Public bodies: governance and funding

Public bodies are subject to complex rules governing the decisions they can make and their interactions with ministers. These vary, but some elements of their governance are common to most or all bodies. This explainer describes how public bodies' objectives are set, and the funding and other constraints within which they must operate.

How are objectives set for public bodies?

A public body’s objectives and policy goals are generally set by ministers, supported by the ministerial department that sponsors the body. Ministers can set expectations informally by meeting with the chair or chief executive of a body, but will usually also send them an annual ‘chair’s letter’.^[1] Formal objectives are included in its ‘framework agreement’ (see below) and are also subject to ministerial approval. Setting objectives is a key way for ministers to pursue the outcomes they want to see, and creates a benchmark against which to assess the body’s performance.

While most public bodies do not set their own policy, non-ministerial departments are an exception. Because they are not subject to direct oversight from their sponsor department, their chief executives can make policy decisions themselves, although generally within pre-agreed (for instance statutory) limits.

Who is responsible for meeting these objectives?

Responsibility for day-to-day decisions within a public body sits with its most senior executive staff member (usually the chief executive) who is designated as the ‘accounting officer’.^[2] They sign off on key decisions, including on spending, and can be held directly accountable to parliament for their organisation (alongside the ‘principal accounting officer’ to whom they report in the sponsoring department).

The accounting officer is ultimately responsible for any major failing in a public body, unless they have been overruled by their departmental permanent secretary or – where it can do so – their board. In public corporations, the accounting officer role does not exist and instead the government has a shareholder relationship with the body.

While the ‘executive’, or full-time, staff of a body are responsible for day-to-day delivery, most public bodies also have a board made up of executive and non-executive directors,^[3] which scrutinises the decisions of the executive staff and sets the body’s strategic direction. In cases where the board and the chief executive disagree, if the board has official fiduciary duties (for instance in public corporations) they can make the final decision. For boards which are only advisory, for instance those of executive agencies, the accounting officer’s decision must ultimately prevail, though any disagreement should be documented.^[4]

What constraints must public bodies operate within?

Many public bodies have duties set out in legislation, which may set statutory expectations of what they are expected to deliver, how they should make decisions or what their governance arrangements should be.

Each public body also has a ‘framework agreement’, negotiated between the department and the body, which sets out their governance.^[5] This document, which is normally public, explains the purpose and responsibilities of the organisation, its legal basis and how it should work with its sponsoring department, including the information it should regularly provide to it.^[6] Framework agreements also set out the degree of operational independence of the body, how performance targets will be set, and what will happen if they are not met.^[7] The agreements should be updated at least every three years to reflect any changes to the body’s remit or governance,^[8] although this does not always happen.

Accounting officers are designated  through a letter of designation from the departmental permanent secretary,^[9] which sets out how the accounting officer should act and the circumstances in which they may be removed. Chief executives are also expected to comply with Managing Public Money, the Treasury guidance that lays out the principles of accountability and decision making on spending across government.^[10] And any spending by public bodies should be decided on and monitored in line with the Treasury’s Green Book, which sets out how the costs, benefits and trade-offs between alternative implementation options should be appraised.^[11]

Like all government spending, public body spending in certain areas is subject to approval from the Cabinet Office or the Treasury to avoid “unnecessary expenditure” by bodies.^[12] Organisations must gain Cabinet Office approval before any spending over a certain threshold on marketing and communications, external consultants or redundancy payments, for example.^[13] Treasury approval is required for any novel or contentious spending or to impose any new fees and charges which have not already been set out in a body’s spending delegations (see below).^[14] The Cabinet Office and Treasury must also consent to the creation of new public bodies, and the former must be consulted on any change in the classification of a body.

How are public bodies’ budgets set?

Public bodies’ budgets are generally set by departments from within the departmental estimates approved by parliament each year. The main exception to this is non-ministerial departments, such as Ofgem or HMRC, which have their own estimates.^[15] Funding passed on to bodies that are more administratively distinct from the department – particularly non-departmental public bodies – may take the form of ‘grant-in-aid’ funding, which can be spent on anything within the body’s remit, or a direct grant for a specific purpose.^[16]

Although formally the Treasury must consent to all spending by departments and their public bodies, even within the approved departmental estimates, in practice it provides ‘delegated authorities’ to departments that set out parameters within which they may make individual spending decisions. These delegations must be reviewed annually.^[17] In turn, departments issue delegation letters (copied to the Treasury)^[18] to the public bodies they sponsor.

Many public bodies partly or fully fund their work through fees or charges for the services they provide. For example, in the year ending March 2020, public bodies like the Housing Ombudsman and the Competition and Markets Authority operated at no net cost to the taxpayer.^[19] The default in setting fees and charges is that government passes on the full cost of providing services. If a public body charges more or less than this cost for its services, the difference is categorised as either a tax or a subsidy and requires parliamentary consent.^[20] Generally only the net spending of a public body is recorded in the departmental budget.^[21]

The extent to which public bodies are involved in funding bids to the Treasury can vary by body and by department, but the Treasury takes a close interest in how departmental budgets are used and will expect to see a robust business case for significant allocations to public bodies.