We should be suspicious of the growth of private financing in childcare

Childcare is frequently reported to be in crisis, with parents navigating a complicated system, many paying high costs, childcare workers being paid low wages, and providers struggling to cover their costs. Many childcare providers are reportedly passing on cost increases to parents and/or cutting back on services such as swapping certain foods for items of lower nutritional value, providing fewer fresh fruit and vegetables, or not providing hot food to children. These rising costs are in part driven by inflationary pressures, but the practice of some for-profit providers reveals an important additional driver which requires political and policy attention.

Childcare in England comprises four main provision types: state, private-for-profit, not-for-profit and informal providers. Recently, the balance of these has shifted so that a new pattern of acquisitions and mergers of many single or small groups has occurred, resulting in large chains or ‘super providers’, and ‘financialisation’ now heavily characterises the sector. Estimates of size differ but the latest Department for Education providers survey suggests 70% of group-based providers are now private, and evidence shows that there has been a reduction in smaller, independent settings, which are being replaced by larger providers or chains. This pattern in England is markedly different to many countries in the rest of Europe and raises concerns about the availability of childcare places to meet current and anticipated future demand.

Is financialisation putting provision at risk of collapse in England? Is allowing childcare to be at the mercy of market dynamics morally and ethically the right thing, or should childcare be provided another way?

What is financialisation and what are the risks to the childcare sector?

Financialisation prioritises profit-making, which seeks ‘growth through loss-making’ (expanding business premises and/or operations through borrowing money or leveraging finance, which expects profits to be greater than the interest payable) and to minimise the amount of tax paid. Profit-making may not in itself be considered a bad thing, provided that quality is not compromised. Indeed, for-profit companies can offer advantages such as competition to meet consumer demand whilst keeping costs down. 

However, childcare provision is not like other businesses. Childcare is the provision of care and education for young children, the benefits of which are known to provide long-term outcomes for children and society, especially for vulnerable children. So, one might question if ethically childcare run by profit-making companies can deliver equal and fair outcomes for all children without robust safeguards, including those which ensure services include provision for vulnerable children, and are located equally in deprived and non-deprived areas.

Some of the practices of financialisation include using property as a collateral for business growth and acquisition While this allows expansion to occur quickly, if in the event a provider becomes unsustainable or loss-making for shareholders, that business can be sold by the parent company causing closures, often at very short notice. This may seem an unlikely scenario, especially in large chains whose size could be argued to withstand market volatility due to operating economies of scale. However, there are plenty of examples from within the sector and outside to ring alarm bells. For example, one of Australia’s largest childcare providers, ABC Learning in Australia, collapsed at short notice during the global financial crisis in 2008.

In adult care sector, Southern Cross Healthcare, which was the UK’s largest provider of adult home care with over 750 homes in 2011, collapsed suddenly because of financial difficulties, resulting in 31,000 residents losing their accommodation. More recently, Nursery World sector magazine reported on two ‘sudden’ closures of private for-profit companies which resulted in local primary schools having to take on the care of these children. The distribution of these providers has not been shown to be linked to deprivation. However, more recent evidence shows there are regional differences in where these collapses of provision are occurring, with the North West, West Midlands, London and the South East having seen a disproportionate reduction in nursery providers than other areas. This is a problem for those areas seeing large reductions in providers, as it means children are potentially going without places or losing their places.

Is there another way?

Other types of providers operate in England which have a different ethical and business strategy. Collectively these are known as ‘not-for-profit providers’.  These organisations are legally constrained from distributing profits to managers or directors for personal gain. They are argued to operate from a position of trust in the way they operate (transparent and offering good value for money),  which is especially important in early childhood education and care, where families make decisions about choice of provider based on ‘trust’ and expectations of safe care.

There are many safeguards within the operation of not-for-profits that register through the Charity Commission making them less vulnerable to overnight closure or collapse. The most important of these is that not-for-profits must operate with sufficiently large financial reserves in their balance sheets to withstand any future financial problems. A reserves policy is important for several reasons, including a high level security for its users (in this case families with young children) and other beneficiaries (such as local authorities who have responsibility to ensure provision covers demand in local areas). Reserves provide assurances that the company’s finances are being properly managed and acts a measure of the company’s long-term viability. Another key feature is that such companies must have a board of trustees with responsibility to ensure the organisation operates with financial responsibility to avoid sudden closure.

Some countries have gone even further to increase accountability and transparency to users - in Norway, each nursery submits an annual report about policy, practices and finances for consideration to parents, carers and staff. This is used both to help parents make informed choices when looking for providers, but also to monitor how well the nursery is functioning.

We need to make a choice about what our childcare system looks like

There’s two directions the system could go. One in which controls are placed on the way the market operates, and one which maintains the status quo.

Without controls and increased regulation, evidence suggests acquisitions and mergers will continue. This will inevitably continue to change the provider mix of the landscape so that the for-profit sector will continue to grow, with fewer local and community-based providers operating. Evidence shows this expansion is not creating new childcare places.

The alternative is a market which imposes common-sense controls to change market dynamics. Conditions could be placed that require all companies in the sector in receipt of state funding to provide accounting evidence that they have adequate financial reserves and low risk of bankruptcy, and to require these companies to include parents, carers and staff on their boards.

Whatever scenario occurs, what is clear is that those providing care should ultimately be those with the best interests of children and staff at the centre of their business ethos, and who place those interests above making profit for shareholders and owners.