The Australian Third, or Civil Sector, is one of the largest industries in the country. According to a 2010 Productivity Commission (PC) report (see here) it consists currently of 600 000 not-for-profit organizations, of which the Australian Bureau of Statistics considers about 60 000 economically significant (e.g., employing paid staff, or otherwise a candidate for taxation). Over the past decade the sector’s contribution to GDP has doubled and it is currently estimated to be at least 4 percent per annum, i.e., well in excess of $40 billion. Nearly 5 million volunteers add an estimated $15 billion in unpaid work. The Third Sector is a key ingredient of civil society.
The Australian Third Sector is also covered by a pathetic hodgepodge of regulation. In the words of the PC, “the current regulatory framework for the sector is complex, lacks coherence, sufficient transparency, and is costly to NFPs [Not-for-Profits]” (PC 2010, XXIII) yet, the Australia does not have standards of recommended practices for charity accounting such as England or Wales, or New Zealand, or the USA and Western European countries for that matter. Fundraising is de facto unregulated. Essentially, donors and state have little idea what happens to the considerable amount of private or government donations (concessions). That’s not a way to instill public trust and confidence in a sector whose livelihood depends on it.
The problem has long been known and a sizable cottage industry has documented the lack of accountability and transparency of the Third Sector in Australia. Over the last 15 years (starting with the 1995 Industry Commission report) five significant federal inquiries have addressed the regulatory mess that the Third Sector represents, and dozens of talking heads — mostly lawyers, advocates, and bureaucrats — have given their opinion on literally thousands of pages of final and draft reports, thousands of submissions on the draft reports, transcripts of hearings, scoping reports (the latest one, drawing on the PC 2010 report, issued in January 2011, see here.
Apparently, to judge from a clip in the SMH this past weekend, the federal government is now determined to install a national not-for-profit regulator to cut the red tape in the sector: Labor, we learn, “will reportedly put aside $53.8 million over four years in Tuesday’s budget to establish the independent Australian Charities and Not-for-profits Commission from July 1 next year.” (see here)
Welcome news that is on the one hand. One the other hand, I fear the problem of accountability and transparency of the Not-For-Profit Sector will not be solved this way. If other countries’ history is any guide, it will take some big scandals to focus the government and the sector on what it means to be accountable and transparent.
I see two key problems:
First, few seem to have a good understanding what exactly the purpose of regulatory reform in this area ought to be, and can be. A couple of weeks ago I attended yet another workshop organized by the Australian Centre for Philanthropy and Nonprofit Studies at QUT. It was telling that in the last of two days of sessions, the participants were scrambling to answer what seemed a naive, and maybe was meant to be a devilishly simple, question: why do we need regulation in the first place? It took a while for the – in other countries widely accepted
— answers to come forth: to promote public trust and confidence in the charitable sector, which requires that fundraising is done properly, that money is going to cause, that accountability and transparency are such that donors (private and public) can verify that money will be spend the way NFPs say it would be spent. The problem is, none of these things can be easily regulated. Partially because regulation that tries to ensure these kind of things needs enforcement which is expensive. Very expensive indeed.
Second, few — specifically the dozens of talking heads that dominate the debate currently — seem to have a good understanding of available working models. Much of the focus seems to be on the Anglo-American model but this model — based as it is on obligatory annual (self-) reporting — is known to have its share of problems and will, in any case, take years to be implemented here. What, unfortunately, continues to be ignored in the Australian discussion are the very effective certification agencies that exist in a number of West-European countries such as Germany, the Netherlands, Switzerland, or Austria. In all these countries,
(self-) reporting requirements are way behind those in, say, the England, or the USA. Yet, these certification agencies have been rather successful in generating public trust and confidence in the sector, or at least its nationally working flagships (which albeit representing typically 5 percent of the sectoral firms account for more than 8o percent of assets and revenues. Importantly, most of these certification agencies make due with surprisingly small budgets. Shoe-string budgets indeed of a couple of millions at most of which typically at most a third comes from Public subsidies. Yet another interesting example is the New Zealand Charities Commission which — having been established only in mid-2005 — has within a couple of years managed to establish a Charities Register which has 24/7 up-to-date information on more than 25,500 registered charities (see http://www.charities.govt.nz) and which is moving towards a model that through its actions (e.g., complaints forms on its website) quickly towards a model that seems to draw on some of the lessons that can be learned from the certification agencies in Europe.
So, while it is commendable that the federal government does something, the way it apparently wants to go about reforming the Not-For-Profit Sector seems ill-advised, wasteful, and predictably ineffective. It is a policy that seems not based on the considerable evidence that is out there on available alternatives, and ultimately insights from economics about the incentive incompatibility of self-report mechanisms.