How do we fund sector reform?

We know what is needed to strengthen the charities and not-for-profit sector, but governments and funders don’t often invest in delivering the required reforms.

Professor Myles McGregor-Lowndes has highlighted that most recommendations made to improve our sector are not implemented.

Myles counted 160 recommendations from five key reports over the decade prior to 2023, of which 21 had been implemented, 33 had been partially implemented or lapsed, and 114 had not been implemented.

In the past two years we can add further recommendations from the Not-for-profit Sector Development Blueprint and the Productivity Commission Future Foundations for giving report.

There are currently more than 200 carefully considered recommendations to improve productivity and effectiveness in the charities and not-for-profit sector that remain dormant.

There have been numerous attempts to analyse why the charities and not-for-profit sector is largely ignored when it comes to key issues such as reducing red tape, cybersecurity, staff development, access to new capital including impact investment and debt financing, better using data, AI, climate change adaption, energy transition, contracting and paying what it takes, streamlining DGR and other restrictions. The list goes on.

Some suggest the reason for inaction is linked to the fragmented nature of our sector and poor investment in peak bodies. Others highlight how the sector uses its advocacy capacity to advance its charitable purposes rather than pushing sector capacity and productivity. Others point to a lack of effective political influence.

The one barrier we can agree has had a major impact on the lack of reform is the cost. Who pays for sector reform?

I should note here that there appears to be an increasing willingness of key philanthropic leaders to prioritise sector capacity and reform. This growing investment in the sector itself is to be welcomed. However, can it provide the level of funding needed to drive sustainable reform?

At a meeting of international leaders from charities all around the world, this issue of resourcing reform was raised as an important policy challenge.

One solution that is gaining traction in Canada is to create a new sector fund. John Hallward, writing for the Canadian thinktank the Institute for Research into Public Policy made a strong argument for this sector funded approach:

“The charitable sector is not structured or incentivised to innovate. Many organisations are resistant to change, fearing repercussions from their funders. There is a power imbalance that tilts heavily in favour of wealthy foundations, leaving operating charities and the millions of people they serve with little agency.

“Additionally, the sector is fragmented and siloed, lacking the co-ordinated approach needed to foster collaboration and systemic change. To address this issue, we need policy-driven, systemic reform…. The creation of a self-financed, self-governed social sector fund and agency could strengthen charities, foster innovation and restore public trust.”

John outlines in some detail how a proposed social sector fund could work including how it could be governed and examples of how this levy approach applies to other industries. This is his central argument:

“To ensure a stable, predictable source of funding, grant-making foundations should be required to make small mandatory annual contributions to this new social sector fund.

“These contributions would be based on the value of each foundation’s investment assets at the end of each fiscal year and would be collected alongside their annual T3010 filing with the Canada Revenue Agency (CRA). If that rate were set at one-quarter of one-tenth of one per cent (0.00025), it would generate about $37.5 million annually when applied to the $150 billion in foundation assets.”

In Australia, a 0.01 per cent contribution (one tenth of 1 per cent) would generate more than $120 million annually from the $12 billion plus currently held in public and private ancillary funds. Is this the funding needed for the Centre for Excellence recommended by the Productivity Commission almost 15 years ago? Could it drive real productivity gains across our sector?

We could go one step further in Australia and argue that an even smaller levy (say 0.0002 per cent) could be applied to all government funding of charities. That could generate another $200 million plus annually. We know governments and treasuries don’t like hypothecation, but when it comes to charities, surely there is a case to be made?

It will be interesting to watch the arguments play out in Canada as this policy idea gains momentum. Here in Australia, if the major barrier to sector reform is partly a lack of resources to support sector wide initiatives, shouldn’t this kind of levy be part of our policy discussions?

The good thing is we already know what needs to be done if we actually had the money required for sector wide reform.

David Crosbie has been CEO of the Community Council for Australia for the past decade and has spent more than a quarter of a century leading significant not-for-profit organisations, including the Mental Health Council of Australia, the Alcohol and Other Drugs Council of Australia, and Odyssey House Victoria.