DCMS "must urgently consider" events insurance and other non-cash supports, MPs say, raising "big questions" about the fund's effectiveness.
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Emergency arts funding missed out "vital" parts of the sector, a flaw that must be urgently addressed, an inquiry has found.
With Culture Recovery Fund (CRF) round 3 imminent, MPs say "it has not all been smooth sailing" to date, with freelancers excluded, a confusing and cumbersome application process and delays to payments.
"Mistakes were made, particularly in relation to the fund's accessibility," the Public Accounts Committee (PAC) said.
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Acknowledging the CRF has provided crucial support to more than 5,000 organisations, the committee said "there remains big questions over whether the fund reached freelancers, commercial organisations and supply chain businesses essential to the sector".
Its Chair, Meg Hillier MP, said the pandemic has "exposed just how poorly departments across Government understand the sectors they oversee".
"DCMS was clear that it 'would not save every organisation' but we are concerned about the impact of Covid-19 on those organisations vital to the culture sector - sound engineers, lighting and technical support."
MPs also said the department "must urgently consider" the cost of an insurance scheme for live events - something it had not yet modelled - or risk "devastating consequences".
Asked for comment, DCMS said it was pleased the report recognised its "achievement in delivering this record investment quickly and accurately".
Another £300m will be distributed through the CRF, it added.
"We continue to explore what further support, including issues around securing insurance, may be required when the culture sector is able to reopen."
Arts Council England (ACE) also defended its work distrbuting the fund: "We’ve saved thousands of much loved cultural organisations across the country that play vital roles in their communities, while still following a rigorous process to ensure that taxpayers’ money is protected and spent responsibly."
Groups at risk
DCMS must outline to MPs by October how it will support groups such as festivals and freelancers that were underrepresented in emergency funding rounds.
While the department says CRF money has supported 100,000 freelancers, the PAC noted it had not verified this estimate, which is based on figures provided by successful applicants.
Submitters to the inquiry disputed funding had trickled down to freelancers.
"Rather than plugging the gaps in the broader employment support package, the CRF sometimes replicated them," UK Music noted.
The Incorporated Society of Musicians (ISM) said the lack of support for English freelancers via the CRF has been "extremely disappointing", and UK Theatre and the Society of London Theatre said that DCMS and ACE "need to do more work to speak with parts of the sector who aren't National Portfolio Organisations".
The Royal Albert Hall offered a case study: having been identified by the Culture Secretary as a 'crown jewel' of the cultural sector, it was surprised to find itself ineligible for a CRF grant, instead taking on a £20.74m loan that will affect its ability to invest in artistic programmes and capital projects for years to come.
"There was a dissonance between the impression given when the rescue package was announced... and the reality of applying for a loan that was paid almost 12 months after we had closed."
UK Music expressed concern some funding was still unpaid in March, a year after the lockdown.
With the lack of indemnity insurance, organisations must decide whether to risk their financial survival by restarting events or continuing to wait.
"Faced with that choice, it is only natural that many businesses will not go ahead regardless of the CRF funding they have received, dampening a recovery that will define the medium term future of the sector."
Communication woes
A lack of feedback for unsuccessful CRF applicants has left them in "perilous financial situations," the PAC said, calling on to DCMS to "set out what more it is doing to communicate" with them.
ACE's anti-fraud processes required applicants to submit bank details for every grant instalment, causing unnecessary extra paperwork, and the language used was prohibitive for commercial organisations that are not used to applying for public funding.
Delays to announcing the grants had also caused stress to organisations that were dependent on grant funding for their survival.
We Make Events, a campaign group for the live events industry, told MPs the 'cultural significance' criterion excluded many supply chain organisations and manfucaturers - "despite the fact that many of them are specialist, niche businesses that exclusively work for the cultural sector".
It challenged ACE's lack of an appeal process, saying a lack of feedback from the funder means there is no accountability.
"They can seemingly refuse an application without having to give any reason why, meaning no scrutiny of their decision can take place, through formal or other channels."
ACE explained to MPs that its large workload meant it could only give limited feedback.
However, when asked what it had learned about setting and communicating realistic deadlines, DCMS told the committee "it had learned it was better not to inform organisations about when allocations were announced before it was certain what it would be able to do".
Value for money
MPs expressed doubt ACE has the expertise to manage the 20-year £252m loan book it now holds, saying it will require "skilled oversight and management for years to come".
ACE, which has no history of managing loans, has brought in new financial experts to meet this need. It told the inquiry the loans will not be turned into grants, and is confident it can manage the risk of non-payment.
But neither ACE nor DCMS have sought out the "considerable" loan management expertise that already exists within government, the PAC said.
"While DCMS "expresses confidence that the Culture Recovery Fund provides value for money, it is vague about how it knows this to be the case," it added.
The funders' said the CRF has supported a larger proportion of the sector than initially anticipated.
The impact of the fund will be independently evaluated later this year.