The entire private nursery market in the UK is about to collapse under a sustained Government attack on its business model. Or so you might think, to judge by some of the reactions to the Government's Code of Practice on free nursery education places. Providers throughout the south-east are quitting the scheme, and the National Day Nurseries Association (NDNA) has launched a major lobbying campaign. But how real is the danger? What is all the fuss about?
Settings such as voluntary pre-schools and playgroups - which mainly offer stand-alone funded sessions - are rightly concerned that the funding needs to cover their costs. There are suggestions that local authorities are diverting too much of their funding allocation to early years places in schools, and not enough to the PVI sector. Some transparency in this area would be welcome.
But the issue in the headlines is different. This mainly concerns settings that provide full daycare and treat the funded sessions as an integrated part of the full nursery day.
Many of these nurseries (and their local authorities) used to interpret the rules as allowing them to charge parents their normal market fees for a full day, and to reduce the bill by the amount of the Government funding.
The apparent 'ambush' has been the Government's recently stated position that the free funded sessions must be exactly that - free. As a result, settings have to credit parents with the full cost of a two-and-a-half hour session. If that cost is higher than the funding that they receive, the nursery must pick up the shortfall. The old practice amounts to charging parents a 'top-up' fee for the funded sessions, and children's minister Beverley Hughes is adamant that this is unacceptable.
The NDNA's campaign report refers to a Kent nursery that provides full daycare for a group of three-and four-year-olds. This nursery receives about 8 per session in funding, but is now expected to credit all parents with Pounds 16 for each funded session, up to a maximum of five per week.
Clearly, on numbers like this, a significant funding gap can arise. But how many nurseries are charging parents 6.40 an hour? This adds up to Pounds 64 for a typical day (excluding lunch and extras, which the Government regards as a private matter between nurseries and parents).
Keeping costs the same
The fact is that, for the vast majority of day nurseries, this is a non-issue. The rate of funding varies from county to county, but taking 8 per session as an average, a nursery charging up to 32 a day (plus extras) will have no difficulty in providing the funded sessions genuinely free of charge. In fact, if their normal fees are lower than the funding, the rules allow them to keep the difference.
But there is still a problem for some high-cost nurseries, especially in London and the south-east. They face a stark choice between pulling out of the scheme and depriving parents of the funding, or going bankrupt. Or do they?
An alternative approach may help them to square the circle. By raising the notional fees for funded children, and then providing credits for the funded sessions at the same hourly rate, providers should be able to comply with the Government's rules, while keeping the effective cost to parents unchanged.
The table below gives a numerical example of this. Assume that one of the higher cost providers charges 48 per ten-hour day for a three-or four-year-old and that the sessional rate of funding is 8. Under the old interpretation of the rules, parents with a full-time booking would have been charged 240 per week and credited with grant funding of 40 a week (five sessions) during the 38 weeks of term time.
Under the new Code of Practice, the Government would deem this a top-up fee of 4 per session. It would expect the provider to provide the funded 12.5 hours free and to charge the parents only for the remaining 37.5 hours.
If the nursery simply falls into line, its term-time income will fall from 200 to 180 per week - a loss of 760 per year for each funded child.
If the provider elects to withdraw from the scheme, then in order to maintain the same income over the full year, it needs to charge parents the full Pounds 240 during term times as well as holiday. To the parent, this would amount to an average cost increase of 14 per cent.
But suppose the nursery changes its fee structure to recognise the funding rules. The notional fee rate rises from 4.80 an hour to Pounds 5.16.
Now, during term time, the nursery charges parents for the non-funded 37.5 hours at this rate. During the holidays, it charges for the full 50-hour week -also at the standard rate.
Patterns of payment
The point is that, while at first this looks like a small fee increase, the cost to parents actually remains unchanged - as does the nursery's income.
As the table shows, the only thing that changes is the pattern of payment.
During term times the parents' bills will actually fall compared with the previous arrangements, because the notional fee increase is more than offset by the increased funding credit. Parents simply pay less during term time and more during the holidays - which, if you think about it, is exactly what the Government intends.
The arithmetic - and the term-time/holiday disparity - is different for bookings of less than a full week, where (because of the five session 'cap') the funding represents a higher proportion of total fees. And it will change again when the funding week increases beyond 12.5 hours. But the principle remains the same. Nurseries will face some difficult arithmetic and the task of presenting the sums to parents in the right way.
But that's a very different matter to staring bankruptcy in the face.
Certainly, if the provider in this example offered free stand-alone sessions of 2.5 hours, there would be a notional loss of income - it would receive only the 8 grant per session instead of the market rate.
However, many day nurseries do not offer stand-alone sessions and those that do would always allocate a full day booking first. By definition, therefore, the problem only arises where there are vacant places, and in these situations most nurseries would regard the grant income as preferable to none at all.
Beverley Hughes has said she wants to protect the integrity of genuinely free nursery education, while staying out of private commercial arrangements between nurseries and parents. This approach reconciles those objectives: it involves no changes to parents' fees or nursery income, and it moves the debate away from the level of nursery education funding.