Analysis reveals multimillion-pound dividends and huge salaries at independent foster agencies
Foster care agencies run for profit by private equity investors are pushing up the cost of placing vulnerable children with families, local authorities have warned.
Concern about independent foster agencies (IFAs) came as a Guardian investigation revealed that one of the largest firms in the sector channelled money to Luxembourg via a complex loan arrangement. Analysis of the accounts of several private equity-owned IFAs, which charge councils to match children with foster carers, also reveals multimillion-pound dividends paid to investors and six-figure salaries for directors.
The details emerged ahead of the government’s national fostering stocktake, which is due to report on the sector. Ahead of the report, councillors and foster care veterans voiced concern at the effect of IFAs on council budgets. IFAs typically pay carers higher fees than local authorities and sometimes offer “golden handshakes” worth up to £3,000 to poach them from rival agencies.
David Simmonds, a Conservative councillor who is vice-chair of the Local Government Association (LGA), said that if cash constrained local authorities could pay carers more to retain them they would end up spending less overall.
“What appears to be happening is that the agencies see they can make money out of something local authorities have to supply by law,” he said. “They offer carers 25% more and then charge the local authority double or triple what they would pay in-house and make a nice bit of profit. From the agency’s point of view it’s a no-lose situation. The shortage of carers means there isn’t competition so prices don’t come down. It’s a market that isn’t functioning, to the detriment of the state.”
Carers are in short supply, but councils are legally obliged to find a foster home for vulnerable children, meaning they are often forced to turn to IFAs if they don’t have in-house carers. Fees paid to IFAs per foster child are almost 92% higher than those paid directly to carers registered with the council, according to a 2016 report by government adviser Sir Martin Narey, with the average fee per week rising to £759 for IFAs, from £396 for council-registered carers.
Narey said the gulf was “very large”, even if there were some reasons other than profit to explain it – such as IFA-registered carers taking on more challenging cases. According to Coventry city council, its IFA placements cost £40,000 on average per year compared with £30,000 for council-registered placements.
The number of children living with foster carers registered to IFAs rose 5% to 17,410 from 2012 to 2016, according to government figures, compared with a 1% rise in children with carers registered directly to the council, to 34,395.
Liverpool councillor Barry Kushner said the cost of paying inflated fees to IFAs had cost the council an extra £6m in one year. He said the council has begun trying to lure foster families back in-house by offering incentives such as reduced council tax, training and free leisure centre passes.
A spate of mergers and acquisitions among foster care firms, typified by last year’s £400m tie-up between the National Fostering Agency and rival Acorn, has fuelled concern about IFAs.
Andy Elvin, chief executive of fostering and adoption charity TACT, warned that consolidation would reduce competition.
“We are moving towards some de facto monopolies or potential cartels of private IFA supply,” he said. “As companies get bigger and have more power over local authorities, they hold more of the supply. This can lead to costs being increased to local authorities, because they need the placements.”
The merger between Acorn and NFA created a vast fostering company owned by private equity group Stirling Square Capital Partners (SSCP).
Analysis by the Guardian of accounts filed at Companies House reveals that the firm uses a corporate structure that transfers money to a parent company in Luxembourg. SSCP owns the firms via subsidiary SSCP Spring Topco, which had annual revenues of £104m but lost £21m after hefty interest payments on loans. This included an interest payment on a £62.5m loan from the Luxembourg parent company. Interest payments have the effect of reducing a company’s taxable profit.
The accounts also show that SSCP Spring Topco’s highest-paid director took home £319,345 for the year. The Guardian has contacted Stirling Square for comment about whether the loan structure generates a tax benefit.
Two other companies in the sector, Orange Grove Fostercare and Partnerships in Children’s Services (PICS), are owned by private equity group Sovereign Capital. Labyrinthine accounts for the Orange Grove group show that a parent company, Boston Holdo B, paid investors a dividend of £1.7m last year and took investor loans of £5.4m, paying an interest rate of 14%.
Sister company PICS paid £2.2m interest on borrowings including £14m of loans from investors, some of whom were company directors. The highest paid director took home £200,000, including pension contributions.
Sovereign said the high-interest loans were “normal practice” and that it paid all “applicable” tax.
Elvin said: “Any money leaving the system is not being spent directly on vulnerable children. Therefore all dividends, bonuses etc are being paid directly from taxpayers’ money allocated to be spent on children in care.
“The private sector is not driving down cost through competition, it is not driving up quality and it is taking out significant sums of taxpayers’ money. Where is the benefit to the taxpayer or to children in care?”
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