The Guardian 5 March, 2008
Simple as ABC:
we need public childcare!
Bob Briton
The usually upbeat Eddy Groves — co-founder of childcare empire ABC Learning Centres — is smiling a lot less lately. "Fast Eddy", as some call him, had 70 percent of his $250 million personal fortune wiped out by last week’s share-price slump. Wife and co-founder Le Neve Groves was also forced to dump millions of shares as margin calls on loans were triggered.
Trading in the company has been suspended and the future of the chain of 2,323 childcare centres worldwide is in doubt. Private equity outfits are reported to be circling as the remarkable expansion of the company comes to an abrupt halt.
There are many questions to be answered in the wake of recent dramas. Doubtless, the most pertinent one for the people of Australia is why a crucial service like childcare should be left vulnerable to the vagaries of the share market and the profit-fuelled ambitions of already wealthy individuals.
Other questions will be taken up by the Australian Securities and Investments Commission. They are considering investigation of the move by company chief executive Martin Kemp to sell off $7.5 million-worth of ABC shares the Friday before the announcement of a half-year profit slump and the subsequent slide in the share price.
Also burnt in the fire sale were former Liberal Brisbane Lord Mayor and ABC Chair, Sallyanne Atkinson. Her 695,000 shares were recently worth more than $5 million. Now they’re worth about $1.3 million and could go lower. Another casualty was former Howard Minister for Children and Youth Affairs, Larry Anthony. Incidentally, Groves has been a generous backer of the Coalition parties, giving $100,000 to the Nationals and $10,000 to the Libs since 2004.
ABC jumped at the opportunity presented by the decision in 1990 by the then federal Labor government to extend fee assistance to parents using for-profit childcare centres.
The young Eddy Groves gave away his milk run to buy his first centre in the Brisbane suburb of Ashgrove in 1988. Times just got better and better for private providers under Howard with more and more taxpayer-guaranteed income rolling through the doors. Groves pressed ahead with his can-do attitude. "… every barrier that a government or a bank, or somebody put in front of me, I jumped through it; I didn’t care how hard it was, I’d just do it", he told The Australian Financial Review back in those heady days.
The company went public and just kept on borrowing to drive its expansion. ABC is now the world’s largest childcare group and the biggest provider in Britain, the US and Australia.
Traders liked the company. The share price went from an original 38c to $8.80 in December 2006. Eddy Groves was Australia’s richest individual under 40 in 2006 with the trappings of the entrepreneurial lifestyle — the obligatory Ferraris, a helicopter operation and a basketball team. But it wasn’t just the "rags to riches" tale that pushed ABC into the headlines.
At the same time Groves was negotiating a price for the Brisbane Bullets, the company was opposing its employees’ work value case being pursued by the Liquor, Hospitality and Miscellaneous Workers Union (LHMWU). Workers were being paid as little as $5.99 an hour at the time and adult entry level pay was $11.90 an hour.
His company has forced some of its childcare workers to double as cleaners. They cleaned toilets and mopped floors for no extra consideration. Some ABC childcare workers had contracts that obliged them to pay for their own first-aid training, police checks and uniforms. Groves sued the LHMWU for defamation for portraying him as "mean and greedy".
The Federal government now underpins fees for childcare at ABC with subsidies estimated at $1 million a day. The company owns about 30 percent of the long day-care market — a dominant position that allows it to exert great influence on the price of childcare.
And it seems the environment for the for-profit sector is about to get even more conducive. Labor’s new $1.5 billion package will raise the Childcare Tax Rebate from 30 percent to 50 percent of out-of-pocket expenses to a new cap of $7,500 a child. When combined with the Childcare Benefit, low income parents stand to get 85 per cent of their costs subsidised by the government.
Even higher income parents will get 66 per cent. Childcare centres will be able to jack up fees given that the taxpayer will be paying the lion’s share of it into private enterprise coffers.
So what’s wrong with the current situation and how could a major player like ABC Learning Centres possibly hit a wall? "Until the 1990s, most child care was provided by non-profit, community-based organisations", Professor Deborah Brennan of the University of NSW wrote recently in The Age. "This changed in the early 1990s when the Australian government stopped paying operational subsidies to non-profit care services, and placed the money in the hands of parents to spend in the marketplace. The belief was that places would spring up where they were needed and that parents could choose the type of care they preferred.
"But the reality for many parents is that their options have been reduced. Many small owner-operators have sold out to ABC or to one of the corporate chains that ABC has now absorbed. Community-based childcare, highly valued by many families, has been marginalised in many parts of Australia and barely exists in some communities.
"Community Childcare Victoria has worked hard to establish new non-profit centres in Victoria, but demand for these services far exceeds supply. The market cannot deliver this type of service, yet it is precisely what many parents want.
"Second, the interests of shareholders and the interests of children are likely to conflict. Shareholders seek high returns on their investment while children require high-quality care that is expensive to deliver."
ABC Learning Centres took full advantage of this misguided reliance on the market but got too greedy. Following its expansion into New Zealand, Britain and the US, it found itself with an estimated equity of $1 billion but a whopping $2 billion-worth of debt.
In these days of the US sub-prime loans crisis, it is not good to be such a big debtor. The government now faces a situation where the viability of the company providing 30 per cent of the long day childcare in Australia is in doubt.
Buyout specialists like Pacific Equity Partners or Bain Capital might step into the breach but the system it is continuing to support will leave it chasing the price/subsidy spiral with no improvement in the quality of early childhood education for its troubles.
Even if governments are slow to change course, the public is learning quickly that there is an important role for public enterprises and services such as the provision of quality, affordable, childcare in government funded community care centres. Such services should never be handed over to the anarchy and greed of the free market.