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BIG LOTTERY FUND ADVICE NOTE May 2008

Options for structuring and managing Dormant Bank and Building Society Account money in Scotland.

Introduction

The Dormant Bank and Building Society Accounts Bill will create the legal and administrative framework for the distribution of money from cash accounts that have been dormant for fifteen years or more. This money must be distributed to the third sector, for social and environmental benefit. The Big Lottery Fund will be the body responsible for distributing this money across the UK.

The Scottish Council for Voluntary Organisations (SCVO) hosted a national scoping seminar on behalf of the Scottish Government on 13 May 2008. Participants - drawn from across the third sector - were interested in how this new resource could be managed to generate ongoing benefit and impact in and for the third sector. They suggested that non-traditional options should be considered in the development of the fund, so that it could be used by and for the sector as a unique source of investment.

The following paper briefly describes how this money might be managed and delivered by the Big Lottery Fund in Scotland. It has been written to help inform the consultation process during June-August 2008.

The Big Lottery Fund is able to distribute funding in three ways: through grants, loans or contracts. Dormant Account funding might be delivered through one, more or a combination (eg, a trust that makes loans or grants) of these mechanisms.

1. Grants - simple model

Grants can be made as a one-off payment (for obvious reasons, this is rare) or can be paid by instalments over a set period or number of years. The Big Lottery Fund in Scotland has made grants between £500 and £8 million through Awards for All and its current Investing in Communities portfolio.

Grants are usually made under an agreement, which makes payment to recipients subject to their meeting specified conditions. For example, conditions may set milestones that require recipients to carry out certain activities, produce outputs or achieve outcomes within a certain timescale, to defined quality levels. The payment of grant instalments can be linked to these conditions. This gives the grant giver some control over what the grant is used for and how successful the funded project might be in achieving its objectives and outcomes. If the grant is large and for a capital project, the funder may also take out security over the project. If a grant term is breached, the funder can then require the grant to be paid back.

There can be open competition for grants. Placing eligibility limits can refine competition. Alternatively, specific organisations can be invited (or solicited) to apply to receive grants. Also, for strategic reasons, the total amount available in grants can be allocated provisionally against, for example, geographic or subject areas so that the available funding can be spread over a particular geographic area or range of themes.

Grants can be made directly to a recipient for a project which the recipient will carry out themselves, or they can be made to a recipient who will then be responsible for distributing the grant amongst a number of projects, which the recipient manages.

Decision-making

The Big Lottery Fund has utilised a variety of decision-making models, including publicly appointed general committees (such as the current Scotland Committee) or specialist panels or committees. Other mechanisms can also be employed to inform decisions on applications for grants. For example, BIG set provisional allocations for the maximum amount of money that each local authority area in Scotland could receive from its Young People's Fund. With the help of partners, BIG established young people's panels in all 32 local authorities. These panels were made up of young people who lived in the area and provided views on whether applications submitted in their areas fitted with what they considered to be the priorities and needs of the young people who lived there. The panels also suggested what priority should be given to applications. All applications received were submitted to the national Young People's Fund Scotland Committee for decision. Young people aged between 11 and 25 formed the majority on the national Committee.

Another mechanism adopted by BIG, this time with its Better Off community drugs rehabilitation programme, was again to set provisional allocations for each Drug Action Team (DAT) area and to have the DAT endorse and rank the applications received in their areas before they were submitted to a national committee for decision.

BIG has also involved the public in deciding which projects should receive funding. The People's Millions programme allowed the public to vote by telephone for projects that they thought should be funded. BIG is currently working with BBC Scotland on the Primetime initiative, where BBC Scotland viewers and listeners will vote by telephone for projects for older people.

2. Grants - Trust Model

A grant can be made to set up a trust. A trust is set up when the funder makes a single grant to a recipient, and the grant is held 'on trust' to be used as an expendable endowment over a set number of years. This means that the grant should be invested to produce an ongoing income, and the trust deed (the governing document which stipulates the use of the funding) will set out a date by which all the investment and income must be spent. The recipient may be an existing or a new charitable or non-charitable organisation, acting through its trustee or trustees. Wider benefits of this model may be generated through the type of investment chosen (eg, in renewable energy projects or ethical investment options).

An advantage of trust funding is that it provides both the funder and the trustee or trustees with a relatively high degree of financial certainty for a longer period (usually, a minimum of 10 years). It may also mean that the funder might not be asked to provide the organisation administering the trust, or the projects which the trust supports, with further revenue support in the longer term. And having undertaken a thorough assessment process, including due diligence checks, the funder can be confident that it has entrusted its investment to a 'can-do' organisation that will deliver the outcomes set for it in the trust deed.

A trust is subject to additional regulatory controls imposed by charity and trust law, which govern the activities of the grant recipient, as well as to the funder's terms and conditions of grant. These external regulatory controls may give the funder sufficient comfort to apply fewer terms itself. However, when funds are held on trust, they are effectively ring fenced for the purposes set out in the trust deed, and cannot be used for any other purpose (eg, including the settlement of debts of the recipient), which are not attributable to the trust.

An advantage for the recipient of a grant made by way of an expendable endowment is that it perhaps gives the recipient the opportunity to develop different or more diverse types of projects over a longer-term timeframe, while acquiring new skills and confidence for itself. Recipients may also be able to attract new sources of funding and act as trustee of a number of separate trusts, even though the objects of each trust might be different.

Example

The Big Lottery Fund in Northern Ireland is currently establishing its Building Change Trust. It has £10 million available to make one grant as a ten-year expendable endowment. The grant must be invested to produce an income, and BIG will require all the investment and income to be committed between 2008 and 2018.

BIG believes that the creation of a new Trust offers the greatest potential for this funding to be used in imaginative and innovative ways. The aim for the Building Change Trust, and for the work it supports, is to build the capacity of the voluntary and community sector by equipping it to meet the changing needs of disadvantaged communities in Northern Ireland. The Trust will have the ability to fund and support change in the voluntary and community sector, beyond a traditional grant making approach. It is anticipated that the Trust will build on the work, skills and expertise of existing organisations to reshape, restructure and modernise the voluntary and community sector and provide a legacy that extends beyond the life and scope of lottery funding. The Building Change Trust should have a transformational impact on the voluntary and community sector and disadvantaged communities in Northern Ireland.

3. Loans

A loan is the temporary provision of funds to a borrower at a zero or some other rate of interest, and with an agreed and legally binding repayment schedule.

Some of the advantages of providing loans are:

· They allow available funding to be stretched further since funds can be revolved and become available again later down the line to support other projects;

· There is evidence that loan finance is more effective than grants in helping organisations lever income to attract future funding;

· They enforce a financial discipline that can encourage sustainability;

· There can be 'added value' in providing grants and loans, for example, through providing a package of grant and loan funding, or providing loans to organisations already in receipt of grants;

· They are increasingly being looked upon as the most appropriate means of supporting the development and expansion of voluntary and community sector (VCS) activities that are expected to generate an income stream, and social enterprise activities in particular;

· They may encourage organisations to use different types of finance, and thereby to be more self-reliant in the longer term and less reliant on grant support.

The main risk attached to giving loans from a funder's point of view is that the recipient cannot pay it back. Also, not every organisation (especially in the third sector) will be able or willing to take on loan finance.

4. Contracts

Funding may also be distributed, for a number of purposes, by way of contracts. In this mechanism, the funder procures or contracts for services or activities from one or more organisations. Although procurement processes can be complex and comparatively lengthy, contracts can give a funder a degree of flexibility not available through the other mechanisms. Contracts can be individually tailored, and managed and varied over time. They can specify a wide range of deliverable outcomes, activities or products.

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