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Economics References Committee
09/09/2011
Finance for the not-for-profit sector

BOWMAN, Ms Susan Catherine, Social Firms Australia

BROWN, Ms Catherine Janet, Director/Principal Consultant, Catherine Brown & Associates Pty Ltd

[13:48]

CHAIR: Welcome to this hearing. Would you each like to make an opening statement?

Ms Bowman : Thank you. My background is in corporate finance. I have worked in the financial services sector for 18 years and joined SoFA in 2007. Social Firms Australia is a not-for-profit organisation. We create employment for people with a disability and mental illness through the development of social firms. A social firm is one type of social enterprise where the majority of income is generated through the trading activity and between 25 and 50 per cent of people have a disability or mental illness. So, it is a blended or integrated workforce through a commercial model. Social firms are primarily small- to medium-sized enterprises. They typically are set up as divisions of not-for-profits; they can be separately incorporated but they are not to be because of duplication of overhead.

Our interest in responding to this inquiry is really how best to frame a policy support provision for the social firm development in the Australian economy. At the moment we see a number of inhibitors to that. The first is access to capital; the second is a general lack of commercial expertise within the sector around entrepreneurship and managing businesses; the third is how best to support or improve the policy framework to enable people with a mental illness and disability into work; and, fourthly, we would like to see the opening up of social procurement.

The SEDIF initiative is one that we strongly support and have had a lot to do with in responding to inquiries to that. We have not seen the guidelines to SEDIF as yet, but we understand it will not have a grant component, which in our view is a limitation. The sector needs hybrid, flexible and adaptive funding responses to the opportunities presented. An example in point is we deal a lot with start-up businesses, so we are providing business planning and feasibility work for not-for-profits to start up small businesses. They are dealing in competitive markets; they have uncertain revenue; they typically do not have an asset base to secure; they have management requirements to support people with complex needs; and they are typically low-margin businesses. To burden them with a debt commitment may not be the best approach to financing them.

The second area is the skilling. We would look at having SEDIF coupling with skills transfer and mentoring to the sector and we would look for the sector to actually use its current surpluses to build financial capacity. The difficulty is attracting skilled people to the sector and having competitive remuneration, which is a challenge.

The third area we are interested in is the employment support, tax and diversity legislation. In our view the current disability employment support framework needs to be more tailored, flexible and elongated so it is not bunched into the 13/26 week payments, particularly for people with a mental illness where their illness is episodic—it is unpredictable—and quite often it is enduring, so the payments really need to flow and be structured to the needs. In terms of the German policy framework around social firm development, that legislation is longstanding and includes a quota system. Why we like it is it has a compulsion for all employers—not just the social firm sector—to mandate the employment of five per cent of people with a disability and if they do not do that they are penalised and they pay into a fund. Those funds then go towards social firm seed funding and also to help with wage subsidies and other supports do that, so it is a way that the corporate sector can then contribute to what we think is the best way, which is a social firm model. The German economy supports 600 social firms employing 15,000 people. Twenty per cent of those have a mental illness and 30 per cent have other disabilities.

Finally, we are really interested in an all-of-government approach to social procurement. The difficulty right now is that corporate and social procurement is really very large contracts, so we need to see an unbundling of million dollar contracts so that small business in particular can respond to those opportunities and at the same time there needs to be an associated capacity building to the sector to be able to respond to tenders. Thank you.

Ms Brown : I am a lawyer and a consultant. I started in general commercial law and then I moved to the not-for-profit sector about 22 years ago probably, and actually worked at the MS society, Wesley Mission, and then I was CEO of the Brain Foundation Victoria. I have been consulting for about 12 years, mainly in philanthropy and organisational development within not-for-profits and governance, and not in relation to developing boards of not-for-profits. I was on the SEDIF advisory committee, so I found that very interesting—the cross-section between commercial and charitable.

In terms of my submission, we had a few questions in the previous session that I probably could respond to so I am happy just to answer questions later, but a couple of the points really were that already philanthropy is doing some interesting funding in terms of, for example, bridging finance when not-for-profits want to purchase land, and I think there is potential for trusts and foundations to be more courageous in some of those funding offers, I guess, rather than just grants. I suppose something I have really noticed—and it has probably been referred to by the others as well—is the grey space between charitable activity and commercial activity, particularly around things like microenterprise or starting social enterprises that start with the public benefit, charitable aspect and then they become successful and they really turn into a private enterprise and it becomes more of a private benefit. So you move out of the charitable eligibility for grants and you are dealing in the commercial world. I think the SEDIF initiative was partly to try and address some of those areas but it is certainly quite a step from being funded by philanthropy, for example, to then having to go off into the commercial world and get a loan. I have seen many projects that are stumbling along at that point.

In terms of the financial intermediary organisations, I suppose I look at it a bit from the not-for-profit sector, but I see there is a lot of capacity within not-for-profits, particularly their boards and finance directors and so on, to perhaps put more effort into how they present themselves when they are not just going for philanthropic funding but going for more commercial loans. Some of them have that ability; they just perhaps need to become a little bit more professional in the way they do that.

I think in terms of the business models there was a comment about strengthening diversity. I think there is a lot of diversity. I think actually it is more about clarity and it is just people understanding the different structures that are being used for social businesses. We have had a few here; they can be a division, a subsidiary company model. To me it is quite clear that there are three or four that people are using, so I am not sure that it is a matter of having even more; it is probably just really understanding what is available and maximising the use of those. At Wesley Mission we had a number of businesses and at the MS Society we also had a number of businesses and as in-house lawyer in those places I had to provide advice to those businesses, so I have some practical experience, particularly of the proprietary limited model and also the division model. In terms of making better use of the sector’s own capacity, I have had experience of national purchasing frameworks. For the MS Society we would actually get all the different states together and do insurance and motor vehicles and things. I am sure a lot of not-for-profits do that, but that certainly could be encouraged and peak bodies can take every chance they can to come up with better purchasing arrangements. What else? In relation to the corpus of philanthropic foundations, I think Australia is probably a bit behind places like some of the foundations in the US that do a lot of mission related investment with their funds, but there is certainly potential to do more of that in Australia as well.

They were the key points. There were a few points before just about the public ancillary fund. I have done a lot of work with community foundations all around Australia and we did some work in the past with the Prime Minister’s community business partnership in about 2004, looking at the tax structure for community foundations and that perhaps they would be better to be on a register and not have the complex corporate trustee and three or four different trusts that they use at the moment. The requirements for the public ancillary fund, in terms of distribution of it, being drafted at the moment I think are not fair for rural and regional community foundations that are trying to build up a corpus over quite a long time. I think perhaps there is a big diversity in public ancillary funds when you actually look at what they are and perhaps that just needs to be thought about a bit more. It probably came from the private ancillary funds having guidelines and then now will be public, but in fact it is more complex. They are a few thoughts.

CHAIR: Senator Stephens.

Senator STEPHENS: Thank you. You spoke about the lack of clarity around social business models, how organisations are using them and perhaps a lack of understanding. How do you think we could go about getting greater clarity? Who should have responsibility for that? You missed the conversation this morning about the grey area, which was each of the people sitting at the table represented a different business model and each was struggling; they were not charitable. They had a community benefit purpose but they were not charitable under the definition and they were not private. There was an altruistic endeavour in each of them but they were each a different structure and they were each struggling. How do we actually educate the sector around the options and what is the best option?

Ms Brown : I think a lot goes to the professional or business acumen of the board of the not-for-profits, so the board should be setting the strategy and I think they really need to be bringing all their commercial expertise—and most not-for-profits have some business and professional people on the boards—to how they approach their own structure. They need to be thinking, ‘Should we be a division within our not-for-profit or should we be setting up a separate Pty Ltd company and so on, or do we not want to be charitable at all and we will just accept that we are going to be commercial and we will just make some donations back for social purposes?’ That knowledge is there; it is probably just a matter of having it presented clearly. Who should actually do it? That might be something the charities commission could actually have some sort of information on. Certainly ASIC would explain how the different structures work.

Ms Bowman : I think the driver has to be a really strong social purpose and, for the for-profits, how you extract profit is a defining feature of how you can then operate as a for-profit. If you are structured as a not-for-profit, it does not really matter what the underlying structure is because any surpluses—and surpluses are good—go back into your social purpose. I struggle with the social business concept where it has a very strong social purpose but as long as you have got that profit extraction capability, it can be bastardised over time or evolve.

Ms Brown : That is the grey area; I would agree with you. People just need to be clear, ‘Okay, we are going to operate a commercial operation; we are going to have a social purpose; and we are going to have some financial returns’, and be clear to themselves about what they are doing. That is fine, but they need to understand that that is not a not-for-profit entity.

Ms Bowman : A lot of the division comes, too, around if you have traditionally operated an enterprise, that it is primarily grant funded and it does not necessarily sell a product, then there is confusion around what is it to operate a business and what is the expertise required around that, irrespective of the structure. So, there needs to be at the forefront a really strong commercial discipline driving the enterprise and then the social purpose sitting very closely behind that, and there is a tension because one is always competing against the other.

Ms Brown : Yes, but if you start with a not-for-profit lens, you would start with the social purpose and then you would say, ‘Okay, now we will bring in the business expertise and work out what is the best way.’ At the MS Society, that is what the board did there and decided that the Pty Ltd model would be good.

Ms Bowman : But then when you run an enterprise you have to flip that.

Ms Brown : Sure; obviously.

Senator STEPHENS: Ms Brown, you were talking about the opportunity for procurement. Keeping aside social procurement, because I will come to that in a second, but just the notion of the sector itself using procurement to leverage best value and you quoted MS as being one organisation that does that.

Ms Brown : Yes, it is a while ago that we did that but I am sure that a lot of organisations could or should do that.

Senator STEPHENS: Is there an existing service for not-for-profits to do that at the moment? I know, for example, there is an organisation that supports lots of church organisations to bulk buy and get the discounts—everything from telcos to cars and everything else. But more generally, for smaller, unaligned, community based, not-for-profit organisations; is there a purchasing portal or umbrella organisation that does any of that work?

Ms Bowman : Social Traders has just developed an online sort of directory which is listing not-for-profits that provide services, but I think it is still in development; I am not sure how live it is, but it is a portal with a view to making it easier. The ADE sector has an online directory that lists all their services.

Senator STEPHENS: Yes. At point four on page four of your submission you make this point about access to contracts and social procurement. I am quite interested in this third dot point here that you have about ‘including a community social benefit criterion in the call for an assessment of competitive tenders’ and wondered if you could point the committee to any work where that is being explored.

Ms Bowman : I think it actually does exist in some local government procurement contracts. The trouble with it is that you can actually put it in a contract, but then your lead contractor who then subcontracts the community purpose down to a not-to-profit is not actually monitored. So, the head contractor will say, ‘Yes, we have engaged a community provider’, but then the actual monitoring of the employment outcomes and the continuing performance under that contract is not actually monitored. So, you cannot actually measure the social impact, but it is a mechanism that is used; it is not used widely, but we could introduce that on a sort of broader scale to local government procurement in particular, or state or federal. The bigger issue from our sector is that we are small businesses and anything more than a quarter of a million dollar contract you cannot service, so they need to be unbundled so that there is more tailored opportunities given to smaller organisations.

Senator STEPHENS: This morning I asked Social Traders about the participants in their program operating as micro-businesses, and small businesses are not able to access NEIS or associated government support that a comparable small business in the ordinary space would be able to access. Is that an issue for Social Firms Australia?

Ms Bowman : It is, because the cut-in for these contracts is typically a million dollars, so even if we could get them and we did meet the tender requirements, we cannot deliver against them because of the size of the contracts.

Senator STEPHENS: NEIS is the New Enterprise Incentive Scheme, which is a government funded program that falls to support the development of small businesses. People referred into that program undertake a kind of business planning program and mentoring and then are eligible for unemployment benefits for a certain period of time to underpin their income while they get their enterprise established. So, you do not have that?

Ms Bowman : I do not think that is available to not-for-profits. You need to be a commercial operator.

Senator STEPHENS: So, the one big thing that would change the world for you is what?

Ms Bowman : I think if we can open up and tailor social procurement at all levels of government, I think that would be a huge utility. Talking about the size of the SEDIF, we are 10 years away from where the market is in the UK; the Futurebuilders England Fund, which is a government procurement tailored fund, is $400 million. It is huge, and that is coupled with mentoring, business support and all of that, so I think that is really where we should be heading.

Senator STEPHENS: We hope.

Ms Bowman : Also, penalising the corporate sector like the Germans do, saying, ‘Co-contribute and co-fund this. If you are not going to create the employment because it is too hard or you are worried about liability, or whatever, then at least pay for it and contribute to the development of a sector that does.’

Senator STEPHENS: There was one thing Dr Burkett said, which I wondered, Ms Brown, if you had any comment to make and that was about the UK fund; the community enterprise fund. Is that what it was? You mentioned a UK fund.

Ms Brown : I probably cannot add to it.

Senator STEPHENS: No? It does not matter. I will read the Hansard and I will ask the question of you later. Thank you. No, Chair, I have no other questions, thank you.

CHAIR: I would just like to ask Social Firms Australia a question. One of your recommendations is for a modest but ongoing subsidy tailored to offset these additional operational costs that could be made available not just to the social enterprise sector but to all employers who commit to a certain number of employees with a disability or disadvantage. Apparently this is a program which operates in Germany. Would you like to make any comment on that?

Ms Bowman : Yes, there are two separate points there. Our current disability employment support framework I think is really the mechanism to either increase the subsidy there or create a new subsidy which is open to all employers that employ people with a disability. The German model is the penalty model where, if you do not employ, you need to pay a fee, so they are sort of separate but related in terms of a policy framework that works; one is a sort of stick and one is a carrot, I guess.

CHAIR: That is interesting. How successful is the German model? Is it actually being implemented?

Ms Bowman : There are 600 social firms; they employ 15,000 people. That is on average about 25 individuals per firm, so I think by all accounts it is pretty successful.

CHAIR: And that replaces, I suppose, disability social services and pensions, does it?

Ms Bowman : I do not know the answer to that—whether it sits alongside or whether there is government support as well as—but it is certainly a co-contribution to the social firm sector in particular, which is the blended, integrated workforce.

CHAIR: One of the things we have heard is that a significant barrier to investment in the sector is the not-for-profits and social enterprises often do not have the strong business and financial expertise to really get their business models working. What would you feel could be done to assist in that respect?

Ms Bowman : That is interesting. That is really the greatest risk to the viability of these enterprises, because a lot of our work is around feasibility, business planning, getting these organisations to see an opportunity and act on it, but if they do not employ the right manager with the right skills it falls over. So, it really is incumbent on the not-for-profit to spend a lot of time, pay perhaps over the market where the not-for-profit sector is to get the right person in and incentivise them to manage this as they would their own business.

CHAIR: Do you have any comments on that, Ms Brown?

Ms Brown : No. I agree you need very strong business skills to run a business well. Some not-for-profits have a lot of those business skills and then some of the other emerging ones would need to recruit for those roles, so yes. I think that that salary issue is true.

Ms Bowman : There is a different skill set between finance and accounting and business management and entrepreneurship, and that is really where the not-for-profit sector struggles. Clearly, they have audited books and they have got an accountant and they know what they are doing, but it is that how to run a business and be continually moving in a competitive market environment, staying ahead of the game, seeing where your products and your markets are.

CHAIR: That is an interesting comment, really. Do you have any comments, Senator Stephens?

Ms Bowman : Just on the SEDIF and the funds, my concern is that we shift wholesale to the large end of town—the wind farms, the GoodStart—whereas Social Firms Australia is embedded in small business which I think in Australia represents about 50 per cent of all employment, so it is a significant sector in itself but it is difficult. It takes three years for an organisation to break even when you start a business. So, it needs all the support it can get and if we focus on the big end of town then this area actually misses out.

Ms Brown : I am not an official spokesperson for SEDIF. I was on the advisory committee but I think it is anticipated to be a very wide range of projects funded and there is a capacity building component to quite a few of those funds.

Ms Bowman : But if it is return driven then start-ups are not really going to generate a return for a long time.

Senator STEPHENS: Ms Brown, I think it was your submission that made the point about the bridging finance provided by the RE Ross trust funds.

Ms Brown : Yes.

Senator STEPHENS: Do you see the notion of bridging finance used very much now as a mechanism?

Ms Brown : No, I do not see it used a lot but I think it is one of the types of mechanisms that philanthropy could use more, for sometimes it is a timing issue; you need to be able to pay a deposit quickly and then they can spend some more time fundraising for longer term funding. So, I think it is a very positive tool.

Senator STEPHENS: How does that fit with the objects and mechanisms of philanthropic trusts, generally speaking? Are they able to provide bridging funds?

Ms Brown : If they are for charitable purposes and the trust deed is worded in a way that allows that, yes. It just depends on the actual constitution or trust deed; as long as it is within the legal definition of charitable purposes. Because it is a charitable purpose; for example, purchasing Ned’s Corner Station was for environmental purposes and Trust for Nature is on the register of environmental organisations and so on.

Senator STEPHENS: Without going into all the detail of the bridging finance, is that principal only or was there interest involved in that being repaid?

Ms Brown : I think that is a good question. I do not know 100 per cent. I do not want to say the wrong thing; it was a while ago.

Senator STEPHENS: No, that is fine. It is interesting because yours is one of the few submissions that have actually talked about bridging finance and given an example. It is something we can pursue.

Ms Brown : We could find out, yes.

Senator STEPHENS: Thank you. Thank you, Chair.

CHAIR: Thank you. Thank you for appearing.