The Australian Journal of Public Administration, vol. 71, no. 2, pp. 211–220 doi:10.1111/j.1467-8500.2012.00765.

RESEARCH AND EVALUATION

Delivery of Public Services by Non-Government

Organisations1

Anthony Housego and Terry O’Brien

Australian Productivity Commission

All levels of government in Australia (national, state and territory, municipal) are increasingly
contracting with charitable and other not-for-profit organisations (and, at times, for-profit
businesses) for the delivery of public services. While estimates vary about the extent of such
arrangements, recent statistics suggest they are a large and growing phenomena. The shift
to ‘purchase of service’ contracting and other forms of ‘managed markets’ has been partly
motivated by a desire to improve the efficiency and effectiveness of service delivery. However,
there are some criticisms of the approach, arguing that it leads to a range of problems for
not-for-profit organisations, including being burdened by excessive regulation, movement
away from their core purpose (so-called ‘mission drift’), and a weakening of the connections
with the community they serve. This article examines the prevalence of the contracting
arrangements and some of the main reasons why they have come about. It also considers
the main gains and challenges resulting from such arrangements, in particular for public
sector management. The article draws on recent work by the Productivity Commission (‘the
Commission’) including the 2010 study of the contribution of the not-for-profit sector (PC
2010); the 2011 inquiry on disability care and support (PC 2011a); and the 2011 inquiry
on caring for older Australians (PC 2011b). It also draws more broadly on a range of other
Commission work, including recent reports on government services produced for the Council
of Australian Governments (SCRGSP 2011a, 2011b).

Key words: Non-government organisations (NGOs), service delivery, aged care, disability care,
‘purchase of service’

The Australian Not-for-Profit Sector Box 1. Services delivered by the not-for-

profit sector
Defined broadly, Australia’s not-for-profit
Contracted services currently include: aged
(NFP) sector is made up of organisations es-
care; disability services; child, youth and
tablished for a community purpose, whether
family support; rehabilitation services; pal-
mutual (benefitting members) or altruistic
liative care; alcohol and drug services; men-
(helping others). Other terms commonly used
tal health services; Indigenous health and
to describe such organisations collectively
housing support; community and emer-
are ‘third sector’, ‘voluntary sector’, ‘social
gency housing; offender and prisoner re-
economy’ or ‘non-government organisations
lated support; victim support; services to
(NGOs)’.
people who are homeless; sexual assault
The sector is very diverse, with consider-
and domestic violence services; rescue
able variation in scale, the extent to which
and emergency services; legal assistance;
organisations are mainly involved in market
and health promotion and prevention (PC
or non-market activity, and in the extent to
2010:299).
which organisations are primarily focussed on


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212 Delivery of Public Services by Non-Government Organisations
Figure 1. The NFP sector is diverse and boundaries are fuzzy
Source: PC (2010:8).
serving their membership or the community
more generally (Figure 1).
The sector is also large, both in terms
of the number of people and organisations
involved and with regard to its economic
contribution. For example, the Commission’s
2010 report on the not-for-profit sector found
that:
• On a broad estimate, there are some
600,000 NFPs (excluding body corporates
such as for strata titles for accommoda-
tion). The majority, some 440,000, are
small unincorporated organisations (such
as local community tennis clubs or hobby
groups).
• Of the remaining 160,000, the ABS clas-
sifies over 58,000 as ‘having an active tax
role’ (on the basis that they employ staff or
access tax concessions). These ‘economi-
cally significant’ NFPs employed 889,900
staff (around 8 per cent of total employ-
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ment), and contributed just under $41
billion to Australia’s GDP in 2006–07
(Table 1).
• Over 4.6 million Australians volunteered
with NFPs in 2006–07. The wage equiva-
lent value of this effort is $14.6 billion.
Best estimates suggest that only around
half of all volunteers belong to NFPs that
also employ staff. Accordingly, there is
substantial engagement by volunteers with
small NFPs that rely solely on volunteer
effort (PC 2010:XXVI).
In recent years there has been significant
growth overall in the sector. The contribu-
tion of the economically significant NFPs to
measured GDP (which does not include the
value of the contribution of volunteers) has
increased from 3.3 to 4.1 Per cent of GDP
between 1999–2000 and 2006–07, reflecting
strong annual growth of 7.7 per cent over this
period.
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 Housego and O’Brien 213

Table 1. Economic activity of not-for-profit organisations

At end June 2007

Economically significant organisations

Organisations Gross value added Total employees Volunteers

no. $m % of total ‘000 ‘000

Culture & recreation 11 510 6644 16.2 102.7 2072.3
Education & research 6 621 11012 26.9 218.4 608.0
Hospitals 102 3510 8.6 55.7 41.4
Health 919 3433 8.4 99.7 389.8
Social services 7 811 6608 16.1 221.5 1474.6
Environment etc 11 972 4161 10.2 110.5 344.0
Religion 12 174 1325 3.2 40.7 –
Associations 3 224 2075 5.1 22.5 102.6
Other activities 4 446 2192 5.4 18.3 –
Total 58 779 40959 889.9 4616.1

Source: PC (2010:VII).

Table 2. Growth in value added, employees and volunteering

Average annual growth rate from 1999–2000 to 2006–07

Gross value added Total employees Volunteer hours

(real) per cent per cent worked per cent

Culture & recreation 2.9 −2.9 7.9

Education & research 5.4 5.7 −7.3
Health (including hospitals) 9.6 8.1 5.9
Social (community) services 6.7 5.1 −0.9
Associationsa 16.4 5.0 −8.9
Otherb 17.1 13.7 −0.4
Total average growth 7.8 5.7 1.6
a
Business and professional associations, unions. b Environment, development, housing, employment, law, philanthropic,
international and religion.
Source: PC (2010: XXIX).

Relationships with Governments Government assistance to NFPs takes many

All levels of Australian government encourage
the development of an active NFP sector. In part
this reflects the considerable dynamism of the
sector, with NFPs doing things not undertaken
by either governments or the for-profit (busi-
ness) sector. Governments see NFPs as being
able to strengthen the social (and human) cap-
ital of the community, as well as performing
their members’ intended purpose. These organ-
isations add value, not just by what they do (the
services they deliver), but also by the way they
work (for example, by fostering social cohe-
sion, a sense of community and a robust ‘civil
society’).
forms, ranging from the provision of low-cost
meeting facilities through to Commonwealth
income tax and other tax concessions and tax
deductibility for donations made to them.
Governments provide significant direct fund-
ing to many NFPs. This includes:
• making direct grants to support their activ-
ities;
• paying for the services that the NFPs have
themselves devised and delivered as their
core purpose: eg drug counselling;
• channelling government spending through
NFPs for the contracted provision of ser-
vices that would otherwise be supplied by

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214 Delivery of Public Services by Non-Government Organisations
government eg employment services, wel-
fare housing.
NFPs now generate less than one third of
their incomes from donations (23 per cent) and
fees (9 per cent).
A further significant dimension of the rela-
tionship between governments and NFPs is in
the area of regulation. The Australian Govern-
ment and state and territory governments regu-
late many aspects of NFP operations, including
their registration and financial reporting, to en-
courage public trust. At the same time, the reg-
ulatory impost has also increased in response
to the need for accountability for the increase
in funding that NFPs receive to deliver public
services.
Recent Developments in Service Delivery
Evidence of the growing use of, and reliance on,
service contracting can be found both in data
on direct funding and in informal survey data.
Direct funding data suggests that the re-
liance of NFP organisations on government
funding has been increasing significantly over
time. For example, total government funding to
the NFP sector has increased from $10.1 bil-
lion in 1999–2000 to $25.5 billion in 2006–07
(PC 2010). By 2006–07 the Commonwealth
supplied about 42 per cent of NFP revenue,
state and territory governments about 32 per
cent and local (municipal) governments about
0.2 per cent.
As part of its 2010 study into the NFP sec-
tor, the Commission undertook an informal sur-
vey of Commonwealth and state and territory
agencies that have significant involvement in
the provision of human services to identify the
scope and scale of service contracting. The re-
sults provide further evidence on the large num-
ber of service now delivered in this way.
The survey involved 43 agencies and pro-
vided detail on government engagement in 109
programs. It found that NFP organisations are
major providers in most human service areas
(Figure 2). Further:
• For all but two categories of human ser-
vices (health and emergency), at least half
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of the government agencies reported that at
least 50 per cent of their services (by value)
were delivered by external organisations.
• Of the services delivered by external or-
ganisations, almost half the government
agencies reported that over 75 per cent of
their program value is delivered by NFPs.
Indeed, for 66 per cent of programs, NFPs
were the only non-government providers
(PC 2010:D1).
The reasons given by agencies for choosing
NFPs to deliver services included:
• NFPs are best placed to respond to com-
munity needs and are closer to the target
group of a particular service. This was
particularly so amongst agencies which
fund Indigenous services. For example,
one agency said ‘local services are closer
to communities and best understand their
needs and expectations’.
• Some NFPs are able to access resources
that are generally unavailable to the gov-
ernment, such as volunteers (for example,
rural fire fighters) and private sponsorship
(for example, community crime prevention
services).
• Where NFPs have a history of involvement
in an area, such as mental health, they have
the benefit of considerable expertise and
links to target groups.
• NFPs are seen as being more flexible and
adaptable to client needs, as well as having
the ability to package government funded
services with other services (PC 2010:
D9-D10).
Some agencies stated that they desired to
concentrate on their core business (such as
policy, administration and reporting). Accord-
ingly, they engage with external organisations
for the actual delivery of services.
Some of the Main Challenges
The expansion of government funded arrange-
ments for service delivery has had a significant
impact on the operation of many NFPs.
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 Housego and O’Brien 215

Figure 2. Services externally funded by participating agencies

a
Agencies could report more than one area of engagement. b Culturally and Linguistically
Diverse. c ‘Other’ included education and training, art and culture, transport, crime prevention,
and legal.
Source: Productivity Commission survey, survey question 1.1, table D.2.

On the positive side, it has in many cases
made service contracting and delivery by NFPs
more ‘professional’, and has increased their
transparency through greater reporting and ac-
countability requirements. It has also led to
improved outcomes for clients in some cases,
given that NFPs can experiment with policy
delivery, better address sub-groups’ problems
(often based on personal trust and shared val-
ues), and deliver services at lower cost or higher
effectiveness.
However, the shift to third party contract-
ing, together with the adoption of competi-
tive processes in the selection of providers, has
also resulted in some significant challenges for
the sector. Several of these challenges are dis-
cussed in more detail below.
tor has traditionally had a very different way
of delivering many services compared to gov-
ernments. Government service provision faces
pressures to be delivered uniformly over the
whole of the country; and to be rules-driven and
‘blind’ to cultural and other differences. This
stands in contrast to an emphasis on tailoring
and needs-based delivery that has been a hall-
mark of many services traditionally delivered
by NFPs, especially by those set up by, and for,
particular sub-groups within the community.
The tension between NFP policy experimen-
tation and governments’ public accountability
can, unfortunately, act to reduce the social inno-
vation that attracts governments to NFP service
delivery in the first place.

Requirements for Uniformity in Service Increased Government Influence and Risks

Delivery to NFP Autonomy

One of the issues facing NFPs in the shift to A second key problem is a gradual en-
‘purchase of service’ contracting is that the sec- croachment on the autonomy of many NFPs
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216 Delivery of Public Services by Non-Government Organisations June 2012

arising from government contracting. The concerns of the median voter, and conse-
power asymmetry between governments and quently with the level of public support for
NFPs can mean that the latter have little or government funding of particular services.
no say in determining the implementation of
policies and programs in which they may be
Lessons
involved.
Further difficulties created or exacerbated
Given the numerous challenges with ‘purchase
by taking on government contracts include
of service’ contracting, the question arises
that: many NFPs have previously undercharged
as to how such arrangements might be im-
for their delivery services – perhaps by about
proved for all involved (including the clients
25 per cent; NFPs often do not budget to fully
of the services being delivered, the NFPs and
cover overheads or evaluation; and the provi-
governments).
sion of tax concessions to NFPs may encour-
There is an important distinction between
age governments to pay for only the marginal
problems inherent in contracting, and those re-
costs of service delivery. Many NFPs now find
lating to how such arrangements are imple-
that they face increased accountability and re-
mented. There are legitimate arguments against
porting responsibilities as a result of receiving
the use of purchase of service contracting in
government funding for service delivery.
some cases because of inherent conflicts with
A greater dependence by NFPs on govern-
the core functions of NFPs. But many prob-
ment funding arguably compromises their in-
lems also arise because of the way that such
dependence. In turn, this can limit their policy
arrangements are designed and governed. It is
advocacy roles and distract NFPs from their
this second area that the rest of this article fo-
original purposes and strengths. Any ensuing
cuses on. (For further discussion of inherent
dilution of purpose within NFPs is referred to
problems, see PC 2010:XX).
as ‘mission drift’.
Some recent lessons from Commission in-
quiries into disability and aged care services
Other Challenges
(PC 2011a, 2011b), together with further anal-
ysis from the earlier study of the NFP sector
The Commission’s 2010 study of the NFP sec-
(PC 2010), point to several main directions
tor discussed a number of other trends aris-
for improvement in implementation. A consis-
ing from contracting arrangements, or resulting
tent general theme is that, where contracting
from the way that they are implemented, that
to NFPs is used, clarity of roles and purpose
have the potential to further erode the compar-
is critical, and that a ‘horses for courses’ ap-
ative advantage of NFPs. These included (PC
proach is needed. In particular, models of con-
2010:307):
tracting and delivery should, wherever possible,
•
be appropriate to the needs of the client base
a perception that NFPs are simply a de-
involved.
livery arm of government and not able to
respond flexibly as needs change or oppor-
tunities arise; Case Study 1: Aged Care
• NFPs taking on the characteristics and be-
haviours of the government agencies they Many aged care services, and much residential
are dealing with, referred to as ‘isomor- accommodation for aged persons, are provided
phism’; by NFPs. Around 84 per cent of care services
• increased differentiation and separation of delivered to aged persons still living in their
stakeholder roles within NFPs and conse- homes are delivered by charitable and other not-
quently weaker connections with the com- for-profit (NFP) community-based providers.
munities they serve; In residential care, there were 2,773 aged care
• NFPs being more exposed to the risks as- facilities in Australia delivering formal resi-
sociated with the changing preferences and dential care in June 2010. Around 59 per cent
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 Housego and O’Brien
Figure 3. Current modes of care in the aged care system
Source: PC (2011b:XXIV).
of the beds were operated by NFPs; while
35 per cent were operated by commercial or-
ganisations and 6 per cent by some state and
local governments (DoHA 2010).
This strong involvement of NFPs in the sec-
tor has existed for many years. As discussed
by Cullen (2003), charitable and other non-
government organisations have played a role in
delivering aged care services dating back over
a century.
Government involvement in the financing
and provision of aged care also has a long his-
tory, and the Australian Government is now
the prime funder and regulator of aged care
services in Australia. Governments have previ-
ously sought to protect the aged by controlling
the price, quantity and quality of services de-
livered by both for-profit and NFP providers.
In conducting its recent inquiry into aged
care (PC 2011b), the Commission found that
the current regulatory and funding structures
have contributed to significant problems for
many older people and for providers: waiting
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217
times can be significant; services can be diffi-
cult to access; consumer choice is limited; and
regulatory burdens are high. Modes of care are
also rigidly defined in the current system into
several main categories (Figure 3), and many
individuals whose care needs change within or
across these categories experience difficulties
in accessing services that are tailored to their
needs.
The Commission’s 2011 aged care report
contained recommendations that, if adopted,
would amend both the broad architecture of
the ‘system’ and the specific operating en-
vironment faced by NFPs and other service
providers.
The Commission’s recommendations in-
cluded simplified entry arrangements for those
requiring aged care services; clearer separa-
tion between accommodation (generally paid
for privately throughout people’s lives) and the
delivery of care; more user choice about aged
care services, service providers and the type
and standard of accommodation; a package of
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218 Delivery of Public Services by Non-Government Organisations
home equity release and other financing op-
tions to allow the aged to pay for their choice
of suitable accommodation (with a safety net),
and to contribute in part towards their cost of
care (with a maximum lifetime limit); and grad-
ual transition to simplified regulatory controls.
There would be significant changes for com-
munity and residential aged care providers (in-
cluding NFPs) if these recommendations were
implemented. Providers would, for example:
• be subject to quality accreditation, but be
free of any quantity limitations such as bed
licences and numbers of care services that
they can deliver (the overall limit being the
number of older people assessed as need-
ing care);
• compete with other providers for clients
who had entitlements to subsidised care
services, subject to being approved pro-
viders of those services;
• receive a price set by the Government
for approved care services that have been
determined through the assessment pro-
cess (comprising a care co-contribution
from the client and a subsidy from the
Government);
• compete on a range of dimensions such as
the professional and relationship skills of
their workforce, the cultural awareness and
languages on offer, the quality of food and
other services and their responsiveness to
the particular requests of individual clients
(while meeting the approved quality and
safety standards, and operating within the
price set for the entitlement);
• be allowed to offer a range of additional
non-essential services, at a quality and
price set by the provider.
The recommendations, if adopted, would
also improve some key aspects of service con-
tracting. The Australian Government would be
required to more readily acknowledge the full
‘efficient’ costs that NFPs incur when deliver-
ing the services, including reporting and evalu-
ation costs. The Government would also be en-
couraged to streamline tendering, contracting,
reporting and acquittal requirements to reduce
the reporting burden on NFPs.
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Case Study 2: Disability Care
Disability services are a second area of service
delivery recently examined by the Commission.
Service provision in this sector has been a mix
of NFP (charity) work, medical system provi-
sion, direct government provision and heavy
reliance on family carers.
The Commission’s report (PC 2011a) iden-
tified many problems with the current sys-
tem. The report observed that disability care
is underfunded, excessively complex and frag-
mented, and insufficiently responsive to the
needs of people with a disability and their
carers. The system is also provider-centred,
short-term in focus and oriented towards ‘cri-
sis’ cases. Providers are (inadequately) ‘block
funded’, often assess individuals’ needs subjec-
tively and meet them as they judge best. People
with a disability and family carers have little
choice about what they get or who provides it.
In its report, the Commission proposed ma-
jor changes to the disability care and support
system, including: a national insurance scheme
funded by general revenue to increase overall
funding and give certainty to people over their
lifetime; a guarantee to meet reasonable needs
(the end of stringent rationing); flexible sup-
port packages appropriate to need; more user
choice, including to cash out entitlements and
manage the employment of carers themselves,
to choose their own service providers, and to
have the ability to choose a support organisa-
tion which could assemble a package of assis-
tance on their behalf; publicly available perfor-
mance reporting of service providers, so that
choice is informed; and innovation funding for
NFPs to try new service models.
Again, these and related recommendations in
the report aim to move service delivery towards
a more client-centred and flexible approach.
Common Lessons
The approach in both the aged care and dis-
ability care reports is consistent with the view
that governments should choose the appropri-
ate model of engagement with NFPs for the
purpose at hand (Figure 4). For example:
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Figure 4. Models for engaging government funded services and features that guide their suitability

Source: PC (2010:25).

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220 Delivery of Public Services by Non-Government Organisations
• where services have clearly defined out-
comes and are being delivered in a con-
testable market, service contracting may
be the most appropriate model;
• where there is real client choice and a con-
testable market, client-directed service de-
livery, with safeguards can be suitable;
• in cases where uncertain outcomes exist
and benefits from experimentation may
be significant, a joint venture approach
can share both the risks and the lessons
emerging.
Where to From Here?
Government decisions arising from the Com-
mission’s 2010 NFP report, for example,
have resulted in the creation of a new
Australian Charities and Not-for-Profits Com-
mission. This will enable governments to give
greater focus to their relationships with the NFP
sector. There has also been the establishment of
a new portal as a ‘one stop shop’ for reporting
by individual NFPs to state agencies, and ini-
tiatives for better targeting of NFP tax conces-
sions towards the primary charitable purpose of
NFPs. As part of the latter initiative, a ‘report-
once, use-often’ general reporting framework
has also been implemented.
More broadly, as set out in this article, ‘pur-
chase of service’ contracting is a growing phe-
nomenon, but significant challenges remain in
delivering government services in this way.
As the Commission has observed in its NFP
Report:
A key issue. . . is what actions governments can
take to ensure their engagement with NFPs in the
delivery of government funded services does not
inadvertently erode the comparative advantages
the sector has to offer and, as a consequence, un-
dermine efficient and effective service delivery
(PC 2010:307).
From the 1980s in Australia, governments
have moved from simply supporting the activi-
ties of NFPs through means such as direct sub-
sidies, to purchasing services they provide via
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performance-based contracts (PC 2010:303).
This practice has also become commonplace
in other countries, including the United King-
dom, Canada and New Zealand.
Given the extensive and increasing use of
such contracting arrangements, improvements
in their implementation – including in terms
of service specification, funding arrangements,
quality assurance and reporting – can result
in the delivery of higher quality services and
greater efficiency improvements.
Endnote
1. This article was prepared by Anthony
Housego, Research Economist, Australian Pro-
ductivity Commission. It supports a presen-
tation by Mr Terry O’Brien, First Assistant
Commissioner, Productivity Commission at the
China-Australia Public Management Dialogue
Sun Yat-Sen University Guangzhou. 15–17
June 2011.
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