Falling occupancy levels, fee rises outstripping inflation by 22 per cent in the past five years, and the ever-growing threat from state-subsidised provision - the private sector has never faced such a stark challenge.
With 25 per cent of private-sector capacity unused, providers are alarmed at Government plans to forge ahead with plans for hundreds of children's centres, many of which will create new and - in many cases, providers feel - unnecessary childcare places, each costing an estimated 15,000.
Amid this gathering commercial gloom, private providers and local authorities are watching with interest - and a degree of hopeful anticipation - the evolution of the London Childcare Affordability Programme (CAP).
The London Development Agency (LDA) has teamed up with the Sure Start Unit to give supply-side funding to providers to subsidise the cost of childcare, fill unused places and 'square the circle', as children's minister Beverley Hughes describes it, between affordability and quality.
The latest doom-laden report has come from the Confederation of British Industry (CBI). Children First: the power of choice warns that heavily subsidised state provision could make it 'uneconomic for the private and voluntary sectors - currently the chief providers of childcare - to stay in the market, leading to a net loss of places and actually reducing parent choice'. The CBI notes that between 1999 and 2003, 625,000 new childcare places were created in England, but over the same period, 301,000 places were lost.
Poor targeting of resources to support childcare is borne out by the findings of the Daycare Trust's recent fifth annual childcare survey. It shows that in spite of an apparent childcare glut, two-thirds of the 150 Children's Information Services surveyed said that parents have reported a lack of affordable, quality childcare. This shortage particularly affects parents on low incomes and those who want to study or undergo training.
Subsidised places
The three-year 33m CAP aims to provide 10,000 subsidised places in the capital. According to the Daycare Trust survey, an average nursery place in inner London is now 197 a week, with some nurseries charging as much as 338.
Under the CAP, providers can offer a maximum of 50 per cent of their registered places to parents who qualify for the scheme, but nurseries must guarantee to charge them no more than 175 a week. In return, providers receive a subsidy of up to 30 per place to help meet the difference between the 175 and the actual cost of a place (see box).
Nurseries charging less than 175 a week - the threshold for claiming tax credits towards childcare costs - do not qualify to participate in the scheme.
Parents are currently able to claim 70 per cent of the 175 through the childcare element of the working tax credit, but this will rise to 80 per cent in April. To be eligible for the CAP support, parents must be receiving the higher level of child tax credits, more than 547.50 a year.
Under the first phase of the CAP, which was launched in November last year, 3,255 subsidised places have been created in 26 London boroughs. Brent, with 526 places, has the most, followed by Lambeth with 380, Hackney with 261 and Tower Hamlets with 249. Kensington with just eight places and Camden and Newham each with 21 have the lowest number. Boroughs not included in this first phase are Barnet, Croydon, Haringey, Havering, Merton and Sutton.
Exceeding expectations
Denise Burke, senior childcare manager at the LDA, says the outcome of the first round had 'far exceeded expectations', adding, 'I knew it was going to be successful but I was amazed that we had 26 boroughs and 221 providers in the first round offering more than 3,000 places.
'There are two reasons for the pilot in London. Childcare costs are around 25 per cent more than in some other areas of the country, and we also have a lot of spare capacity in nurseries.'
A second strand of the first phase includes support for nurseries of up to 68 a week if they offer more flexible hours of care.
She says boroughs not participating in the first phase have indicated that they would take part in another initiative from April, which will involve innovative pilot schemes aimed at helping parents of children with special educational needs and disabilities, or those undertaking training while in transition to work.
Andrea Crosland, director of the Seedlings Day Nursery in Lewisham, south-east London, says that seven of her parents are involved in the CAP scheme and each receives a subsidy of 13 a week as a place there costs 188 a week.
She says, 'It doesn't help us directly as a nursery and there is some administration involved, but it does help the parents and we have quite a few single and young parents and some are engaged in full-time study. If this programme is sustained over a long period then it could be a real help.
'Unfortunately we have had cases where parents have lost their job and have had to take their children out of the nursery and then that stops them looking for new work.'
Greenwich council has 15 nursery providers and 153 subsidised places under the CAP and hopes that more will take part in the second phase.
A spokesman says, 'It is early days yet but we are optimistic that this programme is going to make a difference to low-income families. Although we don't have a high number of providers in the borough charging above the Pounds 175 tax credit threshold, the cost of premises and salaries in London means that it is more difficult for nurseries to keep their fees low and remain sustainable while delivering good-quality provision, and it is not always feasible for them to be able to offer flexible arrangements for part-time places.'
Winners and losers
Russell Ford, chief executive of the Asquith Court chain which has nurseries in many London boroughs, says the CAP scheme is 'the most sensible proposal we currently have on the table to improve affordability'.
He adds, 'We are extremely supportive of any initiative that seeks to use unused capacity, rather than create even more capacity via additional children's centres or other schemes.'
But he believes that the 175 ceiling should be lowered - a demand reiterated by National Day Nurseries Association (NDNA) chief executive Purnima Tanuku.
'We support the concept of the Childcare Affordability Programme, but we would like to see it extended to all boroughs in London. Some of the poorer ones don't qualify for it,' she says.
And that appears to be the rub. Janet Hicks, head of early years and childcare in Newham, says that only one of its nurseries - sited in a relatively affluent area in Docklands - is involved in the scheme. Other nurseries in poorer parts of the borough - one of the most deprived in the country - charge less than the 175 threshold and so do not qualify to take part in the CAP scheme.
Ms Hicks acknowledges that the figure was set at 175, and not lower, because the argument for action on affordability in the capital was based on the fact that its childcare prices are generally higher than in other parts of the country.
But she says that parents struggling in poorer boroughs such as Newham to meet the gap between what they receive in tax credits and what they have to pay for childcare are the ones who will lose out because they are excluded from the CAP scheme.
She says the problem becomes accentuated in poor areas of the capital where there may be more large families, as the child tax credit system fails to meet their aspirations for childcare.
A spokesman for Haringey council confirms that it is not participating in the first phase of CAP as all but two of its nurseries charge less than the Pounds 175 threshold. Camden council, which spearheaded a campaign two years ago for increased childcare tax credits to reflect the higher costs in London, surprisingly has only 21 subsidised places under the scheme.
A spokesman says the authority had not identified clearly why providers were reluctant to get involved, but suggested they may not be keen on additional administrative work.
The LDA, which has provided two-thirds of the CAP funding, is responsible for the quarterly monitoring of the programme while Sure Start is funding its evaluation. There will be three interim reports, the first in August, followed by a final assessment of its effectiveness.
Gathering momentum
Denise Burke hails the scheme as ensuring 'an exciting mix of demand and supply-side funding' and hopes that the initial findings can be fed into the 2007 comprehensive spending review. 'I am hopeful that we will see that supply-side funding is the way forward and we might see a shift in the way childcare funding is done in the future,' she adds.
Norma Hardy, early years and childcare manager in Sunderland, says her authority had examined ways of helping parents with the affordability of childcare, but adds that the DfES was not keen on using sustainability funding in this way. She insists that parents should be protected from the stigmatising effects of means-testing and that a 'universalist approach' to childcare should be upheld.
The London scheme has certainly given a huge fillip to the campaigning of organisations, such as the Daycare Trust and the NDNA, which favour a shift towards supply-side funding direct to providers.
However, while arguing that this form of funding would reduce the administrative burden on providers, aid sustainability and help stamp out fraud, Purnima Tanuku cautions that the infrastructure and adequate capital resources must be in place if it is to be rolled out across the country.
Daniela Reale, policy and campaigns manager at the Daycare Trust, says that a move away from the current over-reliance on demand-side funding through tax credits 'would allow providers to have more of a sense of where the cash is flowing'.
The CAP 'does have the limitation of having to work within the tax credit system', but she argues that the way the nursery education grant has operated, and the level of uptake from parents, indicates that it is a sound model for greater supply-side funding.
Ms Reale cites New Zealand's ten-year strategy which involves grants to nurseries as an incentive to invest in training their workforce. She welcomes the UK Government's decision to use the Transformation Fund - 250m over two years - to encourage settings to employ graduates and to improve the skills and qualifications of the non-graduate workforce.
The clamour for more supply-side funding is clearly gathering momentum, especially in the face of growing discontent within the private sector.
Beverley Hughes hinted at a recent conference organised by the charity 4Children that the Government might consider extending elsewhere the type of supply-side funding used in the London pilots in an effort to square that circle between quality and affordability. The London pilots are aimed at the creation of a modest 10,000 subsidised places but the entire future of childcare funding could hinge on whether the CAP fits.
CASE STUDY: ZOOM DAY NURSERY, ELTHAM
Zoom day nursery in Eltham, south-east London, opened only last year and is steadily building its occupancy levels, but is already taking advantage of the CAP to help to keep childcare costs down. And it is ideally placed to do so.
It charges 204 a week per place and can, therefore, get a 29 top-up to reduce the cost to parents who decide to take up one of the 15 subsidised places.
Manager Justine O'Hare, who has just received the funding, has written to parents giving them details of the scheme and is already receiving positive feedback. The Greenwich early years partnership has also produced extensive publicity to explain the benefits of the CAP.
Ms O'Hare says: 'You have to charge a fee which is conducive to maintaining and improving the quality of provision. Anything like the CAP, which enables people to pay to access this is fantastic. We would like to see more support like this from the Government.
'It's great now that when we show new parents and their children around the nursery we can explain that they will get more support to get quality childcare. With the funding coming direct to us, it also means we are more in control.'