The Interim report of the Childcare Inquiry being conducted by the Australian Competition and Consumer Commission (ACCC) into childcare costs has just been released.
It found that that childcare fees rose faster than inflation and wage growth during the past four years – with long day care fees rising by around 20 per cent. It found that the cost burden of this is felt mostly by disadvantaged families. Surprise, surprise!
Families and government seem to be puzzled as to how the Commonwealth Government could possibly invest more money into subsidising the cost of childcare without it reducing family out of pocket costs by a commensurate amount.
Why they thought it should or would is what is puzzling me! Our childcare, or early education and care system (to give it its proper name) was designed to enable companies, corporations and investors to make money out of educating Australia’s youngest citizens. And yet when they do, people are shocked? Why? Did nobody think about the fact that profit making entities will seize any chance to make more money from their endeavour and the very fact that government is upping subsidies is like a red flag to a bull?
The ACCC found that larger providers charge higher fees than medium and small ones and for-profit centre-based day care providers charge higher average fees than not-for-profit provider.
But for some of the firms that make big money out of childcare provision (or wish to do so) it’s not actually the anticipation of making more immediate money that made them hike their fees up by as much as $20 a day at the same time the Government increased family subsidies. It’s more about readying their investment for sale. Or increasing their share prices.
Let’s look at a few examples. The company that seems to have the most undefendable fee increase is Affinity Early Education. Affinity, as the provider of 225 education and care centres across Australia it is one of our largest. Its current owner, Quadrant Private Equity, is due to sell the company in August. Great timing eh? Straight after an increase in investment in childcare by the Australian Government in July!
Quadrant bought Affinity just 2 years ago for $650 million. But Affinity has a problem. They have a lot of debt – $445 million. This equates to an astonishing 108% of their annual revenue of $411 million. Their interest bill for the last financial year on this debt was $34 million. Interest rates have risen 4% since then – are families copping the actual cost of serving their debt via a 11.5% fee increase? The company justified their fee increase by talking about wage increases. Award wages have increased – but by 5.75%, a lot less than increase in fees Affinity has sprung on families.
And then there is also the question of how much of the money that families pay for education and care actually goes to the educators that do the educating and caring. Goodstart, our largest not for profit provider spends 73% of their revenue on staff costs. Another large not-for-profit, KU Children’s Services spends 81.5% on theirs. Affinity, in comparison spends a tiny 55%. Clearly, it’s a bit of a porky (or a big one) to say they had to increase their fees to pay their staff!
But markets for businesses that have their cashflow underwritten by government, seem not to worry about things like profitability and truth. How much does Quadrant expect to sell Affinity for? Word is around $1 billion dollars. Not bad for a company that only made $13.7 million profit after tax last year.
Guardian Childcare is another interesting company. Owned by the Swiss Private Equity Company, Partners Group, it’s probably the 3rd largest provider of long day care in Australia. It’s also up for sale. Purchased by Partners in 2016 for $440m it is also expected to sell for as high as $1 billion. Guardian are kind of shameless. They claim on their website that 100% of their profits are re-invested back into their Centres. A very interesting claim for a company that hasn’t actually made a profit in years – it lost $26 million last year. Families are servicing a $529m bank loan by their owner and Guardian spends just 61% of their revenue on staff costs. Their fee increase? Reported to be around 11% or $15 a day. It’s not the worst though. A string of others have increased their fees by similar amounts
Then there is our largest corporate provider of childcare, G8 who own around 440 centres. They also don’t invest a lot of their money in their educators – just 62%. G8 also confirmed in its 2022 accounts that they still owed $37 million dollars of the 60 million they discovered they had underpaid their employees way back in 2020. As well as the big changes the Labor Government made to the childcare subsidy system to attempt to make childcare cheaper for families, the hourly rate cap on fees goes up every July by CPI. This year, like every other year, this enables providers to improve their margins. After this year’s extraordinarily high CPI increase was revealed G8 announced it would increase their fees for the second time this year after a January increase. The fact that they timed this to align with the CPI uplift (10 July), not the first week of the financial year (3 July) makes one wonder what level of opportunism they are engaging in.
The mixed market system of childcare provision we have developed in Australia allows these sorts of companies and consequently these sorts of fee increases to exist.
The ACCC has reminded providers that they need to be “transparent and honest about the reasons for any price changes”. But this does not go far enough.
When you allow people to make profit out of childcare who on earth should be surprised that people attempt to do just this? If the Government is unhappy about this, they have just one choice. Change the system!