Memorandum submitted by the National Day Nurseries Association



The Early Years Single Funding Formula (EYSFF), if rolled out properly, has the potential to improve the overall sustainability of delivery of the free early years care and learning entitlement, a welcome step as the initiative brings real benefits to children and families.


The EYSFF initiative has been taken forward over the last two years in response to evidence that many early years providers, mainly in the private and voluntary sectors, were being underfunded on delivering free entitlement hours as a result of existing arrangements on funding allocation.


DCSF guidance on EYSFF implementation encourages local authorities to factor into the criteria, on which their local formula is based, special considerations to safeguard quality and places for children from disadvantaged areas. Other criteria should be fair and consistent to all local settings.


Such a funding model is central to a system that is based on a diversity of provision across the maintained, private and voluntary sectors, which prioritises parent choice over the type of early years care and learning they want their child to have, and prizes continuity of care.


Sustainable funding rates for all free entitlement providers are also important to achieving other goals the government has set the early years sector. These include longer, more flexible hours for the free entitlement, extending it to two-year-olds, and workforce development.


Although some local authorities are finding development of EYSFF a challenge, there is also evidence that others are making good progress and revising funding rates to a more sustainable level. DCSF guidance and government regional office children and learners teams are there to support councils.


For these reasons, NDNA believes it is important that all local authorities implement EYSFF by the April 2010 target date. The impact, however, must be monitored. If EYSFF does not for any reason produce a sustainable funding model, DCSF must consider further measures.


1. About National Day Nurseries Association


1.1 National Day Nurseries Association (NDNA) is the national charity and membership association promoting quality care and early learning for children in nurseries across the UK.


1.2 NDNA's vision is a society where all children and families receive the best quality care and early learning that enables them to reach their full potential. Our mission is to support the delivery of quality care and early learning for children across the UK.


1.3 NDNA supports its members to develop their quality of care and to run a healthy sustainable business by providing members with information, training and support.


1.4 This written submission follows on from the oral evidence NDNA gave at the select committee's initial hearing on EYSFF on 29 October 2009, which preceded the call for written contributions.


1.5 We concentrate on the background to EYSFF development, its anticipated impact and the importance of working hard to overcome any implementation difficulties in order to ensure that the formula goes live in all local authorities in April 2010.


2. Context and background


2.1 The government believes that overall funding for the free early years care and learning entitlement - totalling around 4bn annually - is sufficient to deliver the scheme to every three and four-year-old, free at the point of delivery for 15 hours a week, 38 weeks a year.


2.2 However, serious problems with the free entitlement began to emerge in 2005 after the government published a new code of practice advising local authorities and providers on how to implement the programme.


2.3 The 2006 code of practice tightened rules on the free entitlement, explicitly stating that early years providers could under no circumstances ask a parent to 'top up' the money received from the local authority for their child's free entitlement hours, even if the allocation failed to cover the provider's delivery costs for that provision.


2.4 In a number of localities, private and voluntary childcare providers reported that the funding they received from the local authority did not cover what it cost to deliver integrated early years care and learning in the free entitlement hours. For many this remains the situation. Private and voluntary full daycare settings can charge parents for additional hours outside free entitlement where these extra hours are taken up, but they are not able to recover losses on funded hours directly and cannot raise fees to a level unaffordable for parents. Also, the free entitlement is determining income for an increasing number of hours as the hours of provision offered to families are extended by government.


2.5 On the basis of evidence that underfunding locally would have on the medium- to long-term sustainability of early years provision, and in the absence of extra funding from central government, the then Department for Education and Skills pledged to review how free entitlement funding was apportioned and distributed among early years providers at a local level.


2.6 The review formed an important part of the government's wider appraisal of the Dedicated Schools Grant (DSG) during 2008 and 2009. The process resulted in a package of reforms designed to make allocation of free entitlement funding fairer, based on consistent criteria applied across the settings, a system which would align funding rates locally much more closely with providers' delivery costs by using a comprehensive and sophisticated formula.


2.7 As such, all local authorities have conducted a providers' costs analysis as the starting point to develop their EYSFF. All councils can also draw on the experience, knowledge and good practice established in six pilot authorities, who the Department for Children, Schools and Families (DCSF) asked to take a lead on EYSFF implementation. NDNA understands that they report relatively few problems.


2.8 The DSG reform has sparked several other reforms. These include having an early years representative on Schools Forums and funding based principally on headcount rather than places. These innovations complement EYSFF by giving all early years providers a (albeit modest) voice on the local decision-making body for funding on early years care and learning, support transparency and should lead to less money being spent on unoccupied places.


2.9 Ensuring that all early years providers can deliver the free entitlement sustainably is central to maintain parent choice over who and where they want their child to receive early learning. It is also fundamental to several other headline government policies in early years. These include introducing more 'flexible' provision, extending the free entitlement to two-year-olds and consolidating and continually developing the quality of early years provision. DCSF guidance on EYSFF allows local authorities to give special consideration when devising their formula to reward quality and protect places in deprived areas or for disadvantaged children.


3. Anticipated impact of EYSFF


3.1 Private and voluntary nurseries are important delivery partners for local authorities in securing sufficient early years provision locally, including the free entitlement. They play a particularly important role in delivering the free entitlement to three-year-olds and in developing more flexible provision attuned to families' particular needs. 53 per cent of three-year-olds and 17 per cent of four-year-olds (around 420,000 children) take the free entitlement in private and voluntary settings, compared with approximately 40,000 maintained nursery classes.


3.2 As such, in England, private and voluntary settings form by far the largest part of the nursery sector: approximately 13,800 compared with 450 maintained nursery schools. (There are also 3,000 children's centres, a proportion offering daycare run by local authorities). Overall 65 per cent of full daycare providers are private, 22 per cent voluntary, 5 per cent local authority and 6 per cent school-based (DCSF Childcare and Early Years Providers' Survey 2008). With this range and the number of children in their care, private and voluntary settings need sustainable free entitlement funding.


3.3 The DCSF Childcare and Early Years Providers' Survey calculates average fees per child in private settings at 3.50 an hour. Analysts Laing and Buisson suggest average hourly free entitlement funding is 3.41 per child. But even a small differential can lead to significant loss on a group of children over a year and settings in many areas say they receive much less than this amount, leaving an unrecoverable funding gap. Only 34 per cent of full daycare providers recorded a profit or surplus in 2008, while 33 per cent are just breaking even.


3.4 Sustainability was a big issue for private and voluntary nurseries even before the recession. The economic downturn has intensified pressure on a good number. Underfunding on the free entitlement is not the only factor here, but for many it is an important aspect of the difficulties they experience. Particularly acute underfunding tends to occur in and around the South East.


3.5 As such, EYSFF is an important development for the majority of early years providers across the country. Previous free entitlement funding arrangements failed to take account of various delivery costs specific to private and voluntary daycare settings. These include higher business rates and property costs. Funding on headcount and places was inconsistent.


3.6 EYSFF aims to factor in the various costs that settings in different sectors incur in delivering the free entitlement. Common criteria have the potential to create a broadly level playing field across the various types and sectors of early years provision, leading to the overall pot of funding being divided up in a way more closely aligned with each provider's delivery costs.


3.7 Sustainable free entitlement funding is also at the heart of progressing the early years workforce development agenda. It supports settings to establish a firm financial footing that puts them in a position to meet ambitious targets for graduate leadership and level 3 training. Evidence shows both are attributes of quality and can lead to positive outcomes for young children.


3.8 Indeed, a new code of practice on the free entitlement, due to be published by DCSF in early 2010 and currently under consultation, will explicitly define the free entitlement as a lever in early years quality development. This will encourage local authorities to use the free entitlement specifically to incentivise and reward a setting's quality improvement.


3.9 Moreover, the decision by government to introduce longer, more flexible hours of free entitlement - growing the scheme from 12.5 to 15 hours a week, extending it progressively to two-year-olds and giving parents greater choice over the hours their child takes the free entitlement - makes it imperative that funding rates correspond with delivery costs, as an increasingly greater share of provision is being determined by the free entitlement. DCSF has made extra funding available for these objectives; a formula using consistent criteria should help private and voluntary settings secure funding to deliver the free entitlement sustainably.


4. EYSFF and quality


4.1 NDNA supports continuous quality improvement in nurseries. We want to see quality develop for children and families much further across the early years sector, not concentrated in relatively few settings. Despite the much good quality in the private and voluntary sector already, loss-making on the free entitlement is one of the barriers to further and wider quality improvement, impacting on the availability of funding for investment, training and salaries.

4.2 An equalisation of funding between the sectors brought on by EYSFF does not mean that high quality needs to be sacrificed. Maintained settings are known to generally have high quality; but quality is not exclusive to them. Of 13,800 private and voluntary full daycare providers, 3 per cent are outstanding (414) and 61 per cent are good (8,418). That is nearly 9,000 settings deemed of good or better quality by Ofsted. Many will have achieved this with underfunding on the free entitlement.


4.3 There is much still to do in growing the early years sector's quality, but the sustainable free entitlement funding rate for private and voluntary providers will support investment in quality, offering the potential to turn satisfactory settings into good ones and good nurseries into more outstanding ones. As childcarers' salaries account for up to 80% of nurseries' fee income, a more sustainable free entitlement funding rate may also help alleviate constraints on pay and reward among the early years workforce.


4.4 Longer term ambitions for workforce development means salaries in the PVI sectors must not continue to be capped by under-funding of the free entitlement. To achieve and sustain the Government's vision for the workforce, funding that covers the cost of quality and in particular the model of a well-rewarded graduate lead and Level 3 qualified workforce, must reach the front-line in private and voluntary settings.


4.5 EYSFF guidance permits local authorities to take special measures to protect quality and finance places in deprived areas. If followed by councils, this should leave some spare capacity within the system for special circumstances. It should also be noted that private and voluntary settings play a full part in delivering in deprived areas, with 29 per cent of private and voluntary nurseries located in the 30 per cent most deprived areas, many experiencing a funding gap on the free entitlement.


4.6 Guidance has been circulated over the last 12 months to help councils and providers prepare for EYSFF implementation. NDNA's good practice guide with the Local Government Association, published widely in autumn 2008, also offered advice on developing EYSFF. EYSFF pilot projects provide a resource of good practice too - what to adopt and what to avoid - which other local authorities can draw from, while children and learners teams in government regional offices are also at hand to facilitate development and implementation of local formulae.


5. Implementing and monitoring EYSFF


5.1 Adapting to EYSFF will be challenging for local authorities and providers. But guidance and support is available to assist them and the benefits in terms of sustainability for many providers could be significant. Extensions and innovations to the free entitlement make a transparent, criteria-based distribution method for early years funding especially important. Otherwise the strain on providers' sustainability may become too great, creating a dangerous and costly to replace gap in provision.


5.2 Local authorities are adopting a range of approaches to the EYSFF. Some are more advanced than others in their preparations. Leading local authorities have consulted widely and are in regular communication with all local providers. Models vary from locality to locality in their sophistication and complexity. Providers in some areas already know their new funding rates; others do not. Some nurseries tell us they are seeing real change towards sustainable funding; others are less confident and some remain very concerned that real change to support their sustainability will not happen. Given the recession, and the history of underfunding, no private or voluntary provider will want to see its funding rate reduced. It is not unusual, however, for providers not to know their funding rate at this time of year, as consultation with Schools Forums may not conclude until December. A picture of implementation is still emerging, although providers will need to know their circumstances by February.


5.3 In some areas, EYSFF is likely to be an evolutionary process, although NDNA would want to see local authorities and providers learn lessons quickly and draw from the good work established in the pilot areas. But to postpone EYSFF implementation beyond April 2010, as some are calling for, would waste that significant effort and investment to date, as well as risk further instability among key private and voluntary delivery partners at a time when they are already coping with the adverse consequences of recession and challenge of developing and rewarding their workforce. Better aligning local authority funding with providers' fees would give a welcome stimulus to nursery sustainability. At the very least, all providers will be looking for evidence of greater transparency in early years funding and a level playing field in apportioning that funding.


5.4 Central government, local authorities and key stakeholders have invested considerable time over the last two years to develop reforms to the DSG in relation to free entitlement funding. There has been transparency, guidance and communication about what the EYSFF will entail. All stakeholders have long known that without central government increasing the size of the overall free entitlement funding allocation nationally, the new criteria would equalise how funding is apportioned between the sectors locally. DCSF must, however, ensure that free entitlement funding is not spread too thinly to be sustainable for any type of operator.


5.5 However, if EYSFF fails to produce the answer to sustainable funding for frontline delivery of the free entitlement, particularly given its forthcoming extensions and new flexibilities, DCSF will need to look at additional measures. This will need to include a post-impact assessment of the scheme's impact on early years providers since its inception, a review of whether the overall funding pot really is sufficient, and an analysis of what proportion of free entitlement funding is getting through to frontline early years providers.


5.6 This in turn will require consistent monitoring of EYSFF's implementation and impact. Ministers would also need to consider additional funding - admittedly difficult at a time of fiscal pressure and spending constraint - or separately identifying free entitlement funding within the education and schools budget to ensure it remains protected for its intended purpose on investing in children's early years.


December 2009