Over the next six months nursery managers will learn from their local authorities what they can expect to be paid under the new Early Years Single Funding Formula for providing the free entitlement to nursery education from April 2010.
The hope is that councils will be able to devise formulae which will be fairer and easier to comprehend than the nursery education grant, which left so many private, voluntary and independent (PVI) sector providers out of pocket.
Yet the omens are not all good. Guidance issued by the Government last month, drawn from the experience of 11 pilot authorities, recognises PVI managers' anxieties about affordability and whether the rates paid will be set high enough to maintain the sustainability of their settings.
According to some providers operating in these pilot areas, there are concerns about whether the global allocation from the Department for Children, School and Families in the first instance is enough to create equality between the maintained and PVI sectors.
'It has not been properly costed by the Government,' says Carol Jenkins, managing director of nursery group Places for Children. 'The Government has good ideas but they do not translate into sustainable business.
'We have been cajoled into taking part and, if we don't, questions are asked. It is not that we don't want to provide this support, but there seems to be a lack of understanding that it is not sustainable for the private sector in the long term. If you use the term "private sector", everybody thinks of huge profits, and that is simply not the case.
'If the funding continues as it is, then the businesses are not going to be sustainable in the long term. Hopefully with a change of Government we might have the opportunity to address this with new ministers.'
Understanding costs
Neil Leitch, director of communications at the Pre-school Learning Alliance, says, 'The pilots we have seen have largely only implemented the extension to the free entitlement at this stage, and not implemented a single funding formula as yet.
'However, we have seen some of the proposed formulae of local authorities up and down the country and we are very concerned that they may fail to reach the stated aim of achieving a level playing field across PVI and maintained sectors.'
There are issues about how the monies are divided out, says Paul Brosnan, director of Casterbridge Care and Education. 'A group of the large providers got together and commissioned an independent report. We found out what happens to this £3.2bn funding the Government talks about. About £1bn is grabbed by local authorities in administrative charges for the distribution of the grant. The funding is not ring-fenced, so it often gets put into the schools budget.
'The nursery entitlement can't be delivered free unless the level of funding is doubled,' says Mr Brosnan. 'Government, both central and local, must accept that in the early years sector the costs of every single setting are different from one setting to the next.
'If you look at maintained education you can work out what teaching costs are from the scales; you know what the maintenance budget is and you can say this is what this costs, but in the early years sector there are so many different factors.'
Mr Brosnan believes this is something that local authorities do not understand. 'We can sit down and say staff costs are this but then there are the indirect costs such as servicing the interest on a loan, or paying a mortgage or leasehold costs or tax, if it is profitable concern,' he says.
'Then there are business rates. So our costs are double that of what local authorities consider their costs to be, and yet they will pay the maintained sector more.'
Nursery schools too expensive?
A major difficulty that local authorities face in trying to create a fair formula is the sheer cost of maintained nursery schools. While the National Campaign for Real Nursery Education is mounting a campaign to protect nursery schools as a vital model of good practice, some providers complain the balance is tipped unfairly in favour of nursery schools.
'The biggest problem is the funding for the nursery schools,' says Jo Mullins, proprietor of Kinderland Day Nursery in South Croydon. 'The schools forum is unanimous that they should stay. They have predominately become children's centres locally. Where is the equity in all this money being taken out of the pot to fund the nursery schools and yet just a very few children attend them? Why should they receive a level of service that is so much higher?'
In the past, the PVI sector has coped with the funding shortfall by charging top-up fees, which is not allowed any more, and by encouraging parents to take more hours.
Claire Schofield, director of membership, policy and communications at the National Day Nurseries Association (NDNA), says, 'The recent report on the effectiveness of the pilots for free childcare for two-year-olds illustrated that the places were welcomed by families, and the targeted approach helped disadvantaged children to benefit.
'However, the report did illustrate that in most cases families did not purchase additional hours outside of their entitlement, which is a concern for the future.
'Many providers have delivered the offer on an enhanced rate of funding, and NDNA does question how delivering this will be sustainable if settings do not have the opportunity to recoup losses from hours taken elsewhere.'
Is the quality incentive helpful?
The agenda driving the extension of the free entitlement to nursery care and education has been rewritten over the years. Initially the focus was on the children and trying to give them a good start to improve their life chances. Now the focus has broadened to include disadvantaged families and provide parents with the opportunity to undergo training and get work.
'We understand that some authorities have proposals to implement a whole range of "supplements" - in some cases up to eight,' says Mr Leitch. 'We are concerned that the basic need to understand what childcare provision actually costs is identified before introducing this level of complexity. There is a need to get the basics right in the first instance.'
John Thorn, head of early years and childcare services in Nottinghamshire, believes it is complicated to set a single funding formula that is fair and equitable, 'partly because not everyone agrees with what those terms mean'.
'People are trying to throw too many things on to the menu,' he says. 'Let's make it fair, let's use it to create flexibility, let's use it to bump up quality.'
Mr Brosnan is of the opinion that the single funding formula won't be fair to any individual provider or operator. 'Many local authorities are going to link it to the levels of qualifications of the staff,' he says.
'If there is a failing school, it receives substantial support to try to improve because nobody wants to see a failing school, but failing settings will be penalised and lose funding that could pay for the training to enhance staff knowledge.
'Local authorities are talking about undertaking their own assessments into how good or bad a provision is. Settings will be rewarded accordingly, so if you get graded well you will get a larger sum of money than somebody rated poorly. It is very shambolic.'
John Thorn outlines that funding will be per capita rather than block. 'So funding is per child and not per place,' he says.
'At the moment, we do not fund the maintained sector on the basis of quality. If anything, the poorer-quality places will have more resources put into them to drive up the quality.
'It is rather naive to think the market will always work and that we can say "this setting is not so good, so we are not going to give it so much money and it will improve". It is a punitive kind of response rather than a sensible, pedagogical response. You cannot separate this from the Ofsted inspection regime and we don't always agree with it on the ground.'
Mr Thorn feels that the idea of withdrawing or reducing money to try to impact on quality is a very flawed concept.
'A flexibility supplement will be described by those authorities implementing it as "enhanced funding for those who are able to offer more flexibility", but the other side of the coin is that it penalises those who cannot be flexible, and some cannot be by the nature of their premises. One example is settings operating in church halls.'
Few would disagree that the concept of free entitlement is extremely positive. However, as Kinderland's Jo Mullins points out, 'It is a really good philosophy but it has just not been thought through.'
CASE STUDY: HERTFORDSHIRE
In Hertfordshire, early years provision is spread fairly evenly across the maintained and PVI sectors. Currently it has a mix of 475 PVI and 275 maintained settings - including 15 nursery schools - offering the free entitlement.
John Blake, strategy manager for early years, says PVI settings have mostly responded positively to the implementation of the new funding method.
'The way the funding had evolved meant that PVI settings claimed for the exact number of children they had each term, which made it difficult for them to plan in the medium or long term,' he says. 'Where occupancies fell short, they had to pay the money back. Also they were paid at a flat rate per hour, regardless of their individual situation. Meanwhile, maintained settings were benefiting from a more complex and predictable funding system which gave them a greater ability to plan ahead.
'We are fortunate in Hertfordshire that the schools forum and county councillors agreed to put an extra £3m into early years. Most of the maintained settings and all PVI settings are receiving more, if they have the same number of children.'
One problem Mr Blake pinpoints is where PVI occupancies have fluctuated from year to year. 'Settings are funded on the basis of the previous year's numbers, in order to give them a predictable budget for the year. However, where numbers have unaccountably gone up those settings have to wait a year for the funding to catch up.
'Over time, this should even out but it can cause difficulties in the first year, so we have offered an advance on next year's budget where there are particular difficulties. New settings are funded on actual numbers for up to three years, as we recognise that the previous year's numbers would be unrealistic for them.'
A full evaluation will allow the authority to identify further challenges but John Blake is pleased with the way the funding formula has progressed so far. 'Most PVI settings have responded positively because the sector is receiving substantially more investment and most maintained settings are also gaining,' he says.
CASE STUDY: ROCHDALE
In Rochdale, there are 33 pre-schools, 44 private day nurseries, 40 maintained nursery classes, 11 eligible childminders, four nursery schools and one independent provider.
'They have all been delivering an extended 15-hour offer since 2007,' says Bob Adams, childcare development manager of Sure Start, Rochdale. 'We were asked to become a Single Formula Funding pathfinding authority in 2008.
'We established an all-sector steering group to oversee formula development and provided regular updates to the Schools Forum and the many borough-wide sector-specific associations and forums.
'We had already moved to sector-specific "base rates" as opposed to flat PVI rates, as part of the flexible entitlement, so continued this into single formula development. Base rates for the sectors: childminders, playgroups, day nurseries, nursery classes, nursery schools and independent schools were derived from cost analyses. There are supplements for training, quality and disadvantage.
'The training supplement is 3p per hour for each one of four elements of training completed: observation and assessment, letters and sounds, the four themes of EYFS and outdoor play.'
A £1,000 lump-sum quality supplement is dependent on completion of High Five, Rochdale's own quality-assurance award, and submission of its own Rochdale Early Years Foundation Stage Profile.
'The disadvantage supplement, limited to postcodes within the borough's top 30 super output areas, is 3p per hour on a setting's postcode and 15p per hour on the child's postcode.
'Flexibility in offering the free entitlement is recognised with payments on four bands: up to 15 per cent of base rate for eight-plus hours.
'Implementation began in April. Despite concerns from providers regarding the shift from place-led funding to participation-led funding, no provider is suffering unmanageable reductions in projected budgets, while many have seen an increase in funding.
'A concern is that flexibility has actually increased take-up. If this trend continues we may have to revise either the base rates or supplements, as additional funding is unlikely to be forthcoming. We monitor take-up on a termly basis and project budgetary impact to manage this potential.'
CASE STUDY: GREENWICH
In Greenwich, the provision for free entitlement for three- and four-year-olds is spread across 54 primary and four nursery schools, 63 private and voluntary pre-schools and nurseries, and two childminders.
'The pilot was developed through collaboration between council finance and early years officers working with a sub-group of the Schools Forum, including representatives from all sectors,' says Greenwich head of early years, Julia Phillips. 'It continues to monitor implementation.
'We prioritised additional funding to address deprivation with an hourly supplement for children living in the 15 per cent most deprived areas and used the opportunity to revise criteria and arrangements for funding additional hours beyond the 15 hours' free entitlement.
'Additional hours are targeted to support our most vulnerable children and to promote training and employment in areas of higher deprivation. These will become available across all sectors,' says Ms Phillips.
'Funding is no longer place-led but based on take-up, so there has been more change for schools than PVIs. However, there is a two-year transition period where any negative impact is minimised to avoid creating instability. This allows us time to promote take-up of free entitlement, assess any changes in demand as well as implement any revisions in the formula.
'We included a quality supplement and are working on how best to embed this within our quality-improvement programme. A flexibility supplement will be addressed as part of the review from September.
'The pilot has been a positive experience, which we want to build on. We are considering how to include childminders who have only recently been offered the free entitlement.
'Our review will include assessing the impact of the changes, responding to feedback and the DCSF guidance, looking at the supplements and considering options to simplify our criteria and process for allocating additional hours.'