The success of non-profit welfare organisations becomes visible in society

Dr Markus Doumet on the economic importance of non-profit organisations

The Chair of Finance and Corporate Governance at the University of Wuppertal actually deals with sector analyses of private companies. A well-known example is the project Konjunkturbarometer (economic barometer) with the Stadtsparkassen in the Bergisch land region. “We look at the structures and developments in the sectors nationwide, but also with a special focus on the Bergisch city-triangle of Solingen, Wuppertal and Remscheid,” Markus Doumet, senior academic advisor at the chair, explains. The enquiry from the Association of Independent Welfare Organisations was therefore a particular challenge, which then led to a new project, because “when we as an institute looked at what independent welfare organisations actually do, we quickly realised that what we usually work on here doesn't work there,” the economist says. “After all, these are not classic, privately organised companies that primarily act with the intention of making a profit. That’s why we needed a different analytical approach here.” The project entitled ‘Die volkswirtschaftliche Bedeutung der Freien Wohlfahrtspflege im Bergischen Städtedreieck’ (‘The economic importance of non-profit welfare organisations in the Bergisch city-triangle’) was launched with six leading non-profit welfare organisations in the Bergisch city-triangle (AWO, Caritas, Der Paritätische, German Red Cross, Diakonie, Wohlfahrtsverband der jüdischen Kultusgemeinde).

Non-profit organisations provide added value for society

All of the organisations and sponsors examined in the project are non-profit and committed to the common good. “They do not generate profits, but rather provide additional value to society. They address social needs within the social sector,” Doumet explains. For this reason, the success of independent welfare organisations cannot be measured in terms of business figures, as the services provided and their impact are not visible in the company, but are reflected in society.

Special status of non-statutory welfare organisations due to the principle of subsidiarity

The principle of subsidiarity (subsidiarity is a principle that states that a superordinate unit should only intervene if a subordinate unit cannot fulfil a task independently, editor’s note) gives independent welfare services a special position in the fulfilment of welfare state tasks. “The principle of subsidiarity in itself is a basic principle of a federal state, and it makes particular sense” Doumet comments. “It’s about finding a local solution to a local need or problem. And that is advantageous in the first instance because it encourages citizens to take responsibility for themselves. It leads to a customised solution being found for the specific local problem.” Conflicts could only arise if the objectives varied at federal and state level, but the legislature has the option of enacting federal or state laws.
Independent welfare organisations also enjoy priority in the allocation of services; another aspect of the subsidiarity principle. When it comes to the question of whether a local authority commissions a service from a private-sector provider or from non-profit organisations, it is historically and politically desirable for the state to give priority to non-profit organisations. “However, this does not mean that independent welfare organisations can do whatever they want, but rather that there is a legal framework within which they operate. In addition, not all costs are always covered.” Doumet uses the example of a day-care centre to illustrate this circumstance. “In the case of day-care centres, the costs are based on the number of children, the age of the children and the scope of care. Besides, the municipal and state funds that go into it are clearly limited. Independent welfare organisations have no choice but to work according to economic principles. Otherwise they would not be able to cover their costs.” In addition, over the last 10 years, due to changes in legislation, attempts have been made to promote competition between independent organisations and private sector organisations wherever possible.

Voluntary commitment is declining

Two key tasks of the independent welfare sector are the representation of the interests of socially disadvantaged groups and the mobilisation of voluntary work. While the first group is growing, the commitment of the second group is shrinking, especially in traditional organisations. “First of all, it is fundamentally true that volunteering at club level is declining,” the researcher confirms and states: “The nature of volunteering changed. There is less long-term commitment in organisations; young people in particular tend to get involved on a short-term, project-related basis.” This, in turn, is a challenge for non-statutory welfare organisations because they are traditionally more reliant on long-term volunteering. “They therefore have to reinvent themselves to a certain extent, adapt to this new form of commitment and try to develop other, new programmes, especially for young people.”

The economic importance of non-statutory welfare organisations

The non-statutory welfare sector is one of the largest employers and therefore a key factor in the economic development of the region. However, it is not widely recognised in the public debate. “When we started the project, we had no idea of the scale,” Doumet says. “However, the fact is that if you look at this area of social services, separate from voluntary work, and only look at the employment relationships which are subject to social insurance contributions, this area of social services accounts for 10%. Independent welfare organisations also account for a significant part. If this key area were to disappear, one in 10 people of the working population would be unemployed.”

Every euro invested in non-statutory welfare goes back many times over

Every euro invested in the activities of non-statutory welfare organisations returns many times over through direct and indirect social effects. This social impact measurement can be illustrated using the example of day-care centres. “If you take a day-care centre, it’s relatively easy to calculate the costs, because a day-care centre has to work according to business principles and the financing is also relatively easy to map, because it's mainly state and municipal funds. Then there are also own funds, but you can calculate all of that too.” In order to determine the benefits, the project managers conducted interviews with educators, the day-care centre management, the children’s parents and other relatives to understand what it means for the individual stakeholders when a child has a place in a day-care centre. The result: a financial economic cycle, which Doumet explains as follows: “There are three main effects. First, the employment of the day-care centre staff: these are employment relationships subject to social insurance contributions. The money that flows into the day-care centre and goes to the day-care centre employees in the form of wages and salaries is then channelled back into the economic cycle and, in part, back into the public budget. As the majority of employees also live in the Bergisch city-triangle and neighbouring municipalities, the money also stays local. Then there are the parents. The moment a child goes to day-care, parents have more time and can also pursue an employment relationship, or an employment relationship to a greater extent.” The researchers also analysed the consequences of a child not being able to attend day-care. “In households with two parents, the missing place at a day-care facility would mean that the one with the lower-paid job would have to reduce it even more or even give it up. This would mean a loss of income, not only immediately, but perhaps also in the long term.” It is even worse for single parents who may not even have grandparents nearby. They are then suddenly reliant on the social security system and this places an additional burden on the public budget. And then there is another decisive effect on the children themselves: “In the Bergisch city-triangle, we naturally have a very high proportion of children whose mother tongue is not German . Consequently, exposure to the German language, where these children speak with their peers, is very important, and it helps them later in the school context, completely detached from the educational day-care concept. If you look at how this effect alone impacts on educational opportunities at primary school age and subsequently at secondary school, it is immense. The effects of early childhood education are not immediate, but they are very long-lasting and very strong. Of course this way of education also has consequences for entry into working life and for overall income later on.” All of this is difficult to quantify, but the researchers have tried to work with a model that at least gives an idea of the cost-benefit effect. “Then we are back in the area we are focusing on, which is financial economy. A euro that is produced in 20 years has a different value than a euro that has an immediate value. And if you do that and compare it to the immediate costs, you find that every euro ijnvested in day-care centres yields a benefit of 4.60 to 6.60 euros”.

The social significance of independent welfare organisations

The project goes beyond traditional, often purely cost-based evaluations to translate the social impact of social work into comprehensible key figures. Thus, the non-statutory welfare organisations form an indispensable part of the social infrastructure in the Bergisch city-triangle. Doumet emphasises the importance of the social and economic commitment of non-statutory welfare work in its role as an employer and client. “It is also a major economic player. When it comes to the financing of non-statutory welfare organisations, we always have the issue of costs. Only the costs are ever seen in the public budget. What we tried establish a method that can be used to show the arising social and public budget costs if a measure is discontinued or not implemented.” In order to avoid follow-up costs to society, one should always ask oneself in the public debate whether short-term savings in the public budget could not lead to significantly higher costs to society in the future. This budget planning would be the advantage of this project measure, because one looks at the long-term dimension.

Uwe Blass

Dr Markus Doumet is permanent lecturer at the Chair of Finance and Corporate Governance at the Schumpeter School of Business and Economics at the University of Wuppertal.