Tonight I spoke at the Pro Bono Econos Third Sector Talks at QUT’s Gardens Theatre on the challenges facing not-for-profit organisations in these fiscally lean times and how economists can help. My slides are available to download (Making do with less) and my speech notes are reproduced below. Many thanks to some generous colleagues and friends for comments and suggestions that I have incorporated into the speech notes.
Making do with less
Good evening. Tonight I would like to make some remarks on how economists can assist not-for-profits (NFPs), particularly in these fiscally lean times. To begin, I would note that, in my view, economics is driving the growing importance of NFPs in our society.
The massive increase in living standards we have experienced since the end of the Second World War has meant that meeting our most basic needs is largely no longer a challenge for our economy, and hence we have more time, attention and resources to devote to other priorities.
In meeting these needs, we are faced with a choice. Milton Friedman observed (in Capitalism and Freedom) that:
“There are only two ways of coordinating the economic activities of millions. One is central direction involving the use of coercion—the technique of the army and of the modern totalitarian state. The other is voluntary co-operation of individuals—the technique of the market place.”
Friedman might have clarified that NFPs are covered in the second category, as NFPs exemplify the voluntary co-operation of individuals, and indeed that is one of the advantages they provide relative to government.
Given the NFP sector is a largely voluntary creature of the energy and innovation of a few, it might be worthwhile reflecting on why the NFP sector exists, and why NFPs “self selects” to do things in specific areas of society. I think there are some very strong economic reasons for this:
1) Either the market isn’t providing an outcome that some people think is appropriate (this could be outright market failure or perceived inappropriate priorities or approaches by the state). This is an allocative efficiency argument.
2) The NFP activities are generally consistent with state social policy and programs, but they can be delivered better by an NFP. This is probably more of a technical efficiency argument.
Since at least the 1970s, there has been widespread dissatisfaction with government-directed welfare-state solutions and government provision of social services and delivery of outcomes in other areas such as the environment.
So governments have turned to private providers, including NFPs, to provide community services. One example is the job network, which replaced the old Commonwealth Employment Service (CES), in which NFPs such as the Salvation Army now offer employment services alongside for-profit providers.
At the same time, NFPs are performing their traditional roles, as well as new ones are demanded by the community over time. For many services, governments have always recognised that NFPs deliver services that governments may otherwise have to—e.g. Guide Dogs or Meals on Wheels.
So clearly, the third sector is important, and being seen as more important, but funding for traditional activities from agencies such as Queensland Health and Housing and Communities has been cut back in recent years for many NFPs, or is appearing less reliable in the future. I would like to make some brief remarks tonight on how I think economists can help meet the challenges NFPs face.
It is important for economists (and business analysts) to get involved in the third sector because important factors are making it challenging for NFPs to operate.
- First, the proliferation of NFPs as we become more aware of social ills, as we move further and further away from a subsistence level of living standards—witness all the “chuggers” (charity muggers) on city streets, ever asking us questions about whether we have heard of this or that new NFP. There are now over 50,000 charities with tax exempt status in Australia.
- Second, huge pressures on government budgets—it is easy for Governments to tell NFPs they need to diversify their funding and engage in greater cost-recovery. So despite our growing reliance on NFPs, and a long-run trend toward greater contracting out to NFPs, in recent years, many NFPs have had to learn how to thrive in a more competitive funding environment.
The third sector is challenging for economists because we cannot necessarily assume organisations will act like profit-maximising businesses—although many are good cost minimisers in relation to producing the outputs they perceive as valuable. To provide well-targeted advice, it is essential that economists understand NFPs as best they can.
Let us consider the key features of third sector organisations.
- sense of mission, with a dedicated, passionate but not necessarily business-savvy staff.
- established philosophy—e.g. faith-based or liberal.
- typically have a heavy reliance on volunteers (including a ready supply of pro bono advice from leading professional service providers for some NFPs).
- Flexibility – scale and scope of interests enables them to delivers services in a more flexible manner than Government. They have the luxury of being more bespoke-like in the issues they tackle and the approaches they use.
- Attitudes to innovation and associated risks – Governments and public servants tend to be very risk averse and this can slow the uptake of innovation. NFPs can be less conservative and more innovative as they don’t necessarily face a political backlash of failure. A great example of this has been the relatively recent use of reverse auctions or tenders as an approach to procure environmental outcomes by the Australian Government (e.g. the recent Emissions Reduction Fund), while the environmental NGO sector has been using this approach since the early 2000s.
So third sector organisations tend to thrive in fields that elicit the deep concerns of individuals and are effective in encouraging voluntary labour, which incidentally saves taxpayers a substantial amount of money. This is obviously a key aspect of their work that economists can quantify, and I am sure many of the Pro Bono Econos have been doing work along these lines.
To illustrate, some calculations I undertook for the Asbestos Related Disease Support Society Queensland suggested the organisation benefits the Queensland community, by up to $1 million per annum through, among other activities, the referral and support services it offers—clear community needs that might otherwise have to be provided or funded by Queensland Health.
Now the ways in which economists can be helpful will depend on the type of NFP and the level of sophistication of its staff and board. Let us think about the different types of NFPs:
- Service providers not operating in a commercially competitive environment (e.g. homeless shelters);
- Service providers competing in a commercial environment (e.g. employment services, aged care—in aged care, NFPs account for 64% of aged care beds); and
- Social enterprises (e.g. Buffed).
The first type of organisation is the one that probably has the most pressing need for economists, as they are less likely to have staff experienced in business operations. These organisations increasingly have to consider how they can make do with less funding, or with future funding that is much more uncertain and volatile.
This includes consideration of the following issues, which economists are well placed to give advice on.
- Sustainability by reviewing & modelling income statements and balance sheets to ensure ongoing sustainability and effective utilisation of assets—many NFPs have significant cash reserves that they appear to be saving for a ‘rainy day.’ At the same time, NFPs may have under-provisioned for a future liabilities—e.g. staff liabilities such as long-service leave provisions, or for capital maintenance and reinvestment (i.e. depreciation provisions). From my own experience, economists are well place to develop financial projection models of income statements and balance sheets that are useful in assessing sustainability.
- Cutting costs and getting back to core business operations, including a cost-effectiveness analysis of different expenditures. NFPs actually need to make a financial profit sufficient to cover investment borrowings, re-invest in the organisation over the longer term, and have enough cash for unforeseen circumstances.
- Mergers—e.g. the recent one between Youth Emergency Services and the Carina Youth Agency—to achieve economies of scale and synergies and a great profile to tap private philanthropy; for these organisations it is important to consider compatibility of missions and philosophies.
- Demonstrating the impacts/benefits and results achieved from their operations for funding submissions and in the interest of transparency, given that both private donors and governments are wanting better information on results achieved. Funding submissions may be for either for ongoing operations (e.g. demonstrate the organisation provides a cost saving to Government as the Asbestos Related Disease Support Society does), or for new projects (e.g. a cost-benefit analysis of a Dreaming Track proposal in the Far North, which found a benefit-cost ratio of nearly 2 to 1, after taking into account recreational, productivity and Indigenous health benefits).
- Reducing the reliance on government funding which is increasingly at risk and increasing private fund-raising efforts—e.g. encouraging beneficiaries of services to make bequests in wills. And there is obviously the potential to seek funding from corporates, or social impact investors, given the big focus on corporate social responsibility.
- Commercial operations (e.g. cost recovery of service delivery) or strategic partnerships to secure an income stream independent of philanthropy or government—obviously only where it does not compromise the achievement of the organisations core objectives. There are some great examples of the last point among environmental NFPs, including, for example: Healthy Waterways offering consulting services on water sensitive urban design; and Queensland Trust for Nature delivering the carbon offsets via tree planting offered by Greenfleet.
- Finally, innovative financing methods such as social finance and social impact bonds, which have incredible potential, but may appear exotic and risky to many NFPs.
For all of these issues, good economic and financial advice, as well as some imagination, is necessary, and I think economists are well placed to deliver all these things.
As many of us know, economics is about the optimal use of scarce resources, which is incredibly important to NFPs, with many organisations running on the proverbial ‘smell of an oily rag’.
Despite the view of some in the community about government largesse to charities, it is largely not true. Indeed, many organisations doing important work for the community such as Guide Dogs Queensland receive very little (if any) government financial support.
Ultimately, good people are the best resource, and NFPs from my experience are crying out for good people, whether to help deliver services, provide advice on topical issues or to serve on boards. I would encourage every one of you to get involved, and I am sure Nick has encouraged his Pro Bono Econos members to do so.
Finally, I would like to thank Nick and Abby for the invitation to talk here today. I am very impressed by the initiative shown by Pro Bono Econos in reaching out and assisting NFPs, and I hope the good work continues in the future.
Thank you for listening.