Hard facts of funding gap revealed

The true scale of the funding shortfall for childcare places in the early years sector is revealed in new research from the Pre-School Learning Alliance. Ruth Thomson takes a look at the numbers.

Private, voluntary and independent (PVI) settings are facing a funding shortfall of up to a fifth (21 per cent) in delivering high-quality childcare places under the free entitlement, while a third (30 per cent) of local authorities have made no change to their PVI base rate since implementing an early years single funding formula (EYSFF) three or four years ago, according to new figures.

The scale of the underfunding has emerged in independent research commissioned by the Pre-School Learning Alliance (PLA) and is backed by the Alliance's Freedom of Information (FOI) request to all local authorities in England about their free entitlement base rates.

Both enquiries stem from frustration at the Government's 'constant denial' about underfunding and aim to address, once and for all, 'the gaping hole in the Government's knowledge about the real cost of delivering funded childcare places,' as PLA chief executive Neil Leitch explained at the Nursery World Business Summit in London last week. 'Our FOI request revealed that 70 per cent of local authorities haven't collected any updated costs - not once - since the introduction of the formula,' he said.

Of the final research report - Counting the cost: an analysis of delivery costs for funded early years education and childcare - he said, 'The research demonstrates what we in the sector have been saying for many years now: Government funding for the free entitlement does not meet the cost of providing places. For every four children who access a Government-funded place at a PVI setting, providers have to fund a fifth out of their own pocket. This is not sustainable.'



To establish an hourly rate for high-quality provision, the study tracked the resources expended by 100 'good' and 'outstanding' settings across the country over a two-week period - in all, 186,712 hours of early education and childcare for 5,635 funded and non-funded children from 23 June to 4 July 2014.

Mr Leitch said that Ceeda, the independent research agency carrying out the study, analysed 'not just the obvious costs like salaries, rents and utilities, but also the indirect costs of providing high-quality childcare, like the time spent liaising with external agencies or with parents.

'And to be clear, this is the absolute minimum spending that they have to do. These figures don't include any allowance for profit. They don't allow for any investment in provision. They don't allow for the cost of attending training courses, of hiring graduate leaders, of paying staff a living wage.'

In addition to analysing staff hourly rates, Ceeda used diaries to establish the amount of unpaid work that practitioners regularly undertook.


According to the study, the average hourly cost of providing a high-quality funded place for a threeand four-year-old is £4.53, compared to the average funding rate of £3.88 (DfE figure). This represents a funding shortfall of 17 per cent, rising to 21 per cent when the cost of unpaid staff hours is taken into account, equivalent to £425 per child per year.

In the case of two-year-old places, the average hourly rate was £5.97, compared to an average funding rate of £5.19 (DfE figure). This represents a funding shortfall of 15 per cent, rising to 18 per cent when the cost of unpaid staff hours is taken into account, or £470 per child (see table).

Over a year, and excluding the unpaid contribution of staff, this equates to a sector deficit of £177m for providing funded places for threeand four-year-olds and £29.6m for two-year-olds. Taken together, these figures amount to £206.6m.

The introduction of the Early Years Pupil Premium in 2015 will reduce this deficit by an estimated £19.5m. However, said Mr Leitch, this will make up, on average, only 11 per cent of the current shortfall - 'nowhere near what is needed'.


The study also looked at the extent to which higher occupancy rates could provide a way out of current problems, for as occupancy increases costs reduce.

According to the study, when occupancy falls below 50 per cent, the average cost per hour for a funded two-year-old child is found to be £6.58, reducing to £5.29 when occupancy is above 80 per cent. The figures for threeand four-year-olds are £5.89 and £4.08 respectively.

Occupancy rates for settings within the survey averaged 72 per cent, rising to 76 per cent in the mornings and dipping to 70 per cent at noon and 2pm. Noted too was t he fact that 'the study took place in the second half of the summer term when occupancy levels are typically at their highest'.

On attendance, it found that three-quarters of funded two-year-olds (75 per cent) accessed care all year round but that number fell to half (48 per cent) of funded threeand four-year-olds. Additionally, while half (48 per cent) of funded threeand four-year-olds accessed additional hours, the proportion for two-year-olds was just 17 per cent.

As a result, concludes the report, settings are constrained on capacity by 'their physical environment' and 'the statutory framework'.

'As settings increase the number of funded children on roll, the proportion of the client base paying for... care throughout the year is likely to fall.

'If payment for a funded place fails to meet delivery cost, the "loss" has to be offset elsewhere... - as funded provision expands, so too does the deficit. This creates a scenario of a rising deficit and a contracting fee-paying customer base. If settings do not or cannot absorb funding deficits, the consequence of continued under-funding is likely to be increased childcare costs for families and/or a retraction in the supply of funded places.'


As well as discovering that a third (30 per cent) of local authorities have made no changes to their PVI base rate since implementing a single funding formula, the PLA's FOI request found that:

- Nearly 5 per cent of authorities had lowered their base rate

- less than half had increased their base rate by more than 2 per cent in the past three to four years.

'This means that the vast majority of providers have actually had to endure a real-term decrease in funding,' said Mr Leitch. The prospect of having to pay staff the Living Wage in some areas is adding to providers' concerns, he added, citing Birmingham as an example. 'The local council there has said that it is going to make paying the Living Wage a condition of free entitlement funding. But what our FOI request shows is that this very same council has increased PVI funding by just 3p - 0.8 per cent - since 2010: a real reduction in funding of 16.67 per cent.'

Some LAs, he continued, haven't increased funding levels because 'the level of funding they themselves receive from central Government hasn't changed. On the other side, the Government claims it is giving local authorities enough money - they're just not passing it on.'

To try to settle the 'argument', the PLA looked at the ring-fenced funding for two-year-old places as part of its FOI request and found that:

- a third of local authorities are retaining some of the funding to finance the likes of additional support for two-year-olds with special educational needs

- a third are passing on all the funding they receive

- a third are funding providers at a higher rate than they receive from central Government - on average, by 6 per cent.

'So, already we were starting off, in many cases, from too low a figure,' said Mr Leitch. As for the local authorities currently making up the shortfall, 'A number... told us that this wasn't a sustainable approach and that, unless central funding increases, they will ultimately have to reduce their rates.'

As the General Election approaches, the various parties are pledging more 'free' childcare, but Mr Leitch noted, 'These promises are being made without knowledge (and) understanding. The problem is that economic models are developed on the assumption that the sector is adequately funded... and just needs a bit of extra cash to hire more graduates and boost overall quality. As our research has demonstrated, that is not the case. So any discussions about Government investment needs to accept that the sector is already severely underfunded, and has been for far too long.'

However, the Department for Education has dismissed the findings of the report. A DfE spokesperson said, 'This report has been totally overblown. It is nonsense to suggest that childcare has been underfunded. The cost of childcare is falling in real terms and we have increased annual funding for early education by over £1bn since 2010.'

In response, Mr Leitch said, 'To those who choose to ignore the situation, I say this: you are doing a grave disservice, not just to your own integrity but to the thousands of providers and practitioners..., the parents that they support and most of all to the very children you claim to represent. And that's not just a message to Government. It applies to all the political parties.'

And to the sector, he said, 'We have to look back to the ratios debate, when everything was falling on deaf ears, and use the same collective approach to make a lot of noise.'


Counting the cost: an analysis of delivery costs for funded early years education and childcare, www.pre-school.org.uk/whats-new/ counting-the-cost-report

Number of LAs % of LAs
% decrease 6 4.8%
0% 37 29.4%
less than 1% 6 4.8%
1%-1.9% 17 13.5%
2%-2.9% 17 13.5%
3%-3.9% 8 6.3%
4%-4.9% 6 4.8%
5%-5.9% 5 4.0%
6%-6.9% 2 1.6%
7%-7.9% 4 3.2%
8%-8.9% 3 2.4%
9%-9.9% 3 2.4%
10%-10.9% 4 3.2%
11%-11.9% 2 1.6%
12%-12.9% 3 2.4%
13%-13.9% 1 0.8%
More than
20% 2 1.6%

Funded Average Average Average Average Funding
children in cost funding funding gap funding gap gap as a
England per per hour per hour percen-
hour per child tage
per annum of

olds £5.97 £5.19 -£0.78 -£407.81 15%
year-olds £4.53 £3.88 -£0.65 -£347.33 17%

London region
olds £6.67 £5.71 -£0.96 -£510.36 17%
year-olds £5.48 £4.56 -£0.92 -£486.86 20%

Costs and rates with unpaid contribution of staff
olds £6.10 £5.19 -£0.91 -£469.71 18%
year-olds £4.69 £3.88 -£0.80 -£425.34 21%
Funding data: delegated budget allocated to PVI providers per pupil per
hour 2013/2014 published by DfE
Cost data: England-funded two-year-olds: 383 children in 73 non-domestic
childcare settings
England-funded threeand four-year-olds: 3,488 children in 100 non-
domestic childcare settings
London-funded two-year-olds: 28 children in five settings
London-funded threeto four-year-olds: 267 children in seven settings

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