Should government step in to save charities that fail?

By John Copps 5 October 2010

Recent economic history is a story of fallen giants. The financial crisis and subsequent recession saw a swathe of major corporations put to the sword. But despite the demise of once grand and proud companies, we haven’t (yet) seen a major UK charity fail.

There are lots of reasons why charities don’t collapse in the same dramatic fashion as major corporations, but it isn’t beyond the realms of possibility.

Worryingly, a number of the big charities depend on government for the majority of their income. And with government departments and local authorities facing up to 40% cuts, their business models are looking shaky. Privately, many of the top CEOs must be nervous.

If the worst happens and one of our big charities is in trouble, what happens next?

The starting point is to look for investment, like any business would. In practice this means either a rescue by a major donor, an appeal to the public for funds, or a take-over by another charity. We’ve seen lots of emergency appeals over the last few years to plug funding gaps, for example from Barnardo’s, which was reported on this blog.

But what if this strategy fails? In 2008 when banks were in difficulty and private investors could not be found, governments stepped in. Around the world, banks were nationalised or part-nationalised on the grounds that letting them fail would inflict too much harm on the economy and cause too much human suffering.

This poses an interesting question. Should government bail out a major charity?

It would be a real headache for policy-makers and I guess the answer is that it depends – depends on how important the charity’s work is, how wide its influence spreads, and whether it has a convincing business model to make sure problems don’t happen again. There is precedent of such government help – for example in the case of the ‘rescue packages’ for London-based Kids Company in 2005 and 2007.

We are already know that in a generation’s time we will still be paying for government’s decision to bail out the banks. As the public sector cuts begin to hit, I wonder if we might also end up paying for failed charities too?