Kids Company collapse: ministers should not have over-ruled civil service advice over £3m public grant, say MPs

Report by the Public Administration and Constitutional Affairs Committee says that final round of funding to the beleaguered youth charity — subject to a warning from then-Cabinet Office perm sec Richard Heaton — "should not have been authorised"

By matt.foster

01 Feb 2016

Cabinet Office minister Oliver Letwin (pictured) should not have over-ruled his most senior civil servant in deciding to grant fresh public money to the now-collapsed Kids Company charity, MPs have concluded.

Kids Company, which worked to support vulnerable inner-city youth, folded in August last year, soon after receiving a final government grant of £3m. The grant, which was the latest instalment of around £42m in public money received by the charity since 1996, was handed to the organisation in spite of Richard Heaton, the then-Cabinet Office permanent secretary, raising his concerns over its financial arrangements.

In a scathing report published on Monday, MPs on the Public Administration and Constitutional Affairs Select Committee (PACAC) criticise the charity’s trustees, as well as the auditing firms hired to look into its accounts and the government departments who awarded money to the organisation over the years.

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The committee concludes that “primary responsibility for Kids Company’s collapse rests with the charity’s trustees”, saying that they “allowed the charity’s weak financial position to persist” and “failed to protect the interests of the charity and its beneficiaries”.

Auditors hired by government to look into the charity’s financial position were also “overconfident” in its internal controls, the MPs say, while a 2013 Cabinet Office review conducted by the firm PFK Littlejohn “did not assess the organisation’s sustainability” and “proved to be of little value in assessing the effectiveness of the organisation’s governance”.

In the section of the report focusing on Whitehall’s relationship with the charity, PACAC says that Kids Company benefited from “unique, privileged and significant access to senior ministers and prime ministers throughout successive administrations”, and argue that this access may have clouded official judgement.

Both Heaton — the former Cabinet Office permanent secretary who now heads up the Ministry of Justice — and Chris Wormald, perm sec at the Department for Education, told the inquiry that they “did not feel under political pressure to approve funding to Kids Company”, the report notes.

But PACAC says that the “high level of access and favour” shown by successive governments to Kids Company created “a potentially difficult atmosphere for any criticism of the charity”, and says the charity’s chief executive Camila Batmanghelidjh “appeared to captivate some of the most senior political figures in the land”, meaning that “objective judgements” about the charity’s effectiveness and resilience were “set aside”.

It adds: “The government’s relationship with Kids Company was forged outside the usual decision-making processes of Whitehall departments and there is little doubt that the high profile support of successive prime ministers for Kids Company had an impact upon decision-making across Whitehall.

“This included the authorisation of multiple grants outside of the normal competitive process […] Other charities have said that they are angry and cynical about how one or two charities gain unfair advantage, and that the approach of successive governments towards Kids Company has damaged their confidence in government.”

”Against official advice”

The final £3m grant to the charity, to which Heaton objected, came soon after a £4.265m grant had been made in April 2015 on the basis that the organisation would put in place an overhaul of its financial arrangements. Heaton’s letter to ministers made clear that he did not feel the charity had met the conditions that had been agreed for the April funding, and said he had only “limited confidence that Kids Company will successfully implement the changes they describe in their new restructuring plans while meeting the stringent conditions set out in the proposed new grant”.

However, ministers Oliver Letwin and Matthew Hancock ordered the department to proceed with the grant, a decision that comes in for particular criticism by the committee.

They say: “We are concerned that the Cabinet Office was prepared to hand over money, on a minister’s say so against official advice, to an organisation in which serious allegations had not been fully investigated.

“We are not convinced by Mr Letwin’s assertion that the planned changes to the charity’s leadership rendered the allegations under investigation irrelevant. It was an error for the government to release a second 'final' grant to a charity with a history of financial mismanagement, and in which the new trustees and, as yet unidentified, permanent CEO had not yet proved their competence or commitment to making serious changes to the organisation’s ethos and practices.

“We recommend that in future no department should hand over money to an organisation in which serious allegations have not been fully investigated.”

The committee says Letwin failed to provide a “convincing justification for his and Mr Hancock’s decision to ignore the comprehensive advice of senior officials”, concluding that the payment “should not have been authorised contrary to advice”.

Responding to PACAC’s findings, Letwin said: "As I said to the committee I believed it was the right thing to do to give this charity one last chance to restructure.

"We will of course pay careful attention to this report and in light of what we now know about Kids Company we will be reviewing our grant-giving process.

"Charities across the country do important work transforming people’s lives and strengthening communities, and they are well placed to deliver publicly funded services. "By updating the process by which grants are awarded we will make sure the most stable, most effective charities receive taxpayer funds."

Batmangelidjh herself has dismissed the report as "a product of bias and rumour", while former trustees have accused MPs of hiding behind parliamentary privilege to issue conclusions that would otherwise be subject to legal action. 

Capability call

Among the committee’s recommendations for the future are a focus on improving the civil service’s own ability to audit charities rather than relying on outside firms. Bolstering Whitehall’s ability to scrutinise charities would, they say, allow government to “exercise its own judgement about whether a charity’s governance, quality of decision-making, objective setting and culture are effective, and if its internal controls are sufficient”.

PACAC also warns that regulator the Charity Commission, which has a legal duty to prevent mismanagement of charity funds, is “currently undermined by limits in its powers and resources”, and call on government to “address these shortcomings to ensure that the Charity Commission can effectively regulate charities and maintain public confidence in the sector”.

Launching the report, Committee chair Bernard Jenkin said that while PACAC had heard evidence of the "valuable work Kids Company did with some very vulnerable clients", the organisation's collapse presented an "extraordinary catalogue of failures of governance and control at every level".

He added: "Despite lacking robust evidence about the quality of the charity's outcomes, value for money or governance, Kids Company attracted high profile support from senior ministers throughout successive governments, and tens of millions of pounds of public money have been handed to the charity over the course of its existence.

"Government and regulators must learn from this. Proper mechanisms must be put in place to allow dispassionate, transparent, accountable decisions to be made about charity funding and regulation in the future."

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