Believing market competition will improve care services is a false hope

Ten years ago Children England decided we had better understand market theory, structure and dynamics, and how they work (or don’t) in public services. It was clear to us and our members that the mechanisms and culture in which residential children’s homes were being asked to compete for business in a public sector ‘marketplace’ were having profound impacts on the whole sector, and most importantly on the experiences of children who needed it. The competitive marketplace for children’s homes has also been the subject of extensive research and analysis by others, including the Children’s Commissioner for England, the DfE and the Competition and Markets Authority.

The consensus view is that the market is deeply dysfunctional in multiple ways - for children, for many providers of care (whether public, charitable or private), and for the state (councils) and taxpayers who are paying for it. Even the Government’s own recent response to the Care Review joins that chorus in admitting the marketplace in its current shape is a big problem, although it is arguable whether their reform plans are really a match for the scale and nature of market failure.the scale and nature of market failure.

Residential care is perhaps one of the earliest children’s public service areas to have become so thoroughly ‘marketised’, but its dominant narrative and financing as a competitive marketplace is far from unique. I believe many other public service markets, including early years childcare, have much to learn from children’s social care if they are to avoid the deep-rooted dysfunctions now so obvious today.

What is the nature of the ‘good’?

Things that cost money are not necessarily all the same just because money has to change hands. Some are ‘private’ goods while others are ‘public’ goods. This distinction is not about what type of organisation offers or runs it, but about the nature of the thing being paid for. Public sector and charitable organisations can sell private goods, just as private companies can deliver public goods.

Private goods are things that each of us is free to make private, personal, diverse and changeable choices about, including whether or not we want to purchase at all, what brands we prefer, and what prices we consider affordable.

Some things, however, are inherently public goods. The classic example often used by economists is lighthouses: whose light is a vital life-saving safeguard (important to our collective safety, not just to individual sailors, sea-faring passengers or boat owners), but something no individual consumer could simply choose to pay for privately, and expect to get, on demand. Public goods are things that are collectively agreed as being needed, but for which no commercial market would (or could) ‘spring up’ as a new market, or sustain itself without collective investment. Children’s homes are without doubt a public good.

Childcare is a bit different and straddles these definitions. The freedom to pay other people to look after your child for some or much of the day, in your absence, is something people who want it, and who can afford it, could always do privately with or without state policy, provision or funding. In that sense there is an underlying element of childcare that is a private, commercial market in meeting the demand for a private good.

It is also the case, however, that in our society, governments of all political persuasions have decided that childcare serves an important, collective (and therefore public) purpose that can’t be left simply to a ‘free market’ of private provision only for those who can afford it. Childcare is rightly seen as important for children themselves, in supporting their healthy development and learning; important to women’s rights, freedoms and ability to participate in employment; important to the infrastructure of the economy, for employers and their workforces in businesses, charities and public services alike. So in all these vital aspects, childcare is very much a public good, collectively funded and provided for, because if left to market forces alone it will not be sufficient, readily available or affordable for everyone who needs it.

The reason this kind of analysis needs to underpin our dialogues about the childcare market today is because public goods are, by definition, a market failure. They become publicly funded because commercial market forces on their own will fail to meet the societal need for it. And if childcare is predominantly (even if not wholly, or purely) a public good, then expecting competitive market forces to meet today’s need for it will fail - just as we have seen in the competitive market for the public good of children’s homes.

Commissioning and procurement

What the markets for children’s homes and for childcare really do have in common is that there are huge amounts of public money being spent on them through public sector commissioning and procurement mechanisms. I want to highlight a few key concepts and trends in commissioning and procurement that warrant particular attention.

Firstly, it’s vital to understand the difference between commissioning and procurement as public functions. Commissioning is the process of knowing and deciding how best to meet the needs for public goods and services (to meet public duties) in an area; while procurement is the art of buying things well.

It has become increasingly common to see procurement-led commissioning – in other words public duties being met by ‘shopping’ from whatever’s available. Commissioning-led approaches should start from the other end of that process – first assessing, knowing and investing in what’s needed, and only bringing procurement practices in if there are multiple potential competitors for delivering new or expanded elements of what’s needed. Good commissioning relies on good local knowledge of the community and its diversity of needs, and of the local professionals and services already supporting those families.

Trends towards ‘regionalising’ commissioning (as we are now seeing for children’s homes and the prospect of public Regional Care Cooperatives) rest on the idea of creating stronger statutory purchasing power in the marketplace by pooling Local Authority budgets within the region. But that is a procurement-led rationale. When considering how hyper-local good childcare needs to be for families, near to and appropriate for their home and work habits, childcare commissioning would be better done on an even smaller-scale, neighbourhood level rather than whole authority. To expect a regional commissioner to know and meet all neighbourhoods’ diverse needs and preferences for childcare equitably, everywhere in their whole region, is unrealistic.

The second key issue in both sectors is failure to distinguish clearly between the costs of running a service, and the ‘unit prices’ (or placement fees) being paid for them from the public purse. In childcare, central government determines a fixed, standardised price per child, per hour, that will be paid to a childcare provider for ‘free hours’. That per capita fee per hour of ‘free’ childcare bears no relation to actual costs, which will, quite reasonably, differ from one childcare provider to another. So every time a provider accepts the fixed state fees for ‘free’ childcare hours, they will have to try to make up any shortfall by other means if they hope to cover their actual costs. That means charging parents privately to top up underfunding from government and, as we see among many charitable and community childcare providers, it can even mean managers taking no salary at all, just to make sure their staff do get paid. Whether in childcare or children’s homes, unit-costing and spot-pricing is unrelated to how costs are actually incurred, and public bodies and their commissioners who insist on them create deeply damaging systemic distortions in the marketplace. in the marketplace.

The third shared issue is that spending billions of taxpayers’ money in this spot-priced ‘retail’ purchasing (shopping) approach is actively accelerating market failure. It drives the closures and insolvencies of smaller, specialist, and community-rooted providers, who can’t afford to operate in the current system, leaving gaps in the market that giant private equity-funded firms then buy up and expand into. They, unlike any other kind of provider, have the globally-financed capital backing (debts) to bear the financial inadequacy and bureaucracy of hourly fees and ‘placement’ spot purchases in any given year, in pursuit of their greater medium-term aim of growing their market share and consolidating their market power. Whether you believe in the benefits of market forces in public services or not, nobody seriously thinks the building of powerful cartels is a good idea in any market.

Our conclusion at Children England from the last decade of analysing the effects of competitive forces in public service markets, is that believing market competition will improve the provision of public goods and services is a false hope. But even if you believe childcare will always be a commercial market at heart, we can still probably agree that the current approach to spending state money in that market really isn’t working or delivering best value for money – for children, families or the taxpayer. The future of childcare as a socially and economically essential part of our public service infrastructure – as a public good - really does depend on us finding decisively different and better ways to think about, plan for and invest in it.