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January 28, 2005

Polly on Contracting Out.

Polly Toynbee has a very interesting article today on the contracting out of childcare to the private sector. More specifically she looks at the returns to investors of providing these services. Now I know nothing about the Catalyst Investment Group other than what I read on their website but that is enough to convince me (someone with a year or so’s experience of the dodgier end of the City, 20 years ago now,) that they’re not getting any of my money. No, no inside knowledge, just purely personal opinion.
Polly notes that the returns seem to be phenomenal:

Two to three children placed on the lowest rate of £3,000 a week will be "producing an estimated pre-tax profit in excess of £100,000 a year per house". Unsurprisingly, "venture capitalists are keen to enter this market".

That is indeed a very juicy return. However, Ms.Toynbee has managed to miss one important point about this whole area of life. Let us assume that all of the figures put forward are correct, that Catalyst is indeed correct in its analysis and that these profits are there (including the tax reliefs on the investments) and that it is in fact a completely tickety boo investment opportunity.

Currently, Local Authorities are paying well over the cost of provision for these services. This leads to excess profits ( above the general return to capital across the economy, adjusted for risk), which in turn leads to more capital being invested in the facilities required to provide such services. As Catalyst is doing. What then happens? More homes are available, the price to Local Authorities falls, and the return to capital will fall to the general level of returns (properly adjusted to risk of course) available across all investments.

In effect, the current high prices being paid are a signal that there is an underprovision of facilities, the high returns to capital being the incentive to correct this. It’s one of these things that can be very difficult to explain, that excess profits, publicly known about, are a good thing, for over time (and often amazingly short periods of time) that knowledge leads to greater investment, greater provision of the goods and services in short supply and the extinction of those excess profits.

In short, yay! for heartless capitalists who pursue only their own enlightened self-interest....providing homes for emotionally disturbed children. As more do so all places will get cheaper.

January 28, 2005 in Economics | Permalink


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Isn't it odd: after a century and more of free education, it is still necessary to explain such elementary stuff - not only to the great unwashed, but to the frequently washed and probably somewhat fragrant?

Posted by: dearieme | Jan 28, 2005 11:07:44 AM

Amazingly I find myself agreeing with you. Unfortunately for the taxpayer, many local authorities don't relise the power they have in negotiating contracts with such organisations and pay the asking price.

The Pan London agreement would have made a difference here for London LA's, but I don't know of any LA which has implemented it to any great degree.

Posted by: mrs mcmuffin | Jan 29, 2005 10:35:15 AM