Wednesday, September 12, 2012

Must Mind the Child-Care Sector

The childcare sector is a sensitive and popular topic as it is related to education and couples having more children/brats. Many parents bitch that it is too expensive to bring up a kid and childcare is neither convenient nor cheap. Blablablabla. Depends. PAP aka PCF kindergartens are cheap (less than $200/month), give out lots of homework and are everywhere in a void deck near you, but people want to send to those branded $1,000++ a month Eton or Pats what. Of course those are expensive! Other parents complain that it is stressful to bring up a child in Singapore's no-mercy stream and stream some more education system.  Then don't ask the government to put one leg into the childcare sector as it would be more stressful! Facepalm.

PAP promised during the rally that the government would use taxpayers' money to support and expand the anchor operators in the childcare sector. OK they didn't mention "taxpayers" but obviously it as where else is the money coming from.

Who are the anchor operators? They are - PCF (PAP) and NTUC (PAP)! On one hand it is good as there are standards and standardisation since 2 giants are getting into the pen. On the other hand, it crushes the competition. Once public money is pumped into PCF and NTUC and make these giants even bigger, from an unfair business competition understanding, small-medium childcare centres would bleed to death.

Hence, this is something I truly like about WP NCMP Yee Jenn Jong, who is the SME champion and in the past, he complained about NTUC with its economies of scale and resources, finishing off SMEs retailers and service providers. SMEs are the foundation of Singapore's businesses and employers and they should be given their space to grow and innovate. In parliament, while it is hard to ignore that PCF and First Campus' expansion is good for parents, the WP NCMP said that it should not be at the expense of the little guy. Branded Eton, Pat, Julia Gabriel etc would not suffer as they target a different market and demand for them would not be affected as people would still be biased in favour of their supposed better quality childcare and education, compared to the anchor operators.

However, the other smaller childcare centres either the non-profit or the profit ones, would face unfair competition as public money is used to subsidise the anchor operators. Not the same but good to compare, think of SMRT and SBS and how crap they are because they don't have real competition. What the NCMP suggested in the end is that if public money is used, better than giving it to PCF or NTUC outright, it can be in the form of subsidies and rent control for childcare businesses if they meet strict conditions e.g. hygiene, staff-student ratio,

Proposal for transforming the child care sector

In the child care industry, there are many private operators, most with one or a few centres while several run chain stores.

We also have non-profit operators, dominated by NTUC First Campus and PCF Sparkletots. They are called Anchor Operators, so determined after an exercise in 2009. The criteria used included: (a) $5 million paid-up capital, (b) non-profit and (c) without any religious or racial affiliation.

Anchor Operators function mostly from HDB void decks, at rents of between $2 to $4 per square metre as disclosed by MCYS. For a typical centre of 400-500 sqm, this means monthly rent of $1,000 onwards. They receive generous set-up and furnishing grants for each new centre. In addition, Anchors get recurrent grant for manpower development and learning programmes which is estimated to go into $30 million per year.

MCYS publishes upcoming new centres from HDB and SLA. From its website, I see just a few centres available to private and non profit operators. Yet at the opening of the 100th NTUC centre in October last year, NTUC declared it will open 50 new centres over the next 2 years, which is one every fortnight. PCF too had been growing just as rapidly in the last three years. Just five years ago, PCF was a small child care player. Today, it is number 2 with 90 centres, just behind NTUC. The many new centres by these two do not match the very small number of published centres for non profit operators. Are they given unpublished quotas?

We are told that the role of non profit and Anchor operators is to bring cost down while maintaining quality.

Sir, there is no magic in non profit or in Anchor Operators. The lower fees they provide can be matched by private operators. I will now demonstrate that if private operators get the same benefits as non profit and indeed the Anchor Operators, they have shown that they could match the fees of non profit peers.

Financial modelling for child care is straightforward. The main start-up cost is renovation, fitting out, and investment in resources. Set-up cost can be high, running into several hundred thousand dollars per centre.

In a typical centre paying competitive rents, manpower and rent account for some 80% of all ongoing operating costs. Private operators function from landed houses, commercial and government-owned buildings or purpose-built HDB void decks. Tenancy is often subjected to bidding. When tenancy expires, there is usually open bidding or adjustments to market rate.Competition has caused rents to be in excess of $10,000 to even as high as $40,000 per month in recent tenders.

Anchor Operators getchoice new sites regularly at highly subsidized rents. They receive start-up, furnishing, maintenance and recurrent grants. These give them huge operating benefits over competitors.

The difference in monthly rent between non profit and private operators can be $15,000 per month or more. Divide $15,000 by a typical centre enrolment of 75 children. That works out to around $200 cost advantage per child per month. With setup grants, Anchor Operators need to provide less for amortization of investment. They get ongoing grants to defray costs. Yet with these cost advantages, non-profit’s median fees is currently just two hundred over dollars lower than that of private operators. We can find private centres whose fees are not much higher than that of Anchor Operators. Are Anchor Operators with all these cost advantages, really doing enough to keep fees affordable?

Sir, there are other industry data to support my claim.

In a parliament reply this year, MCYS disclosed that EtonHouse, a premium operator with fees of $1,500 per month, charges only $728 per month at its Hampton Preschool. The centre is a collaboration with PCF. PCF secured the site at low rent, and can enjoy other grants. EtonHouse is responsible for programme delivery, set-up and pedagogy. According to a speech by Mr Wong Kan Seng in 2009 , EtonHouse manages the centre and was selected because PCF wanted to work with a private operator that could deliver ‘high quality programmes’. While there could be variations in operations compared to a typical EtonHouse’s centre, the fact is, EtonHouse could deliver ‘high quality programmes’ atless than halfof its usual fees when it operates at a void deck that enjoys subsidised rents and grants.

In the 1990s, government buildings started to provide for workplace childcare. There was an interesting practice then to charge $1 or other token monthly rent for purpose-built child care facilities which catered to children of staff working in the building. Bids were called. I noted that in open competition, these sites went to established private players whose own centres charged in the mid to upper price range.

The condition for low rent then was that fees for children of staff in the buildings must be kept low. Premium private operators could match prevailing fees of non profit operators.

Today, costs are escalating due mainly to rent and manpower. Manpower cost affects all in the industry. Anchor Operators with recurrent grants can better retain staff, head-huntfrom other centres and deal with rising costs. Rent is steadily rising in our competitive market.

This has caused fees to rise. Out of pocket payments by parents in many private centres today are higher than before subsidies were increased in 2008. MCYS has no control over fees. Centres just need to give ‘ample’ notice to parents, which MCYS recommends as 3 months, and then fees will go up.

The government has announced new measures for the industry. While they may be initiated with good intent, I fear it could end up creating more unfair competition, destroying the diversity and innovation in our current system.

I have a proposal to bring costs down while pushing for quality and diversity – Child care as a public good with private partnership through contestability.

I noted that in delivering public goods such as transport, the government has pumped billions in rail and bus investments without expecting payback from private operators or charging infrastructure at market rent to them. We were told this is to bring the cost of public transport to a level that people can accept.

If we wish for young working couples to be able to afford child care and be encouraged to have more children, then we have a case to use a public good’s approach for child care.

Government can build and lease out centres at managed low rent. All its existing sites can come under the model. Based on answers in parliament, there are 290 void deck centres for non profit and 176 for private operators in void deck and JTC buildings, and another 52 in government buildings. That’s 518 centres, roughly 52.4% of all child care in Singapore. With 200 more centres to be built mostly in government controlled spaces, the share of sites under government‘s control will rise.

Old schools, disused community centres and other SLA spaces can be purpose-built by the government into mega child care facilities, even housing different operators under one roof. Child care generally should be within 2-3 km of workplaces or homes. Many small void decks in new flats are not ideal for child care, limiting options in new towns. We can have mega child care sites as long as we ensure there is easy access by parents, with roads and parking well planned.

We can utilise unused land parcels next to primary schools. There are small plots around some primary schools which are not big enough for meaningful commercial projects. We can tap on infrastructure of the primary schools to add new preschool facilities. This will make use of unutilised space, save on infrastructure costs and cultivate exchange between preschool and primary school.

The government can negotiate as main tenant with large private landlords for sites as a bloc to supplement their bank of child care sites. It can work with property developers who get additional Gross Floor Area when they set aside preschool space at cheap rents and let the government use the space for any type of operator. We should actively pursue all options to increase the state’s child care bank to cater to the mass market.

How do we allocate these centres? Rather than have more Anchor Operators, I have another suggestion.

The Anchor Operators concept has skewed the market. It is like giving a boxer super glooves and energy boosters while tying the hands of the competitor and asking them to fight each other. The stated objective for Anchor Operators was to “develop childcare operators that will set the benchmark for quality and affordable childcare services.”

It may have allowed Anchor Operators to achieve higher quality as they get resources, economy of scale, and certainty of their leases. Is it fair to expect other operators to keep pace? Other operators get little or no state funding. They hesitate to invest, worried if others will outbid them for their centres at each renewal, which will wipe out sunk investment. New HDB sites are so few compared to unannounced sites for Anchor Operators. Anchor Operators could lure their staff away with scholarships. Instead of encouraging other operators to step up, it cancause some to think short term and extract as much out of their investment while they can.

We can apply contestability. Contest clusters of sites openly based on concept rather than on rent. This was done before, when government building sites charged token rent and selection was on other factors such as quality and fees.

There is no need for a one-time selection of new Anchor Operators which will strengthen only a select few and weaken everyone else. Worst, it may become impossible for new operators to enter the market, killing off future innovation. We need active competition to raise standards and to continuously drive innovation.

Recurrent and other grants should apply to all qualifying participants as long as they meet strict selection criteria on fees and quality. There should be no differentiation between private and non profit operators. We already know what the current Anchor Operators can do with the support they had been given. Why have we been limiting ourselves to think only selected non profit players can bring cost down? Let’s open up and see how all others, including private operators can better that in terms of price and quality, if given similar support. I believe fair competition may even force current Anchor Operators to better their pricing, ultimately benefiting consumers.

New operators can surface from time to time. Small operators may band together into economic groups to better compete.

Contestability will drive diversity and quality. Operators cannot increase fees without approval. The government will regain control over the fee process to ensure affordability.

Government can better direct its key programmes. MCYS had found it hard to get private operators to go along with some of its programmes, such as SPARK. Last month, we were told only 115 preschools had attained SPARK accreditation, of which just 39 were private operators. This is way way below the target of 85% of all centres to be SPARK-tested by 2013, a figure established by Minister of State for Education, Mr Masagos in November 2010. We can allow only SPARK-accredited operators to contest these sites.

There may not even be a need for state-run preschools. The call for nationalisation was made by many frustrated with differing standards and high costs. We can improve quality even at the low cost segment by having a critical mass of centres available in this public-good model, and the state regulate to steer quality and pricing. It can designate some centres for the low income group by packaging centres for different market segments in each tender exercise.

While this proposal is in the context of child care, it can also be used for kindergartens.

In summary, I am calling for child care to be a public good with fair contestability of sites at managed rents for all types of operators, with tighter control of fees and quality by the state. This will benefit Singaporeans as fees will drop industry-wide while preserving diversity and driving up quality and innovation. I hope the government can carefully consider this proposal.


  1. Power here comes from control.
    If this public good is to be managed by merit, it will be one avenue less for buying his supporters' votes.

  2. Isn't what the PCF and NTUC doing in breach of competition law? What does the Competition Commission have to say about this?