Capital access holds back not-for-profit sector

28/05/2009 - 00:00

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Some of Western Australia’s most successful commercial enterprises are not-for-profit businesses that compete head-on with profit-driven companies.

Capital access holds back not-for-profit sector

ST John of God Healthcare has grown to become a major provider of hospital services across Australia and New Zealand, and it has done so without having shareholders to provide growth capital.

RAC has evolved from a motoring club to become one of Western Australia's largest financial services organisations

HBF is another success story in the not-for-profit sector, now the state's biggest health insurer without shareholders to provide support.

These businesses illustrate the scale and commercial success of the not-for-profit sector in WA, which also includes the likes of grain handling and marketing business CBH Group, health insurer HIF and superannuation fund Westscheme.

The sector also includes organisations such as aged care provider Brighwater Care Group and Good Samaritan Industries, which have evolved from philanthropic origins to become commercially focused.

While the backgrounds vary, access to capital remains a key issue for not-for-profit businesses, sector leaders told a WA Business News boardroom forum this month.

St John of God Healthcare chief executive Michael Stanford says the hospital industry is one of the most capital intensive.

During the past five years, St John of God has spent more than $300 million expanding capacity of its hospitals both in Western Australia and the eastern states.

Despite the high capital expenditure by the group, St John of God has had trouble matching the deeper pockets of the for-profit sector.

"We haven't been stopped yet with our great ideas, but we have been beaten a number of times with acquisition attempts, because others can pay more, and they can pay more because they have access to capital," Dr Stanford said. "For us, access to capital is more about not what we're doing now, it's about some of the dreams we've got."

Dr Stanford acknowledged there were some advantages being a not-for-profit group in the hospital sector, but other, less capital-intensive healthcare areas had been exploited by private sector organisations seeking to turn a profit.

"The hospital bit of my sector is a good not-for-profit sector," Dr Stanford said.

"Our ability, because we don't have to pay dividends, to then invest capital back in facilities and equipment gives us a leg-up in a long-term competitive sense in hospitals."

The ability to invest in new facilities and equipment provided a substantial incentive when recruiting new doctors and nurses, according to Dr Stanford.

However, he said the consolidation of practices in the pathology sector into large, nationally run laboratory chains had led to fundamental shifts in the way the industry operated.

Currently, St John of God employs more than 1,000 people in its pathology operations.

"For us, medium to longer term, the question would be: 'can we sustain being in that sector," Dr Stanford said. "Ten or 15 years ago it was a no-brainer; but can we going forward, because [pathology's] not as capital intensive, it's easier to work up a scale model.

"Where we'll get squeezed is if we're still running a model in the sector where the dynamics have changed and you really have to be a for-profit [business] to stay in that sector; then we're in trouble.

"Particularly it's a constraint if you need to grow quickly to respond because you can't grow at a certain pace if you can't get access to capital."

But Dr Stanford admitted his organisation was restricted more by a shortage of workers than a lack of capital.

"We would already have built some other hospitals if we knew there were doctors to operate them," he said.

Health Insurance Fund of WA chief executive Graeme Gibson said a fundamental difference for a healthcare operator in the not-for-profit sector was its source of capital.

"The capital contribution to the growth of your business is really coming from your patient or the general community," Mr Gibson said.

"The capital source is still coming from the consumer, so to stay in that environment is going to be challenging, if you're competing with somebody that has got access to bucket loads of capital.

"Despite the fact that you don't have a dividend policy you've still got to generate that bit of capital because you don't have access to it in any other market, and I think that's a challenge for us going forward."

Brightwater Care Group chief executive Penny Flett said the lack of capital investment in the aged care system has resulted in WA being 1,500 beds short of the desired level.

She said the problem would only get worse without sufficient long-term planning due to Australia's ageing population, a challenge she that had largely been ignored by Canberra.

In the health insurance sector, HBF chief executive Rob Bransby said the competition provided by for-profit enterprises with greater access to capital was also a constant challenge.

"If you stack the sector up, you've got big players, small players, not-for-profits and for-profits, in a very, very competitive environment," Mr Bransby told the forum.

He said a key complication of competing with rival for-profit health funds was that success in the industry was traditionally measured by how efficient a company could be, while measuring this efficiency in a not-for-profit was difficult.

"In recent times it's become fiercely competitive in our sector, and as late as last week the government's just announced Medibank Private is about to go as a for-profit so it can compete in that environment," Mr Bransby said.

"The not-for-profit part of our business now, which is heavily influenced by governments and margins and so forth, is really the minority.

"A big challenge in this sector now is competing in a commercial environment with a lack of capital.

"The only capital you can achieve in this environment is what you can get off of your customer, and you've still try to remain competitive.

"We've got a major listed competitor who can throw $40 million or $50 million in a marketing effort that he can get off his shareholder base that we don't have access to.

"So we've done a lot of work in recent times to try and understand 'what is the capital cost of being a not for profit and can you remain competitive in that space?'

"One of the fundamental shifts is that you have to try and be competitive, invest in your business and you do have a longer-term objective, you're not measured by what happens next year.

"But to achieve what you want to achieve is going to come at a cost to our customer base while we're structured like we are."

However, Mr Bransby said a not-for-profit enterprise could hold a significant advantage over its profit-making counterpart and its greater access to capital, but without sufficient communication of this advantage it was difficult to exploit.

"The difference that we have in not for profit is that we don't have a tax burden, and we don't have a capital base to service, so if we're as efficient as they are, we should be better off given they have a tax burden and we don't," he said.

"The challenge is how do you demonstrate that to a customer who doesn't really have a stake in the business?

"That's where we're getting really challenged because the for profits of this scale are probably as efficient as us and there's not a clear differentiator."

RAC chief executive Terry Agnew said while the lack of capital was not a strategic issue for the organisation, this did not mean capital didn't present challenges for general insurers.

"I don't believe we have the same capital issue for the industry but I guess the flip-side is we have to manage the capital," he said.

"If I take, for example, RAC Insurance, if we had any aspirations of going national and if we had aspirations of building some personal lines of insurance in WA, then I think we'd have capital issues.

"Over time, capital management going forward is something we have to be smart about how we do it. I guess for any mutual or not for profit there's always going to be a capital issue.

"If we decided to become a bank or a credit union we'd have real problems with capital, but that doesn't fit in strategically anyway so that's not an issue.

"We do have to be careful in how we manage it so we don't get ourselves in a position we might not like."

 

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