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What you need to know about the funding review

The Department for Education (DfE) has published the results of its funding review into the cost of providing childcare in England.

The purpose of the review, which was announced in June, was to give ministers and officials an in-depth understanding of the childcare market so that they could set a new revised hourly rate for government-funded childcare that is fair and sustainable for both providers and taxpayers. The Government received more than 2,000 responses to its call for evidence (of which 40% were from childminders), and held roundtable discussions with over 100 providers. In October, twenty PACEY members met with the funding review team to discuss the particular costs of running a childminding business. DfE also commissioned independent research and analysis from organisations such as Deloitte and NLH Partnerships, Ltd.

The key findings of the review are:

  • The childcare market is complex, fragmented and highly localised, with a very wide range of providers and business models. It currently functions reasonably effectively, though there is scope for substantial efficiencies to be made.
  • The number of childcare places has increased in recent years and there is sufficient supply available to most parents.
  • Barriers to entry are low, and there is not much exit from the market – with the notable exception of childminders.
  • The majority of providers are breaking even or making a profit.
  • Some providers have reported that complying with regulation can be complex and costly, and there are high administrative costs associated with the current early education entitlement.
  • The cost of childcare has increased by 69% in the last ten years, far outstripping inflation. However, there is a great deal of variability in the prices paid by parents.
  • Staffing costs are by far the largest share of total costs across all types of providers.
  • Providers typically use more staff than government regulations require – and a typical provider could save around 15% of its unit delivery costs by staffing within the statutory ratio requirements. For example, only one quarter of private group-based providers operate at statutory ratios. This is in contrast to maintained settings (nursery schools and primary schools with nursery provision) which generally operate at statutory ratios and still provide high quality provision.
  • Savings could also be made by using more variable staffing models to recognise peaks and troughs in occupancy.
  •  Some providers could save further money by more effectively using spare capacity within their premises or sharing back-office functions with other providers. The review recognises these options are only open to some providers.
  •  Occupancy is another key factor in cost efficiency. The average occupancy rate for private group providers is 72% and for childminders it is 75%. Some providers achieve higher rates of occupancy than others by generating stronger parental demand for their services

As a result of the review, the Government has decided to set the new average rate for 2-year-olds at £5.39. For 3- and 4-year-olds, the average rate will be £4.88 including the Early Years Pupil Premium (EYPP). The new rates are expected to come into effect in April 2017, five months before all working parents of 3- and 4-year-olds will be entitled to 30 hours of free childcare per week during term time.

Next year, the Government will be consulting on a new Early Years National Funding Formula (EYNFF) which it will use to determine how to disperse funding to local authorities and ensure that as much gets passed on to providers as possible. The review states that strong evidence remains for varying funding rates between different areas, which is why the rates given are only a national average.

In September, the Early Implementers programme will pilot the 30 hours policy in a small number of local authorities.

PACEY chief executive Liz Bayram, said:

"We were so grateful to have had such extensive input from our members, volunteers and trustees who attended roundtables, sent in their views and contributed to the funding review over the past few months. The final report, and the subsquent uplift in the hourly rate for free funded hours, is an acknowledgement by the Government that the sector is underfunded. In a time of fiscal constraint, this is good news for the sector.

"Having said that, there are conclusions made in the funding review that we find surprising, given the weight of the evidence that we have gathered from our members and also from other organisations in the sector. For instance, we know from our Building Blocks survey that one in five group settings reported a loss in the last year and one in 15 childminders stated a loss. These findings are reinforced by research from others in the sector that shows a high turnover of staff within settings, with childcare professionals increasingly looking to move out of the sector. One in five childminders that we surveyed told us they were unsure whether they would be working in childcare in a years' time.

"The review's conclusions on sufficiency of supply also fail to grasp the challenge of matching places with families. Whilst many settings report vacancies, the latest figures from the Family and Childcare Trust point to shortage of available childcare to working parents in 57% of English local authorities. Working to match families to places at the times they need will be key to the success of the 30 hours offer as will ensuring it can be stretch beyond its current 38 weeks.

"The review made a number of suggestions for how the sector could improve efficiency that we feel are in reality challenging for the majority of settings. For instance, the suggestion that providers could make making better use of ratios fails to understand that there are good reasons for the ‘slack’ it refers to.

"Settings have to ensure they have the correct number of qualified staff to cover, for instance, if staff go off sick for annual leave or for staff’s professional development and training. Most important of all settings must ensure children’s experience is high quality and that means consistency in a child’s relationship with their key person. This is also important for staff retention and satisfaction in their work, given the low pay most practitioners earn.  With the sector struggling to recruit staff, this proposal fails to understand the reality all settings, especially smaller settings, struggle with every day.

"PACEY will be continuing discussions with Government on how the 30 hour extension will be implemented as the Childcare Bill becomes law. We are especially keen to see how different settings can be supported to work in partnership with each other to deliver this offer to working families. This is something we know already happens in some innovative local authorities.

Do keep letting us know your views and experiences on this issue so we can represent them fully. Together we can ensure providers are supported to offer additional EYE hours with funding levels that help maintain the high quality and flexible care working families need."