ACCC Childcare inquiry releases final report

On 29 January 2024, the ACCC released the final report of its inquiry into pricing in the childcare industry in Australia.^[1]

The ACCC was directed by the Treasurer in October 2022 to conduct a price inquiry into the national market for the supply of childcare services.^[2]  It examined how childcare markets and competition are working, and considered the impacts of market outcomes as they affect different households across Australia. The ACCC also assessed price changes that have resulted from Australian Government policies, including the recent changes to the childcare subsidy.

In preparing its final report, the ACCC sought input and feedback from a variety of stakeholders, including from parents and guardians who completed surveys and engaged in roundtable discussions designed to seek their perspectives on choice, cost and access to childcare services. The ACCC also hosted roundtable discussions with other key stakeholder groups, including childcare educators, childcare providers, culturally and linguistically diverse communities and First Nations peoples. Finally, the ACCC received submissions from the public on the Childcare inquiry September interim report.

This consultation and information gathering process culminated in the release of the final report containing 31 findings and 8 recommendations.

The ACCC’s findings

Below is a summary of the ACCC’s key findings, with a focus on findings concerning centre-based day care (rather than family day care, outside school hours care and in-home care).

1. Increasing prices reflect increasing costs of providing childcare services

The ACCC found that the average daily fee for centre-based day care services increased by 9.8% between the September quarters of 2022 and 2023 respectively – the largest year-on-year increase in daily fees since the childcare subsidy was introduced in 2018.

However, the ACCC found that the rising prices of childcare are generally not the result of childcare providers increasing their profit margins but instead reflect the increasing costs of providing childcare services. In particular, the costs of labour and land have increased – meaning that rising costs are not the consequence of increasing inefficiencies resulting from a lack of competition. This explains why affordability improved immediately in July 2023 following an increase in subsidies as part of the cheaper childcare reforms, although these savings were soon eroded by further increases in the costs of providing childcare services.^[3]

This allays concerns that rising childcare costs are the result of childcare providers pocketing higher margins or price-gouging, particularly in local markets where there is unmet demand for childcare services.

2. Childcare needs vary by local market/region, resulting in differing local market outcomes

The ACCC found that childcare markets under current regulatory settings are not meeting key policy objectives of accessibility and affordability, although the extent to which these outcomes are being achieved (or not achieved) varies significantly by local market. This is the case despite significant increases in the childcare subsidy and additional childcare subsidy since 2018.^[4]

A consistent theme throughout the final report is that needs and preferences for childcare vary considerably between and within each local market, including by care type, willingness and ability to pay out-of-pocket childcare expenses, and according to cultural considerations. This means that local markets currently vary in their capacity to deliver each family with enough childcare of the type they require and at a price they can afford. As a result, there is significant variation in prices, profit margins, service quality and the extent of unmet demand across local markets.

Proposed reforms to childcare policy

The ACCC has made 8 policy recommendations to the Australian federal, state and territory governments to improve the accessibility and affordability of childcare. An overarching theme of these recommendations is that a local (rather than one-size-fits-all) policy approach will be better able to meet the unique needs of local markets.

Recommendations 1 to 4 include suggested improvements to the existing regulatory arrangements for childcare markets:

1. The Australian Government reconsider and restate the key objectives and priorities of its early childhood education and care policies and supporting measures, including the price regulation mechanism.

2. Further consideration and consultation on changes to the childcare subsidy and hourly rate cap, to simplify their operation and address unintended consequences, including on incentives and outcomes.

3. Reconsideration of the information gathered for and reported on StartingBlocks.gov.au so that it is better focused on meeting parents’ and guardians’ information needs in understanding the benefits of early childhood education and in selecting a service, balanced against the costs of collecting and publishing information.

4. 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 sector.

Recommendations 5 to 8 relate to broader design changes to the childcare system:

5. The Australian Government should design policy options to better meet the needs of children and households for whom in-home care services are intended to serve.

6. The Australian Government should consider maintaining and expanding supply-side support options for Aboriginal Community Controlled Organisations that provide childcare and additional support services for First Nations children, parents and guardians. Consideration should be given to identifying alternative approaches for First Nations households to access the Child Care Subsidy (and other childcare entitlements).

7. A market stewardship role should be considered for government, by both Australian federal and state/territory governments, to monitor, regulate and shape childcare markets to ensure they deliver government objectives. Should this recommendation be implemented, childcare providers should expect their business to be monitored for compliance with quality requirements by the local market steward.

8. Further consideration of the benefits and challenges of supply-side subsidies (particularly as a longer-term consideration) coupled with other more direct forms of market intervention, as appropriate. In particular, the ACCC has recommended that supply-side subsidies be implemented in under-served and unserved local markets to increase incentives for childcare providers to establish centres in these regions.

So where to from here?

Amidst the current cost of living crisis, the findings and recommendations of the Childcare Inquiry by the ACCC will be welcome news to households and the childcare industry alike, however, it is up to the Australian federal, state and territory governments to implement some or all of the recommended policy changes. There is likely to be hesitancy from government given this will require further significant increases in funding.

Daycare centre providers will also be watching the government response to these recommendations keenly. If implemented, the introduction of supply-side subsidies in regions deemed under-served or unserved may incentivise investment by private equity funds in daycare centres in these areas. On the other hand, the introduction of a supervisory body with extensive market monitoring powers (such as a local market steward) may also scare off investors. Whether the recommendations have any impact on dealmakers within this space remains to be seen.

Beyond these immediate measures, the broader policy debate about the childcare system in Australia continues, including what is the ideal split between public and private (i.e., out-of-pocket) funding.^[5] This debate is of great significance to Australian households with children, as primary caregivers must currently consider the cost and ease of access to childcare in their decision of whether, and how much, to work and study. On an aggregate level, each of these decisions has significant consequences on educational outcomes, participation in the workforce, social inclusion/outcomes and economic output – meaning childcare policy necessarily involves input from many other stakeholders and government departments.