Bright coloured umbrellas with cafe tables underneath and a man riding a bike

Making regional development grants good policy as well as good politics

Our Thinking | insight



11 Minute Read


Share insight

Idea In Brief

Time for a rethink

We need to rethink how grants are given to regional communities, which will involve helping the public service become more sophisticated in its grant-making practices.

Several problems

Grants programs can have several problems, including poorly defined objectives, small budgets leading to heavy administration and an inability to measure outcomes.

Five essential elements

We have identified five elements that are essential for grant programs: empower local communities, low-touch administration, flexible approach, understanding community benefit and minimum-share funding.

Across Australia, local governments provide facilities to build and maintain connected communities, ranging from sporting venues to art programs, youth centres and skate parks.

While some local governments in affluent areas have the funds to deliver these facilities, other local governments, particularly in regional Australia, lack the required revenue base. The solution to this inequality usually involves the Commonwealth and state governments using grants to distribute funds to regional communities in need.

But this has proven problematic, with political meddling and poor grant administration casting a shadow over the otherwise valid use of public funds. These problems have attracted significant public attention, undermining confidence in the integrity of grant-making.

Less noted, however, has been the fact that distributing small parcels of ad hoc grants has made it harder for local governments to achieve regular or repeated grant funding. The lack of funding certainty makes it harder for local government to make long-term capital plans.

Drawing on our significant experience working with grant providers and recipients, as well as in regional development, we have identified the key problems with grant programs, and then identified what can be done about it.

We argue there is a need to rethink how grants are given to regional communities, which will involve helping the public service become more sophisticated in its grant-making practices. Done right, the result will be more vibrant regional communities that are more economically and socially sustainable.

Regional Australia depends on grant funding

Before we can tease out the challenges, it is essential to understand the basics.

Given their limited means of generating their own revenue, local governments in regional Australia rely significantly on grants. There are two main types of grants:

  • Statutory grant funding. Under the Commonwealth’s Local Government (Financial Assistance) Act 1995, local governments receive a funding allocation determined by a formula intended to achieve horizontal fiscal equalisation. The funding is not tied to any purpose and can be spent at the local government’s discretion. Grants are administered on behalf of the Commonwealth through state- and territory-based Local Government Grants Commissions.
  • Discretionary grant funding. The attempt at horizontal equalisation is not enough for many regions to sustain their investment in community infrastructure. So statutory funding is supplemented by discretionary grant programs funded by state and territory governments. This funding is usually tied to particular policy objectives, ranging from increasing recycling capability, road safety, to providing programs for migrant communities to settle in regional towns.

Grant-making is big business. In 2021/22, $2.7 billion will be distributed from the Commonwealth Government through the Financial Assistance Grant to Local Government program. Many more millions of dollars will be distributed through Commonwealth and state government discretionary programs. These include NSW’s $2 billion Regional Growth Fund, Western Australia’s $40.8 million Royalties for Regions Economic Development Grants and the South Australia’s $160 million Regional Growth Fund. There are many more.

The current operation of grant programs is often ineffective

The importance of grants for regional local government has put them in the spotlight. In looking at some grants programs, including for sports facilities and commuter carparks, the Australian National Audit Office has delivered some critical findings. At a state level, the NSW Independent Commission Against Corruption has looked closely at the probity of some local grants.

While discretionary grant funding can in theory ensure the best projects get funded, in practice it favours the bigger and better-resourced local governments because they are more experienced at writing grant applications. So funds do not necessarily flow to the communities in most need.

When they do get funds, smaller local governments may struggle to spend them effectively, because they may lack the capacity and capability to manage projects or they may struggle to get the required people on the ground (say, contractors for an infrastructure project).

Without appropriate controls over the authorising framework, discretionary grants are ripe for political and public influence. But while this influence may be most prominent in the headlines, it is not the main issue faced by grant programs.

Through our work with an array of funding agencies across Australia, we have observed several other problems:

  • Grant programs have poorly defined objectives. Too often the proposed objectives are not clearly articulated and do not link to the government’s overarching objectives for a particular community.
  • Small budgets, heavy administration. Many grant programs have small budgets but involve a large administration burden for grant applicants and department staff managing the grant. The principle of proportionality should apply when designing a grant program to ensure it presents value for money and that the level of administration is tailored to the materiality and risk.
  • Inability to measure outcomes. Most government departments put grant monies out the door but do not follow up to understand what was achieved with the grant investment. Grant administration should have an equal emphasis on financial acquittal and measuring outcomes.

The collective impact of these problems is that grants fail to achieve the desired benefits while corroding public confidence in the program and causing frustration for participants. 

There is a better way

Given these issues, it is tempting to think that grants are simply a bad way to support regional Australia.

But in cost-benefit analyses Nous has undertaken on behalf of regional development funders we have found that grant-making can be an effective and efficient use of public funds when implemented appropriately.

We have identified five elements that are essential for grant programs to lead to great outcomes for regional communities:

1. Use fixed or minimum share funding.

Discretionary grant programs can use a fixed or minimum funding share approach. This can ensure less-resourced local governments receive a fairer share of the funding pool and mean fewer low-value projects get funded. Within this model, it is possible to advance policy objectives, such as ‘leveling up’, by establishing criteria that favour, say, smaller or poorer local governments.

This explicit preference needs to be made known up front. Whatever the grants method, biases are introduced into the project selection process, contributing to a perception that grant-making is less legitimate compared to government procurement processes. But communicating these biases and the justification for tilting the selection process in a valid direction can help to uphold the integrity, both perceived and actual, of the grant program.

2. Empower local communities.

Regional development investments must consider geographic diversity. Solutions must suit local conditions and cater for different communities within and across regions –including fast-growing regional cities, peri-urban areas, small towns and rural communities. Local governments and the communities themselves are more likely to know the nuances of the region and set up social infrastructure for success, rather than advancing projects that make sense in the city but turn into regional ‘white elephants’

Working in partnership can occur at all stages of a grant program. It can include designing the grant program with the grant recipients to make sure it is fit for purpose from the outset, or actively helping to develop grant applications and write proposals. This developmental approach leads to better applications, offers a higher chance of the funding achieving outcomes and enables local governments with less resources to receive their fair share of grant funding.

3. Adopt lower-touch administration.

Many regional communities and their local governments lack the capacity to write long grant applications and keep up with heavy administration and reporting requirements. Merely having lots of boilerplate paperwork does not ensure good procurement. A more effective way to mitigate risk in the grant process is to invest early in the relationships and undertake development work with organisations and local governments.

Instead of lengthy acquittal or progress reporting, it can be just as valid for a community to send in some photos of the community facility in use or a video of community members talking about how they have benefitted.

4. Be flexible in how grant funding is spent.

Stakeholders in the region should have considerable autonomy in the delivery of grant funding as they understand the local context, conditions, and potential opportunities, as John Tomaney has argued. Too often grant agreements are structured so that monies must be spent on exactly what was in the original proposal, lacking room to adjust without cumbersome variations to agreements.

A grant agreement can be structured around the outcomes of the grant, not the steps needed to get there. Flexibility to adjust within these outcome parameters once the grant project is in train leads to efficiencies and avoids unintended perverse outcomes. For example, if an opportunity arises for a local government to receive corporate sponsorship to fit out a sporting facility, they should have the flexibility to redirect the funds originally assigned to new benefits. This approach requires trust and a strong relationship with grantees.

For smaller local governments lacking capacity, there needs to be scope for grant funds to go toward building human capital in order to allow for the funds to be spent more effectively.

5. Truly understand the community benefit.

Measuring outcomes through qualitative and quantitative techniques is best practice. But it is only worthwhile if the information gathered is fed back into future grant programs and informs the ongoing funding relationship with local governments. With social infrastructure projects designed to deliver social value, it can be difficult to quantify and assign metrics to monitor outcomes and impact. Research by the Regional Australia Institute outlined these steps for measuring the benefit of social infrastructure:

  • Understanding the baseline: What would happen if the project was not completed? This can be undertaken by the funder in collaboration with the local government.
  • List all the benefits of the project to identify which can be quantified and using what metric, such as new jobs, dollars spent, health and employment outcomes, and over what time frame. It is not always useful to measure all metrics.
  • Compare the economic state before and after the project is delivered, to understand the value and risks associated with not delivering the project.

Where cost-benefit analysis (CBA) is used to rank and prioritise projects, it should be based on community benefits (such as reduced travel time to access facilities or increased amenity) or fiscal equalisation. The CBA should not be based on ‘construction jobs’ or ‘tourism spending’ or other metrics that capture only a narrow dimension of the community benefit of a project. The current skill shortages in regional areas underscore the inappropriateness of emphasising ‘job creation’ during construction as an objective over other more important community outcomes, like whether the new facility will be used once built.

We need to invest in grant-making capabilities

To best realise the potential for grants to support regional development, we need to build a mature grant-making practice in the Commonwealth and state/territory public services that views grant-making as more than just getting money out the door.

Grants administration should be guided by a strong grant framework that will articulate the key steps that are involved in successfully delivering a grants program. Nous has successfully developed and delivered our own Grant Framework for government agencies in Australia.

But a framework alone is unlikely to achieve the change and approach we have outlined. Beyond a grant framework, it is important that people with community development expertise are involved in establishing practices and relationships that work for regional communities. This requires shifting mindset and investing in new capabilities to administer grants differently.

Adopting, developing and communicating a robust grant-making practice will empower regional communities and local governments. This can be an important inoculation against accusation of biases in grant selection.

If grants are treated with the seriousness they deserve, they can be a flexible, innovative and powerful financial and policy tool to allocate public funds. To ensure this, governments must work in partnership with and empower local communities. After all, public funds belong to the public.

Get in touch to discuss how we can help you use grants programs to support regional communities.

Connect with Mhairi Cowden on LinkedIn.

Prepared with input from Sally Higgins, Chris Dun, Adam Gray and Tom Leeming.