Pied Piper, in our area we have the Blue Skies Music Festival which is about to celebrate its 30th year. Since it is financially secure and community-minded, it established a community foundation several years ago to promote live music and help encourage young musicians in the local area. Some of the projects are:

-lending instruments and paying for music lessons for young musicians
-all-ages community fiddle orchestra
-day camp for kids focussing on creative arts (pilot project)
-subsidizing local concerts by travelling performers, either to support a related Good Cause (e.g. starting a community choir, or community radio station), or just to underwrite a live music event that a small rural venue can't otherwise afford.   

Once certain things start happening, the projects gain credibility and have received funding from some of the other sources you suggest (lottery money is redistributed here by something called the Trillium Foundation, and yup, we got some.)

Don't know how it works in the UK, but here, most publicly-funded arts councils and foundations (rightly) want to see evidence of local support and stability of organization before they start writing cheques. So start with a focussed smallish project, start an association if necessary--or find a sympathetic folk festival board or similar aggregation to be initial sponsors.

I think you're on to something mate. I would encourage starting from a basis of a project you want to do in the community, rather than writing a project proposal based on the criteria for a particular snooty funding body.

Have at it! Best of luck.
Willie-O