Why some organisations holding charitable status may be crowding out private enterprise and worthy charitable causes

February 15, 2011 4:00 PM

Charities are good. They help the disadvantaged and less fortunate, encourage altruism and facilitate a volunteering ethos. We can easily think of charities we hold dear to our hearts, perhaps because we, or someone close to us, has benefited from their initiative and care. Charities tackle many social ailments, from poverty to domestic abuse to helping our neglected elderly; key issues that are often underserved by private and public sectors. Granting tax breaks to those who go out of their way to ameliorate our society makes perfect sense. Indeed, policymakers encourage such behaviour, by granting favourable tax positions to organisations that have a charitable status.

However, not all organisations holding charitable status actually target social ailments. Many operate in ostensibly straight forward commercial markets that are already well serviced, making them virtually indistinguishable from those in private enterprise. Such charitable status organisations may well have nothing to do with mobilising volunteers, participating in fundraising of any kind, or providing benefit to those who are less fortunate. Indeed, many derive most of their revenues from contracts and the provision of chargeable services. Their client-base often includes corporate and private clients who are in perfectly healthy financial positions.

Such a state of affairs leads one to question the desirability of permitting such charitable status organisations to compete with private enterprise, during instances where there is no need for charitable involvement. Ultimately, all things being equal, charities enjoy a competitive edge when facing their private enterprise rivals, due to the significant benefits in taxation derived from charitable status.

Consider, for instance, the industry for teaching English as a second language (ESL) to fee-paying adults and corporate clients. In England, there are numerous accredited English schools in this market. Interestingly, some are private enterprises while others have charitable status. Yet both provide similar services, to a similar audience, while charging similar fees.

Why do some of these commercially-minded players hold charitable status? One answer to that question is simply due to historical reasons. In other words, that's how the organisation started operating decades ago, and that’s how it remains today.

To be fair, some of these charitable status organisations do note in their annual reports that they provide some scholarships or free English tuition to disadvantaged segments. The proportion of these public benefits, however, often seems quite small relative to their overall income. To some observers, it may seem as though these organisations are simply aiming to tick all the right boxes in order to maintain a tax advantageous charitable status. And, at any rate, scholarships and free tuition could easily be provided by private sector language schools that would, in such instances, enjoy a tax break as well.

The teaching of English as a second language to fee-paying adults is a particularly interesting and topical sector for exploration. Especially, when one considers the government’s wish to reduce the number of student visas granted for non-degree studies. This market is already competitive, crowded and manifesting signs of excess capacity. The presence of competitors holding charitable status – some with annual revenues and balance sheets in the millions of pounds – begs the following question: What, exactly, is the rationale for granting tax exemption to such organisations that participate in a segment that is more than adequately serviced by private enterprise, and whose clientele is by no means disadvantaged?

Some important policy questions naturally derive from here. For instance, how much tax revenue is the government forgoing by not taxing these industry players who hold charitable status? And furthermore, how could such forgone income help the current public spending crisis, and the need to assist those charities that are helping the truly disadvantaged and needy within our society? Presumably, those who run such invaluable charities may be wondering the same questions, and asking whether they’re being crowded out by some of their less deserving peers. And, surely, the crowding out concern already extends to those in private enterprise, who have to compete in an uneven playing field.

Policy questions require answers that take into account the underlying motives within a given problem. For instance, what motivates a charity to remain active in a market segment that does not require charitable intervention? What is their raison d'être? If the people leading such organisations do adhere to loftier moral values, as one might expect they do, would they not care to refocus their resources towards alleviating truly pressing social needs? Why remain active in a segment where the need for charitable involvement is arguably redundant?

It’s a tricky question, and part of the answer might revolve around incentive and governance issues. After all, senior management in charitable status organisations do earn salaries and have personal financial commitments like anybody else. Some may wonder whether, indeed, there is sufficient incentive for a chief executive to refocus their charity’s efforts in the pursuit of more worthy causes and, in the process, possibly jeopardise a job title and salary that may be closely aligned with maintaining the status quo. Perhaps, since there aren’t traditional shareholders to whom a charity head must be held accountable, the sense of urgency isn’t quite as pronounced as it would be in the private sphere.

Instead of simply measuring public spending cuts and tax revenues hikes, perhaps it is time to benchmark charities more closely and be more selective when determining who may hold charitable status. This may well require legislative change, but doing so could boost the efficiency and effectiveness of our charity sector, while enhancing the competitiveness and appeal of our private sector. At the end of 2010, there were 162,415 registered charities in England and Wales, with total revenues of £53.8 billion – these are considerable numbers, and they’re craving for more attention.­­­­­­­­


Alberto Lidji has a degree from Cambridge University and a Masters in Management from the London School of Economics, where he studied Governance and Incentives in Organisations. He volunteers as a local authority school governor, appointed by the City of Westminster, and is the President of LSE Crossfire – an official alumni debating group of the London School of Economics. Comments may be sent to: alberto.lidji@lsecrossfire.org

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