THE lesson from ABC's collapse is the need to rethink our approach to private sector operation of essential social services.

FREE markets can be dangerous beasts.

When they work well they promote efficient use of (and access to) capital.

When everything turns pear-shaped, too often it ends up being the case that we have privatised the profits and are now subsidising the losses.

A microcosm of this syndrome at work is to be found in the collapse of childcare group ABC Learning.

A couple of misconceptions need to be cleared up here.

Firstly, despite the bleating from the federal Opposition which appears to be taking a Darwinian approach to economics here – the Government is not propping up a business that is failing, as Opposition Finance spokesman Joe Hockey tried to argue over the weekend.

ABC Learning has already failed. As a corporate entity it is stone-cold dead.

What the Government is doing is injecting $22 million into the carcass so that ABC's receivers have enough working capital to keep childcare centres (particularly those that are reportedly unprofitable) open.

Secondly, ABC has not received any special treatment in relation to the $300 million in subsidies it receives. This simply represents ABC's share of the childcare payments made to every operator in the sector as part of successive governments' commendable approach to keeping care affordable.

What must be remembered is that, in 21st-century Australia, child care is an essential social service. For countless thousands of Kevin Rudd's ubiquitous working families, it is not an optional extra.

The Government had no option other than to intervene in the ABC debacle.

To allow hundreds of centres to close would have been a disaster of the highest order, and potentially forced thousands of parents out of the workforce in an already spluttering economy.

The lesson that should be drawn from the demise of ABC is the need to rethink our laissez-faire approach when it comes to private sector operation of – and in some cases, dominance over – essential social services.

ABC Learning did not exist because Eddy Groves wanted to make the world a better place for young children, or to make life easier for their working parents. It existed to make money for its shareholders.

And, in this respect, greed ended up taking over.

What was, a few years ago, basically a bit player in a cottage industry, was transformed into a multibillion-dollar enterprise that spanned three continents, and operated 20 per cent of Australia's child-care centres.

As the world's economy continues to spin off its axis, ABC's story of debt-fuelled expansion and hubris is a sadly familiar one.

There is an important difference, however.

When the likes of Allco or Octaviar collapse, owing hundreds of millions of dollars, the pain is generally confined to investors, lenders and employees.

When a service-provider like ABC hits the wall, the potential collateral damage in the wider community is far greater, with tens of thousands of families facing some very life-changing choices in terms of caring for their children.

For this reason, there is a valid argument that for-profit companies in the business of providing essential services be subject to a far stricter regime of oversight and regulation than their peers operating in other sectors.

In the same way that the Australian Prudential Regulation Authority keeps a close eye on our banks' capital and liquidity ratios, the essential services sector merits the same sort of scrutiny.

It is all very well in a free market taking a high risk-high return approach to growing a business, and investors (at least in a sane market) tend to price that risk accordingly.

But, with companies operating in areas such as child care, aged care or health care for example, the risks they are taking affect far more people – innocent bystanders if you like – than the investors who were seeking higher-than-average returns on their money.

Private sector companies providing essential services should be bound by regulation to maintain healthy capital and liquidity ratios. This is not to say that there is not a role for such companies in these service sectors, nor that private enterprise should be precluded from making a profit from services that are supported by government money.

Conversely, there is a definite need for their (regulated) participation, given a corporate structure's ability to access capital more easily than a non-profit organisation.

Two decades ago I would not have wanted the likes of corporate buccaneers Bond Corporation or Qintex running the local hospital or my children's school.

The same argument applies today.

Corporate Australia can take all the risks it likes when it comes to making highly leveraged investments in the likes of property development, mining ventures or media.

However, when it comes to businesses that affect the well-being of our communities and family, a degree of restraint is required.

Source: The Courier Mail - Paul Syvret