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Financial planning, Investment and Self Managed Super Fund Article
Private Welfare
By John Robertson
1st April 2006
This article may be out of date.
One of the challenges for welfare and community groups in trying to capture more of Australia’s wealth, is to identify where it is. The buoyancy of corporate incomes has been helping, but private wealth is harder to tap. Logically, their attention should gravitate to superannuation funds.
Non-government welfare agencies in Australia have typically sourced their incomes from a combination of:
- government funding (including taxation expenditures)
- volunteer workers donating their time
- private cash and goods donations (including emergency appeals)
- public company sponsorships involving direct giving and in-kind contributions
- in-house business enterprises
- bequests.
With the notable exception of the last of these sources, most will be affected by the state of the economy, one of the reasons private giving has been more buoyant in recent years.
A change in corporate approach
With the catch-cry of shareholder value ringing in their ears, executives of larger companies have become reluctant to donate funds based on personal relationships. Many corporations have formalised philanthropic and community spending policies applying stricter criteria to their giving.
Within some organisations, funding has become harder to obtain. In formalising their criteria for giving, however, many corporations have also made a more permanent commitment to giving.
In some cases, specialists have been appointed to the company for this purpose. In contrast to dealing with a CEO with whom they might have established strong personal relationships and who could exercise some discretion, recipients might now have to deal with a more hard-nosed professional focused on the value to the company of corporate giving programmes. Professionals are also more prone to make assessments of whether donated funds are being used effectively, adding another degree of pressure.
In re-orienting their approach, corporate donors have become more likely to support commercial ventures with which they can identify and which appear sustainable. One outcome of this has been greater emphasis among welfare agencies on business models as they seek funding through seed capital and advisers are provided by business groups to assist in commercial development.
Accordingly, sponsorship arrangements associated with products and brands have diminished in importance. Sponsorship has been increasingly removed from the sphere of corporate philanthropy to be taken over by professional brand managers applying more commercially oriented principles to how they promote their brands.
More being given
The level of corporate giving seems to have risen significantly in recent years. The Australian Bureau of Statistics (ABS) has estimated that in 2000/01, total business giving in Australia amounted to $1.4 billion of which $628.0 million or 43% of the total went to sport and recreation with $338.6 million or 23% going to welfare and community service organisations.
The results of a more recent survey published by the Australian Government in Giving Australia, suggested that in 2003/04, business giving was $3.3 billion. The authors noted the sizeable difference from the earlier study and expressed some scepticism about whether the numbers were directly comparable, implying that the latter number might be overstated.
However, they seemed to put little weight on the very sharp rise in business profits which has occurred.
According to analysis undertaken by thebigpicture Economics, if business had maintained its giving at the same percentage of its pre-tax profits as in 2000/01, its 2003/04 contribution would have been $3.4 billion and very much in line with the Giving Australia estimate. The seemingly higher levels of giving might simply reflect the very large rise in profitability which has occurred.
Current rates of profitability imply even higher levels of business giving. In fact, if business continued to simply maintain its 2003/04 contribution rate, it would now be giving in the vicinity of $950 million to welfare and community service groups rather than the estimated $339 million in 2000/01.
However, community and welfare groups should be doing even better than this. The Giving Australia report found that giving to the community service and welfare sector had risen to 30.5% of total business giving, with donations to sports and recreation falling to 18.1%.
If the funding of a broadly-based community group does not reflect this pattern, it might have lost market share against competitors or its usual donors might have become less generous even as it appeared that their total absolute contribution has risen.
Cyclical risks
While comforting in one sense, the apparent buoyancy of recent giving to the welfare sector obscures some risks for recipient organisations.
- Welfare agencies have probably not made inroads into the overall propensity of business to give, posing an ongoing challenge for funding strategists
- They are exposed to the economic cycle. If profits fall from their currently record high levels, for example, as a consequence of a change in economic circumstances, recipient incomes might shrink
- As growth in corporate and household incomes slow due to an aging population, growth in giving is also likely to drop just as demands on the welfare sector are likely to be rising.
Alternative sources
Strategically, community groups will have to become especially attentive to shifts in business performance and wealth accumulation patterns to maintain their incomes.
Corporate giving varies from industry to industry. Within the aggregate profit data published by the ABS is information about seven separate business sectors. In 2000/01, corporate giving varied from 0.2% of pre-tax profit for the mining sector to 21% of pre-tax profit for companies classified as being in property and business services.
The profitability of this latter apparently more generous sector has grown thirteen fold in the past five years. If giving had kept pace, it would now be four times more than even the Giving Australia assessment.
One repository of wealth which has been largely ignored is the accumulation of superannuation and retirement savings.
Since the late 1980s, the quantity of funds in superannuation outside life offices has grown at an annual rate of 14.8% a year, according to data published by Australia’s Reserve Bank, which compares with a far more modest growth in household income of 5.7% over the same period.
The relative strength of superannuation accumulations has most likely been one factor in encouraging a decline in household savings. The most recent data show superannuation funds growing at an annual rate of $128.4 billion a year, while households ran down their other assets at an annual rate of $14.9 billion by spending more than they were receiving in income.
Welfare agencies should be taking into account these changing spending patterns and the implied reallocation of assets if they are to maintain (let alone increase) their current access to Australian financial resources.
Obviously, with superannuation only being accessible under certain prescribed conditions, chasing this source of potential funding is not straightforward. In seeking innovative ways to gain access to this wealth or the income it is generating, welfare agencies might have to seek commitments for a share of retirement savings once they can be accessed rather than emphasise current disposable income as their primary source of individual giving.
In this context, welfare agencies might have to become more conscious of financial advisers as gatekeepers to this pool of wealth.
One could imagine these welfare agencies seeking to align themselves with advisers as they attempt, through them, to establish relationships with their clients as a step toward getting longer term commitments to donate when the clients get access to their savings.
http://www.partnerships.gov.au/pdf/giving_aust_release.pdf
*John Robertson is proprietor of thebigpicture Economics and publisher of thebigpicture – guideposts for the private investor. John can be contacted at john.robertson@thebigpicture.com.au or on 03 9500 8391.
John Robertson is also a member of the investment committee of the Emerging Resources Company Share Fund (http://www.eimcapital.com.au/ercsf.htm) and may be involved in investment decisions relating to companies mentioned in this article.
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