its block grant status removed immediately, in keeping with the Ministry’s policy on fraud and its code of conduct.

The project selection committee can require an NGO to repay funding if the intended objectives of a project are not going to be delivered.

A specific risk is that funds may be allocated to activities that fall outside the funding scheme criteria. An approach to managing this risk has been to ask the NGO community to develop guidance designed to reduce this risk, and to then incorporate the guidance into its own funding policy.

When this situation has occurred in the past, the project selection committee has written to the NGO and its in-country partner to raise the issue, and also to increase its understanding of the issue in the context of its ongoing relationship with the NGO. In addition, the issue has been noted for the team that was due to conduct the next scheduled agency review of the NGO concerned. On occasions when the risk was deemed to be significant, the NGO has been reviewed sooner.

When this situation has arisen, the project selection committee has also:

  • invited the NGO to attend a project selection committee meeting to discuss the project selection committee’s concerns;
  • provided the NGO with considerable feedback on issues and clarification of the reason for project selection committee decisions;
  • placed the NGO on a heightened reporting regime; and
  • lightened the reporting regime, but maintained it at a higher level than usual, once the project selection committee was satisfied that the NGO had taken action to address its concerns.

In instances where an NGO has not been able to ensure that its in-country partners have been undertaking activities provided for within the funding scheme criteria, funding from the scheme for projects involving those partners has been stopped.


The funding scheme takes a risk-based approach to how the Ministry enters into funding arrangements with NGOs. For well-established and proven NGOs, there is less need for intensive monitoring and oversight. Reports are still submitted by, and reviews undertaken of, these NGOs, but less regularly than for those funding arrangements with NGOs that are not as well known to the funding scheme.

Given the high number of NGOs active in development work, and the number and range of funding arrangements supported by the funding scheme, it is not possible for the project selection committee to have close oversight of each and every project that is supported under the scheme. Therefore, if the project selection committee is confident of the ability of an NGO to understand and apply the development principles and the scheme’s criteria, and of its capacity to manage projects effectively, it hands over the role of assessing and approving projects to the NGO.

This is a pragmatic approach to managing and prioritising the risks associated with distributing public funds to NGOs. It relies on gradually setting up effective working relationships between the funding scheme and NGOs receiving block grants. It also relies on the monitoring and review processes put in place to assure the Ministry that the delegated project selection mechanism is working effectively.

1: The NGO representatives are elected by the NGO community for a 2-year term, and can serve a maximum of 2 terms. The Ministry representative has full speaking rights, but can vote only when a casting vote is required.

2: Non-block grants are grants for individual projects. Block grants are distributed to NGOs that then decide which particular projects to support.

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