1. 3 December 2007 IS CHILDCARE SAFE IN PRIVATE SECTOR HANDS? PRESENTATION TO ICMEC SEMINAR William Laing

2. 3 December 2007 THE PRESENTATION WILL: - Focus on day nurseries only (not nursery schools or childminders) -Ask the question, what are the dangers (if any) of a dominant private sector, and is there any threat to public policy objectives? -Draw comparisons with other sectors of health and care in the UK

3. 3 December 2007 EFFICIENCY OF PUBLIC VERSUS PRIVATE SUPPLY IN GENERAL PRO PUBLICPRO PRIVATE No profits to pay outEfficiency incentivised Public sector ethosResponsive to consumers Transaction costs lowerBetter at risk management Arguments evenly balanced?

4. 3 December 2007 £1,365 million PUBLIC Local Authorities £305 million £320 million VOLUNTARY (NOT-FOR-PROFIT) PRIVATE (FOR-PROFIT) Companies £1,370 million PRIVATE (FOR- PROFIT) Sole Traders/ Partnerships TOTAL ALL SECTORS = £3,360 million CHILDREN’S NURSERY MARKET – SOURCES OF SUPPLY Independent sector providers dominate supply with 89% of the UK children’s nursery market (78% private and 11% voluntary)

5. 3 December 2007 £2,600 million PUBLIC Government Direct £260 million £80 million MISCELLANEOUS PRIVATE Companies £420 million PRIVATE Individuals Of which government indirect subsidies contribute £325 million TOTAL ALL FUNDING SOURCES = £3,360 million CHILDREN’S NURSERY MARKET - SOURCES OF FUNDING Nurseries are mainly funded by private individuals (parents)

6. 3 December 2007 Key characteristics of nursery market and comparisons with other health and care sectors -Private funding dominant (unlike other health and care sectors, except for care of older people in affluent areas) -Private supply dominant (like social care, unlike health care) -Fragmented supply (like social care, unlike health care) -Competitive supply (more like social care than health care) -Quality driven by both consumers and regulators (like social care – health care more regulatory driven because of information asymmetry) -Attractive to private equity companies (like all social and health care) -Property based Remarkable similarities with care homes for older people

7. 3 December 2007 SHARE OF SERVICES PROVIDED BY INDEPENDENT SECTOR (mainly for-profit) %POSITIONING Children’s day nurseries 89%mainstream Care homes for older people 88%mainstream Care homes for Learn. Disab. / Ment ill 75%mainstream Special schools and colleges 30%difficult to place Mental health hospitals 22%difficult to place Acute medical surgical hospitals 15%routine elective Are other sectors safe in private sector hands? Is the children’s nursery sector different in some way?

8. 3 December 2007 WHAT’S POTENTIALLY BAD ABOUT PRIVATE SUPPLY? -Monopoly -Super-normal profits from excessive prices -Overseas multinationals -Private equity investors -Poor quality / safety because of focus on profit -May de-stabilise public supply

9. 3 December 2007 RISK OF MONOPOLY? MARKET CONCENTRATION SHARE OF INDEPENDENT SECTOR CAPACITY HELD BY TOP 4 TOP 4 Share Acute medical surgical hospitals63% Mental health hospitals52% Care homes for older people23% Special schools and colleges 15% Care homes for learning disabled / mentally ill 9% Children’s day nurseries 5%

10. 3 December 2007 RISK OF MONOPOLY? – cont. MARKET SHARE OF MAJOR INDEPENDENT SECTOR DAY NURSERY PROVIDERS, NOVEMBER 2007 PlacesMarketCumulative Share Busy Bees (ABC)12,7971.8%1.8% Asquith Nurseries 7,4021.0%2.8% Bright Horizons 6,6440.9%3.7% Just Learning 6,187 0.9%4.6% TOP FOUR33,0304.6% TOP TEN50,8007.0% ALL UK PROVIDERS725,000100% No monopoly risk – market is highly competitive

11. 3 December 2007 SUPER-NORMAL PROFITS / EXCESSIVE PRICES? Not as long as the market remains competitive, ie: Many suppliers and extensive choice for consumers good price and quality information for consumers

12. 3 December 2007 RISK FROM OVERSEAS MULTINATIONALS? The ‘overseas’ dimension is a non-issue – all for-profit corporate organisations behave in the same way. Globalisation of capital markets mean that ownership nationalities are constantly changing (examples from health and social care).

13. 3 December 2007 PRIVATE EQUITY INVESTORS? PLUS SIDE Good at driving efficiencies. Private equity firms typically manage a handful of investments very intensively (presence on Board of Directors, etc) and they are arguably better at ‘creating value’ than institutional shareholders are with publicly quoted companies. Averse to poor quality ratings, which may impact on the value of their portfolios (example from care home sector). Private equity profits are not necessarily at the expense of consumers – NOT a ‘zero sum game’ (example from the care home sector). NEGATIVE SIDE They don’t pay enough tax – even after abolition of taper relief. OTHER The almost universal strategy of private equity in fragmented health and care service sectors is to invest in ‘platforms for consolidation’. Their presence will mean more large scale (80-100 place plus) settings and fewer providers, though the nurseries sector is so fragmented that it will be a long time before the Office for Fair Trading takes an interest. On balance, a positive force?

14. 3 December 2007 QUALITY / SAFETY OF PRIVATE SECTOR vs OTHERS? -Physical facilities and amenities -‘Soft’ quality measures Empirical evidence lacking?

15. 3 December 2007 DOES THE PRIVATE SECTOR RESPOND TO PUBLIC POLICY OBJECTIVES? Yes – if it is paid to. Examples: The London Development Agency’s Childcare Affordability Programme (In the care home sector) the ‘free nursing’ subsidy of £101 per week to nursing homes. Both are ‘supply side’ subsidies, which can work in a competitive market characterised by price transparency.

16. 3 December 2007 CONCLUSIONS The private sector is typically good at operating standardised service models efficiently. For the nursery sector this means larger scale settings, particularly in the case of corporate operators. The private sector is typically responsive to consumer preferences. It can also be responsive to public policy objectives, if paid. The major systemic ‘problem’ in the children’s nursery sector is not so much the existence of a dominant private sector but the failure of local authorities to engage with the private sector in pursuit of public policy objectives.