Not-for-profits must adapt as one arm of government's 'three-sector solutions'

Governments once had a virtual monopoly over the delivery of public services in Australia. But, during the past two decades, Australian governments – both state and federal – have retreated from direct service delivery.

Australia now has a mixed economy of service provision. Governments procure a wide variety of public (that is, government-mandated and funded) services that are delivered under contract by external, non-government providers.

Not-for-profit providers tend to predominate as providers of contracted human services, particularly in areas like disability, employment support, support for youth and families, poverty alleviation and community housing. This is due to their long experience working in these sensitive and complex policy spaces, and because governments are keen to leverage the legitimacy, trustworthiness and social capital they embody, as well as their lower operating costs.

For-profits are less engaged in human services markets, partly owing to lower profitability.

Instead, for-profit providers predominate in delivering public infrastructure and providing “services” that have a coercive element. This includes privately operated prisons and offshore detention centres. Here, transparency and accountability for the use of tax dollars have sometimes collided with the shield of “commercial confidentiality”.

Australia’s long ‘state tradition’

The Australian welfare state did not really begin to take shape until after the second world war. But, as early as 1930, historian Sir William Keith Hancock suggested:

Australians have come to look upon the state as a vast public utility, whose duty it is to provide the greatest happiness for the greatest number.

The welfare state brought new resources, operational and policy rigour, distributional fairness, formalisation and professionalism to the delivery of public services.

Under this expanded settlement, the charitable and not-for-profit sector settled into a supporting role alongside an increasingly monolithic state. The sector offered non-mandated, non-standard services for those who fell through the gaps in government provision. It was aided by government grants schemes, which fuelled a vast expansion of the sector from the mid-1970s.

By the 1990s, however, policymakers had begun to question the financial sustainability and fitness for purpose of Australia’s service delivery architecture.

In Australia, economic rationalism dominated policy debates from the late 1980s until the mid-1990s. It provided the intellectual rationale for an intense focus on competition as a pivot toward more efficient and effective government.

The ground was thus prepared for Australian governments to embrace the central tenets of new public management. In particular, they were attracted to the proposition that subjecting government functions to competition would resolve problems associated with “government failure”. These included high cost, bureaucratic rigidity and lack of choice.

The Howard government enthusiastically took to this idea. It outsourced a wide range of corporate services required by government agencies. This was guided by the “Yellow Pages test” – that government should not be performing any task listed in the phone book.

The rise (and fall) of the contract state

Public service delivery was not exempt from the outsourcing revolution. In 1997, the Howard government offered A$1.7 billion worth of employment services to the market. The result was the Job Network, which replaced the Commonwealth Employment Service and marked the beginning of the “contract state” in Australia.

Today, contracts for purchasing services have largely replaced the grants government once used to subsidise the community service activities of charities and not-for-profits. This has led to the scaling back or cessation of “non-mandated services”.

To remain viable, not-for-profits have to win contracts or somehow generate alternative income to support activities that do not fit within government’s policy priorities.

Some argue that contracting has weakened the bonds that traditionally bound the not-for-profit sector together; that it has encouraged competition and weakened their capacity for civic and political engagement.

Contracting favours “scale”, which has led to the concentration of market power in the hands of a dozen or so large national charities.

Smaller organisations struggle to survive financially. Unable to compete on price, they are obliged to grow. This sometimes means they pursue growth strategies that lead them away from their original purpose.

Disruptive policy innovations like the NDIS might yet offer a lifeline to smaller, “boutique” service providers by devolving purchasing power to the client. Organisations nimble enough to reinvent their business model might yet survive and even thrive.

A three-sector solution?

Governments have come to realise that no one sector acting alone has the capacity or capability to solve complex social policy problems.

As a result, they are increasingly looking to “three-sector solutions” – involving the public, the not-for-profit and for-profit sectors – to tackle so-called “wicked problems” in public policy. Examples include Indigenous disadvantage, domestic violence and mental health. In these areas it is necessary to co-ordinate responses across multiple domains such as education, income support, primary health, justice, child protection, employment, housing and so on.

However, differences in ethos can present obstacles to working collaboratively across sector boundaries. Whereas the public sector is governed by rules, the not-for-profit sector is guided by values, and the for-profit sector by profit. This is a clash of cultures in which distrust, misunderstanding and cross-purposes are ever-present risks.

Australia’s social production system needs a reboot. Both the public and not-for-profit sectors need to do things differently, and do them better.

The head of the Victorian premier’s department, Chris Eccles, says that over the coming decade the public sector needs to be increasingly focused on outcomes, less siloed and portfolio-driven, and more reliant on collaboration, co-operation and co-design. However, the ship of state is a juggernaut that is not easy to turn.

Not-for-profits are not exempt from change. They will have to be smarter, more nimble and able to demonstrate social impact. They also need to make a virtue of their values – which, after all, are their brand. Above all, they will need to learn how to act collaboratively in a competitive environment.

The for-profit sector will continue to do what it does best – engage in delivering government services where it is profitable to do so. Businesses can also invest in social purposes simply because “doing good is good for business”. Government can help by creating a policy environment that rewards social investment.

Rising to these challenges will test the adaptive capabilities of all three sectors. There are clear signs that the policy narrative is gradually shifting from a focus on contractual governance towards more collaborative governance. It will take a while yet for practice to catch up with the rhetoric.

You can catch up on other pieces in our Charities in Australia series here.