There are more useful questions to ask than whether Australia has 'too many' charities

The question of how many charities Australia should have is a recurring topic of debate. But it is not necessarily clear that it is really the key question to be asking. A better one may be: what do we want the sector to look like and why?

Too many charities, and why start a new one?

It is an attractive proposition to say we would gain significant efficiencies if there were a limited number of major not-for-profit and charitable providers of government-funded human services.

If we had such an arrangement, the argument goes, fewer charities would mean less resources spent on overheads, such as CEOs, accountants, auditors and other expenses necessary to manage an organisation.

This is logically sound. The fewer organisations, the higher the economies of scale, the less administrative capacity required. The same could be said of many areas of the economy. But a market economy values competition and diversity in its commercial providers.

Another argument is that establishing new charities should be made more difficult, and that those proposing to establish a new charity should first demonstrate that a similar charity does not already exist.

This discussion assumes charities are inefficient service providers and not fully responsive to market forces, and that charities are economic and social “cost centres”, draining the economy, whereas their commercial cousins are important “profit centres” generating wealth and GDP.

It is a widely held belief that charities are not as efficient as other providers. However, there is no evidence of a correlation between an organisation’s efficiency and whether it is a for-profit or a not-for-profit business. Instead, efficiency and productivity have been found to be dependent on many factors that affect both charities and commercial organisations.

There is also no evidence that larger organisations are always more efficient than smaller ones. An organisation’s optimal size is determined by a range of factors. Many are related to its operating environment, client base and resource costs. It is about being fit-for-purpose.

The reality is that smaller organisations, including small charities, can often meet the needs of small and unique communities of people better than larger organisations.

Small charities can be closer to the community, can have capacity to respond to need more quickly, and be tightly focused. Larger charities (like large for profits) can struggle to meet localised or niche demand as they are not so closely entwined with the community. For example, Southcare Inc, a small aged-care charity operating in suburban south Perth, has a very close connection with local communities.

New charities, like new commercial businesses, are the result of entrepreneurial activity. They are built on the passion and energy of their sponsors to react to a deficiency or demand that might not be apparent to existing providers. They use their energies to develop new ways of doing things.

Charities, like all entities, buy and use resources (including employing staff) to produce outputs. If they succeed, they will attract resources and grow. If not, they will eventually be wound up.

As in the commercial sector, this is part of the renewal and regeneration that is necessary to drive continuous improvement. New charities often invoke new ways of doing things, but rarely do we ask the question whether its establishment is justified.

Fit for purpose?

So, the real question is not whether we have too many charities, but rather, whether they are fit for purpose in the context of the mission and the services or products they offer. And are our charities achieving the highest return for their beneficiaries for the assets they use?

Answering these questions requires charity boards, CEOs, and those donating to, or contracting with, charities to have high expectations and to challenge charities to ensure their resources are achieving the outputs and outcomes needed by their beneficiaries now and in the future.

If not, they should ensure their assets are transferred to an organisation that can.

If we continue to base our views of the charity sector on incorrect assumptions and perceptions we run the risk of doing considerable damage to a national asset that contributes substantially to Australia’s economic and social prosperity.

Like the commercial and public sectors, Australia’s not-for-profit sector is not perfect. But, overall, it is pretty good – and Australians have much to be proud of.

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