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Minister calls for more Private Investment in the Welfare Sector - How?

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In a speech delivered to the Australian Council of Social Service (ACOSS) on Friday 26 June, reported by SBS, Social Services Minister Scott Morrison called for more private investment in the welfare sector.


The idea of promoting private sector investment in social services is to be applauded.

"The federal government wants to make participation in the welfare system more attractive to the private sector… It's not just about charity, it's about private sector investment in solving social challenges. We need welfare to be a good deal for the private sector," Minister Morrison said.

Minister Morrison was referring to the $150 billion social services budget the largest slice of which is the aged pension.

With regard to in-home care for older Australians, it is difficult to see how large-scale private investment can happen. In the 2015 Budget, there is a $1.9 billion annual investment in community care (home care) or care provided to help older Australians to remain independently in their own homes. According to the Centre of Excellence in Population Ageing Research (CEPAR) (2014/15), over 95% of this $1.9 billion is divided amongst 1,655 not-for-profit agencies most of whom have been around for over 20 years. Some are truly giant, billion-dollar, businesses with huge real estate portfolios, owning retirement villages, hospitals and nursing homes.

The reason why there are so few commercial operators providing home care services are fourfold:

  1. Government funding for home care has been so generous that there has been little need for people to dip into their own pockets.
  2. The not-for-profit businesses have financial advantages such as government grants, subsidy of wages, payroll tax exemptions, GST benefits and of course, the big one, income tax exemption. The result is capital surpluses for investment into new markets.
  3. The not-for-profit sector has been able to cross-subsidise across businesses, such as hospitals, retirement villages, nursing homes, and tendered government work in transitional care, palliative care and the like. Cross subsidies can be used to drive out competition in targeted markets.
  4. The not-for-profit sector doesn't have to price services in order to provide shareholders with a return on investment, result, sub-economic pricing.

The fact is there is not a level playing field to allow commercial operators to compete, despite providing better service and client-centred care. In order to survive, those few commercial operators have had to take on brokerage (sub-contracted work) from the not-for-profit providers who have control over client relationships, referrals and margins. These brokerage agreements act as a trap as they effectively prevent the commercial provider from growing beyond a certain point.

The only commercial operators that have grown to any size are those that have 'hung' home care off their own retirement village and residential aged care businesses. In this way, they have remained independent of the not-for-profit sector and are not reliant on it for work.

The reality is the home care industry is dominated by a few giant not-for-profits who run diverse businesses from hospitals to nursing homes to home care, who can use their government grants, successful tenders, cross-subsidy and tax status to undercut pricing. Their influence over commercial operators through brokerage agreements means that they can control the extent to which these small businesses can grow.

The sheer size of the not-for-profit sector and their excellent lobbying efforts with Government means that they can target new government tenders with relative ease. By way of example, recent funding reform in aged care has driven many to focus on the new National Disability Insurance Scheme (NDIS).

Another new horizon for the not-for-profits is the private pay commercial care business. Consumer Directed Care and the means testing of home care packages is pushing more consumers towards the private pay commercial providers. These businesses charge rates that include profit margins to give shareholders a return on investment. The not-for-profits are sniffing the wind, they can smell these dollars and can use their special protected status to undercut prices and drive out competition. The not-for-profits do not have Directors appointed by shareholders, there is no need to pay dividends, provide a return on investment or a return on capital employed. They don't pay tax and they receive government subsidies.

Minister Morrison is on the right track calling for more private investment in social services. If the home care industry is anything to go by, however, this is going to be a difficult task. Not-for-profits, who have been living off taxpayer dollars for years, should not be allowed to hide behind their special status to drive out competition.

The Minister said, "welfare must be a good deal for private investment, with good returns to attract investment".

Level the playing field Minister – the market will take care of the rest!

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