Memorandum submitted by Anne West, Jonathan Roberts and Philip Noden, Education Research Group, LSE

1 This memorandum provides key points to emerge from a small-scale study of the funding of pre-school educational provision (West et al., 2010). We outline the differences in expenditure per pupil across different types of setting and between providers, and then examine, using case study data, the sources of funding for pre-school providers of different types.

Expenditure

2 Providers receive their funding for free early years education via the government's Dedicated Schools Grant. As shown in Table 1, there are differences in expenditure per pupil across different types of setting and between providers. Whilst the annual amount delegated for a child in a nursery schools was an average of Ł3,801, for a nursery class it was Ł1,798 and for a provider in the private, voluntary or independent setting Ł1,832. Nursery schools are known to be costly, although they also provide high quality provision (Sylva et al., 2004; see also West, 2006).

Table 1 Free entitlement to early years education England, 2008-09

Planned expenditure delegated to early years providers (Ł/pupil)	Average (mean)	Average (median)	Minimum	Maximum
Maintained nursery schools	3801	3543	1801	19726
Maintained nursery classes in primary schools	1798	1841	160	7265
PVI settings	1832	1711	649	6291

Rate of funding (Ł/hour)	Average (mean)	Average (median)	Minimum	Maximum
Maintained nursery schools	7	6	3	22
Maintained nursery classes in primary schools	4	4	2	11
PVI setting	4	3	1	9

Source: DCSF, 2009 LA Benchmarking Tables 2008-09

3 Planned expenditure in nursery classes and private, voluntary and independent (PVI) providers is similar, although the average amounts conceal wide variation between local authorities (LAs) and in most LAs the reported rate of funding per hour was higher for maintained nursery classes in primary schools than for PVI settings.

Sources of funding for pre-school providers

4 In depth interviews were carried out with key informants representing six different types of providers: a nursery school (and lead setting of a children's centre), an infant school with a nursery class; the managing director of a large national chain of day nurseries; the owner of a small private nursery school chain; a contracts manager from a social enterprise that operated in several LAs; and the local finance officer of a voluntary organisation that operated nationally.

Nursery school / children's centre

5 The local authority allocates funds for the nursery school provision and via a separate funding stream for day care for children in need (from 18 months of age). The main income streams comprise the DSG (43%) and social services (30%) along with several other smaller funding streams from the local authority, including DCSF and local authority grants related to particular initiatives (19%). The various funding streams are merged into one pot and spent as needed. The centre is expected to provide certain services in addition to early education and day care. Significant parts of the centre's income were uncertain. Although there were several funding streams for different initiatives from different parts of the council, including education initiatives, the interviewee noted that the school budget was the only one that could be relied upon. The nursery education entitlement was seen to be adequately funded by the DSG, but there was evidence of there being a cross-subsidy, with funds from elsewhere being used to enable extra provision for those who were not entitled but felt to be in need.

6 In terms of expenditure, 81% of funds were spent on staffing, 4% on curriculum and 4% on utilities (figures exclude spending on capital improvements). All staff were at least at NVQ level 2. There was a mix in terms of staff, with teachers for nursery education sessions, and other staff with NVQ level 3 qualifications.

Nursery class

7 Nursery classes are integral parts of infant/primary schools. For the infant school with a nursery class, around 75% of the funding was from the DSG and around 17% from DCSF initiatives/funds. The remainder came from a range of other sources. All revenue resources were reported to be merged in one pot by the school, with no separate budget for the nursery. There was also a separate capital funding stream. Staffing was driven by the School Development Plan, which requires a teacher plus assistant structure in every class, including the nursery.

8 There were two sources of financial uncertainty. The first was a fall in the school roll. The second was the limited reach of the government's minimum funding guarantee, which only applies to the DSG, not to the other funding streams which are essential to the budget.

9 In terms of revenue expenditure by the school, 77% was spent on staffing. The remainder was spent on a range of different items including learning resources, administration, maintenance of premises, utilities and rates. The school paid no rent and capital funding was via a separate stream. The staffing ratio was higher than required at 1:10. In each of the nursery classes there was one qualified teacher and one member of staff with an NVQ level 3 qualification.

Large private nursery chain

10 The main funding source was from parents' fees. The organisation also received funds from the government's Transformation Fund (now the Graduate Leader Fund), designed to raise the quality of the early years workforce.

11 There seemed to be lack of clarity with regard to sufficiency of the nursery education grant (NEG) (this is the term used for the money that comes via the LA from the DSG for free early years education). On the one hand, it was reported to supplement the 'overall occupancy quite nicely', but on the other it was less than the normal fees charged: 'the way that the NEG is distributed and divided means that we actually end up subsidising the government's ... free entitlement'. However, there had been unintended consequences in that the free funding had encouraged parents to try out nursery provision for free and then purchase more hours at full cost.

12 In most nurseries the NEG income was reported to cover the nurseries' costs, but in some parts of the country, where operating costs were much higher, there was reported to be a financial loss. The government's desire for increased flexibility in the provision of the NEG was felt to create challenges as the nursery could 'end up providing childcare to people with the NEG maybe in five hour blocks over three days and that's their full childcare required'. This could be a 'threat' to the provider as the normal fees are higher than those from the NEG.

13 In principle, all the nurseries in the chain offer the free NEG places without any requirement that the place should be combined with further paid-for provision. However, access to the free entitlement alone seems restricted and contingent on availability. When a nursery opens there is likely to be space, but once it starts to fill up it is in the interest of the provider for children to attend on a weekly basis as opposed to a more ad hoc basis. Thus, flexibility diminishes as the nursery fills up. Nevertheless, flexible solutions are sometimes found, such as combinations of NEG and other take-up so that in effect parents are sharing a full-time place. The interviewee implied there was little demand for the free sessions alone: 'the sort of parents we're attracting...very few people come just for the two and a half hour sessions'.

14 The interviewee felt that there was 'a fair degree of certainty' although particular challenges could arise as a result of the economic situation, which might reduce demand for childcare. Government policy was not felt to be driving the increased use of childcare - this was felt to be demand led.

15 In terms of expenditure, staffing outside the chain's head office accounted for 57% of turnover, overheads (rates, utilities, refurbishment etc.) counted for 11%, and consumables (food, toys) for 4%. Property costs were estimated to be 9%. Operating profit was around 10% (after the deduction of debt interest repayments on the chain's properties).

16 In terms of staffing, the interviewee reported that the nurseries aimed to exceed regulatory requirements to demonstrate the quality of the product. Staff employed were at NVQ3 level for managers and nursery nurses and NVQ2 for nursery assistants. Nursery assistants without qualifications, but in the process of training for NVQ2, may also be used.

Small private nursery school chain

17 This is a small nursery school chain operating in two LAs. Three funding streams were identified. Fees accounted for about 80% of income; NEG accounted for 10%; other income included the government's Transformation Fund and funds for children with special educational needs.

18 Government funding through the NEG was seen to be totally insufficient. The variation in the amount allocated by different LAs was also noted, with one providing considerably more than the other. Cheques for the NEG amount were reported to be returned on a termly basis to the fee-payer. Although claiming the NEG was seen to be administratively burdensome, it was reported that the provider would not opt-out unless they had to ' provide it free at the point of entry'. There was criticism of the concept of flexibility in relation to the NEG - the idea that parents can chose when to take the free provision. This was seen to be highly impractical.

19 In terms of expenditure, approximately 65% was on staffing. Equipment and capital refurbishment was 10%, rent 10% and the surplus was between 10% and 15% - some of this went towards capital refurbishment and future investment in the business. The owners take remuneration for their own work out of surplus rather than through salary.

20 The staffing ratio was more favourable than required by statute, the prime motive being good practice and achieving higher quality. Similarly qualification levels exceeded statutory expectations. All nurseries were already led by graduates, and the organisation was increasingly looking to employ graduates at lower levels.

Voluntary provider 1

21 Voluntary provider 1 is part of a large voluntary organisation. Funding streams for this organisation included parent fees (49%), local authority contract income and other government grants (40%) and other income such as charitable giving (8%). NEG funds amounted to only 3% of organisational income. Contract funding was seen to provide medium term stability. There was a children-in-need block contract which was particularly important, although contract variations had caused difficulties as the LA has reduced the number of required places. From these funds the organisation provided additional services, including training for the childcare workforce.

22 The NEG was reported to be refunded to parents through discounted fees. It was reported to come 'nowhere close to paying how much money it actually takes to keep that child in the setting...'. In common with the large private chain, the hours funded by the NEG were also seen to be insufficient, so that it was very difficult to provide the free entitlement on its own: 'it's incredibly rare that we can...for that short period of time in the day'. For a nursery to be sustainable, it must reach a certain level of occupancy, but if places are filled piecemeal, then this undermines occupancy. Thus, if a parent only uses the nursery in school term time, the place will be unfilled in the holidays. Again, if a parent takes 2.5 hours per day, this may potentially knock out a full-time place.

23 The organisation rarely takes on parents simply for the 12.5 hours per week in term time. In other words, it may (effectively) withdraw from the scheme if parents only want to use the scheme and no further childcare. Again, the central issue is nursery and organisational sustainability.

24 Expenditure on staffing was approximately 71%, property costs were 15% and consumables 9%; the remainder was for items such as recruitment and audit. In terms of staffing, statutory ratios were adhered to. Qualifications varied. Nursery managers required an NVQ3, although some had significantly higher qualifications. Some nursery assistants had no childcare qualifications, but were participating in the organisation's training programme.

Voluntary provider 2

25 The nursery has three prominent income streams: a large contract with the local authority, the NEG and parental fees. The Transformation Fund was also important. The nursery is part of a larger local organisation which receives approximately 41% of its income from the LA contract, 26% from the NEG, 21% from parental fee income and 9% from the Transformation Fund (the remainder came from other sources including donations). Thus, 76% of the funding came from government sources.

26 The NEG was not felt to be sufficient and without the local authority contract for the provision of childcare the organisation would close. The NEG hours are offered free to parents. This provision is subsidised by the local authority contract: in effect, the local authority is subsidising the inadequacy of its own NEG payments.

27 In terms of expenditure, across the local organisation to which the pre-school belongs, 75% was spent on staffing, 11% on property costs (rent, maintenance, utilities, cleaning), 4% on administration, 3% on resources (e.g., supplies, equipment), the remainder on other items (3%) and a small surplus (3%). The staffing ratio was in line with regulations but volunteer parents were used as part of the ratio if a staff member was out of the pre-school. The pre-school was led by a supervisor with a level 3 qualification.

Conclusions

28 Resource allocation between providers of different types varies: allocations to nursery schools are higher than those allocated to other providers. However, the overall allocation to PVI providers is not dissimilar to that for infant schools with nursery classes. Nonetheless, quality has been found to be higher in the latter than the former (Sylva et al., 2004), even though the ratios required are less favourable. One reason for this relates to the legislative requirement for staff in nursery schools and classes to be school teachers.

29 Qualification levels are far higher in nursery schools and primary schools: over 30% of all paid staff are qualified to at least level 6 (first degree) compared with 4% in providers providing full day care or sessional provision (Nicholson et al., 2008). Teachers are of course more expensive to employ than staff with lower levels of qualification: the average hourly pay in school settings of all paid early years staff was around Ł13.00; in private and voluntary provision it was around Ł7.00 (Nicholson et al., 2008). Staff qualifications thus vary markedly depending on the type of provider, which is undoubtedly related to the quality of provision.

30 The question then arises as to the overall adequacy of government funding to provide high quality, accessible and affordable early years education. Interviews with key informants suggest that the overall allocation of resources is not sufficient. It appears that across most types of provider, funds outside the free early years funding are used to subsidise early years provision. It is not possible to generalise across all providers in the country on the basis of our analysis, but the research does raise issues about the adequacy of the funding regime.

31 Private and voluntary sector providers appear to subsidise the government's early years funding with parental fees and/or from other funds. Whilst a single funding formula for early years is to be introduced in 2010 (DCSF, 2008) it is by no means clear that this will solve the problems highlighted since the key difficulty, except in the school settings, appears to be the unit of resource. PVI providers receive no capital funding and have outgoings that schools do not. Private and voluntary providers also pay their staff less and their staff are less highly qualified. On the other hand they also have to operate higher staff: child ratios than nursery classes (and indeed reception classes in primary schools), which means that they need more staff. Where private providers do seek to improve the quality of staff - as in the case of the small nursery chain in this study - fees may become prohibitive and exclusive.

32 This raises a number of issues. If universal high quality early years education is to be available it might be expected that there would be a policy goal for the qualification levels of staff to be similar and for the staff ratios to be similar. All providers are subject to the same regulatory framework regarding the educational elements of the EYFS. Although government policy is moving in the direction of a more highly qualified workforce, there is some way to go - and it is not clear how the policy aspiration for a graduate worker in every setting will be achieved without a commitment to sustained extra public funding.

33 It would however be a backward step if blurring the distinction between the childcare and educational functions of early years provision had the effect of reducing either the quantity or quality of provision in the best early years services. For example, it remains to be seen how single funding formulae for early years providers will affect funding levels for different providers. Similarly, requiring high quality providers to offer more flexible models for the free entitlement may also have an impact on the quality of service provided.

34 In conclusion, although progress has been made in terms of early years educational provision, policy militates against high quality, affordable and accessible provision for all children. Regulations differ, resource allocation differs, costs vary and fees charged vary. The highest quality provision is likely to remain that provided by certain maintained sector providers because of regulatory requirements for qualified teachers and indeed the pooling of resources at school level. Government policy is encouraging both a market and high quality provision, but high quality is likely to be related to highly qualified staff. Only when providers of all types are required to adhere to similar regulations and receive similarly high levels of funding is universal access to high quality provision a possibility. This will be dependent on increased public funding and a willingness of the tax payer to see the value of high quality early years education and care. This raises the notion of what provision should entail and whether a more holistic approach should be adopted. In Denmark, as elsewhere in continental Europe, there is a pedagogical discourse which sees learning, care and upbringing as indivisible activities; such a shift, along with the development of services, could, as in Denmark, change parents' views about upbringing and increase demand (Moss, 2006), so resulting in high quality provision being available to all children, including those most in need.

December 2009

References

Department for Children, Schools and Families (2008) Implementation of a single funding formula for early years: Interim Guidance, London: DCSF.

Department for Children, Schools and Families (2009) LA Benchmarking Tables 2008-09, London: DCSF.

Moss, P. (2006) Farewell to childcare? National Institute Economic Review, 195, 1, 70-83.

Nicholson, S., Jordan, E., Cooper, J. and Mason, J. (2008), Childcare and early years providers survey 2007, London: DCSF.

Sylva, K., Melhuish, E., Sammons, P., Siraj-Blatchford, I. and Taggart, B. (2004) The Effective Provision of Pre-school Education (EPPE) Project: Effective Pre-School Education, Final Report 1997-2004, London: DfES.

West, A. (2006) The pre-school education market in England from 1997: Quality, availability, affordability and equity, Oxford Review of Education, 32, 3, 283-301.

West, A., Roberts, J and Noden, P. (2010) Funding early years education and care: Can a mixed economy of providers deliver universal high quality provision? British Journal of Educational Studies (forthcoming).