Funded places leaving providers out of pocket by millions

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New research finds that the PVI sector is facing a shortfall of half a billion pounds a year in revenue due to underfunding for the 15 and 30 hours and an inability to cross-subsidise losses.


The PVI sector is facing a shortfall of millions of pounds largely due to underfunding of the 15 and 30 hours

The latest About Early Years data from Ceeda reveals early years settings are facing an average funding shortfall of 17 per cent to deliver early education places for three- and four-year-olds and a 32 per cent shortfall for two-year-olds.

The average estimated cost to deliver a funded two-year-old place is £6.90 an hour, a third higher (32 per cent) than the average funding rate paid to providers of £5.23 per hour, per child.

The average estimated cost of delivering a funded place for three- and four-year-olds is £5.08, 17 per cent higher than the average funding rate of £4.34.

When taking these shortfalls into account for all funded places delivered in PVI settings (84 per cent of two-year-old places, 38 per cent of those for three- and four-year-olds for the 15 hours and an estimated 38 per cent for the 30 hours), this amounts to a total shortfall of £370 million per annum.

Broken down this is £128 million for the two-year-old offer, £179 million for the 15 hours for three- and four-year-olds and £63 million for the 30 hours. The figures take into account additional funding providers can obtain including the Early Years Pupil Premium (EYPP), Disability Access Fund (DAF) and SEN inclusion funding.

The research also highlights that the majority of early years providers are making a loss on places for children under two as well because of greater staff to child ratios. Providers would normally cross-subsidise losses made on these places with income from three- and four-year-old places, but in most cases they do not receive enough Government funding to cover costs and with the introduction of the 30 hours, fewer children pay for hours outside of those that are funded.

According to Ceeda, the average cost of delivering a place for under-twos is £7.44, compared to an average fee to parents of £5.71.

Factoring this in with the loss made on funded places, Ceeda estimates that the total annual shortfall across all care delivered by nurseries and pre-schools is £536 million.

With early years funding levels frozen until at least 2020, the Pre-school Learning Alliance is warning that parents are likely to see an increase in fees in the coming months and years as providers struggle to break even in the face of rising business costs.

Neil Leitch, chief executive of the Pre-school Learning Alliance, said, ‘Time and time again, we have told the Government that there simply isn’t enough money in the system and time and time again, they have denied that there is any problem – but these independent figures prove that the childcare sector’s concerns are completely justified.

‘So much of the Government’s rhetoric around ‘free’ childcare has been about helping working families – but this research makes clear that its current childcare policy is in fact likely to have the opposite effect. 

‘With the recent introduction of the 30 hours, things are only going to get more difficult as nurseries, pre-schools and childminders across the country struggle to close a growing funding gap – and this is inevitably going to have an impact on parents, as providers are forced to ramp up fees or limit free entitlement places to stay afloat. Worst still, week after week, we are hearing reports of settings being forced to close their doors as a result of the government’s unwillingness to acknowledge and address the long-running issue of underfunding.

‘It doesn’t have to be like this – but ministers needs will first have to admit that they have got this policy wrong. It’s clear that the Government needs to look again at the way it funds the early years sector, and that to do this it needs to gain a proper understanding of how providers actually operate on a day-to-day basis. Pushing blindly ahead with promises of ‘free childcare’ when there is so much evidence that current policies are unworkable in practice is simply not sustainable.’

Dr Jo Verrill, managing director of Ceeda, said, ‘There are two key problems with the approach that the government is taking to early years funding. Firstly, the evidence base used to set funding rates did not account for year-on-year national living wage increases and other inflationary factors. Secondly, funding rates do not reflect the way that childcare providers run their provision and the extent to which they cross-subsidise places for younger children. Without these cross-subsidies, childcare fees for under-threes would be beyond the reach of many working families.

‘A policy introduced to help 390,000 families therefore risks increasing costs for over 900,000 who also rely on childcare providers to care for and educate their children and allow them to work – not to mention those parents and carers who are already priced out of formal childcare services.’

A Department for Education spokesperson said, ‘We are spending more than any other government on childcare – including £1billion every year to deliver 30 hours of free childcare and fund the increase in rates we introduced last year. The rollout of 30 hours for working parents of three- and four-year-olds has been a success, with 294,000 children now benefiting. 

‘As with any new policy, we continue to keep this under review and have commissioned new research to ensure we’ve got this absolutely right.’


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