Ministers backed a £3m grant to the Kids Company charity in spite of concerns from the Cabinet Office permanent secretary that to do so would not represent value for money, according to newly-published letters.
Earlier this month, Kids Company founder Camila Batmanghelidjh claimed that the government had attempted to "silence" her in exchange for £3m of extra financial support to try and shore up the organisation's finances.
The charity – which works to support vulnerable inner-city children, and says it has been hit by a fall in public donations while demand for its services has been increasing – subsequently confirmed that Batmanghelidjh would be moving to an advocacy and campaigning role.
It has now emerged that Cabinet Office permanent secretary Richard Heaton (pictured) sought a rare "ministerial direction" over the grant, writing to Cabinet Office ministers Matt Hancock and Oliver Letwin to raise his concerns. Hancock and Letwin then ordered Heaton to proceed with the grant, citing "clear conditions" that would be placed on the fresh funding.
The government says the direction to the perm sec has been made "on a contingent basis" and "will be actioned only when the detailed grant conditions are agreed with Kids Company".
"Limited confidence"
According to Heaton's letter – published on GOV.UK on Thursday night – the charity had already received a government grant of £4.265m in April, which included a stipulation that it would be the last payment of the financial year and would encourage Kids Company "to move to a more financially sustainable model".
Setting out his concerns over the progress made, Heaton wrote: "The government has a long history of making grants to Kids Company, and I recognise the good work that the charity does with vulnerable young people.
"But the fact remains that, to date, they have not met the conditions that they agreed to in April. More generally, the experience that this department [the Cabinet Office] has of the charity's management and capacity gives me 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.
He added: "It is therefore my judgement that the proposed additional £3m grant does not represent value for money, in terms of delivering the outcomes for which the department is funded by parliament."
As accounting officers for their departments, permanent secretaries have a duty to ensure that spending decisions meet four key tests – "regularity", "propriety", "value for money", and "feasibility".
If a perm sec believes a policy decision may contradict one of these aims, they are required to write to a minister asking for a formal "direction to proceed" – essentially noting their concern and seeking permission to continue regardless. That exchange of correspondence is then forwarded on to MPs on the public accounts committee, the NAO public spending watchdog, and is published online.
Heaton's letter seeking direction concludes: "I recognise that the judgement rests on how confident we can be in Kids Company's willingness and ability to transform itself radically. If your view is that we should nevertheless proceed with the additional grant, I will proceed accordingly but require your written direction to do so. I will then ensure that your instruction is taken forward without delay."
"Confidence"
Letwin and Hancock responded to the permanent secretary three days later, saying that while they were "grateful for the work the department has put into investigating this urgent issue" they wished Heaton to proceed with the grant because they believed the charity's reform plans were viable.
"We have noted your concerns about the confidence we can place in Kids Company's ability and capacity to restructure in a way that will secure its long term viability, based on the department's previous experience, and therefore the value for money of making this payment. But equally, we are very mindful of the inspirational work that Kids Company does with young people, for which reason the government has contributed to it for several years.
"We also take confidence from the changes that Kids Company has undertaken to make in terms of its leadership, management and governance, which we judge do give it a realistic prospect of long-term viability so it can continue to deliver for vulnerable young people."
They added: "We have therefore decided that the department should proceed with providing additional funding of £3m to the Kids Company, and direct you to proceed accordingly. We have agreed between us a set of clear conditions that will be placed on this funding, which we believe will help to protect government's additional investment."
Letters of direction
Heaton is the second permanent secretary to request a letter of direction since the election. In June, Martin Donnelly – perm sec at the Department for Business, Innovation and Skills (BIS) – raised value-for-money concerns over a plan to gift extra shares to Royal Mail staff. He was ordered to proceed with the plan by BIS secretary Sajid Javid.
Recent research by the Institute for Government (IfG) found that the use of ministerial directions was rare, with just 50 sought between 1990 and 2013. According to the IfG, almost three-quarters of the directions issued by ministers came after concerns were raised by officials over the value for money of spending plans.
Earlier this month, it was announced that Heaton would become the new permanent secretary at the Ministry of Justice, stepping into the post vacated by the retiring MoJ perm sec Ursula Brennan. His Cabinet Office job will be taken on by civil service chief executive John Manzoni when Heaton moves to the MoJ at the end of July.