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Examining the seven recommendations in the latest ACCC Childcare Inquiry Report
Jason Roberts
Oct 03, 2023
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The Australian Competition and Consumer Commission (ACCC) has released its second Childcare Inquiry “interim” report in which costs, competition, viability and current price regulation mechanisms are examined in detail alongside a set of findings that inform seven key draft recommendations.
The recommendations are split into three broad categories; those that include suggested refinements to the existing regulatory arrangements (1 to 5); those that highlight potential broader design changes to the system (5 to 6); and one that recommends further consideration be given to alternative price control and subsidy mechanisms (7).
The release marks the second of three deliverables expected from the ACCC, with the first interim report released in June and the final report due by the end of the year.
This piece will focus on the seven recommendations in the first instance along with a brief summary of key findings emerging as a result of the ACCC inquiry. Alongside each recommendation a commentary is listed, providing further context, evaluation and response from The Sector.
Recommendation commentary
Draft recommendation 1 - The ACCC recommends that the Australian Government reconsider and restate the key objectives and priorities of its childcare (sic.) policies and supporting measures, including the relevant price regulation mechanism.
Comment - The ACCC is right to call out that the clarity of objectives underpinning childcare policies, legislation and regulation should be updated. The current Child Care Subsidy (CCS) system was created by a Coalition Government with workforce participation objectives at its core. Five years have now passed since its implementation and questions about its appropriateness and relevance should be considered in light of significant changes in the economic, social and political climate over the course of the last five years.
Draft recommendation 2 - The ACCC recommends further consideration and consultation on changes to the CCS and existing hourly rate cap mechanism, to simplify their operation and address unintended consequences, including on incentives and outcomes.
Comment - The underlying drivers to this recommendation are findings associated with negative affordability and accessibility consequences of the activity test and the failure of the CCS rate cap to act as an effective mechanism to disincentive providers from raising fees too high and fast. A rethink of the role of the activity test and rate caps within the CCS would be welcome.
Draft recommendation 3 - The ACCC supports reconsideration of the information gathered for and reported on StartingBlocks.gov.au so that it is better focused on meeting parent and guardian information needs, and is balanced against the costs of collecting and publishing information.
Comment - StartingBlocks has gained a degree of prominence in this report due to the belief that a functioning price comparator platform can support downward pressure on prices through promoting competition. In its current form StartingBlocks is likely to fall well short of this objective and there are question marks around whether it ever will without adequately incentivisig providers to maintain up to date information on the site.
Draft recommendation 4 - The ACCC recommends that governments further consider how the existing regulatory frameworks support and influence the attraction and retention of educators and workforce in the early childhood education and care (ECEC) sector.
Comment - Given the workforce challenges currently being experienced by the ECEC sector and the implications they have on costs, and fees, it is understandable that the ACCC would recommend as a starting point an examination as to whether the current regulatory setup might, or might not, impact this dynamic. That being said, the conclusions drawn from any analysis are reasonably foreseeable. The CCS framework does not provide for workforce matters but calling this out may herald a move to include mechanisms that do for inclusion in future frameworks.
Draft recommendation 5 - The Australian Government should consider maintaining and expanding supply-side support options for Aboriginal Community Controlled Organisations (ACCOs) that provide childcare and additional support services for First Nations children, parents and guardians.
Comment - This recommendation makes sound sense and also has historic precedent on its side given that prior to the introduction of the CCS many services in remote or very remote communities were funded by direct blocks of subsidies, also known as supply side subsidies, because they are paid to the supplier of the service provided and not the consumer of the service. The current CCS system does not lend itself to incentivising providers to operate services in these communities.
Draft recommendation 6 - A market stewardship role should be considered for both Australian and state and territory governments, in identifying under-served areas and vulnerable cohorts, along with intervention whether through public or private provision. A competitive tender process is one tool that could be used by governments to facilitate delivery in these areas.
Comment - As noted above given the high costs of providing services in remote areas providers are less inclined to commit to opening services in these spaces. High prices and undersupply inevitably follow. Creating appropriate incentives and support for providers to provide services in these underserved areas makes sense. There is abundant precedent for tender-like mechanisms in the OSHC sector and also outside of the early learning sector which could be used as templates to better ensure service provision in key target areas.
Draft recommendation 7 - The ACCC supports further consideration of supply-side subsidies and direct price controls. Some changes to the policy settings are likely to reduce the impact of the hourly rate cap as an indirect price control, and may warrant a shift to direct price controls supported by operating grants for regulated childcare providers.
Comment - Of all the seven recommendations this one is the potentially most far reaching for the early learning sector in Australia. Although the ACCC was, broadly speaking, not able to uncover any “smoking gun” when it comes to segments of the ECEC community abusing their pricing practices, and found that there was no evidence of excessive profiteering, the reality that the system is not currently set up to prevent ever increasing prices, and consequently pressure on the public purse, is clear.
Against this backdrop the ACCC has used the recommendation to encourage a broader and deeper discussion about alternative types of regulation that may better protect the Australian taxpayer going forward. Direct price controls and supply side subsidies are being adopted in other OECD jurisdictions and will ultimately be considered by the Productivity Commission in their assessment of what a future early learning sector may look like.
The subject of supply side subsidies and direct price controls in the context of ECEC will be the subject of a “deep dive” article to be released in the coming days.
To read the ACCC’s second interim report please click here.
Appendix 1: A selection of key findings from the first interim report:
- Average LDC fees increased by 20% since Sept 2018, or 4.7 per cent per year
- LDC fees are higher in areas that have a higher density of centres
- For profit services generally charge more than not for profit services
- For profit and not for profit services are raising fees at similar rates
- Large LDC providers charge higher average fees across Australia
- Higher quality services had higher fees but only just
- One in five LDC’s charge fees above the daily CCS rate cap
- Average out of pocket expenses (once adjusted for inflation) have decreased since 2018
- ECEC costs can be up to 20 per cent of disposable income for poorer families
Appendix 2: A selection of key findings from the second interim report:
- Average profit margin at large LDC for profit providers in 2022 were 9 per cent
- Average profit margin at large LDC not for profit providers in 2022 was 6 per cent
- On average centres with higher quality ratings had higher margins
- On average higher quality centres had more staff paid above award
- On average labour accounted for 68.5 per cent of all costs and property 14.6 per cent
- Labour costs have been rising faster than inflation and fees
- For profits spend more on land than not for profits and not for profits more on labour
- Tax data shows average margin for al LDC companies was 15 per cent in 2020/21
- Any economies of scale generated at service level are canceled by support offices costs
- 22 per cent of LDC services charge above the rate cap in 2022, up from 13 per cent in 2018
- For profit services are more likely to charge above the rate cap
- The activity test has materially impacted session lengths offered in services
- Poorer families that are less active have much higher subsidised fees expenditure
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