The collapse of ABC Learning is not merely a business failure, but a government policy failure of the highest order. Julia Gillard should be undertaking a fundamental reconsideration of child care support in Australia.

The full causes of the disgraceful collapse of this company may eventually come to light. Perhaps Eddy Groves’s penchant for related party transactions played a role. The reliance on an ever-increasing stock price to help fund ceaseless expansion certainly did. The Australia Institute argued back in 2006 that the company was vulnerable to share price collapse.

But the real blame lies in with successive governments’ child care policies.

Over the last three decades, Australia has moved from a community-dominated childcare model to a private-dominated model without any real debate about the type of industry structure most appropriate for families and what the role of government should be. In particular, the Howard Government strongly encouraged private sector child care provision. There’s nothing, in theory, wrong with that. Private-sector child care was and is a sound model, when accompanied by a rigorous standards and accreditation process.

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But as the sector consolidated, government subsidies grew and ABC Learning began focussing on acquiring child care centres rather than running them, the hands-off attitude of the Howard Government set us up for the spectacular failure we’ve now witnessed.

Sue Lines of the LHMU, which covers workers in the sector, told us “governments have never thought through what sort of childcare sector they want. The current government has just come in on top of that. We need to go back to basics and debate how we want to provide this important infrastructure.”

As both a basic service that enables much of the Australian workforce to function effectively and as a critical component of early education, childcare has huge economic consequences. And it can’t function like a normal market. This year, the Commonwealth will provide over $2.5b to subsidise nearly 700,000 child care places. Reported figures vary, but ABC Learning would on a rough estimate get about $330m for its 120,000-odd places. In previous years, subsidies have provided over 40% of ABC’s revenues.

The private health industry, which also heavily depends on subsidies, must look at child care in amazement, given the tight regulation and heavy government control under which it is required to operate. Private health insurers have to obtain ministerial approval for premium rises and demonstrate their capital adequacy. Another industry heavily-reliant on subsidies, aged care, has a tough — even, according to some in the industry, aggressive — regime of standards monitoring and accreditation requirements across all aspects of aged care operation.

With minimal government supervision, ABC Learning tried the Macquarie Bank trick of leveraging a reliable income stream to fund acquisitions, and hoping an ever-increasing share price would fund limitless growth. But they didn’t have the nous or the diverse asset base to run the model properly and were hopelessly exposed to an increase in credit costs.

Given the Government’s role in providing nearly half the revenue for the 70% of childcare providers in the private sector, it shouldn’t be so quick to dismiss out of hand the idea of taking control of ABC Learning. But the sheer size the company’s debt — it owes over $1b to the big four banks alone — would be problematic even when budget surpluses seemed unlimited. And as Sue Lines pointed out, ABC Learning doesn’t own most of the land on which its centres are sited. How much it owes to property holders is unknown. To say nothing of about $20m in basic employee entitlements.

The alternative, however, is cherry-picking of profitable centres by ABC Learning’s competitors, leaving low-profit or unprofitable centres in limbo.

At the very least, the Government should start playing a governance role commensurate with its financial importance. The ABC Learning board, top-heavy with politicians, appear to have radically failed in exercising a basic level of control over Eddy Groves and his management. The Government should impose significantly higher accountability requirements on private sector operators, and in particular establish the same sort of price regulation as the private health insurance has to submit to. This will help to prevent the sort of subsidy-price spirals witnessed earlier this year when the Government increased its childcare benefit subsidies. It will also enable regulators to see directly into childcare providers’ accounts, something ABC’s shareholders and creditors would dearly love to have been able to do in years past.

Successive governments have failed to think long-term about the provision of childcare for Australians. It’s time the Rudd Government corrected that failure.