THE ECONOMY - Time to encourage the third sector

The ‘social economy’ is being held back by a lack of recognition and inappropriate regulations, according to Mark Lyons and Andrew Passey THE organisational world inhabited by the people of Australia consists of three distinct sectors, each behaving according to a different operational logic. We are all familiar with two of these - government and business - but there is another sector that is of equal importance to the well-being of the people of Australia and the communities in which they live. This sector is sometimes called ‘the third sector’ and often (in Europe especially) the social economy. As we show in this comment piece, the social economy is economically large and a significant employer. However, a lack of visibility, and a complex regulatory regime unsuitable to the ways that social economy organisations operate, has the potential to impede its development. The social economy is comprised of organisations that combine social with economic objectives. Such organisations are formed by people to provide services for themselves or others - the product of mutuality or altruism. They represent collective responses to need, and provide goods and services that investor-owned firms do not, or at least not in an affordable or reliable way. Through these organisations groups of people ensure the provision of services for themselves or others, the representation of their interests, and the provision of opportunities for sport, self-expression and religious worship. Such organisations are known variously as associations, clubs, charities, cooperatives, churches, societies, and unions. They are important providers of services in many industries, including health, education, community services, arts and culture, sport and recreation, consumer finance and interest representation. Collectively, they constitute a third sector of the economy, alongside the public and business sectors, and the nation’s social economy is larger than many would realise. Even a brief analysis of the largest 500 private companies in Australia reveals the scale of this hidden sector. Our analysis, using data in the BRW500 (7 August to 3 September 2003) reveals that 68 of the top 500 - more than one company in eight - is part of the social economy. Collectively, these social economy organisations turned over $22 billion in 2003 (16% of the BRW500 total) and employed 52,000 people - more than 1 person in 5. The typical social economy organisation has 17% higher revenue than the BRW500 average, and significantly more staff (64% more than the average BRW500 company). A detailed analysis of the BRW500 reveals more about the social economy. Looking first at cooperatives - jointly-owned and democratically controlled enterprises - we see they comprise over 5% of the total revenue and staff of the BRW500, and the average cooperative is almost twice as large as the average BRW500 organisation in revenue and staff terms. Many of these large cooperatives operate in the agricultural sector, providing basics such as milk and sugar. Taken together, mutuals - organisations that are run by members but which are not legally constituted as cooperatives - are bigger in revenue terms (more than 6% of the BRW500 revenue), but smaller in staff (3% of the total). Many mutuals operate in the financial services industry, especially insurance, and perhaps it is not surprising that the average mutual in the BRW500 is 30% bigger in revenue terms than the average for the BRW500, but 30% smaller in terms of staff. The final component of the social economy visible in the BRW500 is the range of nonprofits that have a wider public benefit mission than either cooperatives or mutuals. Many of these organisations work in social welfare and economic support. Taken as a whole, nonprofits accounted for 4% of total BRW500 revenue but 14% of staff. The average nonprofit employs nearly 1200 people - two and a half times the BRW500 average. Looking at year-on-year change in revenue, we find that the social economy is faring worse than the BRW500 as a whole. The latter saw only 16% of organisations registering an annual fall in revenue, compared with 22% of social economy organisations. Again however there are differences within the social economy, with cooperatives (27% fall) and mutuals (28%) faring markedly worse than nonprofits (11%). Many of these large cooperatives are agricultural producers, which will have suffered from the drought (and possibly from changes in international trade), whereas the revenue generated by mutuals stems in part from their investments in stock markets, which did not perform particularly well in 2002-03. Nonprofits, on the other hand, will have benefited from shifts in government policy, which have led to third-party organisations delivering government-funded services, especially in education, social care and economic support. GIVEN that social economy organisations behave differently to for-profits, it is less than helpful to treat them as if they were the same as other firms. Each social economy organisation is part of an industry but is likely to respond to forces at work within that industry in different ways to for-profits. For example, decision-making in cooperatives and mutuals is democratic and likely therefore to be slower than in conventional private companies, where votes go with share holdings and the views of a few large shareholders overwhelm the rest. Social economy organisations find it much more difficult to raise capital than investor-owned firms and so are likely to be slower to respond to expansionary opportunities that might emerge in an industry. This was the reason given by many cooperatives and mutuals for converting to investor-owned firms over the past decade or so. On the other hand, the capital invested by social economy organisations in local communities is more securely rooted in those communities than investor-owned capital. One other difference between social economy organisations and conventional investor-owned firms is the mess of legal forms (cooperatives, associations, charities, and companies limited by guarantee) and regulatory regimes (ASIC, state registries, state offices of charities) faced by social economy organisations. These represent a potential drag on the development of this important sector: not only burdening organisations with multiple regulators, but minimising chances to develop a coherent sector by creating barriers to better links between social economy organisations. Professor Mark Lyons and Andrew Passey work in the Australian Centre for Cooperative Research and Development (ACCORD), University of Technology, Sydne