The great childcare price gouge may not be all it seems

Australia’s supermarkets, energy sector, banks and a floundering Qantas have been in the news this week amid a report by former competition tsar Allan Fels that states a lack of competition has “added significantly” to recent inflation woes.

“Australians are paying prices too high too often, and the cause is weak and ineffective competition,” Fels said in an address to the National Press Club on Wednesday following the release of his report, which was commissioned by the ACTU.

The ACCC says the average Australian couple with two children spends 16 per cent of their net income on childcare.

Supermarkets, energy providers, banks and airlines are not the only sectors targeted recently on behalf of financially stretched families.

In October, Education Minister Jason Clare singled out profiteering childcare operators as the bete noire of Australia’s cost of-living-crisis.

“The idea of naming and shaming providers that are just charging over the top fees makes a lot of sense to me,” Clare told Sky News. “This is the biggest bill, apart from the mortgage or the rent, that a lot of Australian families pay.”

He was commenting on the Australian Competition and Consumer Commission (ACCC)’s interim report on childcare.

Goodstart chief executive Ros Baxter says wages in the early childhood sector simply can’t compete in a tight labour market.

The report did not actually answer whether the rise in childcare fees was due to profiteering. But there was enough to suggest this issue deserved much closer scrutiny.

The October report from the competition watchdog said childcare in Australia is less affordable compared to most other OECD countries. An Australian couple on average wages with two children spend 16 per cent of their net household income on net childcare costs. The average spend per household among OECD members is just 9 per cent.

This is despite the government contribution to childcare fees in Australia being significantly higher than the OECD average. Childcare subsidies will top $12 billion this year, according to the ACCC.

Something did not add up.

And it was not that long ago that Lamborghini-driving aged care owners were being vilified as the sector’s threadbare service was exposed by the pandemic. Did childcare have its own dodgy operators with a luxury car habit to feed?

Adding fuel to the fire last year were financial press reports on private equity players looking to flog their childcare operations into a market recovering from COVID.

Partners Group was reportedly looking to sell Guardian Early Learning for up to $1 billion. It bought into the business for $440 million in 2016.

Another private equity group, Quadrant, paused the sale of Affinity Education in October. It also had pricing expectations around the $1 billion mark. It acquired the childcare business for $650 million in 2021.

But these high hopes may have been grounded in desperation rather than reality.

In September 2022, Bain Capital was forced to hand ownership of high-flying Camp Australia to its lenders. In effect, the private equity smart money was wiped out by COVID and too much debt.

Bain paid $400 million for the business in 2016.

With this in mind, it should not have been too much of a surprise when the final report from the ACCC landed last week and failed to find evidence of profiteering. “Our analysis does not show systemic excess profit margins from 2018 to 2022,” the report says.

The finding came despite the watchdog confirming the suspicions of embattled families that any fresh financial support they received from the government is soon gobbled up through higher fees charged by operators.

Prime Minister Anthony Albanese at a childcare centre in Canberra last year.

Rob Bray, a research fellow at the Australian National University, who helped evaluate the previous federal government’s Jobs for Families Child Care Package in 2018, says this ACCC report might have finally killed the idea that high childcare costs means there are big profits.

“Good quality childcare costs money and that’s really the bottom line,” he says.

Bray and others from within the industry paint a picture of a high-cost, highly regulated industry that is struggling with a crisis brought on by the current labour shortage. It means the industry can no longer rely on underpaying workers who can earn far more in comparable industries like education.

“The ACCC report has cleared the air and is really pushing us now to focus on those real issues, as opposed to sort of keeping on trying to chase this mythological, super profits, price gouging etcetera,” Bray says.

‘I think, eventually, there will be no option, but for wages to increase in the sector.’

Rob Bray from the Australian National University

“It allows us now to focus on what really is important, rather than chasing these beliefs, [that] there’s some easy fix.”

The ACCC verdict was not a surprise to Bray, who came to a similar conclusion when evaluating the 2018 child care package during his time as a government bureaucrat.

“We could not see anything obvious that pointed to people obtaining large profits, but we had nothing like the access to information the ACCC has,” he says.

The ACCC’s verdict was also welcomed by the embattled sector.

“Minister Jason Clare has said several times that he wants to name and shame the big providers that are making obscene profits. Well, we don’t see the evidence of that, and neither does the ACCC,” says Darren Stevenson, the founder of after-school care provider The Extend Group.

“The ACCC report itself revealed that nearly a quarter of childcare companies are barely struggling to break [even], let alone gouging.

“In my discussions with other providers in the marketplace, they are experiencing severe hardship, financial hardship. They’re not making profits, and that can’t go on forever.”

The ACCC says for-profit providers have higher profit margins, increase their fees more and charge more than not-for-profit providers. But the commission agreed that a significant number of operators are doing it tough.

Allan Fels is investigating the lack of competition for Australian consumers.

“The bottom quartile of childcare companies had profit margins of less than 1 per cent, which is unsustainable for an ongoing business,” its report says.

Not-for-profit Goodstart, Australia’s largest operator – which was created by the spectacular financial collapse of ABC Learning in 2008 – has struggled with the challenges which have rocked the entire sector.

Goodstart’s annual report released in October unveiled an $85.3 million loss for the year ending June 30, 2023. This was on top of a $65.7 million loss for the prior year.

While non-cash items made the financial performance look far worse, the annual report did not hide the massive challenges the business faced as the pandemic eased.

Goodstart chief executive Dr Ros Baxter offered a list of woes, but highlighted as the central issue the tight labour market, which has triggered profound consequences for the entire sector.

“In the early childhood sector, we are increasingly seeing competition with the school sector being really difficult,” Baxter says.

“The wages in the early childhood sector simply can’t compete. We know that [childcare] teachers – with identical qualifications to teachers in the school system – are paid 20 per cent to 30 per cent less. We know that a qualified educator in our childhoods paid up to 30 per cent less than an unqualified teacher aide in school.”

In November, The Parenthood’s Jessica Rudd told the National Press Club of her dismay at just how badly staff were paid.

“When I started doing this job, I was shocked to learn that a Cert III qualified early childhood educator takes home $500 less a week than an entry-level bricky labourer,” Rudd, the head of the childcare advocacy group, said at the time.

Bray also thinks this is the heart of the problem and will not be easy to fix.

“One of the reasons costs are increasing is that basically, we’re running childcare on cheap labour … you have an awful lot of dedicated workers in the sector, who really enjoyed doing that work. That’s effectively been exploited by everyone because they’ve been willing to accept relatively low wages for jobs that they really enjoyed doing,” he says.

“The difficulty is, now we’re into the labour shortage and there aren’t that number of people who are willing to make that trade off.”

Goodstart’s Baxter points out that this cascades into higher costs, not just in recruitment of new staff, but in using expensive agency staff in the interim.

The ACCC reported that labour accounts for around 70 per cent of childcare costs for the average daycare provider, rising to 77 per cent for outside of school care providers.

Rent is the other significant cost, and the ACCC noted that this cost had been rising faster than CPI between 2018 and 2022.

“In contrast, commercial office and retail property operators have generally experienced a decrease in their revenue over the same period,” the ACCC report says.

But back to staffing. If employees with the right credentials cannot be found, it means capping the number of children that can be looked after, which in turn cripples revenue coming through the door.

Baxter confirms this has been an issue for Goodstart, and it is not alone.

The Australian Childcare Alliance, the peak body for small-scale childcare providers with 2500 members, says a survey in October showed that half of respondents had been forced to cap enrolment numbers due to staff shortages.

Given the high, fixed cost base, this is a huge problem for operators which need occupancy levels of around 70 per cent to break even. This figure is even higher for not-for-profit operators such as Goodstart, which invests more into its staffing and education.

And as if this were not enough, competition between operators causes its problems, as it exacerbates the challenges with staffing and occupancy levels.

The government’s reliance on a market-based subsidy model means supply is left to the market.

‘The bottom quartile of childcare companies had profit margins of less than 1 per cent, which is unsustainable for an ongoing business.’

ACCC report

The problem is, all the current expansion is coming from for-profit operators and – as the ACCC points out – their only focus is the most lucrative geographic and demographic areas.

The commission report confirms that the childcare sector is creating a market where areas that are already well-served are getting even more centres, and poorly served areas do not get a look-in.

But the main headache for the Albanese government is we may be barely scratching the surface of the labour cost challenges in childcare.

The only uncertainty is just how expensive it will get if operators, and the government, are forced to pay workers to a level commensurate with similar roles in other sectors.

“I think, eventually, there will be no option, but for wages to increase in the sector,” Bray says.

“If the government is committed to the idea of parents not having to pay so much, then that means the government needs to be committed to putting in more funding.”

The government’s spending on childcare subsidies is currently expected to hit $15 billion in 2026-27, according to the ACCC report.

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