Introductory comments and a Social Finance Taskforce for Australia
The first part of this report has two chapters. The first
introduces the types of organisations that comprise the social economy in
Australia, and outlines the international and domestic context for this
The second chapter presents the committee's key recommendation:
namely, to create a Social Finance Taskforce for Australia. This Taskforce is
premised on several witnesses' arguments on the need for cohesion and strategic
direction in the development of a robust capital market within the social economy.
The committee believes that a Social Finance Taskforce is best placed to meet
Introduction and conduct of the inquiry
Referral of inquiry
On 9 February 2011, the Senate referred to the Economics References
Committee the matter of mechanisms and options for the development of a robust
capital market for social economy organisations in Australia, for inquiry and
report by 31 October 2011.
An extension for this reporting date was subsequently granted, with the revised
reporting date being 22 November 2011.
Terms of reference
The terms of reference for this inquiry direct the committee to inquire
the types of finance and credit options available to not-for-profit organisations,
social enterprises and social businesses, the needs of the sector and
the role and current activity of financial intermediary organisations
and how these can be strengthened;
strengthening diversity in social business models;
the development of appropriate wholesale and retail financial products
government actions that would support the potential for social economy
organisations involved in the delivery of government services to access capital
incentives to support investment in the sector;
making better use of the sector's own financial capacity, including
practices relating to purchasing of products and services and use of reserve
making better use of the corpus of philanthropic foundations and trusts
to make investments in Australia's social economy organisations, expand socially
responsible investments and impact investments and any current barrier to their
policies, practices and strategies that affect the availability of
capital markets for social economy organisations on social innovation,
productivity, growth and workforce issues in these sectors; and
any other related matters.
The social economy
The terms of reference for the inquiry refer to the development of a
robust capital market for social economy organisations in Australia. The term
'social economy' is not well defined in the Australian context, and includes a
variety of organisations including not-for-profit (NFP) organisations, social
enterprises and social businesses. Social economy organisations operate with a
commitment to a stated social goal or outcome. This commitment to social
outcomes differentiates social economy organisations from commercial
enterprises, which exist purely to maximise profit for owners or shareholders.
NFP organisations, social enterprises and social businesses cover a
multitude of organisational types, and there is considerable overlap between
the three. Many social enterprises, for example, have a not-for-profit legal
structure, while many social business models straddle the divide between
commercial operations and social enterprises. This makes clear categorisation
within the social economy difficult, and as new organisational types continue
to emerge in the marketplace, the distinctions between these sub-sectors are
becoming increasingly blurred.
In the Australian context the terms 'Not-for-Profit sector' and 'social
economy' are sometimes used interchangeably. In broad terms, the committee
considers that the umbrella term 'social economy' includes the NFP sector, as
well as emerging forms of social business and social enterprise that may not
traditionally be considered part of the NFP sector. However, rather than making
definitive categorical statements about what exactly constitutes the 'social
economy', the committee believes that a better approach for the purposes of
this inquiry is to acknowledge the diversity within the sector, with reference
to specific organisational types wherever possible.
Spectrum of organisations within
the social economy
One useful framework for thinking about the makeup of the social economy
has been developed and articulated by Venturesome, a social investment fund
based in the United Kingdom. Venturesome compares organisations by placing them
along a spectrum ranging from charities fully reliant on grant or fundraising
income, through to commercial businesses. This framework is useful in the
Australian context, and is outlined in Diagram 1.1.
Diagram 1.1: Spectrum of organisational models
Louisa Mitchell et al., Financing
civil society: A practitioner's view of the UK social investment market,
September 2008, p. 7.
The horizontal axis represents the motivation of the organisation. Organisations
concerned only with 'social returns' are placed at the far left of the
spectrum, organisations concerned only with 'financial returns' are at the far
right and those offering 'blended returns' (i.e. a mixture of social and
financial returns) are in the middle.
The section below outlines some of the major categories of organisations
within the social economy.
NFP organisations impose the non distribution of profits to the members
of the organisation, and are established for a community purpose. They are not
part of the business sector because the generation of profit is not their
The sector consists of a range of entities including charities, churches and
religious organisations; sporting organisations and clubs; advocacy groups;
community organisations; some cooperatives; trade unions; trade and
professional associations; chambers of commerce; welfare organisations and
The main broad categories of NFP organisations in Australia are outlined
in Diagram 1.2. These include charities, which are NFP organisations with
a charitable purpose. This purpose is defined in common law as acting for the
relief of poverty; the advancement of education; the advancement of religion;
and other purposes beneficial to the community.
Some charities which act predominantly for the direct relief of poverty,
sickness, suffering, distress, misfortune, destitution or helplessness, attain
Public Benevolent Institution (PBI) status and are entitled to additional tax
By numbers, NFP organisations make up the majority of organisations
within the social economy.
There are many ways of classifying organisations within the NFP sector. NFPs
may be defined according to the type of activities they undertake, their size,
legal structure, charitable status, resourcing or area of focus.
Diagram 1.2: Broad categories of NFP organisations in
Charities and Not-for-Profits Commission Implementation Taskforce, 'Key
(accessed 26 October 2011).
A January 2010 Productivity Commission (PC) report into the contribution
of the NFP sector defined a social enterprise as an enterprise established
using a business model to deliver services for the purpose of providing a
social benefit, rather than to provide a profit.
Finding Australia's Social Enterprise Sector (FASES), a
recent study on social enterprise in Australia conducted by the Australian
Centre for Philanthropy and Nonprofit Studies at Queensland University of
Technology in conjunction with Social Traders Australia, expanded this
definition, finding that social enterprises are organisations which:
are led by an economic, social, cultural or environmental mission
consistent with a public or community benefit;
trade to fulfil their mission;
derive a substantial portion of their income from trade; and
reinvest the majority of their profit/surplus in the fulfilment
of their mission.
Social enterprises may use not-for-profit or for-profit legal structures.
As noted in Diagram 1.1, a variety of types of organisations can be generally characterised
as 'social enterprise', including:
charities with 'mission focussed' trading arms;
social benefit enterprises (or social enterprises);
social purpose businesses (or social businesses);
socially responsible businesses; and
businesses whose purpose is to generate funds for charities.
There are no clear data available establishing the number of social
enterprises operating in Australia, although the FASES study estimated that there
may be up to 20 000. The report characterised the social enterprise sector
in Australia as diverse, mature and sustainable, with social enterprises
operating in every industry of the Australian economy.
Although all social enterprises trade to fulfil their social purpose,
the majority still operate using a not-for-profit legal structure. Social
enterprises which take on a for-profit trading structure are often referred to
as 'social businesses'.
A recent report by Foresters Community Finance (Foresters), Financing
Social Enterprise: Understanding Needs and Realities, defined a social
business as 'a commercial business that has social objectives at its core'. The
A social business, unlike a social enterprise, is a
commercial entity, so all its income is derived from commercial undertakings
rather than from grants or gifts. It may, however, undertake activities that
are non-commercial in nature (or approach issues from a 'more-than-commercial'
frame of reference) or conduct itself as a hybrid between the commercial and
Social Business Australia, an organisation created to assist the
development of social businesses in Australia, notes that these businesses have
social objectives at their core and often diversify ownership through
democratic membership and governance structures.
There is a range of organisational models considered under the 'social
business' umbrella, including co-operatives, mutual businesses, employee owned
businesses and social firms.
These organisations are considered in detail in chapter 8.
Towards a 'Fourth Sector'?
Social economy organisations have been characterised as constituents of
the 'third sector'. The term 'third sector' describes organisations that are
neither private businesses ('first sector' organisations) nor related to
government ('second sector' organisations). The terms 'third sector' and
'social economy' are seen by many to be interchangeable.
However, some submitters to the inquiry, including Foresters and SENTECH,
have contended that social enterprises and social businesses could be
considered as populating a new 'fourth sector'.
This new sector sits between the three traditional sectors, sharing features of
each but with a new form, as shown in Diagram 1.3.
Diagram 1.3: The 'Fourth Sector'
Foresters Community Finance, 'Financing
Social Enterprise: Understanding Needs and Realities', Submission
4–attachment 3, p. 9.
Promoting access to capital for a
The diversity of purpose, organisational structure and resourcing
requirements for social economy organisations is particularly pertinent when
considering mechanisms for developing a capital market for social economy
organisations. Organisations within the social economy have different financial
needs, goals and capabilities, and a prescriptive approach to developing new financing
options will inhibit the progress of the sector. As Foresters noted:
One of the difficulties of working in the sphere of social
enterprise is the sheer diversity of organisations / entities that are starting
to identify as social enterprises and populate space under this umbrella. It is
increasingly difficult to make meaningful comparisons across social enterprises
and it is important to realise that broad generalisations and
‘one-size-fits-all’ solutions are not the answer to addressing the
undercapitalisation and financial exclusion of social enterprise. This also
means, unfortunately, that this is a space that is not straight-forward to
Context of the inquiry
This inquiry occurs at a significant time for the social economy both in
Australia and globally. In Australia, the significant growth of the NFP sector
over the last decade, combined with the current support to improve the
efficiencies and the accountability of the sector, has created a pressing need
to develop adequate capital arrangements for social organisations.
Simultaneously, there is a global trend towards the convergence of the business
and social economy sectors through the emerging field of 'social impact
investment'—for-profit investments which deliver some measure of both financial
and social returns.
The need for a capital market for
social economy organisations
The Australian NFP sector has grown significantly over the last decade,
with average annual growth for the sector of 7.7 per cent from 1999–00 to 2006–07.
The 2010 PC report noted that despite this rapid growth in the sector, many NFP
organisations in Australia struggle to access the capital they require to grow
to scale and achieve their potential.
Similar concerns have been raised regarding social enterprise in Australia,
most notably by Foresters.
The financial needs of social economy organisations are discussed in chapter 3.
This lack of access to adequate financial products and services is not
unique to social economy organisations. A recent report by the National
Australia Bank and the Centre for Social Impact detailed, for the first time,
the extent of financial exclusion for individuals in Australia. The report noted
that over 15 per cent of Australian adults are either fully or severely excluded
from basic financial services.
These individuals often require the most support from the NFP and charitable
sector, making it even more important that these organisations have adequate
financial resources to continue delivering services to the most underprivileged
in Australian society.
Global context—the rise of 'social impact
In the current era of fiscal restraint and ongoing economic uncertainty,
it is imperative that governments, philanthropists and mainstream investors
maximise the value of their financial investments. Governments are increasingly
constrained in their ability to fund social service delivery, and there is an
emerging realisation that 'the resources of government and philanthropy alone
are insufficient to address the world's biggest problems'.
In this context, there is a great need for innovative and creative
solutions to social and environmental problems, and governments around the
world are turning to the emerging fields of the innovation of social enterprises
and 'impact investment'
to foster these solutions. These approaches involve mobilising capital from a
broader range of sources than traditionally associated with the social economy sector,
including mainstream banks, superannuation funds, wholesale investment funds
and retail investors. Sir Ronald Cohen, one of the world's leading
private-equity investors and a key proponent of impact investment in the UK,
stated in his submission to this inquiry:
Just as hi-tech business enterprise and venture capital, working
in tandem, have attracted increasing numbers of talented risk-takers since the
1970s, so social enterprise and impact investment are now attracting a new
generation of talented and committed innovators seeking to combine new
approaches to achieving social returns. Social enterprise and impact investing,
in short, look like being the wave of the future.
Internationally, organisations such as the Global Impact Investing
Network (GIIN) have emerged to champion the role of impact investments and seek
to develop them as an emerging asset class worldwide.
Infrastructure to support this asset class is being developed, through
initiatives such as the Global Impact Investment Ratings System (GIIRS). The
GIIRS is a project which acts as an independent ratings agency for social economy
sector businesses and investment funds, providing impact investors with social
and environmental impact ratings for potential investment opportunities.
Concurrently, governments around the world have increasingly focussed on
developing investment in the social economy sector. In the UK, a government Social
Investment Taskforce operated from 2000—2010, making key recommendations to
encourage social investment. The Taskforce's final report noted that in the
decade of its operation, a social investment market emerged in the UK, marked
by an increase in the flow of investment to disadvantaged communities, the
establishment of new and innovative types of social investment organisations
offering a range of financial products to the third sector, and increased
interest in social investment from the mainstream financial sector (see chapter
In Canada, a similar taskforce has been established, making its initial
report to government in December 2010 and setting out seven primary recommendations
to mobilise new capital for social purposes (see chapter 2). The report stated:
Canadians have long relied on governments and community
organizations to meet evolving social needs, while leaving markets, private
capital and the business sector to seek and deliver financial returns. However,
this binary system is breaking down as profound societal challenges require us
to find new ways to fully mobilize our ingenuity and resources in the search
for effective, long-term solutions.
Mobilizing private capital to generate, not just economic
value, but also social and environmental value, represents our best strategy
for moving forward.
In the United States, several key government initiatives, including
strong tax incentives and requirements for mainstream financial institutions to
invest in underdeveloped areas, have attracted tens of billions of dollars
worth of private investment to the social economy sector over the last fifteen
More recently, the Obama administration has allocated up to US$100 million in
its 2011–12 budget to fund a new social investment vehicle known as
pay-for-success bonds (an investment vehicle originally developed in the UK
under the name 'social impact bonds'–see chapter 6).
In recognition of the growing importance of impact investment and social
entrepreneurship, the White House recently hosted a forum of over 150 key
social and financial sector leaders to discuss the future of the 'Impact
In Australia, there is recognition within government of the importance
of social investment. As the Office for the Not-for-Profit Sector within the Department
of the Prime Minister and Cabinet noted during this inquiry:
From the Department of the Prime Minister and Cabinet's
perspective, encouraging increased social investment is critical for at least
three reasons. The first is that the social sector is growing rapidly, and we
have seen the Productivity Commission's estimates of the contributions of
not-for-profits and how that has grown over the recent decade. Second, there
are increasing demands on government's limited resources, and yet many policy
problems are actually growing in their complexity, so we have got a real
tension in that area. Thirdly, leveraging community and private assets is not
only likely to promote efficiency and help bridge the resource gap; it is
likely to promote broader community ownership of the social change that we are
trying to seek as well. There is not only a good resource reason; there is
actually a deeper policy benefit from this area.
While Australia has a less developed capital market for social economy
organisations than some overseas jurisdictions, the committee has heard there
are encouraging developments in the nascent Australian market. Additionally,
being able to learn from international experiences in this area will enable
Australia to take confident steps in the coming years.
Current Australian reforms
As noted earlier, the Australian government is currently seeking to
implement a reform agenda within the intention of the Australian government to
strengthen the NFP and social economy sector in Australia. Some of the key
developments over the last two years provide important context for this
The National Compact
In March 2010, a national compact between the federal government and the
NFP sector was released. The National Compact: Working Together is
described as an agreement which outlines shared principles, aspirations and
priorities for action that will facilitate the government and the NFP sector
working together to improve social, cultural, civic, economic and environmental
outcomes, enhancing community wellbeing across Australian society.
The Productivity Commission report
and subsequent reforms
The PC was tasked with assessing the contribution of the NFP sector in
Australia and impediments to its development. In January 2010, it presented its
report to the government. The report examined various aspects of this
contribution including funding by government, the sector's workforce, its
productivity and knowledge base, as well as the ability of the sector to build
relationships with business. The report stated:
Given the sectors' wide reach and diversity, improving its
efficiency and effectiveness will have broad benefits, especially in the field
of human services. While there have been a number of reviews and inquiries over
the years, implementing identified reforms has been slow.
While the future of the sector rests largely in its own
hands, a wide range of regulatory, institutional and funding reforms are needed
to enhance its effectiveness and achieve even better outcomes for the
The report examined the issue of access to capital for NFP
organisations, and recommended that Australian governments should assist in the
development of a sustainable market for NFP organisations to access debt
financing. This inquiry seeks to build on the work of the PC report in this
area and examine in some detail the options for developing a robust capital market
for social economy organisations.
The PC report made a total of 38 recommendations about various aspects
of the sector. The government agreed 'in principle' to all but one of these
and has implemented a significant suite of reforms in the sector in response to
Office for the NFP Sector and the
Reform Council for the NFP Sector
In October 2010, the Office for the Not-for-Profit Sector was
established within the Department of the Prime Minister and Cabinet, with a
mandate to drive and coordinate the NFP sector policy reform agenda and the
national compact between government and the sector.
In December 2010, a Reform Council for the Not-for-Profit Sector was
established for a three year term. The Council is comprised of prominent
individuals from within the sector, with the role of advising the government on
various issues relating to NFP reform.
The Council has established working groups in the following areas:
scoping of a national regulator (see below);
red tape reduction for the sector;
harmonisation of legislation across Australian jurisdictions;
National Compact and other reforms; and
better targeting tax concessions for the sector.
Establishment of the Australian
Charities and Not-for-Profits Commission
In the 2011–12 budget, the government allocated funds for the
establishment of an implementation taskforce for the new regulator: the
Australian Charities and Not-for-Profits Commission (ACNC). The ACNC is
designed as a new one-stop-shop regulator for the sector, and is due to
commence operations on 1 July 2012. The ACNC's initial responsibilities will
...determining charitable, public benevolent institution, and
other NFP status for all Commonwealth purposes; providing education and support
to the sector; implementing a 'report-once use-often' general reporting framework
for charities; and establishing a public information portal by 1 July
The implementation taskforce has been established within the Department
of Treasury, and commenced work in July 2011 to ensure that the ACNC can
commence its activities as planned from 1 July 2012. The
implementation taskforce launched its website in October 2011 to ensure the
sector is informed on developments of the ACNC.
Currently, the Implementation Taskforce for the ACNC is receiving advice
from the Reform Council, of which Mr Fitzgerald is an ex officio member. An
ACNC Advisory Board will be established on 1 July 2012 to support the work of the
ACNC. Mr Robert Fitzgerald
of the PC will chair this board.
The infrastructure of the NFP sector reforms is detailed in Diagram 1.4.
Diagram 1.4: Primary infrastructure of NFP sector reforms
Committee secretariat, adapted
from The Treasury, Australian Charities and Not-for-Profits Commission
Implementation Taskforce, Submission 35 and the Office for the
Not-for-Profit website, 'Not-for-Profit Sector Reform' http://www.notforprofit.gov.au/office-not-profit-sector (accessed 27 October 2011).
Additional reform announcements
As well as the establishment of the ACNC implementation taskforce, two
other announcements were made in the 2011–12 Federal Budget relating to the NFP
sector. These are a tightening of the tax concessions available to NFP
organisations (discussed further in chapter 9) and the introduction of a statutory
definition of 'charity'.
Additionally, the government announced on 14 July 2011 that Public Ancillary
Funds, a commonly used financial structure for philanthropic organisations, will
be reformed 'to improve their governance and accountability'.
A public consultation process on these proposed changes is currently underway.
Australian Government initiatives
in the sector
Several government initiatives designed to make an impact in the social
economy have been brought to the attention of the committee over the course of
Social Enterprise Development and
Investment Funds (SEDIF)
In July 2010, the federal government announced it would provide a $20 million
investment for the establishment of at least two SEDIF funds, to be managed by
fund managers appointed through a competitive tender process. The main
objectives of the investment funds are to improve access to finance and support
for Australian social enterprises, and to catalyse the development of the
broader social impact investment market in Australia.
In August 2011, the government announced Foresters and Social Enterprise
Finance Australia as the two successful applicants for the management of the
SEDIF funds. The SEDIF initiative is discussed in chapter 8 of this
National Rental Affordability Scheme
As a response to poor housing affordability, the NRAS was created in
2008 as a supply-side initiative to encourage the construction of 50 000
affordable rental properties. The scheme is now expected to be extended to fund
up to 100 000 properties. Tax credits or cash payments are provided over 10
years to investors providing affordable housing, which is then leased to
residents at a minimum of 20 per cent below the market rate. In
practice, nearly all NRAS properties are managed by not-for-profit housing
providers, where the credit is provided as an equivalent cash payment.
Community Development Finance
Institution (CDFI) pilot program
In January 2010, the federal government announced a CDFI pilot program
to be administered by the Department of Families, Housing, Community Services
and Indigenous Affairs (FaHCSIA). Under the program, the government is
investing in the CDFI sector by providing $6 million to five Australian CDFIs
to fund operational and business development costs. This organisational funding
is being matched by investment from the private sector for service delivery,
enabling the CDFIs to offer products to help address financial exclusion in
Conduct of inquiry
The committee advertised its inquiry on the Senate website and in The Australian,
calling for submissions by 15 April 2011. The committee also wrote directly
to a range of key individuals and organisations inviting written submissions.
These included government departments, social organisations, academics, and research
and policy institutes. The committee received 39 submissions, which are listed
at Appendix 1.
The committee held four public hearings for the inquiry: in Canberra on
1 August 2011 and 26 September 2011, in Melbourne on 9 September 2011,
and in Sydney on 23 September 2011. A list of the committee's public hearings and
the names of the witnesses that appeared is found in Appendix 2.
The committee thanks all those who made a contribution to the inquiry,
and acknowledges the many NFP organisations that made submissions to the
inquiry with limited time and resources available to them.
In particular the committee would like to thank officers from the
Department of Education, Employment and Workplace Relations and the Office for
the Not-for-Profit Sector for their assistance in providing resources and
suggestions to the committee; the Community Council for Australia, for bringing
together a roundtable of experts to provide additional input to the inquiry; Dr
Richard Seymour from the University of Sydney for providing information to the
committee; and Mr Stephen Nash of Home Ground Services for giving
secretariat staff a tour of the Common Ground facility in Melbourne.
Structure of report
The report consists of nine chapters, divided into four parts.
Part I: Introductory comments
Chapter 1 has introduced the types of organisations that comprise the
social economy in Australia, and outlined the international and domestic
context for this inquiry. Chapter 2 draws together the main arguments presented
to the committee on the need for a Social Finance Taskforce to bring cohesion
and direction to the development of a robust capital market within the social
Part II: Demand, supply and the
role of intermediaries
Chapter 3 discusses the main financial needs amongst organisations
within the social economy, in particular the challenges of attracting
investment and the importance of different types of finance.
Chapter 4 outlines the main sources of financial investment available to
the social economy, and discusses options for expanding the pool of capital
available to social economy organisations and encouraging investment in the
Chapter 5 discusses the role that intermediary organisations play in
helping develop capital markets for the social economy by supporting social
organisations and building links between investors and investment
Part III: Emerging investment
vehicles and innovation
Chapter 6 discusses innovative new financial instruments being developed
in the social economy, particularly focusing on the use of social bonds, social
impact bonds and social investment funds.
Chapter 7 discusses the need to develop a measurement framework that
will enable emerging investment vehicles, facilitate analysis and performance
comparison, establish track records and offer potential investors an assessment
of the risks and returns related to different investments.
Chapter 8 discusses the specific needs and challenges relating to social
enterprises in Australia, and mechanisms for strengthening the diversity in
social business models.
Part IV: The role of government in
promoting access to finance for social economy organisations
Chapter 9 discusses the current regulatory framework for social economy
organisations, its implications for the financing options for different types
of social organisations, and possible regulatory reforms. It also offers
concluding thoughts from the committee on the role of government within the
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