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Focus: Productivity Commission reports on not-for-profit sector

12 May 2009

In brief: Allens' Head of Pro Bono and Community Programs Nicky Friedman, Partner Niranjan Arasaratnam and Paralegal Tim Leung look at a recent issues paper by the Productivity Commission that highlights some of the matters inhibiting the efficiency and effectiveness of the not-for-profit sector.

How does it affect you?

  • The Productivity Commission has identified a number of issues faced by not-for-profit organisations, particularly resourcing issues and regulatory burdens faced by such organisations.
  • Interested parties should forward written submissions on these or any other relevant issues to the Productivity Commission by 29 May 2009.


On 17 March 2009, the Federal Government requested the Productivity Commission (the Commission) to conduct a study into the economic and societal contributions of the domestic not-for-profit (NFP) sector.  The study's aim is to improve the Government's understanding of the contributions of, and issues faced by, NFP organisations, with a view to generating improved government policies and collaborative outcomes.  On 7 April 2009, the Commission released an issues paper outlining the scope of the study and raised a number of issues for public comment.  The matters raised include both methodological issues relating to the relevance of other studies, the definition of the NFP sector and the most effective ways of measuring its contributions, and substantive issues relating to the financial and regulatory constraints on the efficiency and effectiveness of the NFP sector.

Key issues raised

Relevance of other studies

The Commission proposes to consider a number of previous and concurrent studies, particularly the current review of Australia's tax and transfers system headed by Dr Ken Henry and the 2001 Inquiry into the Definition of Charities and Related Organisations.  The Commission has also annexed to its issues paper a list of recommendations from previous inquiries and reports, and the progress (if any) that has been made in implementing them.  Comments are sought on the relevance and importance of these previous reports and recommendations.

Defining the NFP sector

The Commission is seeking comments on its proposed approach of a progressively narrowing definition of the sector.  For the purposes of measuring the sector's contributions, however, the Commission has proposed a broad definition of the sector.  This definition would include all organisations that are NFP organisations according to the United Nations International Classification of Non-Profit Organisations' list of activities, that do not distribute profits back to members.  For the portion of the study relating to the sector's efficiency and effectiveness, the Commission has proposed a narrower focus.  This portion of the study would not focus on unincorporated entities, smaller organisations relying solely on the resources of members, organisations such as trade unions and professional associations that provide specialised services solely to members, and organisations such as political parties that are subject to unique regulatory requirements.  For the component of the study relating specifically to government-funded service delivery, its focus will narrow even further to organisations within the community and social services sector that deliver such services.

Measuring the sector's contributions

The Commission has queried how well previous studies have measured the contributions of the sector.  NFP organisations provide contributions that differ in their nature and ease of measurement.  The Commission has highlighted the difficulty of systematically measuring the more intangible outcomes and broader impacts of NFP organisations.  The measurement of inputs into the NFP sector is not regarded as an adequate proxy for output and outcome measures.  The Commission is therefore seeking comments and suggestions regarding more satisfactory methodologies, particularly regarding its proposed use of a range of quantitative, qualitative and proxy measures.

Constraints on the efficiency and effectiveness of the sector

The Commission has identified three factors that may impair the NFP sector's efficiency and effectiveness: resourcing difficulties, constraints on innovation, and regulatory burdens. 

Two types of resourcing issues have been identified – human and financial.  The Commission is seeking comments on any difficulties NFP organisations have encountered in attracting sufficient numbers of qualified, paid and volunteer workers, and the detrimental impacts (if any) of labour regulations such as public liability obligations.  The Commission is also interested in any impediments to the formation of human resourcing and expertise partnerships with private enterprise.  In terms of financial resources, the Commission has similarly queried whether NFP organisations face any particular difficulties in obtaining sufficient financial resources.  Possible issues flagged include the complexity of the tax treatment of NFP organisations, reporting and disclosure requirements under state and territory fundraising regulations, and the design of government grants and other financing arrangements.

In terms of innovation, the Commission is seeking comments on the factors impeding or promoting the identification and diffusion of best practices in the NFP sector.  Additionally, comments are sought on the incentives for NFP organisations to adopt innovative approaches (such as the need to use limited resources most efficiently), and whether constraints such as government funding requirements, regulatory considerations, and/or the insufficiency of resources or skills are limiting innovation.

The Commission has identified several regulatory issues that may impair the operation of NFP organisations.  These include inconsistent cross-jurisdictional regulation and the governance and accountability obligations inherent to different NFP organisational structures.  The Commission has also expressed concerns regarding an apparent trend for government agencies to move to lead provider relationships with larger NFP organisations to the detriment of smaller organisations.  Additionally, the Commission has invited suggestions for changes to the restrictions imposed by government on the pursuit of an advocacy role by NFP organisations.

Constraints on service delivery

The Commission is seeking comments on trends in the provision of government funding, including any apparent preference for traditional or new initiatives and the extent to which government seems to be outsourcing service provision to the NFP sector.  Submissions are also sought on the treatment of NFP organisations when competing for government contracts (particularly when in competition with for-profit providers), and the more general effects of government funding on other services provided by NFP organisations.

The Commission has also identified a number of welfare organisation-specific issues associated with government-funded service delivery.  More specifically, the Commission has questioned whether the trend towards competition-based grants of government contracts is delivering the intended efficiency outcomes.  A number of concerns have been raised, including inadequate levels of funding, administrative burdens associated with the tendering process, the transfer of risk to welfare agencies, the use of funding agreements to restrict criticism of government, and a decline in trust between welfare providers and clients.  Service delivery and governance and accountability requirements are regarded as potentially problematic.  Concerns include that contractual conditions may inhibit flexibility and innovation, the length of contracts may generate uncertainty and instability for NFP providers, and that reporting requirements may be both unnecessarily burdensome and a poor reflection of service quality.

Future trends

Finally, the Commission has identified several emerging trends relevant to the NFP sector.  The Commission invites comment on the impact of current and emerging trends such as the current economic downturn, the ageing of Australia's population, technological developments, changing philanthropic patterns, and the rise of business partnerships and social enterprises.


The Federal Government has indicated that the final report of the Commission, expected to be released by late December 2009, will inform future government policy and regulatory reforms under its social inclusion agenda.  More specifically, the Federal Government has foreshadowed the possibility of new governance arrangements for its relationship with the NFP sector, such as a national compact or collaboration agreement.  Interested parties should make initial submissions to the Commission by 29 May 2009.  Following the publication of the Commission's Draft Report in mid September 2009, there will be a further opportunity to make submissions in late October 2009.


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