Early learning and childcare: sustainable rates review

Background and Approach to the Review

Introduction

1. In December 2018 the Scottish Government and COSLA published the details of the Funding Follows the Child policy framework to support the delivery of Early Learning and Childcare (ELC) alongside the statutory roll-out of the expanded ELC offer.

2. Funding Follows the Child was developed following consultation with the sector on the overall policy framework and funding models between October 2016 and January 2017. Evidence at this time indicated that the rates paid to providers in the private, third and childminding sectors did not always meet the costs of delivery and also highlighted the challenges of low pay. At that time most childcare workers in private and third sector services were earning below the real Living Wage.

3. A key aspect of Funding Follows the Child is for local authorities to set sustainable funding rates for providers in the private, third and childminding sectors who deliver funded ELC. In addition, these rates should be set at a level to enable payment of the real Living Wage to childcare workers delivering funded ELC. Separate guidance was also produced, in April 2019, to support local authorities to set sustainable rates. The three year funding agreement between Scottish Government and COSLA reached in April 2018 to deliver the 1140 expansion included the funding to enable payment of sustainable rates, as have subsequent single-year settlements.

4. The decision to adopt this policy framework and introduce a new approach to setting sustainable rates represented a significant change in approach for local authorities and providers. Nationally, the policy has resulted in real progress being made to increase the rates paid to funded providers in the private, third and childminding sector and in helping to support the payment of significantly higher wages in the sector.

5. Since 2017, the average rate (calculated as the mean of all local authority rates) paid to providers to deliver an hour of funded ELC for 3-5 year olds has increased by 57%, from £3.68 per hour in 2017-18 to £5.80 per hour in 2022-23. In 2022-23 the average rate paid across all local authorities to funded providers for an hour of ELC to 3-5 year olds in Scotland was significantly higher than the rate in Wales (£5.00 per hour, the national rate reported at gov.wales) and the average across local authorities in England (£5.15 per hour, an average of rates reported at gov.uk) for the delivery of funded childcare.

6. However, the delivery of the expansion to 1140 funded hours at the time of the Covid-19 pandemic had an impact on the financial outlook for providers of ELC in the private, third, and childminding sectors, and their business models, and required local authorities to adapt how they provided support to providers. The rates data publication from August 2021 found that a majority of local authorities had not increased the rates paid to funded providers since 2019-20.

7. Alongside this, the Scottish Government carried out a Financial Sustainability Health Check which captured evidence on the impact of the pandemic on the childcare sector. It also set out a programme of actions for strengthening the process for setting sustainable rates for the 2022-23 academic year. 90% of local authorities have increased their rates payable for delivering an hour of funded provision for 3-5 year olds since rates data was last collected in August 2021, and the average rate paid by local authorities increased by 6.6% in that year. However, in 2022-23 childcare providers and local authorities, alongside the whole Scottish economy, faced significant inflationary pressures as a result of the costs crisis. Inflation, as measured by increases to the Consumer Price Index, reached 11.1% in the year to October 2022.

8. The Scottish Government published ‘Best Start’, a strategic plan for Early Learning and School Age Childcare, on 6^th October 2022. This plan committed the Scottish Government to working with Local Government to review the approach to setting sustainable rates for providers of funded ELC in 2022-23, in the context of the additional programme of work undertaken to improve the process since summer 2021. Subsequently, the COSLA Children and Young People Board agreed in November 2022 that COSLA would undertake a joint review of sustainable rates with the Scottish Government. The review would take an evidence-led approach, and utilise intensive engagement with stakeholders, from both local government, and funded providers and their representatives.

9. The objective of this review is to learn lessons from the implementation of policy in 2022-23, to identify where the process can be improved further, and to ensure that sustainable rates are set in-line with the guidance. This includes reflecting the costs of delivering funded ELC and payment of the real Living Wage to staff.

10. The findings from this review will inform what further action may need to be taken ahead of the 2024-25 financial year and the wider approach to rate setting over the rest of this Parliament. This includes consideration of any required updates to the supporting sustainable rates guidance, and what can realistically be achieved within the context of the currently available budget for delivering ELC.

Background – Policy for setting rates for the delivery of funded childcare

11. Until 2007, the Scottish Government set a minimum advisory ‘floor’ level of funding for local authorities to pay to partner (funded) providers in the private, third and childminding sectors. The last advisory floor, for 2007, was set at £1,550 per child when the (then) funded offer of free pre-school education had just increased to 475 hours; which would have been an hourly advisory floor of £3.26 per hour.

12. From 2007 to 2017, local authorities set their own rates for partner providers. During this period, the approach to setting rates varied across local authorities – with some electing to uplift rates from the previous floor in line with inflation, some at a higher or lower rate than inflation, and with some rates remaining at 2007 levels.

13. Prior to the expansion to 1140 funded hours, the Scottish Government published a Financial Review of the ELC Sector, and Cost of ELC Provision in Partner Provider Settings (the latter produced by Ipsos MORI) in September 2016. Evidence from the Ipsos MORI report showed that in 2016, the rates being paid would not cover costs for around 40% of funded providers in the private and third sector. Analysis in these reports also highlighted that levels of pay for staff working in partner settings in the private and third sector was low. In 2016, around 80% of practitioners and 50% of supervisors in private and third sector settings delivering the funded entitlement were paid an hourly rate below the real Living Wage.

14. Following consultation on various options in 2016-17, Funding Follows the Child (FFTC) was implemented alongside the statutory rollout of 1140 funded hours in August 2021, to provide the underpinning policy framework to support delivery of funded Early Learning and Childcare (ELC). Reflecting the impact of the pandemic, the policy was implemented with a small number of flexibilities with supporting Interim Guidance published most recently in May 2022. A key aspect of Funding Follows the Child is the payment of sustainable rates to providers in the private, third and childminding sectors for the delivery of funded ELC.

15. Reflecting the evidence gathered, under Funding Follows the Child the rates paid to providers in the private, third and childminding sectors for the delivery of funded ELC by local authorities should be sustainable. Specifically, the rate should:

• support delivery of a high quality ELC experience for all children
• reflect the cost of delivery, including the delivery of national policy objectives
• allow for investment in the setting
• enable payment of the Real Living Wage (RLW) for those childcare workers delivering the funded entitlement

16. For most providers delivering funded ELC, they will receive income from both their local authority (for the delivering of funded ELC) and from private income sources (fees paid by parents for non-funded hours). The Financial Sustainability Health Check reports that the average share of income from funded provision, for services delivering ELC, was 46% for private sector services and 84% for third sector services.

17. Ahead of the expansion, in April 2019, guidance was published to support local authorities when setting sustainable rates. The guidance was produced based on feedback gathered from across the sector, and sets out the principles that should underpin any approach to setting sustainable rates, as well as options for taking the process forward.

18. The guidance also highlights that the rate must be sustainable and affordable for local authorities in terms of their overall budget. The rate must:

• not have a detrimental effect on the local authority's ability to continue to pay for the service in the long-term
• be considered in the context of the wider package of 'in-kind benefits', which are separate to the sustainable rates and are available to the funded provider as part of the contract with the local authority
• not need to be cross-subsidised by parents and carers through charges for non-funded hours

19. In July 2019, the Scottish Government collected information on the rates paid by local authorities for the period 2017-18 to 2019-20. Information on the rates paid for 2020-21 and 2021-22 was published in August 2021. The Scottish Government then committed, in the Financial Sustainability Health Check, to publishing information on the sustainable rates set by local authorities annually.

20. In light of the findings of the publication, in August 2021, of the sustainable rates set by local authorities for 2021-22, the Financial Sustainability Health Check, (also published in August 2021) set out a programme of actions for strengthening the process for setting sustainable rates for the 2022-23 academic year. Significant work was undertaken including:

• COSLA and local authorities, through the Improvement Service, commissioned Ipsos Mori to undertake an independent cost collection exercise to improve the evidence on costs of delivery that local authorities could draw on.
• The Scottish Government provided grant funding to the Improvement Service to enable them to provide local authorities with dedicated support, including a series of workshops for authorities on rate-setting.
• The Scottish Government and COSLA published updated joint guidance on setting sustainable rates on 26 May 2022, which highlights the need for local authorities to reflect the most up-to-date cost information in setting rates, and emphasises the importance of ongoing consultation and dialogue between local authorities and their local ELC providers.

21. The remainder of this review considers what lessons we can learn from the process of rate-setting undertaken in 2022-23 – including the programme of support made available – and whether the process can be improved further, based on evidence gathered from private, third and childminding sector providers and from local authorities.

Collection of Evidence

22. The review has taken an evidence-based approach that captures views from both local authorities, and from funded ELC providers in the private, third and childminding sectors. This included both written feedback, captured through surveys, and feedback gathered through direct engagement with local authorities and providers. The review has also utilised data available on sustainable rates from previous surveys, and from concurrent work being done by other policy officials, and the Improvement Service.

23. The primary evidence sources this review has drawn on are:

• Surveys of local authorities on the sustainable rates currently paid to funded providers in the private, third and childminding sectors to deliver funded hours (reported alongside details of meal rates and the additional support packages made available by local authorities). The most recent survey, published December 2022, has been utilised; along with data from surveys in previous years. Additionally, we have updated average calculations on current rates to include the most recent information from Moray and North Ayrshire (which weren’t available at the time of the December 2022 publication), these calculations are included at Appendix C.
• An update to the Financial Sustainability Health Check of the Childcare Sector funded providers due to be published in July 2023. We estimate around 6% of all registered private and third sector day care of children services participated in the updated health check.
• Reports and analysis by the Improvement Service. This includes reports evaluating the delivery of the expansion to 1140 hours, and a ‘lessons learned’ review conducted jointly with local government on the Ipsos Mori cost collection exercise carried out in 2022.
• Written feedback on rate-setting collected from local authorities during the December 2022 survey of sustainable rates and summarised at Appendix A2.
• Engagement meetings involving local authority officials and representatives, COSLA and Scottish Government officials held during February and March 2023 as part of the review. These meetings included discussion of sustainable rates and the issues surrounding the policy in more detail. This evidence is summarised at appendices A3 – A6.
• A survey of funded providers carried out as part of the review during January and February 2023. Providers were given the opportunity to provide feedback on the sustainable rate-setting process in their area, what engagement took place between them and local authorities with respect to this process; and on the Ipsos-Mori cost collection exercise carried out in 2022. This evidence is summarised at Appendix B2.
• Engagement meetings involving Funded Providers, COSLA and Scottish Governments officials held during March and April 2023 as part of the review. These meetings included discussion of sustainable rates and the issues surrounding the policy in more detail. Officials invited contributions from the national childcare sector representative organisations. Early Years Scotland took up this offer by supplying written evidence from the Early Years Scotland Members’ Steering Group to complement the data from our provider engagement meetings; and SCMA met with officials to ensure engagement included sufficient evidence around the particular concerns of childminders. This evidence is summarised at Appendices B3 – B6.

24. We estimate that responses to the survey were representative of feedback from around 99 private, third and childminding sector settings. At the last census there were 985 providers of funded ELC operating in the private, and third sectors, so the response reflects around 9% of potential participants from these sectors. We also estimate that around 1% of the number of childminders currently approved to provide funded ELC participated in the survey. That is why the review team also sought input from key stakeholders in the private, third and childminding sectors, who collectively represent a majority of childcare provision in Scotland (SCMA, for instance, also had run their own survey work that the team could draw on).

25. It is important to note that due to the relatively low response rate to the provider survey, caution should be taken when interpreting this strand of the data and it has not been possible to break this down to regional or local level, for example. However, the review team has been able to combine this with analysis of the robust data provided through the 2022-23 rates collection and other sources.

26. The sector has had a high number of requests for information post-Covid, including the Ipsos Mori cost collection exercise in 2022, provider surveys in relation to the Financial Sustainability Health Check, further surveys by representative organisations, and information requests from local authorities. This likely contributed to a relatively low response rate to the data collection. Further information on how evidence was gathered from providers is included at Appendix B1. To avoid ‘survey fatigue’ the Scottish Government will consider carefully how future requests for information from the sector can be improved so that participation is maximised and the burden of dealing with requests is reduced.

27. A majority of local authorities participated in the review, with 28 responding to the request for written feedback during the rates survey, and 21 attending engagement meetings; provided alongside input from COSLA. Representatives from ADES, Directors of Finance and SOLACE also attended an engagement session. Further information on how evidence was gathered from local government is included at Appendix A1.