I rise to speak to amendment 25 and clause 14. I thank the hon. Member for Twickenham for what she said about our amendment. I completely agree that, ideally, we would have what we are asking for on a regular basis, but just to be clear, the requirement on the Secretary of State to report to Parliament details and analysis of available placements is in amendment 25 because we want to keep the focus firmly on supply and capacity, which I think we agree are the ultimate drivers of the problem we are addressing.
As we said in response to the oral statement to the House by the Secretary of State, we welcome the continuing focus on issues that we identified, and we set up the market intervention advisory group to look at that when we were in government. The heart of the problem, however, as I think we all recognise, is the lack of supply of high-quality places in residential, kinship and foster care for looked-after children. Demand for such places outstrips supply, and that is what is causing the high cost of placements.
It is striking that in its 2022 report, the Competition and Markets Authority did not recommend a profit cap because, in its words,
“The central problem facing the market…is the lack of sufficient capacity.”
The CMA concluded that taking measures to limit the profitability of providers would
“risk increasing the capacity shortfall.”
So if we do not take action to increase capacity first, ironically, we risk simply driving up prices and exacerbating the shortage of places.
Likewise, the review commissioned by the last Government and carried out by the hon. Member for Whitehaven and Workington (Josh MacAlister) found that profit caps would not work as it would be,
“relatively easy for providers to reallocate income and expenditure to maintain profit levels”,
a point already alluded to by the hon. Member for Twickenham. The capacity problem rests on the availability of places and the demand for those places. We spoke previously about the need to do much more to grow fostering to reduce demand. Our amendment is designed to ensure that that capacity issue remains at the front of everybody’s mind at both the national and the local levels, so that at neither level do we fall into thinking that we can fix this without primarily fixing supply.
I understand the argument that it cannot hurt to have the power in the clause, which is the reason why we will not vote against it, but it is unlikely to change things very much compared with increasing supply. In fairness, the Bill’s policy notes state that the profit cap power
“is intended only to be used as a last resort should other measures not have the expected impact”.
The hon. Member for Twickenham talked about it being a backstop. My only worry is we should not even rely on it as a backstop. As the previous independent review and the CMA highlight, it would not be easy to use. One reason is that it would inevitably have to be backward-looking. The Government’s policy notes state:
“We are aware that the administration of the profit cap will be a retrospective look back at whether or not the profit cap has been breached in a past period. It will therefore not necessarily prevent breaches in itself, but it will allow action to be taken retrospectively if such breaches have occurred and act as a disincentive for further breaches.”
We will be looking backwards at a sector where there are a lot of complicated financial arrangements, and because we are looking backwards, people will have time to do all kinds of things to make sure that they look like they are complying, for the reasons I have mentioned.
As Ministers take this measure through the other place and consider implementation, I strongly recommend that, if they regulate for fines, they set up an absolutely iron-clad mechanism to ensure that those fines are paid. I was very disturbed to learn from an answer to a parliamentary question the other day that the Home Office has no idea what proportion of the fines imposed for illegal working are actually paid. In that sector, people just move on—they set up a new company, or get their brother to start a new thing. They just move on, and they do not pay the fine. It is widely known that we do not even know how many people are paying those fines. Obviously, we need to prevent that from happening in this sector, where there is equal scope to move on, to set up new things and collapse the old, and so escape fines. I am sure Ministers are seized of that risk; I just wanted to emphasise what they need to do when regulations are made.
Another way out that Ministers might want to try to close off is that some in the sector adopt offshore models of provision. Might the Government want to use this rare legislative moment to discourage, either in primary legislation or by giving themselves the power to regulate, the commissioning of places with providers that are domiciled offshore? They might want to take that power now, but even if they fix it, there will continue to be so many opportunities to fudge and to manage profits with interest and debt.
I do not mean to labour this because, as I listen to some people in the debate, including Ministers, I hear that they understand the difficulties, but then I hear from some other people, and they think, “Oh, we can just control prices to get out of this, without addressing the underlying real problem about supply.” When I was at the Treasury, one reason we were really keen on the work we were leading on through the OECD on base erosion and profit shifting was that we were faced with the endless generation of new tax wheezes and profit-shifting arrangements. They all had these exotic names—the Dutch sandwich, the green jersey and the double Irish; people were constantly generating new ways of moving profits around.
I want to bring that to life a bit by asking some questions. How would profit be defined for the purposes of the cap? The policy summary talks about
“(on average) profits of 19.4% on fostering, 22.6% on children’s homes and 35.5% on supported accommodation.”
I went back to look at the 2022 CMA report from which those numbers are drawn, but it just talks about margins, so I was not clear on whether we were talking about pre-tax, post-tax, or earnings before interest, tax, depreciation and amortisation. I am keen to understand what measure of profit we are using.
What analysis have the Department done to think about the capital needs of the sector over the next five years? It will need large sums, which may make profit capping harder. Fundamentally, there is a big question about what level of profit the Department for Education deems to be acceptable. In in her articulate and thoughtful remarks, the hon. Member for Twickenham mentioned one provider that had a very high rate and another that she said was more acceptable. That is the heart of the issue: given the powers that are being taken, do Ministers at this stage have some rough barometer of what they would regard as unacceptable profits?
Alongside this debate, even as we as we speak, the consultation is running. Obviously, in an ideal world it would have been much better to have had the results of that consultation before the debate and before we moved to legislate. To say we are being asked to sign a blank cheque is an overstatement; I am less worried about it than that. Obviously, though, it would have been much better to have the results of the consultation. What is the timescale of the consultation and when will we have some results from it? Is the Minister already able to share any findings?
I am labouring the point slightly, but I want the Minister’s reaction to the issue, which I am trying to raise in different ways, of the difficulty of capping profits in this kind of industry with these kinds of players so that the concerns that caused the CMA and the hon. Member for Whitehaven and Workington not to recommend profit caps do not come to bear in practice.
A fundamental question is what the evidence is that, on a like-for-like basis, private sector providers are more expensive than either charities or local authority provision in this area. The numbers may exist, but I have not seen them. If the margins are so high, why are more providers not entering the market? It is a strange thing: there is not enough supply, but we think profits are too high. What is the barrier to entry? It may be that all those questions are addressed in the impact assessment, which is one reason that it is frustrating that we still do not have it.
The DFE says that it is trying to do other things to tackle excess profits. In its policy summary notes to the Bill, it said:
“Until these other measures have had time to be implemented and have effect, we will not know whether regulatory action in the form of a profit cap is necessary.”
That is totally sensible; I completely agree. What are the Minister’s thoughts on timing for making a decision on that? We have a consultation now. The Ministers are trying to do other things to tackle excess profits now; once implemented, they will take time to have an effect, if they are going to have an effect. In what year will we potentially make a decision on the profit cap? As I started to make the mental Gantt chart, I wondered whether this was a decision for the end of this Parliament or the next. I just want a sense of what Ministers think about the timing for making that decision.
Page 53 of the policy summary notes says:
“The level of any future profit cap would depend on a number of factors, including market conditions at the point that we make a decision that a cap is needed.”
That line is a bit mysterious. This may be obvious, but it is not obvious to me—what does that mean in practice? I could not work out which way round it was: would there be no profit capping if supply was too limited, as there would be no scope to do it, or would profit capping come in if supply was limited and prices higher than Ministers wanted? I was not sure in which direction the arrows ran between market conditions and the decision on having a profit cap.
We are not against the clause standing part of the Bill. We are obviously keen on our amendment, and indeed the improvement to it suggested by the hon. Member for Twickenham, but, as an amendment, it is what it is. But all of this is just an aim. We think there are massive limits to how usable this power will be in practice and we do not want it to become a distraction from fixing the main issue, which is supply. To use an example from housing policy, which is apt, given the Chair’s former Select Committee role, the places around the world that have tried to rely on rent controls to fix housing problems generally fail. The people who focus on supply generally do much better. That is the spirit behind our amendment and our questions to the Minister.