The report said that while the Home Office co-ordinates the government’s efforts to engage third sector organisations, the quality and timeliness of its data on the level of public funds invested should be improved. Third sector activity is estimated to account for around £2bn of central government expenditure in the 2001-2002 financial year, but departments do not have consistent methods of categorising this expenditure making collation of more accurate data difficult, the report found.

The report said that while the government had been making efforts to implement recommendations made in the 2002 Treasury Review of improving funding practices relating to the third sector, there were still a number of issues causing difficulties. These included full cost recovery not being embedded; annual funding still being common; and funders’ monitoring processes not always being proportionate to the funding and nature of the services provided.

However, it said progress had been made in some areas including payment in advance of expenditure being more common than in past, and improved application processes for organisations seeking funding.

The report also laid out a number of steps which the Home Office, working with the Treasury and all government departments, needed to take to improve engagement with the third sector. These included:

• identifying and promoting beacon funders at all levels of government to act as centres of expertise and help spread good practice
• developing joint or shared teams across departments to deal with third sector service providers
• training staff to specialise in working with the sector and encouraging secondments to the sector
• making all relevant guidance to funders, whether produced by government or outside experts, available from a single source to provide a web-based ‘virtual university’ for funders
• seeking through training and co-operation greater trust between the government bodies and the third sector so that real partnership can be created and inform the relationships between funding and service suppliers

Commenting on the report’s findings, Sir John Bourn, head of the NAO, said departments needed to be clear of their objectives when engaging with the third sector, whether this meant buying a service, supporting a worthy cause or building capacity in the sector, and adapt their approach to funding accordingly.

“Developing shared centres of expertise across departments would enhance effectiveness in working with the third sector through, for example, application of specialist procurement skills,” he said. “They would also assist in streamlining monitoring processes and building relationships based on trust and professionalism thereby securing the full contribution which the third sector can make.”

The National Council of Voluntary Organisations (NCVO), which was commissioned by the NAO to research the experiences of the sector to help inform its report, responded by welcoming NAO's commitment to include the experiences of the sector in the project.

"It is only by listening to both sides of the story that we can properly understand what progress has been made, and what more needs to be done," said NCVO's chief executive, Stuart Etherington. "Both government and the sector need to act to improve the funding relationship. It now simply requires the commitment, on both sides, to deliver this."

Off the back of its work with NAO the NCVO has launched a report, Shared aspirations: the role of the voluntary and community sector in improving the funding relationship with government, which highlights the issues that emerged from the research.

The full report can be found on the NAO's website. Visit www.nao.org.uk
Copies of the NCVO report are available from 0845 458 9911 or publicationsorders@ncvo-vol.org.uk