In this blog Scott Greenhalgh examines why children’s social care is an example of market failure, what the current government is proposing and what more can be done. He has been involved in this sector both through the Evergreen social impact fund and as chair of the social investment fund Social and Sustainable Capital.

We use the term “market failure” to describe a situation where markets are not working efficiently; that is to say where demand and supply is not in balance with a lack of competition leading to excess costs and/or poor quality for consumers. In this case we are talking about poor outcomes for children in care (and for society more broadly) and costs to the public purse that seem way too high.

The Children’s Wellbeing and Education Bill 2025 is currently being reviewed by Parliament. It includes measures designed to address market failure in the provision of care for looked after children and we suggest further action the government could take.

The challenges: There are some 83,000 looked after children in England, a number that has risen from nearer 60,000 some 20 years ago. Some 33,000 young people entered and left the care system last year. A recent major report highlighted that the system is not working for young people; educational, wellbeing and opportunity outcomes are all poor. (1) Improving outcomes for these young people should be the primary objective of any policy changes. (2)

A second key challenge is the cost of care which has risen dramatically with an overspend of £600m last year for local councils in England; a key factor in their financial challenges. This pressure is most acute in the costs for children looked after in residential homes (as opposed to foster or kinship arrangements), where costs per child have increased by over 50% in the past 5 years to nearly £6000 per week. (3)

With over 80% of residential care and over 90% of supported living places provided by private for-profit businesses, policymakers have voiced concerns about profiteering especially by larger private equity owned operators. The ability of (some) operators to dictate prices, reflects a lack of competition (supply side market failure) and a shortage of placement alternatives for council social workers against the backdrop of rising demand (for places). Put another way, we are faced with a situation where Adam Smith’s “invisible hand” that leads to market efficiency is not working.

The current situation stems arguably from government policy failure; some 40 years ago local councils became more commissioners and less providers of services. The idea was (quite reasonably) to stimulate competition, quality and efficiency in the provision of public services. However, in residential care, the need to raise capital both to buy the homes and to develop operational capacity (people, systems etc) favoured for profit as opposed to non-profit operators, as the former could more easily raise the money to invest.

(1) “The Independent Review of Children’s Social Care 2022 led by Josh MacAlister.
(2) In addition, a recent study showed private provision delivers poorer quality care than state or non- profit provision- “Outsourcing and Children’s Care”, Bach-Mortensen et al University of Oxford 2022.
(3) LG Inform DfE data 2018/9 to 2022/3.

The Bill’s proposals: The Bill contains a wide number of proposals; those that relate to addressing this market failure include:

– Financial oversight of providers that are deemed to have strategic significance by virtue of their size or dominant position in a particular
geographic area. (Article 14). This reflects concerns about the ownership, financial strength and therefore sustainability of providers and includes powers to call for an independent investigation. In the past several major private (and institutional equity owned) adult residential care providers went bankrupt leading to huge distress for elderly people and their families including sometimes having to move care homes at short notice.
– Profit caps being capable of imposed on providers (Article 15). This is designed to address concerns about profiteering.
– Disclosure and financial penalties: The right to require disclosure for the purposes of determining either of the above and the right to levy penalties.

In summary, this Bill proposes to address market failure through regulation rather than the other levers open to government- provision, taxation or subsidy.

Commentary: The CMA reviewed the children’s social care “market” in a report in 2022. (4) It highlighted poor outcomes for children, high costs and a lack of competition. It also raised concerns about the financial risks of debt levels among some large private providers. It was in favour of greater financial oversight, but not in favour of profit caps (or directly trying to reduce the extent of private provision).

The key issue in this “market” is a lack of supply of high-quality care places of the right type and in the right locations and (therefore) a power imbalance between provider and commissioner. It is partly through stimulating more provision that this dynamic can be changed. Without such measures, the danger is that private provision (wary of the above proposals) reduces, thus putting local council commissioners in an even worse position.

Possible Solutions: We would therefore propose that more focus be placed on increasing supply- ideally through the non-profit sector. There are charities and social enterprises already involved in supporting looked after children; their willingness and ability to expand their involvement requires a mix of:

• Funding or risk sharing- both the capital cost of new residential homes and the working capital for the hiring and training of qualified staff.
• Streamlining regulation to make it easier to open new homes.
• Fast-tracking planning consent for new children’s homes.
• Place based partnership working between local commissioners and (non- profit) providers to map and address demand/supply imbalances.

(4) Competition and Markets Authority Children’s Social Care market study published March 2022

All of this with a real focus on quality and improving outcomes for children who unfortunately need this type of care.

The Government’s Bill focuses on regulation as its’ policy lever; I believe subsidy and/or provision to increase the “right” high quality provision are the additional levers that need to be grasped to ensure success.