Market Failure and the need for Stewardship in Early Childhood Services:  This is more about oversupply, than a loss of public confidence.

The announcement of Australia’s second largest provider of early childhood education services G8 Education will close 40 of its services due to key issues such as low occupancy, shortage of experienced educators and financial sustainability, was no surprise to anyone in the sector.  

This follows reports that at least three smaller providers have entered voluntary administration over recent months and other providers are consolidating their networks. There are also widespread examples of small private operators trying to sell their services and small not-for-profit providers approaching larger providers to take them over before they collapse. 

The potential closure of more services across the country is unsettling for both families and educators. 

There has been speculation in the media that service closures are due to a lack of public confidence resulting from child abuse perpetrators infiltrating some services and harming or attempting to harm young children. This is a legitimate concern but is not the whole story. In the past year, total child enrolments across centre-based day care fell 1.5%, but total centre places rose by 4.1% thanks to more centres being approved by State regulators. The result was an average reduction in centre occupancy of 3.6%. 

In their announcement yesterday G8 indicated that their services are operating at 56% occupancy, that is well below a typical occupancy rate of around 70% that it is regarded as a minimum for financial viability.  This is in part an oversupply problem.

Many in the sector have been sounding alarm bells for several years now that the number of new long day care services being built was far more than demand and would result in oversupply.  There is no central monitoring or control of supply and demand in the early childhood sector and this has been repeatedly raised as a risk in submissions to the Productivity Commission Inquiry (2024), the ACCC Inquiry (2023) and various inquiries into quality and safety over the past 12 months. 

Over successive governments we have seen a ‘hands off’ approach to managing supply and demand, relying on market forces to ensure that services are provided where they are needed and to force out poor quality service providers. This has resulted in market failure – we have too many services in some areas and not enough services in others, particularly in small rural communities or ‘thin markets’ that are unattractive to property developers. In some areas we even have both at the same time – too few places for children aged 0 to 3 years and too many places for children aged 3 to 5 years.

The services that close in areas of oversupply are not necessarily poor quality, they tend to be the services with the least capital reserves – those that cannot sustain a period of loss making. Small, community managed, not-for-profits are often the first casualty of market oversupply.  The impact is also felt on all services in an area as competition for qualified educators becomes more difficult and utilisation goes down, services try to stay viable by closing rooms, reducing hours or increasing fees – none of this is good for families who are often not equipped to choose the highest quality service in an area or may be constrained in their choice by factors such as the number of places or days they need, the out-of-pocket costs and the distance they can travel as they go to/from home and work. There is no net gain from oversupply.

What Australia needs is stronger system stewardship, a way to map, inform and ultimately influence where new services are established. Until we have this for the sector as a whole, we will continue to see services being closed, sold or contracted without consideration to the impact on families or the local community. ECA, Thrive by Five coalition and many others in the sector are calling for a National Early Childhood Education and Care Reform Blueprint this Federal Budget; a time-limited, national design process to map the ECEC system Australia needs, including the role of a future national commission to provide system oversight. We know the Federal Budget will be tight this year but the very least we need is a funded Blueprint to scope the role and functions of a new entity to prevent ongoing chaos in the provision of early childhood services. 

This ask also has an important role in providing leadership on measures to address child safety and safeguarding, in order to strengthen quality across a sector that more than one million families rely on every week. We must ensure that every child in Australia has access to high quality early childhood education and care. 

Author

Samantha Page, CEO
Early Childhood Australia