Memorandum submitted by Federation of Small Businesses


The Federation of Small Businesses (FSB) welcomes the opportunity to respond to the Committee's inquiry.

The FSB is the UK's leading business organisation. It exists to protect and promote the interests of the self-employed and all those who run their own business. The FSB is non-party political, and with 215,000 members, it is also the largest organisation representing small and medium sized businesses in the UK.

Small businesses make up 99.3% of all businesses in the UK, and make a huge contribution to the UK economy. They contribute 51% of the GDP and employ 58% of the private sector workforce.

The FSB represents approximately 1,150 day nurseries across the UK and many are concerned by the lack of funding available to meet the cost of compulsory free provision.

The Government is currently running a consultation on legislation that would give parents the right to fifteen hours of free nursery care a week per child; an increase of 2.5 hours from the current weekly entitlement of 12.5 hours. Nurseries are refunded for the hours taken through this scheme at an hourly rate set by their Local Authority. However, as a result of a survey completed by nurseries, the FSB is concerned that the hourly rate is not high enough to cover the cost of providing childcare. As a result, the FSB is calling for the suspension of the current code of practice until more research can be carried out in to the funding formula that Local Authorities are using before the new legislation comes in to effect in September 2010.

Local Authorities are required to generate an 'Early Years Single Funding Formula' (EYSFF) for all Private, Voluntary and Independent (PVI) nurseries in their area, although supplements can be built in to the formula to account for quality or unavoidable cost differences. Central Government has instructed Local Authorities to complete a cost survey involving all maintained and PVI sectors then use the resulting information to create a Typical Cost Model (TCM) in order to generate an appropriate formula. However, the deadline for completing the survey and providing funding formulas was July 2009 and many Local Authorities were unable to complete a survey in the timeframe given and have therefore not based their funding formula on a thorough knowledge of the costs incurred by nurseries in their area.

A survey conducted by the FSB found that Nurseries charged an average hourly rate of 4.69 whilst the average hourly funding given for hours taken under the free entitlement was just 3.64. Government advice stated that the EYSFF should allow nurseries to make a profit as the ability to make a return on investment is vital to provide incentives for the operation of nurseries as well as providing capital for future investment to improve service provision.

Inadequate funding for the programme creates a system of incentives that could have a detrimental impact on the quality of nursery care. Local Authorities are instructed to allocate places under the free entitlement scheme to the nurseries that provide the highest quality care. If the EYSFF produces an insufficient hourly rate then nurseries will prefer to provide nursery care on the free-market rather than through the Early Years programme which could mean lowering the quality they provide so that they are obliged to provide fewer hours of care under the Early Years scheme. There is also the likelihood that the EYSFF will not be particularly reactive to increases in the quality of care. This means that the incentives to invest in new equipment or provide extra training for staff in order to increase the quality of care will be reduced as they will only derive benefits from doing so for the hours of care provided that they are able to charge parents for, leading to under-investment in the nursery sector.

The FSB feels that it is vital that Local Authorities conduct comprehensive surveys of the costs of providing nursery care and use this to inform the EYSFF - and until this is undertake the Code of Practice, which prevents many PVI providers from meeting costs for the 12.5 hours, should be suspended. The FSB also suggests that Local Authorities should look at the prices that nurseries charge for care outside of the Early Years programme and use them to help set the EYSFF as this will help to correct the incentive problem that an unresponsive formula would create.

From an FSB Member:

"The Maintained Nursery Schools and Classes are having their premises costs paid in full while an averaged payment ( apparently 0.53p per child hour) is being offered to the PVI Sector where actual premises cost vary enormously."


The FSB urges the Committee to advise the Government to suspend the 2006 Code of Practice on the provision of free nursery education places for three and four year olds to enable nurseries to charge at a level which enables them to cover costs until a workable funding formula can be applied across all local authorities.

The FSB position, based on legal advice, is that the government should conduct a post implementation impact assessment into the 2006 Code of Practice on the provision of free nursery education for three and four year old children before deciding whether the move from 12.5 hours to 15 hours is discussed.

A recent Barrister's opinion advised the FSB to push for a post-implementation impact assessment to fully address the negative impacts on Nursery providers. We are delighted that the DCSF has decided to undertake an RIA on the extension from 12.5 hours to 15 hours; however, many providers have told us that they will be out of business by 2010 which is why the FSB urges the Government to:


1) Hold a post implementation impact assessment on the current state of the nursery sector.


2) Suspend the current Code of Practice until a full assessment of the Early Years Single Funding Formula has been undertaken.



November 2009