Home » Impact Investment » Red Tape and Social Impact

Red Tape and Social Impact

Sign up to the Barefoot Economist’s Newsletter

© Barefoot Economic Services

All content on this website (unless otherwise specified) is copyright of Barefoot Economic Services. Please acknowledge any content used in your work appropriately. Thank you for your consideration.

 

Summary

Red tape (i.e. regulatory burden) reduction has been a focus for governments in recent years. However, the focus has been on the private commercial sector and has largely ignored other sectors. In this post I will discuss the red tape imposed on social service organisations. The red tape has implications beyond increasing costs for social service organisations. At worst, it could provide perverse incentives for social service organisations to focus on process and outputs rather than producing and measuring genuine social impact.

Introduction

Yesterday, I attended an Evaluation Network meeting at MacKillop Family Services. It was an opportunity for me to learn more about evaluation on social policy. The meeting took an unexpected turn and all of a sudden, many of the evaluators started to complain about how onerous and inconsistent government reporting requirements were. How they were often focused on process rather than the outcomes the organisations were trying to achieve. For organisations that aren’t exactly resource-abundant, it seemed crazy to me that governments were imposing this regulatory burden. Granted, accountability is required but it makes the rhetoric of red tape reduction rather hollow when you cut it with unseemly haste for businesses but ignore the impact on another sector. As a former official who was charged with red tape reduction, I was concerned that a major part of government was blithely imposing red tape while seemingly ignoring the costs. In this post, I will discuss the how’s and why’s of this problem and possible solutions.

The Problem

Let me be clear about one thing before I start on describing the problem. I’m not against regulation in general. It has useful social benefits such as discouraging people from murdering each other (e.g. criminal law and the penal system) to reducing the risk of food poisoning (although that has come into question recently). But there are ‘smart’ regulations and ‘dumb’ regulations. Smart regulations deliver the social benefits with proportionate compliance costs for the regulated individuals and organisations. Given this, I am very much against dumb regulations because it makes useful activities such as delivering social services unnecessarily difficult and costly.

Why do governments regulate the social sector? First, it is to ensure that social services are actually been delivered and to protect vulnerable intended beneficiaries such as children and the elderly. Second, governments are key investors of social services and want to know what they are getting. Both reasonable objectives for regulation.

According to a report done by Ernst and Young for the Australian Charities and Not-for-Profits Commission (ACNC), most of the regulatory burden is imposed through funding agreements with individual social service organisations. Ernst and Young estimated that the cost of complying with Commonwealth reporting requirements cost on average $108,000 in 2012-13. The cost varies depending on the size of the organisation: $18,000 for charities with less than $250,000 per year and $235,000 for organisations $1 million or greater per year. Note, that this figure does not include funding by State governments so this estimate only partially captures the extent of red tape faced by this sector.

As mentioned before, these reporting requirements are imposed for accountability reasons and also to gather data on the specifics of the funded program. It is quite reasonable for government to expect some form of reporting. However, the problem occurs when multiple agencies fund the same project and do not coordinate their reporting requirements. For example, a counselling service may be funded by the Department of Health and the Department of Justice, each having different templates, data requirements and reporting cycles.

Agencies may legitimately argue that they have different objectives and internal reporting requirements which necessitates the service organisations reporting multiple times for the same project. However, this does not excuse why agencies cannot work together to streamline reporting requirements for the funded organisations. I think agencies have little incentive to cooperate with each to reduce red tape for their service providers. Unless there is a top-down directive to reduce red tape in funding agreements, this situation is unlikely to change.

Besides these reporting requirements are for accountability, right? It depends on what is being reported. Much of the time the social impact isn’t being sought but instead what inputs the funding has been spent on. This is probably a hangover from the commercial procurement software that governments use to manage their social service contracts. Such procurement software can only handle inputs and are not designed to report on outcomes. Now, there is a range of software available that specifically allows for the reporting of social outcomes. However, government has been slow to integrate such software into their IT systems.

The problem in a nutshell appears that agencies have little incentive to reduce red tape and as a result haven’t picked up technically-feasible solutions that could help them. How do we give governments the right incentive to reduce red tape on social service organisations?

Possible Solutions

The New South Wales’ (NSW) Government may have provided a clue to a possible solution to align the governments’ incentives with red tape reduction on social service organisations. The NSW Government recently released their Social Impact Investment Policy which outlines how the government intends to encourage the growth of impact investment. One of the big criticisms against impact investment is the choice of metrics. Metric development can be a costly and technically-challenging task as many critics will be eager to tell you. As part of identifying priority areas for impact investment, the NSW Government will state upfront what outcome metrics in their Statement of Opportunities.

The NSW approach focuses on outcomes rather than inputs. This reduces red tape because it is not specific to individual agencies but instead the intended outcomes. This reduces the need for separate reporting because the funded organisation would simply report progress towards outcomes. The NSW approach also makes the data requirements explicit upfront. There is no variation for different agencies, but agencies may be interested in different outcomes. The clear statement of outcome metrics makes it easier for the social service organisations to build in data collection systems, processes and analytics to comply with the reporting requirements. Conceivably, governments could reduce red tape for service delivery by reducing repetition and data requirements.

Adopting a NSW approach to stating desired outcome metrics is not restricted to impact investment. It can be used for conventional service delivery. It may require coordination between agencies to agree on priority areas. The development of a similar policy such as the NSW Social Impact Investment Policy would be an opportunity to obtain agreement and for government to send a clear signal throughout the bureaucracies on the need to reduce red tape for social service delivery. A clear policy announcement will provide an incentive to align their activities with government policy goals. The last thing most bureaucrats want to be seen as is irrelevant to achieving policy goals.

In the end, a move towards outcome-based policy framework would be to improve the social impact for beneficiaries. This would occur by allowing social service organisations to adopt the most effective delivery methods rather than be prescribed by government. It also allows room for innovation. Furthermore, resources are freed up from reporting that can be used in service delivery. And if agencies’ incentives are aligned with achieving explicit outcomes, this would have a good chance of improving social impact in our communities.