I beg to move amendment 42, in clause 14, page 28, line 37, at end insert—

“(c) independent schools with caring responsibilities and offering SEND provision.”

This amendment would include independent special schools within the profit cap provision.

With this it will be convenient to discuss the following:

Amendment 25, in clause 14, page 29, line 25, at end insert—

“(10) Before making regulations under this section the Secretary of State must lay before Parliament a report containing —

(a) details of the number of available placements in relevant establishments or agencies;

(b) an analysis of the expected impact of this section on the number of available placements in relevant establishments or agencies.”

Clause stand part.

It is a pleasure to serve under your chairmanship, Mr Betts. Clause 14 grants the Secretary of State the power to limit the profits of certain social care providers, so I will say at the outset that I, as a Liberal, support a mixed economy in the provision of public services, but I believe that there must be limits to that. It is clear that we have a market that is not functioning, and there are providers who are shamelessly profiteering. I spoke to my director of children’s services about this last week, and he told me at the moment the average price of a placement in a children’s care home per week is £5,500. That is very much the average price; a number charge multiple times that amount per week. That local authority finances are being utterly crippled by some providers, which are clearly behaving inappropriately in the market because of the lack of supply, leaves me incredulous.

A number of hon. Members have made reference to the Competition and Markets Authority’s 2022 report. It said that the UK had sleepwalked into a dysfunctional market, and that

“the largest private providers…are…charging materially higher prices, than we would expect if this market were functioning effectively”.

The power in clause 14 is an important backstop if other measures are not successful, but the devil will be in the detail of how the power is implemented if it is triggered. We all know that many of those big companies have deep pockets from which to pay the best accountants and lawyers, and comprise multiple companies in complex structures all over the world; they can put money into all sorts of different places to avoid the intended scrutiny.

Amendment 41 would include independent special schools in the provision. I will say at the outset that there are many independent special schools run by private providers and voluntary sector providers that do an excellent job and are certainly not profiteering; none the less, some do not fall into that category. We are all acutely aware of the crisis in state special educational needs and disabilities provision and the lack of specialist places, which has led to a growth in private provision that is crippling local authority finances. In 2021-22, councils spent £1.3 billion on independent and non-maintained special schools—twice what they spent just six years previously. The average cost of one of those places was £56,710—twice the average cost of a state-run special school place.

It is clear from analysis done by the House of Commons Library for the Liberal Democrats that some of the companies running those schools are the same private equity companies that are running the children’s homes and fostering agencies that the power in clause 14 is designed to address, so I am at a loss as to why the Government have not included independent special schools in the provision. LaingBuisson, which undertakes reports on children’s services, looked at those providers on the profitability measure of earnings before interest, tax, depreciation and amortisation. It says that the profitability of 23 of the major providers, using the EBITDA measure, varied from 27.9%, in the case of the Witherslack Group, down to 4.7%, which is a much more acceptable level; over a third of the 23 major providers had a greater than 20% profitability margin. Typically, it was the private equity-owned providers that had that high level of profitability, not the other private sector providers. I urge the Government to look very seriously at amendment 42, which seeks to ensure that we also crack down on profiteering in special schools.

On amendment 25, tabled by the Conservatives, I actually think the first part of it, about detailing the number of placements available in relevant establishments or agencies, is a good idea. That information should not be published only when the power is triggered; frankly, we should have an annual assessment of the availability of care placements and details of what the Government are doing to boost their availability. It is clear that the lack of provision is what is driving the profiteering. A later clause allows local authorities and others to open new special schools where there is demand. We need a provision that gives local authorities the power and funding to fill a need for social care placements as well, so that we are not filling the coffers of private equity funds and sovereign wealth funds in the middle east, which pay their directors massive bonuses, huge amounts of money, drawn from the public purse, when many of our local authorities are on the brink of bankruptcy.

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 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.

It is good to see you in the Chair, Mr Betts. I rise briefly to echo some of the points made by my hon. Friend the Member for Harborough, Oadby and Wigston and to ask a couple of questions. I have total sympathy with what Ministers are trying to do here. Having spent a bit of time at the DFE, I know the pain of seeing the amounts of money going out from local authorities for some very expensive placements.

The thing I always found vexing, and still do to this day, is exactly the thing the shadow Minister mentioned. If there are fat margins to be had, ordinarily, in a Schumpeterian world, people come into that—again, I hesitate to use the word—market. The insurmountable barriers stopping that from happening were never clear to me. It was not just that additional supply was not coming in to bring down unit costs, but that, on occasion, there was no place to be found. It is very important that we understand the underlying economics of this, bearing in mind, as ever, that we are talking primarily about the care of children.

The profit made by an entity cannot be limited, ultimately, because that is the residual left at the end of the year between revenue and cost. All one can do is either to choose not to use an entity that makes a profit of more than a certain amount, or seek some form of clawback. I note from the Bill that it is the latter approach that Ministers wish to take, as in proposed new section 30ZM. Do they seek to use this power as a fine—a penalty—for having a profit above whatever is deemed the appropriate level, or in proportion to it? In other words, do they seek to claw back the entirety of the surplus—the profit made—in excess of what is deemed a fair return?

This will come up in the secondary legislation, but I hope the Minister does not mind my asking about it now, because it is pretty fundamental. Defining profit is an extraordinarily difficult thing to do. To the person in the street, it is obvious, but any financial analyst would say that they can make the profit more or less whatever they would like it to be, depending on how they treat direct cost, how they absorb the fixed cost, how, in the case of a relatively small business, they treat the balance between remuneration of employees and reward to shareholders, and many other factors.

Even if we talk about gross profit or gross margin, that could be defined in different ways at different levels. The hon. Member for Twickenham suggested that perhaps EBITDA—earnings before interest, taxes, depreciation, and amortisation—would be the correct definition to use. It might be, but another argument says that taking the line above depreciation is not appropriate if a capital investment is involved. In any event, the overarching point is that it is a very complex issue. Private sector companies can be rather good at knowing how to best present their finances. Of course, that can be entirely legitimate. My question is, what monitoring does the Department for Education believe will be necessary, how much it will cost to put in place, and how effective does it think it will be?

My final question is: does this also apply to the voluntary sector? We are talking about profit, but a charity or voluntary organisation does not have distributed profit. They may, however, have a surplus, so does this also apply to surpluses made by entities in that sector?

Amendment 42, in the name of the hon. Member for Twickenham, seeks to extend the powers to cap profits of Ofsted-registered non-local authority providers of children’s homes and independent fostering services to also cover private schools with caring responsibilities and offering SEND provision.

As hon. Members will be aware, the Competition and Markets Authority found the children’s social care placements market to be dysfunctional, estimating that the largest private providers were making profit margins well above what would be expected in a well-functioning market. It is important to be clear that the study was restricted to looking at the state of the market for specific types of placements. It provides clear evidence of excess profit making by some providers of these placements, but its scope did not extend to looking at private schools.

We set out a wider package of measures in “Keeping children safe, helping families thrive”, which we expect will rein in profiteering among children’s social care providers, and the profit cap is intended as a last resort if they fail to do so. Children and young people with special educational needs are found throughout the private school sector, and it is not our intention to introduce a blanket cap on profits in private schools that offer special educational provision.

With regards to private special schools, they can play an important role in the special educational needs and disability system, particularly in meeting low-incidence needs. Many have important expertise, but we recognise that independent special schools have higher costs than maintained special schools and academies. The Government are very aware of the challenges in the SEND system, and we understand how urgently we need to address them. But these complex issues need a considered approach to deliver sustainable change. As part of that work, we are considering the role and place of independent special schools. It would not be appropriate to introduce a profit cap on a completely different sector without proper engagement with stakeholders and an assessment of its impact.

The hon. Member for Twickenham made a number of insightful and helpful comments when moving her amendment, and I hope that I addressed earlier her remarks about private special schools. As I mentioned, private special schools often have higher costs compared with their maintained equivalents. In some cases, that will be particularly because of higher specialist provision to support children and young people, particularly those with complex needs.

Some private schools, of course, operate for profit. We need to ensure that placements in private special schools are used appropriately. It is the Government’s intention that special schools should be reserved for those with the most complex needs. As I have mentioned, we will consider the role and place of private special schools and the potential for a cap on profits as part of our wider reforms to special educational needs.

Amendment 25, in the name of the hon. Member for Harborough, Oadby and Wigston, the shadow Minister, seeks to require the Secretary of State, before making regulations to implement a profit cap, to lay a report on the number of placements for looked-after children in relevant establishments or agencies and the expected impact of a profit cap on the number of places available. As I outlined earlier, we intend to use the powers in clause 14 only if profiteering is not brought under control through the wider package of measures set out in “Keeping children safe, helping families thrive”. Those measures include improving data transparency and boosting the supply and diversity of provision, helping to foster greater competition and to drive down prices and profits to more sustainable levels.

It is crucial that we allow time for those other measures to work before considering regulatory action. If it becomes necessary to use the powers—I hope that it does not—the clause already includes important safeguards through restrictions that ensure that the powers are used appropriately. Regulations may be made only if the Secretary of State is satisfied that that is necessary on value for money grounds. The Secretary of State must also have regard to the welfare of looked-after children and the interests of local authorities and providers, including the opportunity to make a profit.

Crucially, the clause also requires the Secretary of State to consult before making regulations. That will be particularly important to ensure that all interests are considered in determining issues such as how the cap will be calculated and the level at which it will be set. The consultation is particularly important: not only would it inform the details of the proposed cap itself, but it would require the Government to respond and publish that response. That would set out our rationale if a cap were introduced, including the matters in the amendment tabled by the hon. Member for Harborough, Oadby and Wigston.

In addition, the explanatory memorandum to the regulations would set out the policy rationale; in effect, that would already fulfil the amendment’s aim of having a report laid before Parliament. Of course, the regulations would be subject to affirmative resolution, so these matters would no doubt be covered in debate. I hope that the hon. Member is reassured that important safeguards are already in place to ensure that the power to cap profits is appropriately restricted. Existing mechanisms also ensure that Parliament has sight of the information that the amendment covers. For those reasons, I ask hon. Members not to press their amendments.

I turn to clause 14, which inserts new sections into the Care Standards Act 2000. It is a crucial element of our strategy to drive down profiteering in the children’s social care placements market. It will provide new powers for Government to take regulatory action to restrict provider profits if they are not brought under control through our wider package of measures set out in “Keeping children safe, helping families thrive”. While some private providers are doing brilliant work, we want to ensure that all providers are delivering high-quality placements at a sustainable cost. We know that that is not always happening. The Competition and Markets Authority found the placements market to be dysfunctional, establishing that the largest private children’s social care placement providers were making profit margins of 19% to 36%—well above what would be expected in a well-functioning market.

Let me be clear: making this level of profit from providing placements for some of our most vulnerable children is unacceptable and must end. The clause provides important backstop powers to ensure that the Government can take action if needed to end profiteering. The clause also sends a clear signal to providers that Government will not hesitate to take regulatory action to restrict this unacceptable behaviour if profit making is not reined in. If it becomes necessary to use these powers—I hope it does not—then the clause includes important safeguards and restrictions on the powers to ensure that they may only be exercised proportionately.

Regulations may be made only if a Secretary of State is satisfied that it is necessary on value-for-money grounds. The Secretary of State must also have regard to the welfare of looked-after children and the interests of local authorities and providers, including the opportunity to make a profit. Crucially, the clause also requires the Secretary of State to consult before regulations are made. That will be particularly important to ensure that all interests are considered in determining issues such as how the cap would be calculated and the level at which it would be set.

In addition, clause 14 provides for regulations to be made that set out important detail about the administration of any future cap by providing for annual returns from registered providers and the ability to request supplementary information. The detail of these returns, including their contents and format, will be determined after full consultation. We will want to ensure that we do what is possible to prevent profits from being disguised while ensuring that returns are not overtly onerous and burdensome.

I thank the shadow Minister, the hon. Member for Harborough, Oadby and Wigston, for his specific points. I also thank the right hon. Member for East Hampshire for his points on the importance of places and on the profit cap. On the question of why we cannot do an annual report on placement sufficiency, local authorities already have a duty to undertake an assessment of the availability of placements and sufficiency. As discussed earlier, the regional care co-operative will be able to take this forward at a regional level.

The shadow Minister also asked about the annual report on places. We are improving data transparency and boosting the supply and diversity of provision among other interventions, which will have swift, positive impacts. They will help to foster greater competition, which will naturally help to drive down prices and profits to more sustainable levels. The shadow Minister is right to raise the hiding of profits. We are aware that there are numerous ways in which registered providers may seek to avoid the cap or artificially reduce their profits for the purpose of the profit cap return, and legislation will seek to limit that. Should our analysis indicate that providers have attempted to hide profits, we will take that into our account in our determination as to whether the cap has been breached. That can also be considered to be an aggravating factor that could lead to more a severe monetary penalty for breach of the cap.

We are not introducing a profit cap immediately and we are not setting out the level of cap at this stage. The level of the profit cap will depend on a number of factors, including market conditions at the point it was introduced. Full consultation with local authorities and provider representatives, including on the appropriateness of the level of the cap, would need to take place before this power is used. We are clear that we are not seeking to eliminate profit making entirely; it will continue to play a role in the market.

The right hon. Member for East Hampshire asked a range of questions about how this will work in practice. I hope I have covered a number of them already, but the Secretary of State will assess returns, including ascertaining whether revenue not recorded as profit should have been. The process will look retrospectively at profits made in previous periods. Any breaches of the cap will be punishable by fine. The former Education Secretary also asked about how we will enforce the cap. Yes, the Secretary of State will be able to issue a civil monetary penalty if the cap has been breached, and the maximum level of the penalty for a breach may be prescribed in affirmative regulations and changed as needed in future with the approval of Parliament.

Finally, and more broadly, we are committed to taking a measured approach to implementing our reforms and are acutely aware of the importance of not destabilising the market and risking significant disruption to the care of our most vulnerable children and young people. We are confident that the package of reforms set out in the paper published on 18 November last year will address profiteering and ensure that the supportive and caring placements that children need are delivered at a sustainable cost to the taxpayer. However, we will keep the market under close review, and we will not hesitate to take action to cap providers’ profits if needed.

I thank the Minister for his kind remarks about my comments, but he is aware that the SEND system is in crisis—he and his fellow Ministers hear that every other week in the Chamber. He knows that local authority finances are on the brink because of SEND costs, and that those deficits are driven to a certain extent by the spending on private provision. I am curious as to why the Government are so hesitant to take action in this space, yet they are happy to slap VAT on parents wishing to send their children to independent schools. This amendment is about tackling specific providers that are clear outliers in the fees they are charging. It is a targeted intervention that could really help local authorities and, in turn, children who are desperate for more support that local authorities cannot provide.

The right hon. Member for East Hampshire talked about whether we can control profitability. I used to work in the pharmaceutical industry, in which the Government have for many years had a control on not only prices but profits and have clawed back profits. As a monopoly purchaser of services, the Government can act on behalf of NHS trusts around the country, and they could do something similar for local authorities where needed, whether it is with special schools or private social care providers. I would like to press amendment 42 to a vote.

I was quite reassured by the Minister’s thoughtful comments and his clear appreciation of the difficulty and extreme number of obstacles to making this power practicably usable. Kenneth Clark said that he did not know what civilisation was, but he knew it when he saw it, and I think quite a few Members of this House, including those on the Government Benches, have the same feeling about excess profits—we feel that they are too high, but we struggle to say what we think an acceptable level would be. That challenge will not get any easier over time.

As ever, my right hon. Friend the Member for East Hampshire is more articulate than I am, and he made the point well that this is not a profit cap but a retrospective clawback mechanism, which is another reason why it will be so hard to use in practice. Unless we are going to get into problems of retrospection and loads of legal action, we will be giving people advance warning, which will give them time to move money around and ensure that things look compliant.

I am keen to move amendment 25 to a vote. I promise that we will make great progress on subsequent clauses; I am not trying to be a dog in the manger. I understand and accept the Minister’s arguments about the things that the Secretary of State would do before commencing such a power—that was reassuring—but there should be a national assessment of the number of available placements. The Minister said that such things happen locally, and that someone could tot them up; I hope the Government will do that. It would be a powerful thing for the Minister to do and would give him huge clout in driving this agenda forward, so I hope he will do it even if the Committee votes against this amendment.

There should be a German word for a bit of data that we think should exist—we look on the internet and think we should be able to find it, but somehow it does not exist. This assessment of what is available out there is an example of that. I am keen to put our amendment to the vote, to make that point for our friends in the other place when they discuss the Bill, but I am reassured by the Minister’s comments.

Question put, That the amendment be made.

The Committee divided: Ayes 2, Noes 11.

Question accordingly negatived.

Amendment proposed: 25, in clause 14, page 29, line 25, at end insert—

“(10) Before making regulations under this section the Secretary of State must lay before Parliament a report containing —

(a) details of the number of available placements in relevant establishments or agencies;

(b) an analysis of the expected impact of this section on the number of available placements in relevant establishments or agencies.”—(Neil O’Brien.)

Question put, That the amendment be made.

The Committee divided: Ayes 3, Noes 11.

Question accordingly negatived.

Clause 14 ordered to stand part of the Bill.