House of Commons - The Early Years Single Funding Formula - Children, Schools and Families Committee

The Early Years Single Funding Formula - Children, Schools and Families Committee Contents

4 Drawing up new formulae: practice and consequences

40. In the bulk of this Report, we set out the evidence which we received on the degree to which the proposed new formulae appear likely to achieve the Government's aims for the Single Funding Formula and for early years education and care more generally:

Greater transparency in how settings are funded;
Increasing flexibility in the way in which the free entitlement is offered;
Securing the quality of early learning and care offered under the free entitlement;
Increasing access to and availability of early learning and care under the free entitlement.

The consequences: transparency and the "level playing field"

41. The single funding formula has undeniably introduced greater clarity into funding for early years provision.[66] Interim guidance on implementation of the single funding formula, issued by the Department in July 2008, stressed that "local authorities must as a minimum be in a position to justify and explain in a wholly transparent manner:

The core level of funding and any differences between providers of different characteristics, including any differences in funding levels between providers in different sectors;
All supplementary payments over and above the core funding level;
All funding that is based on anything other than actual levels of participation".[67]

42. The various hourly base rates set by each local authority have each been informed by an assessment of actual costs of provision; but confidence that funding rates are fair has not necessarily been enhanced, as the data assembled by local authorities on different providers' costs was incomplete. In addition, the anticipated "level playing field" has turned out to be a field in which many have gained less than they might have expected and a few have lost a lot more than they might have expected. We say more on these two themes below.

Poor cost information

43. For one reason or another, it appears that the cost surveys undertaken by many local authorities did not yield enough good quality information to give a solid foundation to local funding formulae. The main cause seems to us to have been the poor response from providers themselves. Sheffield City Council reported that:

We experienced difficulties in engaging the PVI sector in the cost analysis exercise with only 31.5% of providers taking part. Once the analysis was completed only 18% of the returns could be used for reliable data, and these returns showed a very wide range of costs, with no reliable standard pattern that could be used to determine the new formula allocation.

As a result, the Council felt able to use the average pound per pupil hour figure only as "a general reference point" in determining the new formula allocation. None of the eight independent schools with nurseries in the city returned data, nor did any of the childminders working at home; and the witness representing the Council concluded that the whole process had been "a bit of a waste of time".[68] Birmingham City Council reported a very similar pattern of responses and also noted that the process had been time-consuming.[69] Cambridgeshire County Council reported a 25% response rate.[70]

44. Various reasons were given for this poor rate. The Department recognised at the outset that many providers might find the cost survey "daunting" and might need help from local authorities or from the local Business Link in completing the survey.[71] Some providers appear to have been given very little time in which to provide cost information.[72] However, it was regularly suggested to us that PVI providers had been wary of disclosing what they saw as commercially sensitive information about turnover and profit levels.[73] We note that some local authorities partly overcame this reluctance by using third parties to assemble the information.[74]

45. Several maintained nursery schools argued that local authorities had not taken account of all of the unavoidable costs which they faced.[75] One witness reported that local authorities had been "taking, at best, finger in the wind estimates based upon a whole range of factors" and had then found that other factors had not been taken into account, or that certain figures included in the calculation were "complete guesstimates".[76] In fact, if cost information supplied by maintained nursery schools was not comprehensive, that may have been because schools lacked a precise knowledge of what their settings cost to run beyond their devolved budget responsibilities. The NUT suggested that, in some cases, local authorities had been unable to provide this information.[77]

46. 36.5% of respondents to a survey by Early Education of head teachers and other staff in maintained nursery schools in June/July 2009 believed that their local authority had a "good understanding" of the costs of maintained nursery schools; and 59.1% believed that their local authority had "some understanding" of their costs. However, many described the knowledge of local authority officers making decisions on setting the formula base rate as 'patchy', and 37% of respondents said that their local authority had not included them or their school in the cost survey.[78]

Cost information provided to us

47. We invited witnesses to identify the hourly cost of providing early years education and care; but they were often cautious about citing figures. Megan Pacey, Chief Executive of Early Education, said that it was "very difficult to give a ballpark figure, because there are so many different variables".[79] Claire Schofield, representing the National Day Nurseries Association, agreed, saying that there was "a different picture in every area" and that there was "no straightforward answer".[80] This was borne out by the Daycare Trust, which recently undertook research into the cost of providing early years education and care, and which quoted ranges of £1.85 to £4.44 per child per hour in settings "with current wages and qualifications" and £2.94 to £6.17 per child per hour under a high quality model in which 50% [of staff] were qualified to Level 6 and 50% to Level 3, with appropriate pay.[81]

48. Other witnesses ventured more precise figures. Colin Willman, representing the Federation of Small Businesses, quoted an average cost of £4.70 per hour for early years provision: this figure was derived from a survey of 1,100 Federation members in the nursery sector.[82] Jean Ensing, Chair of Governors at a maintained nursery school and Children's Centre in Bognor Regis, hazarded an estimate of £9.40 per child per hour for the cost of provision at her school.[83] Tim Davis, representing Southampton City Council, illustrated the marked extra cost of provision per child per hour in maintained nursery schools, estimated by the Council to be £8.29 per hour as opposed to about £4.50 per hour in maintained nursery classes.[84]

How to improve cost data

49. The Department acknowledged that the work involved in completing the cost survey stage had not been easy and had sometimes led to a poor response. It recommended that, where no survey had been conducted and completed by summer 2009, the local authority should skip this stage and "move directly to building a Typical Cost Model", but it added that local authorities should validate those cost assumptions within six months of implementation, using actual cost data.[85]

50. Early years single funding formulae which are based upon inaccurate information on the costs of providing early years education and care will not command the confidence of providers in either the maintained sector or the private, voluntary and independent (PVI) sector. However, criticisms of local authorities for basing their funding formulae on incomplete cost data are not necessarily justified: many early years providers in the private, voluntary and independent sector failed to share key information. The reluctance of some PVI providers to offer cost information to local authoritiesperhaps because of a perception that they were in competition for children to fill placesis understandable but ultimately shortsighted.

51. Accurate data on costs to providers must be obtained: this may require the use of a consultancy or other third party to secure information which private, voluntary and independent providers deem to be commercially confidential. Representative bodies for businesses in the private, voluntary and independent sector should encourage their members to participate in cost surveys, guide them through survey forms, and provide advice. Local authorities have a similar role in relation to maintained settings.

The "level playing field" between the maintained and PVI sectors

52. Local single funding formulae were intended to offer greater transparency by using common criteria to set rates of funding to providers across all sectors, with differences in those rates being openly justified.[86] The Department also took the view that consistent funding by participation rather than by places would ensure that funding would support "a level playing field between different maintained and PVI providers".[87] However, some saw the long-desired 'level playing field' as being not just about transparency through common funding criteria but also about greater parity of funding between different types of provider.[88] That parity of funding might be achieved either through an increase in rates for PVI settings to bring them more in line with those paid to maintained settings or by a redistribution of funds from those types of setting which have typically received high unit payments (principally maintained nursery settings) to those which have not (sessional or daycare settings in the PVI sector). The NUT referred to "private and independent providers' perceptions that the maintained sector received the lion's share of early years funding and were unfairly subsidised".[89]

53. In fact, anyone who thought that 'transparency' was a way of providing a 'level playing field' in terms of parity of funding between the PVI and maintained sectors will have been disappointed, as the funds to be released by substantial decreases in the few maintained providers' budgets end up being spread very thinly when redistributed among the more numerous PVI providers. Megan Pacey, Chief Executive of Early Educationa body that represents providers in the maintained and PVI sectorssaid that the single funding formula was "not working for anybody" and added that significant cuts in funding for maintained providers were translating into increases of "pennies" in the funding for providers in the PVI sector.[90] The Department was clear from early in the process that the Single Funding Formula "does not equate to there being a single rate of payment", and it stated that variations in unavoidable costs in different areas and between providers meant that a single rate of payment to all providers would be neither fair nor reflective of their needs in covering the costs of the free entitlement.[91]

54. Some representatives of the PVI sector agreed that the new formulae did not necessarily lead to any clear gain in the financial position of their providers. Save Our Nurseries[92] believed that specialist PVI providers would be "disproportionately hit" by the new formulae,[93] and the Montessori Schools Association told us that "formula funding will not meet present staffing costs, let alone the full cost per place when on-costs of rent, heating, lighting, etc. are added in".[94] Although we believe that only a minority of private, voluntary and independent providerschiefly those with highly qualified staffwill actually lose out through introduction of the Single Funding Formula, it will not provide the significant boost to the stability of private, voluntary and independent sector enterprises which some had anticipated. This was not, however, the purpose of the Single Funding Formula.

The consequences of redistribution for the maintained sector

55. It was put to us very strongly that the consequences of the redistribution of funding could be devastating for some maintained settings, particularly maintained nursery schools. Early Education told us that "many of those working in the maintained sector are reporting that they are increasingly being threatened with closure or significant budget cutsmany with immediate effect".[95] It supplied us with summaries of the damaging impact of the proposed local funding formulae upon 26 maintained nursery schools;[96] and in oral evidence, the Chief Executive spoke of maintained settings losing between 20% and 35% of their budgets.[97]

56. This general theme recurred constantly in submissions to the inquiry from maintained nursery schools, and closure was a fear for many.[98] The NUT reported concerns that "in Birmingham there is a very real worry that measures being proposed will close most of the 27 nursery schools";[99] and one maintained nursery school in the city told us that it was facing a fall of £156,000 in funding.[100] Sheffield City Council told us that "our three stand-alone nursery schools will receive significantly less funding via the new formula. The highest loss for any single nursery school (before transitional funding) is £104,000 or 30% of its delegated budget".[101] Other annual losses cited in evidence were £59,000 (Flatts Nursery School),[102] £100,000 (McMillan Children's Centre and Nursery School, Hull)[103] and £132,878 (Brentwood Early Years Centre, Wirral).[104] An early years officer at Oxfordshire County Council described the potential loss of funding to maintained nursery schools as "disastrous".[105]

57. We were presented with some stark examples. Jean Ensing, Chair of Governors at Bognor Regis Nursery School and Children's Centre (a maintained setting) told us that the rate being offered by the local authority under the new funding formula was £4.92 per hour and that her school stood to lose 52% of its overall fundingalmost £100,000if the funding reform went ahead.[106] The headteacher at the school listed the likely consequences, which included:

Redundancy or a cut in hours for eight staff;
20 fewer part-time places for children;
A risk of full or partial closure of the integrated daycare provision;
Fewer rooms in use, as there would be fewer supervisory staff;[107]
A move to short-term contracts for some staff, with less likelihood of children having a consistent key worker throughout their time at the school as a result; and
No employment of specialist teaching assistants to support inclusive practice with children who have special needs or who have English as an additional language.[108]

58. Other nursery schools reported that they would have to lose staff, with an inevitable impact on quality.[109] In some cases, the head teacher would need to fill the gap, taking on a teaching role with children at the expense of leadership duties.[110] However, not everyone accepted that the damaging impact on maintained nursery settings was widespread: one written submission claimed that only a small number of maintained nursery classes would lose out significantly under the new formula.[111]

The Department's response

59. The Department anticipated that the most significant implications of the change would be for maintained sector providers "particularly … where settings have been running with spare capacity".[112] In guidance issued on 28 October 2009 to Directors of Children's Services in all local authorities with maintained nursery schools, the Department observed that some schools had "received consultation papers showing them likely to receive over £40,000 (in one instance over £160,000) less funding in total than they had received under last year's formula allocation". The Department warned that "this type of difference should be cause for alarm. Either a school has been massively overfunded in the past ... or the new funding formula is missing something fundamental. It is more likely that it is the latter".[113]

60. In a cover letter accompanying that guidance on 28 October 2009, the Minister for Children, Young People and Families, the Rt Hon Dawn Primarolo MP, said:

114

She asked all local authorities with maintained nursery schools to:

115

Although the tone of the Minister's letter was welcome, the NUT described her intervention as "too little too late", noting that "many local authorities are well advanced in their plans and had already published their Early Years Single Funding Formula proposals for consultation before the letter was received".[116]

61. We welcome the Minister's clear signal, in her letter of 28 October 2009 to local authority directors of children's services, that good quality nursery schools should not be forced into closure by the Single Funding Formula. We believe that it was no accident that her letter was prepared just as the Committee was announcing that it would take oral evidence on the effects of the Formula. Although the letter may have come too late to influence local authorities implementing the Formula in April 2010, we encourage local authorities aiming for implementation in 2011 to reassess their formulae in the light of the Minister's letter and to find ways of improving prospects for the sustainability of their maintained nursery schools.

The consequences: flexibility and choice

62. The Government recognises that, for many providers, the move from 'sessional' provision, often in blocks of time in either the morning or afternoon, to more flexible 'wraparound' provision "represents not only a significant culture change but also some real practical and sometimes financial barriers".[117] These might include the need to recruit extra staff (for instance for cover through lunch hours), limits to the availability of premises, an increase in staff time in drawing up staff rotas and in billing parents (because of the greater variety of patterns of take-up), and contractual limits to the number of "contact hours" which teachers in maintained settings may have with children.[118]

63. The Government strongly encouraged local authorities to offer incentives to providers "to deliver the entitlement in patterns that are more responsive to parental demand".[119] Cambridgeshire County Council supplied us with a copy of its proposed single funding formula, which included a highly sensitive flexibility supplement, with a scale of six different payment premiums being awarded according to the level of flexibility offered.[120] Yet, according to a data collection exercise carried out by the Department in November 2009, only a minority of local authorities have chosen to offer a flexibility supplement. Those that have done so have based the supplement on factors such as session length, opening hours or "stretched provision" over more than 38 weeks of the year.[121]

64. In evidence to this inquiry, there was little sign of any appetite among providers to increase the availability of 'wraparound' or flexible education and care where it was not already offered. In fact, some maintained settings warned that the new funding formula, by bringing about staffing cuts, would actually reduce their ability to provide the free entitlement flexibly.[122] Although the picture remains unclear, there is little evidence so far that the Single Funding Formula has encouraged greater flexibility in provision of the free entitlement to early years education and care.

How "flexible" should the free entitlement be?

65. Absolute flexibility, with parents free to define by the hour start and finish times for early years education and care outside the home would be very difficult to administer and fund under the free entitlement. So the Government has set limits within which the free entitlement should be offered:

No session longer than 10 hours
No session shorter than 2.5 hours
Not before 8.00 am or after 6.00 pm
The full 15 hours over no fewer than 3 days
A maximum of two providers.[123]

The Department has defined two models for access to the flexible entitlement, which local authorities should secure as a minimum:

— Three hours a day, over five days of the week

— Five hours a day, over three days of the week

and two further models which it put out for consultation:

— Two sessions of six hours and one of three hours, over three days of the week

— One session of nine hours and two of three hours, over three days of the week.[124]

66. The de facto session length would therefore be three hours long rather than the present 2.5 hours. In order to fit two three-hour sessions into one day so as to correspond with school hours (for parents' convenience) and allow a lunch break, some settings will need to start earlier and finish later, and lunch breaks for staff who need to clear up after a morning session and prepare the venue for an afternoon session will be constricted.[125]

67. It would be possible, in theory, for a parent to use a continuous session of 10 hours on one day as part of their free entitlement of 15 hours. However, we doubt that this would be good practice. Barbara Riddell, a freelance consultant on early years education, questioned whether such a pattern of education and care would allow a child to benefit from the opportunity to make friends and establish themselves in peer groups. She also argued in favour of the consistency of a curriculum organised over five days, which she described as "by and large, better for children".[126] Jean Ensing observed that specialist help for children with particular needs (such as speech and language delay) might be available on only one day of the week and might therefore not be accessible by a child whose parents took up the free entitlement over few days of the week.[127] On the other hand, one witness suggested that while 15 hours taken in three-hour sessions over five days might be the ideal, a more concentrated take-up over fewer days could have an overall benefit to the child if it enabled parents to work and escape child poverty.[128]

68. We accept that flexible care may suit parents; however, it risks serving the interests of the parent but not of the child. Some local authorities have put a maximum on the number of hours in a day which can be funded from the free entitlement: we were told that Peterborough City Council had set a limit of six hours, and Islington Borough Council was consulting on a similar proposal.[129] We approve of steps taken by local authorities to ensure that take-up of the free entitlement to early years education and care is spread reasonably over the week. We believe this to be the ideal for most children, and the design of any flexibility supplement should favour such a pattern.

The consequences: quality

Existing levels of quality

69. Maintained early years settings have a high reputation for quality, borne out by recent data from Ofsted. 58% of the 147 maintained nursery schools inspected by Ofsted between 1 September 2008 and 31 August 2009 were judged to be "outstanding" and a further 41% "good" in the overall effectiveness of their provision.[130] Local authority witnesses described maintained nursery schools in particular as "beacons of excellence"[131] or as "engines developing quality provision that others can learn from";[132] and Jenny Spratt, Head of Early Years and Childcare Services at Peterborough City Council, said that maintained nursery schools "provide us with a really key beacon in terms of where the theory and practice of good early childhood education sit, and that can be disseminated".[133] These views were echoed by others,[134] many of whom drew our attention to the findings of the Effective Provision of Pre-School Education (EPPE) project team in its Final Report, published in November 2004. The authors of the Final Report found that integrated centres and nursery school provision scored highest on pre-school quality and tended "to promote better social development even after taking account of children's backgrounds and prior social behaviour".[135]

70. The principal reason given for the higher quality ratings in maintained settings is the level of qualifications among staff. The EPPE Project reported that the most highly qualified staff (for childcare qualifications) were in maintained settings and that centre managers with the highest qualifications (B.Ed or PGCE) appeared to be predominantly in nursery schools and nursery classes.[136] As we noted above, in paragraph 9, all nursery classes are required by law to have a qualified teacher.

71. Evidence from Ofsted, academic research and local authorities is overwhelming: the quality of early years education and care offered by maintained nursery schools is almost invariably very high indeed. The standards set are there for others to follow, and they should not be put at risk by implementation of the Single Funding Formula.

72. Good quality provision is by no means exclusive to maintained settings. Claire Schofield, representing the National Day Nurseries Association, maintained that "two thirds of private and voluntary nurseries are good or outstanding" and that quality of provision was improving. The Montessori Schools Association told us that 88% of its 630 member schools had been graded by Ofsted as "outstanding".[137] Ofsted judged 67% of childcare providers on non-domestic premises (such as day nurseries, pre-school and playgroups) in 2008-09 to be either good or outstanding in their overall effectiveness.[138] Changes over time in Ofsted's presentation of data in HM Chief Inspector's Annual Reports make direct comparison with performance in earlier years difficult; but the 67% figure is higher than that achieved individually in 2006-07 either by full day care providers or by sessional day care providers.[139] It should be noted that different frameworks are used by Ofsted in assessing maintained and non-maintained settings.

73. In 2008, 4% of staff in full day care and in sessional settings held a Level 6 qualification[140] but 62% and 51% respectively held a Level 3 qualification.[141] In each case these figures were either equal to or slightly higher than those for 2007. Figures for staff in maintained nursery schools in 2008 were 22% (Level 6) and 42% (Level 3).[142] Many staff in maintained early years settings are required to hold higher qualifications such as a PGCE (for qualified early years teachers).

Government policy on improving quality

74. The Government has taken steps to improve the quality of settings in the private, voluntary and independent sector. It intends that, by 2015, those leading full daycare settings should hold Early Years Professional Status, described by the Children's Workforce Development Council as "a graduate award based on a set of professional standards, similar to Qualified Teacher Status".[143] We note that the Government is considering making this a statutory requirement, alongside a requirement that all early learning and childcare workers have a full and relevant Level 3 qualification by 2015.[144] The Department also makes available to local authorities a Graduate Leader Fund (worth £305 million over the 2008-09 to 2010-11 period), which may be used to support providers in developing, attracting and retaining staff with Early Years Professional Status.[145] Nina Newell[146] accepted that the Graduate Leader Fund did help private and voluntary sector providers to pay higher rates to staff qualified to graduate level, but she argued that there was no guarantee that the Fund would continue.[147]

75. Further funding is available under the Outcomes, Quality and Inclusion strand of the Sure Start, Early Years and Childcare Grant. The Department's Memorandum of Grant setting out conditions for the release of this funding states that local authorities should use this element of the Grant "to support practitioners, including childminders, to raise the quality of their delivery of the Early Years Foundation Stage (EYFS)". In part, that would be achieved "through the support and challenge of Early Years Consultants".[148]

76. Claire Schofield, Director of Policy, Membership and Communications for the National Day Nurseries Association pointed out that funding was needed to improve quality in PVI settings. She told us that "low funding caps salaries and the way that you can reward your staff, so if we want graduate leadership, which we do—we want everybody more highly qualified working in nurseries—that needs to be funded appropriately".[149] Typical hourly rates of pay being offered for vacancies in PVI settings, as advertised in Nursery World at the time of the inquiry, were £9 per hour for a nursery manager and £6 per hour for Level 3 staff.[150] Barbara Riddell suggested that rates of pay in the maintained sector could be as much as two and a half times higher,[151] and the Federation of Small Businesses told us that PVI settings, having trained staff, struggled to retain them as they were attracted to jobs in the maintained sector "at far higher salaries".[152]

Improving quality through the Single Funding Formula

77. The Department's practice guidance on implementation of the single funding formula noted that "the pilot authorities who most successfully incentivised quality through their early years single funding formula did so through the use of a quality supplement". It continued: "All local authorities should strongly consider including a quality supplement to reward providers who demonstrate strengths or efforts to raise quality".[153] We took evidence from local authorities which had established quality supplements or were proposing to do so, using staff qualifications as an indicator.[154] Peterborough City Council had devised two forms of quality supplement, one reflecting levels of staff qualifications and another to reflect the undertaking of a quality assurance programme.[155]

78. We were astonished to learn of local authorities that had not incorporated any quality supplement into their funding formula. In one case, which came to light in oral evidence, providers could not agree on a suitable measure: maintained providers wanted to use staff qualifications as a yardstick but PVI settings were opposed and preferred to use Ofsted gradings.[156] The result of the stand-off was that there was no quality supplement at all.[157] However, this proved not to be an isolated case: in a data collection exercise undertaken by the Department, 61 out of 126 returns from local authorities (48%) reported no quality supplement.[158] We were told that one local authority had decided against offering a quality supplement because there was "no clear method of measuring quality": it was reported to have taken the view that "staff training and qualifications could be measured but would be costly".[159] Other local authorities have set low hourly rates for their quality supplement. One nursery school reported a rate of 10 pence per child per hour; the total gain for the school concerned was £3,500 per year, which did little to acknowledge the costs of employing highly qualified staff.[160] Another local authority proposed supplements to recognise qualifications above Level 3 only when held by the setting's leader.[161]

79. The Department observed that "a significant number" of local authorities which had not managed to reach agreement over criteria for a quality supplement nonetheless intended to introduce one in future "as part of the iterative process of developing their formula". It also noted that some authorities had decided not to include a quality supplement as "they considered quality to be built into their system to such a degree that an additional supplement was not necessary.[162]

80. Whatever the stated purposes of the Early Years Single Funding Formula, it is unacceptable for a local authority not to use it to try to stimulate improvement in quality of early years education and care. As Nina Newell told us, "the whole point is to close the gap, and it has been proved that a quality provision does that".[163] Every local authority should include a quality supplement in its single funding formula, and the level of that supplement should be credible and not minimal. We recommend that the Department specify in future guidance to local authorities that a quality supplement is mandatory. At the very least, local authorities which have decided that a quality supplement is unnecessary should be challenged by the Department.

How a quality supplement should be applied

81. We acknowledge that providers will not necessarily agree on what indicator of quality should be used to trigger payment of a supplement within the single funding formula. There is also evidence of doubt about how any such supplement should be used. We were told that a lot of providers in the private and voluntary sectors wanted "an aspirational element" to the single funding formula, in order to pay for more highly qualified staff.[164] One local authority officer told us that it was "tricky to decide whether you give more money to your good and outstanding settings or to those that are inadequate or satisfactory".[165]

82. We note that the Draft Code of Practice on the Provision of Free Nursery Education Places for Three and Four Year Olds, issued for consultation in September 2009, encourages local authorities to rate providers in terms of quality, using the principles set out in the Early Years Quality Improvement and Support Programme (EYQISP) guidance issued as part of the National Strategies. The Department specifies that EYQISP ratings should be awarded after taking into account "the full local evidence base", which might include (for example) the setting's Ofsted rating, or participation in any local quality improvement or assurance programme. The Department proposes that where there is a surplus of free entitlement provision which is flexible, accessible and meets parental demand, free entitlement funding should be concentrated on best quality providers according to EYQISP assessments; when there is a deficit of providers rated 'good' or above, local authorities may fund settings with a lower rating.[166]

83. It would be perverse for a funding formula to reward settings with highly qualified staff at a lower rate than those with less qualified staff. We believe that a quality supplement should normally be payable to settings not on an aspirational basis but rather to those which demonstrate that a standard has been or is on the way to being achieved. Local authorities should be using funding from other sources, such as the Outcomes, Quality and Inclusion element of the Sure Start, Early Years and Childcare Grant, to improve quality in settings needing intensive or targeted support. In order to continue stimulating the recruitment and retention of graduate level staff in early years settings, the Government should not allow the Graduate Leader Fund to peter out after 2011.

84. Early Years Quality Improvement and Support Programme (EYQISP) ratings of early years settings are reached following a consistent process across local authorities. We believe that they would serve as good indicators of quality for the purposes of allocating a quality supplement under the Single Funding Formula.

The cost implications of increased quality

85. The free entitlement is now being made available, on a pilot basis, to the most disadvantaged two-year olds. Jean Ensing pointed out that, in the case of the nursery at which she chaired the governing body, these were children with particular family problems, such as mental health problems, sudden bereavement, isolation, depression, sudden mounting debt and poverty because of unemployment.[167] As we noted in paragraph 9, a much lower staff to child ratio is required in settings when caring for two-year-olds, so costs of provision will be correspondingly higher,[168] particularly when specialist care is needed. Tim Davis, representing Southampton City Council, told us that "we are having to commission places of high quality because they are for very vulnerable two-year-olds".[169] As access to the entitlement to free early years education and care is extended to disadvantaged two-year-olds more widely, and given the possibility that such provision may in time need to be funded from the Dedicated Schools Grant or its equivalent, single funding formulae may need revision to acknowledge the cost of high quality care for two-year-olds.

86. We also observe that one consequence of enabling the free entitlement to be taken up more flexibly is likely to be greater mobility between providers funded at different rates, which in turn will lead to much less certainty at the start of a financial year about how much Dedicated Schools Grant will be needed for early years education and care. The Single Funding Formula will itself stimulate higher payments to settings as thresholds for higher quality and flexibility payments are met. Tim Davis warned that the impact on budgets "could be quite massive" and that his local authority would "need to keep a very, very close eye on it".[170] Cambridgeshire County Council also identified risks to the local authority should there be a significant shift to provision funded at higher rates.[171] We draw the Department's attention to the possibility that the cost to local authorities of early years provision may rise significantly if quality levels rise and parents make more use of high-cost provision under the free entitlement.

The consequences: availability

Availability of the free entitlement at PVI settings

87. Widespread availability of the entitlement to free early years education and care cannot be achieved without PVI providers, which operate the majority of settings. Unless the education and care provided by those settings is given on a voluntary basis or is funded by charitable income, PVI providers need to cover their costs through fees charged to parents, combined with income from local authorities to honour provision of the free entitlement.

88. We were told that the economics of providing the free entitlement have been precarious for many PVI providers, who have found the hourly rates paid by local authorities to cover provision under the free entitlement insufficient to cover costs.[172] Typically, therefore, the books have been balanced by deriving sufficient profit from fees for provision outside the free entitlementeither for children under 3 years old or for hours of care over and above the free entitlement.[173] Nina Newell, an Area Manager for the Pre-School Learning Alliance, pointed out that these were limited options for providers of sessional care, such as pre-school playgroups, which might only be able to open for three hours in a morning and which might have two-thirds of their children aged three and above. In such cases, the setting was in effect capped as to the amount of income it could generate.[174]

89. The Federation of Small Businesses conducted a survey of PVI nurseries in February 2009: 84.6% of 274 respondents said that the level of funding for the free entitlement was insufficient to cover the cost of provision, and 58% said that extending the free entitlement to 15 hours would negatively affect their business.[175] A similar picture emerged from research commissioned by the Department to assess the extension of the early learning entitlement in pilot areas. Private providers in many local authority areas were found to be "already unhappy about the rates for the existing 12.5 hours' free provision", and "they did not want to deliver any additional hours at these rates":[176] increasing provision of 'free' hours at below cost was loss-making, and it reduced the market for 'paid-for' hours. This was especially so for providers with highly qualified staff and consequently high staff costs. Both the Independent Schools Council[177] and Save Our Nurseries indicated that many PVI providers would decline to offer the free entitlement and would opt out of it entirely.[178] The consequences would be higher fees for parents and fewer options for those without the means to pay.

90. As we noted above, providers are barred from charging top-up fees for education and care under the free entitlement or from making access to the free entitlement conditional on take-up of 'paid-for' hours. The Montessori Schools Association objected strongly to the imposition of this bar, arguing that top-up fees were essential to help cover the cost of highly qualified staff.[179]

91. The independent sector was especially unhappy with the way in which the Single Funding Formula had been modelled. The Independent Schools Councils listed a series of factors which it believed had not been taken into account, including independent schools' inability to reclaim VAT, the higher costs of business insurance, and greater administrative overheads.[180] One independent early years setting argued that the local authority cost survey had failed to distinguish properly between different elements of the PVI sector when estimating the average hourly cost of provision in PVI settings: it suggested that the figure had been distorted by the lower operating costs of voluntary settings.[181] Another independent school challenged the assumption made by its local authority that the costs of provision in the independent sector "were most akin to those of the maintained sector's primary schools which have attached nursery classes".[182]

92. The Department intended that the creation of single funding formulae based on "clear and robust understandings of provider costs across the sector" would help to address anxiety among providers about whether the rates paid by the local authority would "support the sustainability of settings".[183] To some extent, this seems to have been achieved. Colin Willman, Chair of the Education, Skills and Business Support Policy Unit at the Federation of Small Businesses, told us that many PVI providers that had been informed of the rates of funding under the new formula "do feel that it's going to be useful for them and raise the price above the cost so they are not going to be operating at a loss in that area".[184] Jamie Lang, representing Sheffield City Council, believed that PVI providers in the city "would be small winners" from the new formula, and he doubted that PVI providers would want to withdraw from offering the free entitlement.[185] The National Day Nurseries Association, while describing the Single Funding Formula as "not a perfect process", was nonetheless hopeful that "it would make a difference".[186]

93. The free entitlement to early years education and care is available to any parent. We do not support any erosion of that universal availability through allowing providers to charge top-up fees for 'free' hours. Nor are we convinced that it is necessarily good economics to regard a constant element of income, such as local authority funding for early education and care under the free entitlementeven at or slightly below cost of provisionas dispensable if it provides a reliable basis for other, more profitable activity, as long as there is demand. One form of income would sustain the other. If the costs of providing the free entitlement are far exceeding the income received for it, then either providers should be re-examining those costs or they should be making a forceful case to local authorities for those extra costs to be recognised through supplements. This is particularly so for the cost of highly qualified staff.

94. It is in local authorities' interests to ensure that provision under the free entitlement continues to be offered by a wide range of private and independent providers, who may offer the greatest degree of flexibility. Otherwise, local authorities will risk being unable to discharge their statutory duty to secure sufficient childcare for working parents.

Availability of protected places: the consequences of termly counts

95. The Department's practice guidance on implementation of the single funding formula stated in July 2009 that "there will be a requirement that, as a minimum, participation must be counted on a termly basis across all providers, but where a local authority already has systems in place that go beyond this and are more reflective of participation, they are free to continue to use such systems".[187] Funding will depend on those termly counts and will fluctuate accordingly, so the change will introduce instability into maintained settings' budgets.[188] The requirement upon local authorities to count children at early years settings termly (rather than only at the January Census and Early Years Census) also seems likely to introduce new pressures on maintained providers[189] to maximise participation at the start of the school year, possibly at the expense of children whose birth dates mean that they only become eligible for the free entitlement, or only become ready in developmental terms for education and care at an early years setting, later in the school year. This has already led to some anxiety at local level.[190]

96. Maintained nurseries commonly allocate places to children in September for deferred take-up later in the school year. The justification for this is that staggered entry "facilitates the settling-in process" and allows better care of children at a lower developmental age, many of whom may have toileting issues and anxiety about separation from parents.[191] Places are also sometimes kept open for cases of particular or unforeseen need. Jean Ensing, Chair of Governors at Bognor Regis Nursery School and Children's Centre, told us that:

192

97. However, under participation-led funding, no unit funding would be received for those protected places in the autumn term, even though it may be impractical or uneconomic not to employ the full complement of staff throughout the school year.[193] The Department's practice guidance on implementation of the single funding formula does permit exceptions to participation-led funding in "a very few circumstances", and it gives as an example sustainability of settings in very rural areas.[194] Jean Ensing was aware of this saving, but she said that her local authority was "not choosing to interpret it" in a way which would fund protected places.[195]

98. Strict application of participation-led funding is not in a child's best interest if the effect is to pressure them into early years education and care prematurely. The Department should permit local authorities to fundeven if not at a full unit rateplaces which have been allocated to a child whose entry has been deferred until they reach a suitable stage of development. Such arrangements should apply equally to settings in the maintained and private, voluntary and independent sectors.

Full-time places

99. Some local authorities choose to fund full-time places at maintained settings, generally for children in areas of significant disadvantage with a high proportion of families suffering social deprivation.[196] Many, however, plan to discontinue the practice when they implement the Single Funding Formula.[197] There is in fact no requirement to do so, as the Daycare Trust made clear:

198

Guidance attached to the letter sent by the Minister for Children, Young People and Families to local authority directors of children's services on 28 October confirms that local authorities may continue to fund full-time places from the schools budget "provided they have a clear rationale" and on a participation-led basis.[199] We are aware of at least one local authority which has chosen to do so.

100. It is not entirely clear whether local authorities which have decided not to continue funding full-time early years places did so because they thought that the Single Funding Formula prevented it in some way or whether they judged that it was a justifiable economy.[200] Either way, it has caused alarm among schools which are not confident that there is enough demand locally for the number of part-time places which would need to be filled in order to compensate for the loss of full-time places.[201] The NUT said that the Formula did "not provide sufficient flexibility for local authorities to continue with this practice, however much they might wish to".[202] However, we believe that it is more a matter of local priorities than of flexibility under the Single Funding Formula. Local authorities may be perfectly justified in deciding that they can no longer afford to fund full-time early years education and care, but they should not portray the cessation of funding as a direct consequence of the Early Years Single Funding Formula.

66 See memorandum from the NCB Early Childhood Unit, EYFF 23 Back

67 Implementation of the Early Years Single Funding Formula: Interim Guidance, DCSF, July 2008, paragraph 5.1 Back

68 Ev 30; see also Q 99 Back

70 EYFF 28, paragraph 3.3 Back

71 Implementing the Early Years Single Funding Formula: Interim Guidance, DCSF, July 2008, paragraph 5.2. See also memorandum from Diana Rose, EYFF 32, paragraph 16 Back

72 Memorandum from the Montessori Schools Association, EYFF 24, paragraph 2.4.1. Back

73 Jamie Lang Q 99; London Councils, EYFF 18, paragraph 6; National Association of Head Teachers EYFF 26, paragraph 4, Chichester Nursery School, Children and Family Centre, EYFF 30, paragraph 2.1, NASUWT, EYFF 42, paragraph 13 Back

74 London Councils, EYFF 18, paragraph 6 Back

75 See for example memoranda from Anne Bell, EYFF 9, Penny Mason, EYFF 14, and Flatts Nursery School, EYFF 16 Back

76 Megan Pacey, Q 16 Back

77 EYFF 13 para 14 Back

78 Implementing the Single Funding Formula: How is it affecting you?, Progress report on how the implementation of the Single Funding Formula is impacting on Maintained Nursery Provision and Children's Centres in England, Early Education, September 2009 (available at http://www.early-education.org.uk) Back