This is the funding consultation response written by Tricia.  To find out more about her please visit this page.

Executive Summary

  • Evidence relating to the current underfunding and comparison of rates over time
  • Evidence relating to the general issues for the PVI sector
  • Evidence relating to what it costs to run a childcare business
  • Evidence relating to the inequitable distribution of the EY funding


What is clear from recent surveys and reports is that the current funding rates are not enough to cover our (meaning the PVI sector as a whole) basic costs as they exist at the moment. With this being the case currently, it becomes an even more inequitable figure if you factor in the cost of auto-enrolment and the new Living Wage from April 2016 (KMPG survey factors in the current Living Wage of £7.85 in one example). However, this review should now question if we should stop there, surely NOW is the time for the sector to be able to raise its pay rates in line with what is being asked of it. We should not be looking at what it costs NOW or in April 2016, but what it SHOULD cost if our staff were paid a proper rate for the job, in line with teachers and unqualified staff in Schools. Why should such an important job be so lowly paid? Why should business owners, childminders, leaders and managers not be receiving the pay that Heads, Curriculum Leads and Year Heads in schools receive? Let this review analyse what the REAL cost of delivering nursery education should be rather than what it is. It may then be possible to build an early years’ service based on true desire for increased quality and better outcomes for children, rather than trying to achieve this on the cheap through the PVI sector.

Additionally, our funding rates have not gone up proportionately over time with the increases in the Minimum Wage, this is the perfect example of a mis-match of local and national government policy. Legislate our costs to go up through Minimum Wage nationally – but then don’t advocate that additional funds for nursery education be made to cover this locally. This review has the opportunity to address this mis-alignment of policies by linking funding rates to Living Wage rates.

Here is an overview of this mis-alignment over the last 5 years:

Minimum Wage Costs LA 1 NEF Rate LA2 NEF Rate LA3 NEF Hourly Fee Rates
2010 £5.93 £3.56 £3.46 £3.52 £3.89
2015 £6.70 £3.59 £3.60 £3.77 £4.40
% difference +13% +1% +4% +7% +13%


Understanding our issues

The KPMG research for Birmingham above identifies current costs, with a 6% rate of return, would be £4.09/hr and this increases to £4.31/hr for 3-4 yr olds with Living Wage of £7.85 and auto enrolment factored in (NB: the costs for providing care for younger children is higher due to ratios being higher). The Ceeda report suggests the national average cost is closer to £4.53.

We don’t choose to pay our staff low pay rates, it is really all we can afford to pay them. We understand that we can’t continue to put our fees up as this makes it unaffordable for parents. Therefore every time there is a disproportionate rise in Minimum Wage and little or no rise (and even a cut in some years) in Nursery Funding it puts a strain on each and every provider. We have to find alternative ways of maintaining the same income, whilst costs are continue to go up. We really are in an ever decreasing circle. In one of my settings over half of my income is now from funded hours, rising from 10% a few years ago. With the funding hourly rate not meeting my normal fees rate this does mean that without a higher rate of funding we will have to consider all options going forward, including not taking funded children or closure (as without the funding we may not survive anyway). So as this trend is set to continue with 15 hours more underfunding on its way, I will have less ‘other hours’ to charge for and sustainability becomes an increasing issue. This is an existing threat so is it any wonder that we are concerned as a sector about increases to Minimum wage and the new Living Wage in the future, without it being funded effectively.

The Lords Committee highlights a Government trying to meet several agendas; affordable childcare, raising quality, narrowing the gap and funded education to get parents back to work. Is it trying to do too much at the expense of the PVI sector? Is it any wonder the early years sector is in uproar? The Government has used our private sector businesses and is essentially trying to nationalise them by imposing impossible financial constraints on our ability to do what we set out to do. We are now expected to pick up the cost of this mish mash of policies and we have just about reached breaking point. We are also expected to take with gratitude whatever crumbs the local authority choose to give us and have to live with their bullish rules and regulations, despite government guidance and interventions to help prevent this. I give one major example of this as Birmingham City Council’s intention to impose the Living Wage (£7.85) on all providers from September 2014, because we are ‘suppliers’ to the city (i.e. they pay us money for funding) and then forcing us to sign up to the Social Charter. The legalities of their being able to do this i.e. demanding we increase our costs whilst not funding us adequately to cover this, were obviously in question, but as a sector we have had 12 months of worry, concern, stress and in some cases this has caused closure of settings. For the LA to have such power over us is intolerable when we are private businesses. We have to use our own money to fight such bullish tactics, and are doing so successfully, whilst the council will sit behind their taxpayers funded £278k KPMG cost review to justify why they pay nearly double to some maintained settings and £1.35/hr more to schools than they do to the PVI. How is this a fair distribution of early years funding, surely all children deserve the same opportunity for the same money?

Whilst the removal of the PVI sector might be part of the Government’s long term agenda it will be many decades before schools could accommodate all children currently in the PVI sector (some 60% of 3 yr olds and over 90% of 2 year olds) and for many parents this is not where they would wish their child to go at such a young age. The PVI sector is therefore crucial to delivering the existing Government’s commitment to early years education. We are happy to step up to the mark. However, there is a danger that many more settings will close and others will withdraw from accepting funding as it becomes ever more costly to deliver, a situation that will not change unless a new system is introduced that is both fairly funded and linked to rises in line with the Living Wage.

As a private sector delivering government initiatives, we are also not treated with any equity to other national services such as schools. We get no tax breaks (we even get taxed on our nursery education funding as sales income!), no reductions on business rates (if you are running several settings as I am), we have to pay VAT in full and can’t claim it back and in all respects we are treated like every other business in the country. However, we are then told by Government that we cannot choose our own prices but have to accept the rates they give us via the LA and then it is frowned upon if we try to make a profit, despite the fact that without that we could not afford to pay our business mortgages and loans, or indeed re-invest in our buildings and our resources. Additionally, unlike any other business in the country we are then expected to provide our services for below cost because the funding is provided from government. We have no redress on this and despite the fact that LA’s are (in some cases) well-funded, these funds do not reach the front line and we are castigated constantly by the media about the high cost of our fees? It is not surprising that many nursery owners are thinking ‘why do I bother?’ If you wait for the answer you will hear – because of the children ! Whilst we are not looking to be seen as altruistic, the facts are that we put our hearts, souls and our own or borrowed money into these childcare settings for what is essentially very little reward. As an owner of three nurseries I earn just about half of what an entry primary head earns, and I have been doing this job for 17 years. My business still has a high value mortgage and retirement with all its supposed ‘future rewards’ is a long way off yet.

The Government has the power to make the system work but not until it respects what we do for the money we get, makes the system fairer for all children and makes changes across all areas of other aspects of childcare funding, including the childcare tax credits system. With £6.4b about to go into childcare support – there is possibly enough money to go around it is just not directed correctly and therefore does not end up where it is meant to be – spent on the child being cared for and educated – but rather in the pockets of claimants. But that is another issue for another day.

What does it cost to run a childcare business?

So much more than just providing qualified staff to deliver teaching and support learning. The childcare industry is unique in its business model. Because whilst our staff salaries start at minimum wage, our wage bill still remains around 65% of our overhead (sometimes as high as 77% when occupancy goes down each year). For those readers with a business background you will appreciate this is a difficult business model to try to make profitable. Add to this the fact that you can be full of children one month and then nearly empty the next month, when all the children go off to school (the ‘September Slump’) not something that any other sector has to cope with in quite the same way – losing sometimes 75% of your customers overnight. This then requires redundancy processes to be put in place to reduce overhead and maintain sustainability. And then there are costs of re-recruitment. All these things take additional time and resources. Our businesses are unpredictable and subject to these constant changes

But like other businesses, we have loans and re-investment requirements, which can only be serviced out of profits. No profit would mean no loan repayments and no money for maintaining a quality environment. Whilst in previous years many improvements have been funded through Government Capital Investment programmes, which is appreciated, this is no longer the case. Therefore this cost now needs to be reflected within the funding rates either by including an allowance for it rather than forcing us to inflate other hourly rates (and therefore making non-funded parents pay more) or by other Government initiatives e.g. by removing the tax burden for settings in having to treat funding as sales income.

It could be argued that running a childcare setting is actually more costly than any other business because of the amount of legislation we have to follow. We must not only comply with all Employment regulations, health & safety, environmental health but also have to ensure we comply with all the elements within the EYFS framework including Safeguarding (including a huge time commitment to Child Protection), Prevent Duty and so forth. The amount of information we need to know, learn and understand is huge and then we have to monitor everything in the setting as leadership and management is key to being good or outstanding. This cannot be achieved easily by one person and therefore like any organisation we need senior personnel, office administrators, accounts personnel, maintenance and IT support to work alongside the nursery managers and owners like myself. Quality childcare and quality education are not cheap.

You will receive many responses demonstrating the cost of childcare in the PVI sector. It’s not a difficult thing to work out, as business owners we constantly look at our costs and overheads. As you would expect it will be different for everyone and because we are all private businesses we have different costs. My own hourly ‘cost’ averages out at £4.60 per hour, which demonstrates how I have to use other areas of the business (Babies through to Out of School Care) to subsidise the funded areas, however my fee rates are also market driven and not only cost driven so I have to ensure I am competitive to other providers in the market e.g. childminders, pre-schools and other nurseries. You will receive much evidence from surveys so I do not feel it is necessary to include any further financial figures as my points above are what I feel need to be considered in the review. However, I am willing for any professional to come along and examine our business financial information and structure if further evidence is required.

Where does the money go?

In my role as PVI Representative on one LA’s Schools Forum I have come to understand some of how the funding system works. The inequity of this has prompted me to investigate further what the PVI sector are paid from their LA’s and the results are quite alarming. I can quite understand how the DfE consider that they are funding the sector adequately, because on the surface with the figures that are supplied this appears to be the case. However, when you look underneath the surface you find some inequities, this review has to be the time to remove these.

In order to raise awareness of this unfair system I started a petition to Ministers which can be viewed here. To this point I have 1007 signatures on this and many comments. I am enclosing the comments and signatures from the petition as part of my evidence of concerns relating to funding that providers and parents have made. E3 Comments and E4 signatures

Here are the key findings:

  • The Early Years DSG Guaranteed Units of Resource (E5) shows that some local authorities receive nearly 3 times more funding than others. There are many historical reasons for this but surely this is a situation that cannot be continued. It is making it a postcode lottery for each child as to how much funding they receive. Each child should be adequately funded equally prior to any local area cost adjustments being made. A National Funding Formula will achieve this.
  • Even where LA’s are funded at a high rate, little of this money sees the front line in the PVI sector. My attached funding comparative list (E6) shows what each LA receives (when reduced to an hourly rate) from the EY DSG Guaranteed Units of Resource and compares it to the rates paid to providers. (Whilst I cannot guarantee the full accuracy of this list, I have checked many rates against LA’s S251’s so accuracy is adequate for this purpose I feel). A minimum rate per child would remove this inequity.
  • The lowest funded LA’s are having to re-direct other budgets to fund their EY Provision. It is not right that the DfE does not fund these authorities adequately enough. A National Funding Formula will resolve this inequity.
  • Additionally the figures provided in the EY Benchmarking Tool do not reflect accurately the costs that are being paid to the various providers and are not even calculated in the same way by each local authority. E.g. In one authority their S251 shows 3 rates £6.30 nursery schools, £4.98 schools and £3.59 for the PVI. The figure on the benchmarking tool shows £5.35 which is an average of none of these. Another authority has 8 different rates but the benchmarking tool shows a rate that is at the lower end of the scale, so again not an average.

An interesting observation I made was that if you took all of the EYDSG Units of Resources and averaged them equally between all LA’s the figure comes out at £4.54 per hour. This is surprisingly close to the Counting the Cost, Ceeda report figure of £4.53 and also the figure that the DfE states they pay per hour (BBC News 24/2/15 ) which was £4.51. As I said earlier this explains how the DfE considers it is funding the programme effectively. However, the real picture is somewhat different as this evidence proves. As a sector if we were being paid any figures in excess of £4.50 for our 3 and 4 year olds, this would potentially be sufficient to maintain the status quo with the introduction of Living Wage, and with inflation only price increase to parents across the board, this supports our sustainability. However, it would not yet allow us to pay the rates that staff receive in schools and reward our front lines workers for the incredible job they do. This should also be factored into the review.

We need a National Fairer Funding Formula which is fair to all children, families, providers and the Government. We should not be in the hands of the LA’s ‘discretion’ as to what to pay us as it is obviously discriminatory in some areas and just too little in others.