metadata: authors: 0: author: Aran,Meltem A.
1: author: Munoz Boudet,Ana Maria
2: author: Aktakke,Nazli
count: Türkiye
docna: 0: docna: Building an ex ante simulation model for
            estimating the capacity impact, benefit incidence, and cost
            effectiveness of child care subsidies : an application using
            provider-level data from Turkey
docty: Policy Research Working Paper
subtopic: Taxation & Subsidies,Labor Markets,Educational Sciences
teratopic: Poverty Reduction,Education
abstracts: cdata!: Public financing of child care can allow
            for more equitable access to these services in places where
            public provision and capacity are low. However, the
            mechanisms of subsidy delivery will affect who benefits, and
            the overall cost effectiveness of such subsidies. This paper
            sets out an ex ante simulation model for estimating the
            benefit incidence of expanded capacity and enrollments
            resulting from different child care subsidy mechanisms. It
            uses a supply-side provider level and a demand-side
            household model, and combines the two models. The paper
            considers investment grants to providers, operational
            monthly grants to child care providers, combinations of the
            investment and operational grants, and demand-side vouchers
            to households. The model is applied to empirical data from
            child care centers and households in Turkey. The results
            reveal that the choice of the subsidy delivery model has a
            strong bearing on the benefit incidence and cost
            effectiveness of the subsidy. In the case of Turkey, where
            significant supply-side constraints exist in the market, a
            demand-side voucher system is shown to be the least
            cost-effective subsidy delivery model. A targeted
            demand-side voucher does not necessarily deliver the most
            "pro-poor results," and combinations show
            different benefits and costs. The proposed simulation model
            can be applied in other country contexts, with the only data
            requirements being micro data on the costs and pricing
            structure of child care providers, as well as household data
            with variables on household welfare and child care utilization.
geo_reg_key: 517208,517191,119229,517198
repnme: repnme: Building an ex ante simulation model for
            estimating the capacity impact, benefit incidence, and cost
            effectiveness of child care subsidies : an application using
            provider-level data from Turkey
display_title: Building an ex ante simulation model
            for estimating the capacity impact, benefit incidence, and
            cost effectiveness of child care subsidies : an application
            using provider-level data from Turkey
listing_relative_url: /research/2016/12/27022624/building-ex-ante-simulation-model-estimating-capacity-impact-benefit-incidence-cost-effectiveness-child-care-subsidies-application-using-provider-level-data-turkey
topicv3: Education m1327048 470,Jobs m1503931 2670,Labor Force Participation m1504050 2746,Labor Supply m1504055 2751,Vouchers m1504820 3553
publishtoextweb_dt: 2016-12-14T00:00:00Z
historic_topic: Poverty Reduction,Education
no_of_pages: 28
author_keys: 0: author_key: NA
1: author_key: 950872
2: author_key: NA
model_extractions: WPS7917 Policy Research Working Paper 7917 Building an Ex Ante Simulation Model for Estimating the Capacity Impact, Benefit Incidence, and Cost Effectiveness of Child Care Subsidies An Application Using Provider-Level Data from Turkey _Meltem A. Aran Ana Maria Munoz-Boudet Nazlı Aktakke_ Poverty and Equity Global Practice Group December 2016
Policy Research Working Paper 7917

# **Abstract**

Public financing of child care can allow for more equitable access to these services in places where public provision and capacity are low. However, the mechanisms of subsidy delivery will affect who benefits, and the overall cost effectiveness of such subsidies. This paper sets out an ex ante simulation model for estimating the benefit incidence of expanded capacity and enrollments resulting from different child care subsidy mechanisms. It uses a supply-side provider level and a demand-side household model, and combines the two models. The paper considers investment grants to providers, operational monthly grants to child care providers, combinations of the investment and operational grants, and demand-side vouchers to households. The model is applied to empirical data from child care centers and households in Turkey. The results reveal that the choice of the subsidy delivery model has a strong bearing on the benefit incidence and cost effectiveness of the subsidy. In the case of Turkey, where significant supply-side constraints exist in the market, a demand-side voucher system is shown to be the least cost-effective subsidy delivery model. A targeted demand-side voucher does not necessarily deliver the most “pro-poor results,” and combinations show different benefits and costs. The proposed simulation model can be applied in other country contexts, with the only data requirements being micro data on the costs and pricing structure of child care providers, as well as household data with variables on household welfare and child care utilization.

This paper is a product of the Poverty and Equity Global Practice Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at amunozboudet@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
<!-- Start of picture text --> Meltem A. Aran (Development Analytics)<br>Ana Maria Munoz-Boudet (World Bank)<br>Nazli Aktakke (Development Analytics)<br><!-- End of picture text --> The study was supported by the Swedish International Development Cooperation Agency (SIDA) under the Kurtipek, Yildiz Yapar, Pinar Ozel Ucuzal and Dilek Okkali Sanalmis (Turkey Ministry of Development); Burcu Ertugrul and Fatih Kaynar (Turkey Ministry of Education); Giiler Ozdogan, Akin Yumus and Fatma Kiiciikbasol (Turkey Ministry of Family and Social Policies); Facundo Cuevas (The World Bank); Oykii Ulucay and Tomas Bergenholtz (Swedish Consulate) for comments and guidance received during methodology review meetings held
<!-- Start of picture text --> with in various countries, including and not limited to: (i) per child operational grants to supply-side service<br>providers; (ii) tax subsidies to working parents and (iii) vouchers or direct cash transfers provided to<br>increasing labor force participation of poor mothers (Mateo Diaz and Chamussy, 2013). Child care centers<br>facilities. Additionally, monthly grants were provided to day-care centers on a per capita (per child) basis<br>(Calderon, 2014). The operational costs of these centers are covered by the public subsidy plus a fee collected<br>from the parents (Staab and Gerhard, 2010). Similarly, in the Republic of Korea, in 2009 the municipal<br>Nearly half of the city’s child care centers are now part of this scheme (OECD, 2012).<br>to child care services (Warner and Grauds, 2011). In the Netherlands and Australia, the government’s aim has<br><!-- End of picture text --> methodology for modeling the behavior of service providers (through a supply-side model) and the behavior of households (through a demand-side model) to consider the impact of supply-side investment and/or
|DelBocaandVuri (2007) mergingdatafromtwo micro-level surveys, simulatetheimpactofapartial ora full<br>to Del Boca and Vuri (2007), Apps et al (2016) use a discrete choice model to investigate the changes in<br>Vanleenhove (2013) investigates inanex-antesimulationmodelimpactofa capacity expansionin<br>theFlemish<br>Looking atthe distributional impact of various child care policies, Kornstad and Toresen (2006) considerthe<br>reformsthatareinvestigated are (i) increasingchild care capacity, (ii) reductions in fees, (iii) rescindinghome<br>careallowance(theallowanceforfamilieswhodonotusecenter-basedcare)andlastly(iv)introducinga|
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|In Turkey, [Ikkaracan et al (2015) evaluated ex-ante a policy intervention that would increase child care<br>Our paper contributes to the ex-ante simulations literature on child care in two different ways: (i)<br>firstly it<br>calculatingthecapacityexpansion;and(ii)secondly,itusesdataonthechildcaresectorofadeveloping|
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<!-- Start of picture text --> considering the cost-effectiveness of each scenario (in terms of per new child enrolled in the system) as well<br>Kornstad and Toresen (2006) where different types of reforms are investigated at the same time in order to<br><!-- End of picture text -->

|modelexpensiveandunaffordableforpoorerhouseholdsinurbanareas(Aranet.al,(forthcoming)).|
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|decided to leavethe laborforceandthe majority ofthesewomen (71 percent) reported leavingthe laborforce<br>“due to child care responsibilities” (World Bank (2015)).<br>option. More specifically, the policyscenarios considered included: (i) an investmentgrant only (Scenario 1),<br>(ii)anoperationalgrant(withorwithoutapricecap(Scenarios2Aand2B),(iii)throughavoucherscheme|
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(Scenario 3), and (iv) through the interaction of an investment grant with an operational grant or a voucher scheme (Scenarios 4A, 4B and 5 in Table 1). The purpose ofthe policy measures was three-fold: (i) to increase the capacity of these services, (ii) to increase accessibility and affordability of services for children from disadvantaged backgrounds and (iii) to increase female labor force participation by increasing employment We build a model that allows for three basic types of subsidies for child care through (i) investment grants to the service provider, (ii) operational grants to the service provider and (iii) vouchers provided to the
<!-- Start of picture text --> Government<br><<<br>Schools |/ 4 Families<br>E o Oo a ; . a .<br>fe] ao pe"2 al ny! ; ; ; 2 5 2<br>HH yO oO oD P 5<br>ST .<br><!-- End of picture text -->

The subsidies have an impact on utilization of services in two ways: (i) through their impact on expanding capacity and availability of services, and (ii) through their impact on affordability of services. In the model, price is a portion (in this case assumed at 50%) of the operational grant per child. The benefits from the operational grant has an impact on enrollments both through its impact on enhanced capacity (through benefits realized by the service provider) and through its impact on affordability (through benefits realized by the household).

benefit (50,000 TL one-time investment grant and 300 TL per child per month operational grant or voucher value), though this parameter can be adjusted to take on different levels under each scenario. The operational grant in the scenarios can be provided witha price cap option and without a price cap option (in Scenario 2A and 2B). The scenarios consider the investment grant and operational grants provided separately and in
|~~oe (no price cap)~~<br>~~ee~~<br>Price cap: 750 TL (the service provider agrees<br>(with price cap)<br>ofthe subsid<br>+<br>combined (no price cap)<br>+<br>combined (with price cap)<br>Price cap: 750 TL (the service provider agrees<br>~~ofthesubsidy~~<br>~~Se~~|
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interact with one another in producing the results. These models are (i) the supply-side simulation model and (ii) the demand-side simulation model. Using these models and changing the parameters for the subsidy type
<!-- Start of picture text --> Bank study “Supply andDemandfor Child Care Servicesin Turkey’ (World Bank, 2015) from 603 center-based<br>(whether through the investment or operational grants to facilities).<br>For the demand-side model we make use of the Turkey EU-SILC (Survey of Income and Living Conditions)<br>neighborhood, and increased affordability of child care given the operational grant (which leads to reduced<br>prices in the market through a pass-through assumption) or through the vouchers.<br><!-- End of picture text -->

|(investment) and operational costs and certain prices and enrollments. All of these data come from the<br>empirical data set, but are treated in the model as hypothetical cases (as ifinvestments in these centers have<br>notyetbeenmade).Aprobability ofinvestment is calculated for each service provider inthe baseline. We call<br>grants (ofvarying sizes) and to seewhich ones lead to a higher capacity increase.<br>initial probability to invest, given their (i) price per child, (ii) setup cost ifthey were to open up the center<br>now,(iii)monthlyvariablecosts,and(iv)totalnumberofchildrenenrolled.Netpresentvalueofeachchild|
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Net Present Value = — Setup Cost + 2 ~~((Price per child * Enrolment) — Total monthly variable costs) *12+*(1—- tax)~~ > ~~Gin~~ + Terminal Value Setup cost is the setup cost (e.g. if the center were to be opened up now what the setup cost would be) costs (These are personnel costs, stationary costs, utility costs and travel costs).

Secondly, the net present value (NPV) of an investment is mapped onto a probability of investment through a functional form as described below (See Figure 2). This non-linear functional form is used to hypothetically <!-- Start of picture text --> o.9yy<br><!-- End of picture text -->

> : _ P(invest) ~ ~~—(NPV—500,000)1~~ o.9yy ite 100,000

value. (For those who have a negative net present value, a probability of 0 is directly assigned without using the functional form).

reduces the burden of the investment (setup) costs of the service provider which is reflected in the calculation Net Present Value = — Setup Cost + Investment Grant Eq (2) 10 <u>( (Price per child * Enrolment) ) +12 «(1 tax)</u> + ~~OO—Total monthly variable costs~~ + Terminal. Value y; ~~Ss~~ ral (14+r)
Eq (3) Net Present Value = — Setup Cost + (((Price per child+Operational grant*Pass through) 5 <u>*Enrolment)—Total monthly variable costs)+*12*(1—-tax)</u> ~~ce~~ ((Price per child 10 ~~*Enrolment)-Totaleee~~ <u>costs)*12*(1—tax)</u> + Terminal Value therefore that a sub-group of child care centers will opt-in for the grant (those with already high prices will opt out of this program). The new prices are then calculated as follows for all centers: Price_new = Price_old ifPrice_o/d-operationalgrant*pass-through>=Price cap(Those who opt-out) &£q (4) Price_new = Price_old-operational grant*pass-through ifPrice_old-operational grant*passthrough<Price cap (Those who opt-in) Eq (5) benefit to the households by leading to a decrease in prices (Pass through rate is assumed to be 0.5).

E(Capacity) = Probability to invest in Baseline*Total capacity of the center Eq (6) E(Capacity) |= Probability to invest in Sc. X*Total capacity of the center

Eq = (E(Total capacity) -E(Total capacity) )/ EcTotal Eq (8) capacity) total estimated impact on mothers’ employment. We also calculate the cost implications in each scenario (net of taxes collected as a result of the intervention) as well as cost-effectiveness per child enrolled and per woman
In the model, we can expect an increase in children’s enrollment from two different channels: (i) the first channel works through the expansion of capacity and hence enrollments (a new center is opened in the child’s neighborhood and those most likely to enroll become beneficiaries of this newly created capacity; (ii) the second channel works through affordability (the child becomes enrolled because now it is more affordable for the family to send the child to daycare). The scenarios considered may contribute to enrollments through their effect (income effect at the household level), as we assume that the benefit from the operational grants are affordability effect (the income effect at the household level). In the short term, we assume that there is no Impact on Affordability (Income Effect) (as in Scenario1) (as in Scenario 2A and 2B) <u>(as in Scenario 3)</u> P(attending preschool or daycare)=@(X’ ) Eq — household size, number of adults in the household aged 65+, number of children in the household aged 0-6
|=<br>Eq (10)<br>han aleincrease inScX*NumberofcurrentlyenrolledchildreninthedatasetIndividualweight inthe dataset<br>this impact, the probability to attend preschool is calculated for the children (i) P1-when there is an<br>operational grant and children are allocated the new capacity and (ii) P2-when there is an operational grant<br>the capacity increase and the affordability increase (the income effect).<br>preschool is calculated for the children using the probit equation above (i) in the baseline where there is no<br>voucherand (ii)whenthere is avoucher creatingapositiveincome effect. Inthesecond step expectednumber<br>.<br>Hest<br>A<br>Eq AU)<br>E(Numberofchildren enrolledduetoaffordability increase )=<br>(P2-P1)*individual<br>=Number of children enrolled due to the capacity<br>Eq (12)<br>+E(Numberofchildrenenrolledduetoaffordabilityincrease<br>_)|
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a child care center (in our case, this was 50 children per center on average). The expected number of newchild care centers (countrywide), is multiplied with the level of the investment grant. Cost = (Number of children enrolled due to the capacity increase/Average capacity of a Eq (13) center)*Investment grant Number of enrolled 5 children in Turkey (after grant) | * 12 Total cost = » ~~_—oo * per child(1+r)é grant~~

t=1 <!-- Start of picture text --> Eq 4)<br><!-- End of picture text --> (Number of children already enrolled in the bottom 80% + «12 5 Number of newly enrolled children) Total cost = » ~~As perchildgrant~~ t=1 (1+r)é Eq (15) (Number of children already enrolled in the bottom 40% + «12 5 Number of newly enrolled children) Total cost = » ~~>* per wwwchild voucher~~ t=1 (14+r)* Eq (16) (i) Tax revenues obtained from the newly opening centers: This is in the form of income and (ii) Tax revenues obtained from employee contributions: This is composed of the women working in
is applied to the case of Turkey taking into consideration the (i) impact on capacity and estimated number of new centers (ii) impact on enrollments which are derived both from capacity increase as well as affordability increase in the household and hence may be higher than the amount of capacity increased (iii) benefit incidence of new enrollments and grants (% of children in the bottom 40% of the income distribution that benefit from the expansion and households in the bottom 40% that benefit from the grants), (iv) costs and revenues and (v) cost effectiveness in terms ofthe net cost ofthe<sup>policy perchildenrolled.</sup> (and does not impose a price cap). This scenario (provided under Scenario 4A) expands existing preschool for 206,608 newly enrolled children (additionally 29,738 children are expected to be enrolled due to an affordability increase). Whena price cap is introduced to these scenarios (Scenario 4B) the impact on capacity When an investment grant is provided alone (Scenario 1), there is a small increase in capacity, while the impact on capacity of only providing operational grants is projected to be higher (Scenario 2A and 2B). With estimated to be 17 percent with price cap and 24 percent without the price cap (an estimated 2,394 and 3,306 new centers respectively). Where an operational grant is introduced with a price cap (Scenario 2B), the capacity increase is - as expected

|The increase in the enrollment figures come from the increase in capacity in the supply-side model (which is<br>assumed to be taken up fully by new enrollments) as well as the increase in affordability of child care by<br>through their impact on affordability of child care (hence are assumed to have no impact on capacity). The<br>onthedemand side (and hence increased enrollment in existing capacity). Number ofnewlyenrolled children<br>operationalgrantstogether(Scenario4Aand4B).Thisisinparallelwiththefactthatthesescenariosalso|
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enrolled in preschool, the majority of which are enrolled through the capacity increase (206,608 children). Whena price cap is introduced (Scenario 4B) the increase in enrollments is estimated to be 7.6 percentage <!-- Start of picture text --> .<br><!-- End of picture text --> Providing only demand-side vouchers to families (Scenario 3) has a minimal impact on enrollments. Provision whom are enrolled due to an increase in affordability (See Figure 3). This is due to our assumption that constraint in the sector is on the supply side (a capacity constraint), the demand-side stimulation introduced effective way of expanding enrollments in terms of money spent per new child enrolled (See Section 5.5 for more details).

the number of children enrolled due to the affordability increase (See Annex Table A1). For instance in the
<!-- Start of picture text --> and investment grants implemented together (scenario 4A) without the price cap, 30.3 percent of capacity<br><!-- End of picture text -->

|limited under this scenario (since thevoucher systemworks through the demand side andthrough improved<br>affordability ofexisting services - ratherthanby increasing capacity), the overall impactonthe poor children<br>isvery limited. We find thatthe enrollments of the bottom 40 % ofchildren increase more (about 6% points<br>in Scenario 4B) in the scenarios with the investment and operational grants provided together, while in the<br>theenrollmentincreaseforthebottom40%isonly2.1percent(Scenario5).Thisisaveryinterestingand|
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Figure 4. Preschool enrollment rates of children aged 3‐5 by per capita income quintile <!-- Start of picture text --> Scenario 1: Supply Side Investment Grant only Scenario 2A: Supply Side Operational Grant only<br>1 2 3 4 5 1 2 3 4 5<br>Scenario 2B: Supply Side Operational Grant only Scenario 3: Demand Side Grant only<br>with Price Cap<br>1 2 3 4 5 1 2 3 4 5<br>Scenario 4A: Supply Side Investment Scenario 4B: Supply Side Investment<br>and Operational Grant combined and Operational Grant combined with Price Cap<br>1 2 3 4 5 1 2 3 4 5<br>1 1<br>.8 .8<br>.6 .6<br>.4 .4<br>Enrolment rate for Children aged 3-5 .2 Enrolment rate for Children aged 3-5 .2<br>0 0<br>1<br>1<br>.8<br>.8<br>.6<br>.6<br>.4<br>.4<br>.2 Enrolment rate for Children aged 3-5 .2<br>Enrolment rate for Children aged 3-5<br>0 0<br>1 1<br>.8 .8<br>.6 .6<br>.4 .4<br>.2 .2<br>Enrolment rate for Children aged 3-5 Enrolment rate for Children aged 3-5<br>0 0<br><!-- End of picture text -->
Scenario 5: Supply Side Investment Grant and Demand Side Grant combined <!-- Start of picture text --> 1 2 3 4 5<br>Baseline Capacity increase Affordability increase<br>Figure 5.<br>Scenario 1: Supply Side Investment Grant only<br>0.0 0.0 0.0 0.0 0.0<br>1 2 3 4 5<br>Scenario 2B: Supply Side Operational Grant only<br>with Price Cap<br>309.6<br>247.9 264.0<br>151.1<br>0.0<br>1 2 3 4 5<br>1<br>.8<br>.6<br>.4<br>.2<br>Enrolment rate for Children aged 3-5<br>0<br>1,000<br>800<br>600<br>400<br>Total benefit (in million TL)<br>200<br>0<br>1,000<br>800<br>600<br>400<br>Total benefit (in million TL)<br>200<br>0<br><!-- End of picture text --> Figure 5. Benefit incidence of the grants and/or vouchers by per capita income quintile <!-- Start of picture text --> Scenario 2A: Supply Side Operational Grant only<br>427.6<br>311.3<br>252.2 265.9<br>157.3<br>1 2 3 4 5<br>Scenario 3: Demand Side Grant only<br>413.7<br>310.7<br>0.0 0.0 0.0<br>1 2 3 4 5<br>1,000<br>800<br>600<br>400<br>Total benefit (in million TL)<br>200<br>0<br>1,000<br>800<br>600<br>400<br>Total benefit (in million TL)<br>200<br>0<br><!-- End of picture text -->
<!-- Start of picture text --> Scenario 4A: Supply Side Investment<br>and Operational Grant combined<br>434.2<br>318.3<br>284.4 287.0<br>165.7<br>1 2 3 4 5<br>Scenario 5: Supply Side Investment Grant<br>and Demand Side Grant combined<br>417.1<br>317.0<br>0.0 0.0 0.0<br>1 2 3 4 5<br>1,000<br>800<br>600<br>400<br>Total benefit (in million TL)<br>200<br>0<br>1,000<br>800<br>600<br>400<br>Total benefit (in million TL)<br>200<br>0<br><!-- End of picture text --> <!-- Start of picture text --> Scenario 4B: Supply Side Investment<br>and Operational Grant combined with Price Cap<br>291.4 284.8 316.2<br>163.7<br>0.0<br>1 2 3 4 5<br>1,000<br>800<br>600<br>400<br>Total benefit (in million TL)<br>200<br>0<br><!-- End of picture text -->
<!-- Start of picture text --> tax revenues are collected in the form of (i) corporation and income taxes of the newly established centers<br>and (ii) employee taxes of the employees working in these centers. The costs are calculated as the total cost<br><!-- End of picture text --> Revenue generating scenario (Scenario 1 - Investment Grant Scenario): The investment grant Least Cost Effective scenario: (Scenario 3 - Only voucher scenario): The scenario that uses vouchers
Most Cost Effective scenarios (Scenarios 2A, 4A and 4B - Investment and Operational Grants with or without Price Cap and only operational grant without price cap): The most cost effective scenarios in terms of budget <!-- Start of picture text --> a<br><!-- End of picture text -->
delivery of services is ‐ and simply targeting “poor households” may not be the most pro‐poor way of expanding services or subsidizing child care.