Stocks are surging after the Australian government set a hard deadline for the end of free childcare, as investors bet that an economic recovery will help parents keep children in care.

Think Childcare (ASX:TNK) opened up almost 10 per cent at 91c.

G8 Education (ASX:GEM) opened over 6 per cent higher at $1.10.

Mayfield Childcare (ASX:MFD) was the laggard, up 1 per cent at 82c, falling behind the broader index which ticked up 3 per cent at the open.

Minister for Education Dan Tehan said on Monday the government would cancel its fee-free childcare scheme from July 13 onwards.

It will pay childcare businesses an extra $708m “transition payment” of 25 per cent of their fee revenue between July 13 and September 27 to replace the JobKeeper wage subsidy, provided centres cap their fees at pre-pandemic levels during that time and guarantee jobs.

It is also giving parents who have been laid off or stood down until October 4 to find work, study or volunteer work, as it eases the “activity test” criteria that sets a minimum amount of activity in order to receive the child care subsidy.

“This will assist families to return to the level of work, study or training they were undertaking before COVID-19,” Minister for Education Dan Tehan said in a statement.


Childcare centres were struggling to make ends meet under the ‘fee-free’ model put in place during the worst of the pandemic to ensure parents on reduced wages or in essential services could remain in the workforce.

The fee-free model stipulated that centres could not charge parents fees and would instead be reimbursed with half of their usual revenue by the government.

“The transitional arrangements announced today are welcome as they provide operators with increased flexibility to support families as the economy recovers,” said G8 managing director Gary Carroll.

“It’s been positive to see the sector being universally recognised as essential to the Australian community and economy.”

G8 will be no worse off under the transition framework even if parents pull children out of care. It will receive about $16.5m per month until the end of September as well as charge parents fees.

RBC Capital Markets analyst Garry Sherriff says G8 achieved cost saving targets and has monthly cash costs of about $58m. It could break even at 50 per cent occupancy; occupancy currently sits at 65 per cent.

“The transition payment provides support for G8 in the event of materially lower occupancy once fees are reintroduced, but allows participation in the upside as the economy recovers and parents return to work,” he said.


Who’s not happy?

The government was subject to a strong lobbying effort from industry groups such as the Early Learning Association Australia (ELAA), The Parenthood, and even the Australian Small Business and Family Enterprise Ombudsman.

The biggest concern was that parents will pull children out of childcare and reduce their working hours because they won’t be able to afford the cost on newly reduced salaries.

“This sits in stark contrast with the very clear message Australian families have been sending government for weeks that they are struggling financially and are no longer in a position to pay for the fees they could barely afford before the pandemic,” The Parenthood campaign director Georgie Dent said.

National surveys by The Parenthood, Goodstart Early Learning and KU Children’s Services indicate that almost half of all families accessing childcare have lost work or income since COVID-19, and roughly a third of those families indicated that with the return of pre-COVID-19 fees they would either reduce the days their children attend services or remove them altogether.

RBC’s Sherriff expects a short term dip in occupancy from parents who cannot afford childcare fees removing their children.

ABS labour force data shows women have been hit hardest by the COVID-19 crisis, with the female workforce participation rate falling to 58.4 per cent in April.

The ELAA said the return to the old system so quickly re-introduces affordability issues and “could also compromise the financial viability of early childhood education” as parents reduce their use of childcare.

It says fewer children in care will create additional financial pressure for an already strained early childhood education and care providers.